Chapter-V

Role of Depositories: NSDL and CDSL

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CHAPTER-V

Role of Depositories: NSDL and CDSL

Introduction;

Shares and bonds are being issued by companies for quite some time. Twelve

years back, all these were issued in the form of physical certificates that the

investor had to keep safe and then forward to the buyer once sold. This process

was highly time consuming and gave rise to issues like fake securities and bad

deliveries. All these reasons and the improvement in technology gave rise to

depositories and the electronic mode of holding securities.

A depository resembles a bank; however incase of a depository the deposits

are securities, such as shares, debentures, bonds and government securities, in

electronic form. A depository functions as a bank- both are common houses that

hold assets of the participating members and provide services to clients.

In India there is Depository System for securities trading in which book entry

is done electronically and no paper work is involved. The physical form of

securities is extinguished and shares or securities are held in an electronic form.

Before the introduction of the depository system through the Depository Act,

1996, the process of sale, purchase and transfer of securities was a huge problem,

and there was no safety at all.

DEMATERIALISATION OF SECURITIES:

Dematerialization is relatively a new concept introduced in the securities

market. It is basically a process by which the physical certificates of an investor

are taken/surrendered-by/to the company/registrar and actually destroyed and an

equivalent number of securities are credited in the depository account of the

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investor on request of the investor. To overcome the problems associated with

settlement of physical share certificates and to provide electronic depository

facilities for securities traded in the equity and the debt markets, the process of

dematerialization of shares was evolved.

Key Features of the Depository System in India

h Multi-Depository System: The depository model adopted in India provides

for a competitive multi-depository system. There can be various entities

providing depository services. A depository should be a company formed under

4 the Company Act, 1956 and should have been granted a certificate of registration

under the Securities and Exchange Board of India Act, 1992. Presently, there are

two depositories registered with SEBI, namely:

National Securities Depository Limited (NSDL), and

Central Depository Service Limited (CDSL)

2. Depository services through depository participants: The depositories can

provide their services to investors through their agents called depository

participants. These agents are appointed subject to the conditions prescribed

under Securities and Exchange Board of India (Depositories and Participants)

Regulations, 1996 and other applicable conditions.

3o Dematerialization: The model adopted in India provides for dematerialisation

of securities. This is a significant step in the direction of achieving a completely

paper-free securities market. Dematerialization is a process by which physical

certificates of an investor are converted into electronic form and credited to the

account of the depository participant

4. Fungibility: The securities held in dematerialized form do not bear any

notable feature like distinctive number, folio number or certificate number. Once

shares get dematerialized, they lose their identity in terms of share certificate

distinctive numbers and folio numbers. Thus all securities in the same class are

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identical and interchangeable. For example, all equity shares in the class of fully

paid up shares are interchangeable.

5. Registered Owner/ Beneficial Owner; In the depository system, the

ownership of securities dematerialized is bifurcated between Registered Owner

and Beneficial Owner. According to the Depositories Act, ‘Registered Owner’

means a depository whose name is entered as such in the register of the issuer. A

‘Beneficial Owner’ means a person whose name is recorded as such with the

depository. Though the securities are registered in the name of the depository

actually holding them, the rights, benefits and liabilities in respect of the

securities held by the depository remain with the beneficial owner. For the

securities dematerialized, NSDL/CDSL is the Registered Owner in the books of

the issuer; but ownership rights and liabilities rest with Beneficial Owner. All the

rights, duties and liabilities underlying the security are on the beneficial owner of

the security.

6= Free Transferability of shares; Transfer of shares held in dematerialized

form takes place freely through electronic book-entry system.

Advantages of the Depository System;

The advantages of dematerialization of securities are as follows:

» Share certificates, on dematerialization, are cancelled and the same will not

be sent back to the investor. The shares, represented by dematerialized share

certificates are fungible and, therefore, certificate numbers and distinctive

numbers are cancelled and become non-operative.

9 It enables processing of share trading and transfers electronically without

involving share certificates and transfer deeds, thus eliminating the paper

work involved in scrip-based trading and share transfer system.

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• Transfer of dematerialized securities is immediate and unlike in the case of

physical transfer where the change of ownership has to be informed to the

company in order to be registered as such, in case of transfer in

dematerialized form, beneficial ownership will be transferred as soon as the

shares are transferred from one account to another.

» The investor is also relieved of problems like bad delivery, fake certificates,

shares under litigation, signature difference of transferor and the like.

» There is no need to fill a transfer form for transfer of shares and affix share

transfer stamps.

9 There is saving in time and cost on account of elimination of posting of

certificates.

9 The threat of loss of certificates or fraudulent interception of certificates in

transit that causes anxiety to the investors, are eliminated.

Disadvantages/Problems of the Depository System ;

Some disadvantages were about the depository system were known beforehand.

But since the advantages outweighed the shortcomings of dematerialisation, the

depository system was given the go-ahead.

® Lack of control; Trading in securities may become uncontrolled in case of

dematerialized securities.

9 Need for greater supervision; It is incumbent upon the capital market

regulator to keep a close watch on the trading in dematerialized securities

and see to it that trading does not act as a detriment to investors. The role of

key market players in case of dematerialized securities, such as stock

brokers, needs to be supervised as they have the capability of manipulating

the market.

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<* Complexity of the system; Multiple regulatory frameworks have to be

confirmed to, including the Depositories Act, Regulations and the various

Bye Laws of various depositories. Additionally, agreements are entered at

various levels in the process of dematerialization. These may cause anxiety

to the investor desirous of simplicity in terms of transactions in

dematerialized securities.

Besides the above mentioned disadvantages, some other problems with the

system have been discovered subsequently. With new regulations people are

finding more and more loopholes in the system. Some examples of the

malpractices and fraudulent activities that take place are:

a Current regulations prohibit multiple bids or applications by a single person.

But investors open multiple demat accounts and make multiple applications

to subscribe to IPOs in the hope of getting allotment of shares.

» Some listed companies had obtained duplicate shares after the originals were

pledged with banks and then sold the duplicates in the secondary market to

make a profit

* Promoters of some companies dematerialized shares in excess of the

company’s issued capital.

9 Certain investors pledged shares with banks and got the same shares reissued

as duplicates.

0 There is an undue delay in the settlement of complaints by investors against

depository participants. This is because there is no single body that is in

charge of ensuring full compliance by these companies.

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Table 5.1: Comparison of a Depository with a Bank

Depositories Banks

Hold securities in an account Hold funds in an account

Transfer securities between

accounts on the instruction of the

account holder

Transfers funds between accounts

on the instruction of the account

holder

Assist in transfer of ownership

without having to handle securities

Assist in transfers without having

to handle money

Facilitates safekeeping of shares Facilitates safekeeping of money

Depositories in India

At present there are two depositories in India, National Securities

Depository Limited (NSDL) and Central Depository Services (CDS). NSDL

is the first Indian depository; it was inaugurated in November 1996. NSDL was

set up with an initial capital of US$28mn, promoted by Industrial Development

Bank of India (IDBI), Unit Trust of India (UTI) and National Stock Exchange of

India Ltd. (NSE). Later, State Bank of India (SBI) also became a shareholder.

The other depository is Central Depository Services (CDS). It is still in the

process of linking with the stock exchanges. It has registered around 20 DPs and

has signed up with 40 companies. It had received a certificate of commencement

of business from SEBI on February 8,1999.

These depositories have appointed different Depository Participants (DP) for

them. An investor can open an account with any of the depositories5 DP. But

transfers arising out of trades on the stock exchanges can take place only

amongst account-holders with NSDL’s DPs. This is because only NSDL is

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linked to the stock exchanges (nine of them including the main ones-National

Stock Exchange and Bombay Stock Exchange).

In order to facilitate transfers between investors having accounts in the two

existing depositories in the country the Securities and Exchange Board of India

has asked all stock exchanges to link up with the depositories. SEBI has also

directed the companies’ registrar and transfer agents to effect change of

registered ownership in its books within two hours of receiving a transfer request

from the depositories. Once connected to both the depositories the stock

exchanges have also to ensure that inter-depository transfers take place

smoothly. It also involves the two depositories connecting with each other. The

NSDL and CDS have signed an agreement for inter-depository connectivity.

Depository Participant

NSDL carries out its activities through various functionaries called business

partners who include Depository Participants (DPs), Issuing corporates and their

Registrars and Transfer Agents, Clearing corporations/ Clearing Houses etc.

NSDL is electronically linked to each of these business partners via a satellite

link through Very Small Aperture Terminals (VSATs). The entire integrated

system (including the VSAT linkups and the software at NSDL and each

business partner’s end) has been named as the “NEST” [National Electronic

Settlement & Transfer] system.

The investor interacts with the depository through a depository participant of

NSDL. A DP can be a bank, financial institution, a custodian or a broker. Just as

one opens a bank account in order to avail of the services of a bank, an investor

opens a depository account with a depository participant in order to avail of

depository facilities.

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The recent exparte interim order of Sebi concerning IPOs has raised several

issues and has also pointed a finger against quite a few market intermediaries for

their failure to discharge their role in accordance with the applicable law. Among

the important agencies that figure prominently in the Sebi order are the

depositories.

Investors would recall that not very long ago, securities in the capital market in

India were traded in the physical form. As a result, the market suffered from

various drawbacks including thefts and forgeries of share certificates. Moreover,

dealing in the physical mode had its own limitations which inhibited the growth

of the capital market in India. These shortcomings were acutely felt more so after

the liberalisation of the economy. To address all such issues the Central

Government enacted the Depositories Act, 1996, with retrospective effect from

September 20,1995.

Is it compulsory for every investor to hold securities in the demat form or can

he also hold shares in the physical form? The Depositories Act provides that

every person subscribing to securities offered by an issuer has the option to

receive the security certificates or hold securities with a depository. However,

investors need to note that while securities can be held by way of certificates,

dealing in the market is permitted only if the securities are in the demat mode.

When an investor holds securities in the physical form, the certificates bear serial

numbers, the distinctive numbers, etc. However, when the securities are held in

demat mode, they are akin to money lying in the bank account. Therefore, there

is no question of certificate numbers or distinctive numbers, though the quantity

will remain the same.

As in the case of certificates, holders of securities in demat mode (called

beneficial owners) can create a pledge or hypothecation in respect of the

securities held by them. In such cases, it is necessary for the beneficial owner to

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inform the depository of the pledge or hypothecation created by him. The

depository concerned has to make a noting in its records to that effect.

SECURITIES ELIGIBLE FOR DEMATERIALISATION :

The entire depository system in India is governed by the rules made by the

market regulations - SEBI. According to the SEBI (Depositories and

Participants) regulations, 1996, the following securities are eligible for holding

in dematerialized form.

Shares, scripts, stocks, bonds, debenture stocks or other marketable securities

of similar nature or any incorporated company or body corporate including

underlying shares of ADR’s and GDR’s. Units of mutual funds, rights under

collective investment schemes, venture capital funds, commercial paper,

certificate of deposit, securitized debt, money market instrument and unlisted

securities.

A list of securities available for demat in NSDL/CDSL depository is made

known to all DP’s by way of circulars sent through e-mails. The information is

also put up on NSDL/CDSL website and in the monthly information bulletin.

Registration:

As per the provisions of the SEBI Act, a depository can deal in

securities only after obtaining a certificate of registration from SEBI. The

sponsors of the proposed depository should apply to SEBI for a certificate

of registration in the prescribed form.

Commencement of Business:

A Depository that has obtained registration as stated above, can

function only if it obtains a certificate of commencement of business from

SEBI. A Depository must apply for and . obtain a certificate of

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commencement of business from SEBI within one year from the date of

receiving the certificate of registration fromSEBL

Agreement between the Depository and Issuers:If either the issuer ( a company which has issued securities ) or the

investor opts to hold his securities in a demat form, the issuer enters into

an agreement with the depository to enable the investors to dematerialize

their securities. No such agreement is necessary where the state or Central

Government is the issuer of government securities.

Services of Depository:

A Depository established under the Depositories Act can provide any

service connected with recording of allotment of securities or transfer of

ownership of securities in the record of a depository. Any person willing

to avail the services of the depository can do so by entering into an

agreement with the depository through any of its participants. A depository

can provide depository services only through a DP. A depository cannot

directly open accounts and provide services to clients. Every depository in

its bye-laws must state which securities are eligible for demat holding.

Generally, the following securities are eligible for dematerialization:

(a) Shares, scrips stocks, bonds, debentures, debenture stock or other

marketable securities of a like nature in or of any incorporated

company or other body corporate.

(b) Unit of mutual funds, rights under collective investment schemes and

venture capital funds, commercial paper, certificates of deposit,

securitised debt, money market instruments, government securities and

unlisted securities.

(c) Securities admitted to NSDL depository are notified to all DPs

through circulars sent by email everyday. Investors are informed about

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these securities through NSDL5s website-www.nsdl.co.in - and NEST

update-a monthly newsletter of NSDL.

Functions of Depository;

1) Dematerlization: One of the primary functions of depository is to

eliminate or minimize the movement of physical securities in the

market. This is achieved through dematerilization of securities.

2) Account Transfer: The_depository gives effects to all transfers

resulting from the settlement of trades and other transactions between

various beneficial owners by recording entries in the accounts of such

beneficial owners.

3) Transfer and Registration: A transfer is the legal change of

ownership of a security in the records of the issuer. For effecting a

transfer, certain legal steps have to be taken like endorsement,

execution of a transfer instrument and payment of stamp duty.

4) Corporate Actions: A depository may handle corporate actions in two

ways. In the first case, it merely provides information to the issuer

about the persons entitled to receive corporate benefits. In the other

case, depository itself takes the responsibility of distribution of

corporate benefits.

5) Pledge and Hypothecation: Depositories allow the securities placed .

with them to be used as collateral to secure loans and other credits. In

a manual environment, borrowers are required to deliver pledged

securities in physical form to the lender or its custodian. These

securities are verified for authencity and often need to be transferred

In the name of lender.

6) Linkages with clearing system: Whether it is a separate clearing

corporation attached to a stock exchange or a clearing house

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(department) of a stock exchange, the clearing system performs the

functions of ascertaining the pay-in (sell) or pay-out (buy) of brokers

who have traded on the stock exchange.

National Securities Depository Limited (NSDL)

Although India had a vibrant capital market which is more than a century old, the

paper-based settlement of trades caused substantial problems like bad delivery and

delayed transfer of title till recently. The enactment of Depositories Act in August

1996 paved the way for establishment of NSDL, the first depository in India. This

depository promoted by institutions of national stature responsible for economic

development of the country has since established a national infrastructure of

international standards that handles most of the securities held and settled in

dematerialised form in the Indian capital market

Using innovative and flexible technology systems, NSDL works to support the

investors and brokers in the capital market of the country. NSDL aims at ensuring

the safety and soundness of Indian marketplaces by developing settlement

solutions that increase efficiency, minimise risk and reduce costs. At NSDL, we

play a quiet but central role in developing products and services that will continue

to nurture the growing needs of the financial services industry.

Promoters / Shareholders:

NSDL is promoted by Industrial Development Bank of India Limited (IDBI)

- the largest development bank of India, Unit Trust of India (UTI) - the largest

mutual fond in India and National Stock Exchange of India Limited (NSE) - the

largest stock exchange in India. Some of the prominent banks in the country have

taken a stake in NSDL.

Promoters

Industrial Development Bank of India Limited (Now, IDBI Bank Limited)

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Unit Trust of India (Now, Administrators of the Specified Undertaking of the

Unit Trust of India)

National Stock Exchange of India Limited

Other Shareholders

State Bank of India

HDFC Bank Limited

Deutsche Bank A.G.

Axis Bank Limited

Citibank N. A.

Standard Chartered Bank

The Hongkong and Shanghai Banking Corporation Limited

Oriental Bank of Commerce

Union Bank of India

Dena Bank

CanaraBank

Management of NSDLs NSDL is a public limited company managed by a

professional Board of Directors. The day-to-day operations are conducted by the

Managing Director. To assist the MD in his functions, the Board appoints an

Executive Committee (EC) of not more than 15 members. The eligibility criteria

and period of nomination, etc. are governed by the bye-laws of NSDL.

Bye-laws of NSDL t Bye-laws of National Securities Depository Limited have

been framed under powers conferred under section 26 of the Depositories Act 1996

and approved by Securities and Exchange Board of India. The bye-laws contain

fourteen chapters and pertain to the areas listed below.

1. Short title and commencement

2. Definitions

3. Board of Directors

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4. Executive Committee

5. Business Rules

6„ Participants

7. Safeguards to protect interest of clients and participants

8. Securities

9. Accounts / transactions by book entry

10. Reconciliation, accounts and audit

ILDisciplinary action

12. Appeals

13. Conciliation

14. Arbitration

Functions >

NSDL performs the following functions through depository participants (DPs):

• Enables the surrender and withdrawal of securities to and from the

depository (dematerialization and re-materialization).

® Maintains investor holdings in the electronic form.

• Effects settlement of securities traded on the exchanges.

• Carries out settlement of trades not done on the stock exchange (off-market

trades).

• Transfer of securities.

® Pledging / hypothecation of dematerialized securities.

® Electronic credit in public offerings of companies or corporate actions.

® Receipt of non-cash corporate benefits like bonus rights, etc. in Electronic

Form.

® Stock lending and borrowing.

Services Offered by NSDL :

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NSDL offers a host of services to the investors through its network of DPs:

® Maintenance of beneficiary holdings through DPs.

® Dematerialization

• Off-market Trades.

• Settlement in dematerialized securities.

• Receipt of allotment in the dematerialized form.

® Distribution of corporate benefits.

® Re-materialization.

® Pledging and hypothecation facilities.

® Freezing / locking of investor’s account

® Stock lending and borrowing facilities.

Fees Structure of NSDL:

NSDL charges the DPs and not the investors directly. These charges are fixed. The

DPs, in turn, are free to charge their clients, i.e., the investors for their services.

Thus, there is a two- tier fee structure.

Inspection, Accounting and Internal Audit:

NSDL obtains audited financial reports from all its DPs once every year. NSDL

also carries out periodic visits to the offices of its constituents - R & T agents, DPs

and clearing corporations - -to review the operating procedures, systems

maintenance and compliance with the bye-laws, business rules and SEBI

Regulations.

Additionally, DPs are required to submit to NSDL internal audit reports every

quarter. Internal audit has to be conducted by a chartered accountant or a company

secretary in practice. The Board of Directors appoints a Disciplinary Action

Committee (DAC) to deal with any matter relating to DPs clients, issuers and R &

T agents. The DAC is empowered to suspend or expel a DP, declare a security as

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ineligible on the NSDL, freeze a DP account and conduct inspection or call for

records and issue notices.

Table S.2 Progress of NSDL in India

August 2009 Demat Accounts cross one crore

August 2008 Launch of Central Recordkeeping Agency (for New Pension

System)

May 2008 NSDL and Japan Securities Depository Center sign Information

Sharing and Collaboration Pact

April 2008 NSDL and National Depository Center (Russia) sign

Information Sharing and Collaboration Pact

February 2008 NSDL and Euroclear (Belgium) sign Information Sharing and

Collaboration Pact

September 2007 Value of securities held in dematerialised form at NSDL crosses

US$ 1 trillion

September 2007 Launch of SMS alert facility for investors

June 2007 NSDL and DTCC (US Depository) sign Information Sharing

and Collaboration Pact

January 2007 NSDL and TDCC (Taiwan Depository) sign Information

Sharing and Collaboration Pact

November 2006 NSDL completes a decade of depository operations

January 2006 Launch of National Skills Registry by NDML

July 2005 Launch of Tax Information Network - PAN Ledger

January 2005 Launch of online upload of Central Excise challan data

October 2004 Intraday production shifting to Disaster Recovery Site

June 2004 Incorporation of NSDL Database Management Limited (NDML)

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- wholly owned subsidiary company of NSDL

June 2004 Launch of Online Tax Accounting System (OLTAS)

June 2004 Launch of PAN card services

January 2004 Launch of Tax Information Network (TIN)

January 2004 Launch of IDeAS

November 2003 Introduction of demat of Warehouse Receipts

November 2003 Launch of Market Participants and Investors Database (MAPIN)

October 2003 Demat Accounts cross 6 million

April 2003 Introduction of T+2 Rolling Settlement

December 2002 Demat Accounts cross 5 million

November 2002 Launch of STEADY - An STP initiative by NSDL

April 2002 Introduction of T+3 Rolling Settlement

September 2001 NSDL launches SPEED-e

July 2001 Introduction of T+5 Rolling Settlement and Uniform Settlement

Cycle

June 2000 98% settlement in demat form

June 2000 Commencement of Demat of Debt Instruments

May 2000 Demat accounts with NSDL cross 2.5 mn

February 2000 NSDL launches internet based service - SPEED - for CMs

May 1999 NSDL launches NCFM - Depository Operations Module

January 1999 Commencement of compulsory trading for retail investors

December 1998 Introduction of Demat of Government Securities

December 1998 Establishment of NSDL branches at Chennai, Delhi & Kolkata

November 1998 Demat accounts with NSDL cross 100,000

April 1998 Demat delivery in physical segment at NSE and BSE

March 1998 Value of securities held in dematerialised form at NSDL crosses

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US$ 5 bn.

January 1998 Compulsory demat trading for Institutional investors

December 1997 Commencement of Demat trading at BSE

June 1997 Value of securities held in dematerialised form at NSDL crosses

US$ 1 bn.

December 1996 Commencement of Demat trading at NSE

November 1996 NSDL Inauguration

August 1996 Enactment of Depositories Act

December 1995 NSDL Incorporation

September 1995 Promulgation of Depositories Ordinance

Source: NSDL website

From inception NSDL travelled a long way. In the depository system, securities

are held in depository accounts, which is more or less similar to holding funds in

bank accounts. Transfer of ownership of securities is done through simple account

transfers. This method does away with all the risks and hassles normally associated

with paperwork. Consequently, the cost of transacting in a depository environment

is considerably lower as compared to transacting in certificates.

Settlement of Disputes: All disputes, differences and claims arising out of any

dealings on the NSDL, irrespective of whether NSDL is a party to it or not, have to

be settled under the Arbitration and Conciliation act 1996.

Maintenance of Accounts at the Central System: The NSDL central system

known as DM maintains accounts of all account holders in the depository system.

All the transactions entered at any point in the computer system connected to it are

first effected in the central system and subsequently at these Computers. Thus, the

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central system of NSDL has the records of all details of every transaction

conducted in the depository system.

Distributed Database; Each of the computer systems connected to NSDL system

has its own database relating to its clients. This helps in giving prompt and

accurate service to the clients. However each of the databases is reconciled with

the data at the central system everyday in order to ensure that the data in the

distributed database tallies with the central database.

Common Software; NSDL develops software required by depository participants,

Companies, R&T Agents and clearing corporations for conducting depository

operations. Thus, the computer systems used by all the entities will have common

software given by NSDL. However, depending on the business potential, branch

networks and any other specific features, DPs may develop software of their own

for coordination, communication and control and provide service to their clients.

Such exclusive software is called “back office software “„DPM system given

NSDL gives “export and import” facility to take out the transaction details to be

used by back office software and to feed in transaction details generated from the

back office software.

Account Gpemng; Any investor who wishes to avail depository services must first

open an account with a depository participant of NSDL. The process of opening a

demat account is very similar to a bank account. The investor can open an account

an account with any depository participant of NSDL. An investor may open an

account with several DPs or he may open several accounts with a single DP. There

are several DPs offering various depository-related services. Each DP is free to fix

its own fee structure. Investors have the freedom to choose a DP based on criteria

like convenience, comfort, service levels, safety reputation and charges. After

exercising this choice, the investor has to enter into an agreement with the DP. The

form and contents of this agreement are specified by the business rules of NSDL.

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In this chapter we deal with the procedure for account opening under the NSDL

system.

Types of Accounts: Type of depository account depends on the operations

to be performed. There are three types of demat accounts which can be

opened with a depository participant viz. (a) Beneficiary Account (b)

Clearing Account and (c) Intermediary Account.

Types of Accounts

Beneficiary OwnerAccount Clearing Member Account Intermediary Account

House Non - House

A DP may be required to open three categories of accounts for clients - Beneficiary Account, Clearing Member Account and Intermediary Account.A Beneficiary Account is an ownership account. The holders / s of securities in this type of account own those securities.The Clearing Member Account and Intermediary Account are transitory accounts. The securities in these accounts are held for commercial purpose only.A Clearing Member Account is opened by a broker or a Clearing Member for the purpose of settlement of trades.An Intermediary Account can opened by a SEBI registered intermediary for the purpose of stock lending and borrowing.

Beneficiary Account: This is an account opened by investors to hold their

securities in dematerialized form with a depository and to carry out the

transactions of sale and purchase of such securities in book- entry form

through the depository system. A beneficiary account holde r is legally

entitled for all rights and liabilities attached to the securities (i.e. equity

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shares, debentures, government securities, etc.) held in that account. Therefore,

the account is called “beneficial owner account “. A beneficiary account can

be in the name of an individual, corporate, HUF, Minor, Bank, Financial

Institution, Trust, etc. or the broker himself for the purpose of his personal

investments in demat form. The account is opened with a DP.

Documents for Verification: For the purpose of verification, all investors

have to submit the following documents along with the prescribed account

opening form.

Proof of Identity A beneficiary account must be opened only after

obtaining a proof of identity of the applicant.

Proof of address The account opening form should be supported with

proof of address such as verified copies of ration card / passport / voter ID /

PAN card/ driving license/bank passbook.

In case any account holder fails to produce the original documents for

verification within the aforesaid period of 30 days, it must be immediately

brought to the notice of NSDL. Failure to produce the original documents

within the prescribed time would invite appropriate action against such

account holders, which could even include freezing of their accounts.

Common Information: The process of opening an account with a depository,

nature of such an account, and various factors to be considered for opening

a depository account are explained below. Some details are common to all

types of accounts. These are :

1. Name of the holder

2. Date of birth (for individual accounts )

3. Occupation

4. Address & phone / fax number

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5. Bank details like name of bank, type of account (current / savings).

Account number, branch address, MICR, etc.

6. PAN number, if applicable

7. Details of nomination

8. Specimen signatures

Clearing Member Account; The entities that are authorized to pay in and

receive the pay out from a clearing corporation / clearing house against trades

done by them or their clients are known as clearing members. CMs are

identified in the system through their CM-BP ID. All pay-out transactions are

carried out through their accounts. There are two types of clearing members:

1. All members of a stock exchange popularly known as brokers, are

clearing members.

2. Custodians who are permitted by the stock exchange to act as a clearing

member.

Intermediary Account; As per SEBI Regulations on Stock lending and

borrowing, only an approved intermediary can lend and borrow stocks from

clients. This intermediary borrows from lenders and lends to borrowers.

Intermediaries registered with SEBI as approved intermediary may open an

intermediary account with a DP of its choice, for executing stock lending

and borrowing transactions made through them. An intermediary account may

be opened only after obtaining registration from SEBI under an approved

Stock Lending Scheme, and getting the approval of the depository for

opening the account.

Closure of Account; Closure on client’s request - A DP can close a

depository account on receipt of an application in the prescribed format. The

application should be made by the account holder or by all the joint-holders.

An account can be closed only when there is no balance in the account. In

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case there is any balance in the account sought to be closed, the following

steps are necessary.

(a) Re-materialization of all securities standing to the credit of the account

at the time of making the application for closure; or

(b) Transferring the balance to the credit of another account opened by the

same account holder (s) either with the same participant or with a

different participant.

TRADING AND SETTLEMENT;

Any trade that is cleared and settled without the participation of a clearing

corporation is called off-market trade. Transfer from one beneficiary account

to another due to a trade between them is called off-market transaction.

Large deals between institution, trades among private parties, transfer of

securities between a client and sub-broker, large trades in debt instruments

are normally settled through off-market route.

Off - Market Trade

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h Seller gives delivery instructions to his DP to move securities from

his account to the buyer’s account

2. Buyer automatically receives the credit of the securities into his

account on the basis of standing instruction for credits.

3. Buyer receives credit of securities Into his account only if he gives

receipt instructions, if standing instructions have not been given.

4. DP needs to be extra careful in verifying the signature of the client if

unusual quantities of securities are being debited to the account.

5. Funds move from buyer to seller outside the NSDL system.

Settlement of Market-Transactions

A market trade is one that is settled through participation of a Clearing

Corporation. In the depository environment, the securities move through account

transfer. Once the trade is executed by the broker on the stock exchange, the

seller gives a delivery instructions to his DP to transfer securities to his

broker’s account.

Market Settlement - Demat Shares

The broker has then complete the pay-in before the deadline prescribed by

the stock exchange. The broker removes securities form his account to CC /

CH of the stock exchange concerned, before the deadline given by the stock

exchange.

The CC / CH gives pay - out and securities are transferred to the buying

broker’s account. The broker then gives delivery instructions to his DP to

transfer securities to the buyer’s account. The movement of funds takes

place outside the NSDL system.

1. Seller gives delivery instructions to his DP to move securities

from his account to his broker’s account.

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2. Securities are transferred from broker’s account to CC on the

basis of a delivery out instruction.

3. On pay-out, securities are moved from CC to buying broker’s

account.

4. Buying broker gives instructions and securities move to the

buyer’s account.

CENTRAL DEPOSITORY SERVICES (INDIA) LTD. (CDSL)

Benefits of opening an account with CDSL system

1) The unique centralized database of CDSL enables DPs to debit / credit

securities instantaneously to the Beneficial Owner’s account thereby

avoiding any transit position.

2) CDSL’s unique client ID number ensures debit / credit of securities only to

the intended account, as the system does not accept a transaction, where

account number is keyed in incorrectly.

3) CDSL offers a facility to the clearing House / Clearing Corporation under

which securities sold purchased by any BO on BSE can be directly delivered

from / received in the BO account without routing them through the broker’s

pool account.

4) CDSL does not collect any custody fees from its DPs. Thus BOs can except

a lower charge in respect of securities held in CDSL accounts. The

transaction cost of settlement of securities through CDSL is lower in most

cases.

ACCOUNT TYPES WITHIN CDSL

The account structure in CDSL is designed to meet the following objectives.

S To maintain proper records.

S To Segregate accounts of Beneficial Owners from each other and form

the depository participants.

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^ To enable RTA / Issuers to access an index of all accounts, this

represents the balances of all holdings in a particular ISIN (International

Security Identification Number).

^ To enable Depository Participants to enquire about only those Beneficial

Owner accounts that do they service. The Beneficial Owner master file

account details and the current and historic details of transactions and

balances will be available to DPs.

S To provide a flexible accounting structure to support the settlement

requirements of the market.

^ To account for dematerialized securities at BO level.

FEATURES

1) All beneficial Owner accounts are operated at Depository

Participant level, however data is maintained at CDSL Level.

2) BOs do not have direct access to CDSL system, except through

66 Smartcards44 for enquiry purpose, as and when provided.

PROCEDURE FOR OPENING DEMAT ACCOUNT

The process of opening a demat account through a DP of CDSL is very easy

and simple. It is similar to the opening of a bank account.

L Investor as choose a DP from the list of CDSL DPs published in CDSL

Infoline or accessible through the CDSL website www.cdslindia.com

2. The investor should submit an application form to the DP.

3. Before demat account is opened, the investor will have to execute an

agreement on a stamp paper to be provided by the DP, which defines the

rights and obligations of both, the investors and the DP.

4. On opening an account, a unique BO ID (Beneficial Owner Identification)

Number is allotted, which should be quoted in all future transactions.

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5. Under the Depository system, there is no restriction on opening more than

one BO account in the same or identical names with the same or other DPs

subject to the condition that all requirements are compiled with.

6. There is also no compulsion on any investor to open this demat account with

the same DP as that of his broker, Investor can open account with the DP of

his choice and carry on his trading activity through a broker of his choice.

Where any DP offers special charge with the brokers DP may have some

advantages.

However a BO belonging to any one of the categories specified under the

CDSL Bye laws need not enter into an agreement with the DP, if the DP has

entered into an agreement with the BO pursuant to securities & Exchange Board of

India (Custodian of securities) Regulations 1996. The BO Categories are as under:

> Public Financial Institutions as defined in section 4A of the Companies

Act, 1956.

> A Bank included for the time being in the second schedule to the

Reserve Bank of India Act, 1951.

> Foreign Bank operating in India with the approval of RBI.

> State Financial Corporation established under the provisions of section

3 of the State Financials Corporations Act, 1951.

> An Institution engaged in providing financial services, promoted by any

of the Institutions mentioned herein above, jointly and severally.

> A Custodian of securities who has been granted a certificates of

Registration by the Board under sub-section (1A) of section 12 of the

SEBI Act, 1992.

> Foreign Institutional Investor as defined under section 2(f) of the SEBI

(Foreign Institutional Investors) Regulations, 1995.

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> A Mutual Funds as defined under Section 2(q) of the SEBI (Mutual

Funds) Regulations, 1992 and Registered with SEBI under regulation 9

thereof.

DEMATERIALISATION OF SECURITIES :

Objectives >

To enable Beneficial Owners to convert their scripts existing in physical

form to electronic balances in accounts maintained by CDSL, through DPs.

Features >

Dematerialization is a process by which the scrips existing in paper form are

converted into electronic balances maintained in securities accounts held by the

BO with a DP of CDSL.

However, to Dematerialize the share certificates an investor has to

> Fill up a Dematerialization request form, which is available with

the DP.

> Submit share certificates along with the forms (Write “Surrendered

for Demat” on the face of the certificate before submitting it for

demat).

> Receive credit for the dematerialized shares within 15 days.

Only those securities held in the form of certificates registered in one’s name

individually or jointly can be dematerialized. Moreover, the securities must belong

to the list of securities admitted for dematerialization at CDSL. Securities held in

street name (Market deliveries) cannot be dematerialized.

If one wants to dematerialize the securities of a company that is not admitted

with CDSL, then the investor should request the company to have that security

admitted with CDSL and once that has been done, he can get it dematerialized.

SEBI has laid down a separate procedure for simultaneous transfer and!

demat of share’s in one’s favour. The transfer cum demat facility is available only

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in respect of securities of those issuer companies, who have entered into special

arrangement with the depositories. After the company / RTA has transferred the

shares in the name of the Transferee, it will send option letter to the transferee to

ascertain whether he wishes to have them dematerialized. Incase the transferee opts

to receive them in demat mode; he will submit the option letter along with the DRF

to the DP. DP will forward the DRF and the option letter to the company / RTA,

whereupon company / RTA will demat them and the BO account will be credited.

In demat form the market lot is one share and therefore, there is no question

of odd lot. Dematerialized shares do not have any distintives or certificate

numbers. In demat all shares are fully fungible, which means that any 100 shares

of a company are similar to any other 100 shares of that company.

While CDSL does not levy any charges for dematerialization of securities,

DPs collect dematerialization charge together with postage / courier charges.

REFERENCE TO LAW:

Depositories Act, 1996

> Section 6 - Surrender of Certificate of Security.

SEBI (Depositories and Participants) Regulations, 1996.

> SEBI Regulations 27 - Depository to declare specific securities

eligible.

> SEBI Regulations 28 - Securities eligible for dematerialization.

> SEBI Regulations 29 - Agreement between depository and Issuers.

> SEBI Regulation 38 - Records to be maintained.

> SEBI Regulation 53 - Agreement by Issuer.

> SEBI Regulation 54 - Manner of surrender of Certificate of security.

PROCEDURE FOR DEMATERIALIZATION

1. To Materialize any physical security, one will have to open a demat account

with a DP of one’s Choice.

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2. Thereafter, all one has to do is to fill in a DRF (Demat Request Form) and

submit the same with the shares / securities Certificates to the DP for

dematerialization.

3. DP defaces and sends these certificates to the Issuer / Registrar who credits

an equivalent number of securities in the demat account maintained with

CDSL. For each scrip, a separate DRF has to be used.

4. The investor shall fill up the following details in the DRF :

• Investors account number with the DP

® DP ID

• DP Name

• ISIN

® Name of the Issuer

• Type of the Security

• Total quantity to be maintained

• Name (s) of the holder (s)

• Certificate Details : Folio No., Distinctive Nos., Certificate Nos.,

No. of Securities

® Lock in status.

5. The registered holder (s) shall sign the DRF.

® As per the specimen signature (s) recorded with the DP and

• As per the specimen signature (s) recorded with the Issuer /

RTA.

6. The Investor shall also surrender the physical certificate to be

dematerialized along with the duly filled DRF to the DP. Immediately on

receipt of DRF along with the scripts the DP should give the counter

acknowledgement to the BO

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7. The DP shall verify the following :

• Whether the DRF is complete.

• Whether the Certificate details mentioned on the DRF

and on the Certificate enclosed, tally.

• Whether the name (s) of the holder (s) and the order of

the names of the holders appearing on the certificates

exactly tally with those records under the BO Account

maintained with CDSL.

• Whether all the holders have signed the DRF and the

signatures of the account holders tally with those

recorded by the DP.

» If there is any discrepancy in any of the details, the DP

will get it rectified from the investor and the error free

DRFs will be taken up for further processing by the DP.

8. The DP shall capture the details from the DRF & Certificate through the

front-end system provided by the CDSL and shall generate the DRN on the

same day or latest by the next working day from the date of receipt of DRF.

9. In case the Securities are in “ Lock - In “ status the following details need

to be specified:

> Lock in Reason

> Lock in Release date.

10. The DP shall then write down the DRN on the DRF and deface the

certificates by affixing a rubber stamp “ Surrendered for Dematerialization

The DP has to take proper care that the stamp should be affixed in such a

manner that no material information such as distinctive numbers, Folio

Nos., etc., on the Certificate is smudged or becomes illegal.

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1 l.The DP shall then mutilate the certificates, by punching two holes at the top

of the certificates.

12. The DP shall then give a “System Generated acknowledgement” of the

demat request to the BO. This acknowledge will contain details such as BO

A/c No., BO Names, ISIN, Name of the Issuer & Type of Security,

Quantity, Distinctive / Certificate / Folio No., Date of request, DRN. The

DP shall authorize this acknowledgement by putting his seal / rubber stamp

& Signature of the authorized signature (may be printed on the letterhead of

the DP).

13. CDSL shall electronically send the DRF data to the issuer /RTA after the

DRN is generated. The process is done automatically by the system.

14. The DRF shall be authorized by the DP by putting his seal & signature.

The certificates & the original DRF shall be sent to the issuer / RTA along

with a covering letter printed on the DPs letterhead. This covering letter

content will be generated by the CDSL system. A copy of the DRF is to be

maintained by the DP for its own reference and records.

15. The DP then shall capture the dispatch details on the front - end system

such as the dispatch reference no., dispatch date, name of the courier, etc.

The DP must dispatch the physical documents within a maximum of 2 days

from the date of DRN Generation.

16. For items marked confirmed from the Issuer / RTA, CDSL activates the

balances in the BO account and they will be treated as fully dematerialized

securities.

17. The DP will print the statement of holding for the BO account for which the

balances have been activated by CDSL and mail / delivery the same to the

BO.

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18. The dematerialized process must be completed within 15 days or as

specified by the CDSL from time to time.

19.1ncase of rejection of certificates, unless there is a compelling reason, the

RTA / Issuer will print fresh certificates in lieu of the defaced certificates

and return the same under the objection to the DP concerned, along with an

appropriate rejection letter.

PLEDGING OF DEMAT SECURITIES Not only the demat securities can be

pledged, in demat form the BO may be able to get higher loan amounts, with

reduced margins & lower rate of interest. In respect of pledged securities, banks

give advance to the extent of Rs. 20.00 Lacs at a reducing margin of 25% as

against the amount upto Rs. 10.00 Lakhs with 50% margin that is advanced incase

of physical holdings. Some banks even charge lower interest rate for advances

against dematted securities. Moreover procedure for pledging securities in demat

form is more convenient both for the pledgor and the pledgee.

Procedure for pledging securities;-

L The pledgor and the pledgee must have Beneficial Owner accounts with

CDSL. These accounts can be with the same DP or with different DPs.

2. The pledgor has to fill up the “ Pledge Request Form “ (PRF) in

duplicate. The pledge may countersign the PRF.

3. One copy of PRF should be given to the DP for setting up the pledge

and second copy shall be sent to the pledgee.

4. One receipt of the PRF, file pledgor’s DP verifies that the securities to

be pledged are unencumbered and there is a depository system and a

unique pledge sequence no. will be generated.

5. The pledgee’s DP has the facility to access the request online.

6. Based on the pledgee’s DP either accepts or rejects the request using

the accept / reject flag.

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PROCEDURE OF UN-PLEDGING THE SECURITIES IN DEPOSITORY

SYSTEM

a) The pledgor through his DP makes a request for unpleding the pledged

securities by submitting the “ Unpledge Request Form “ (URF). The DP

sets up an un-pledged request in the depository system.

b) The pledgor should provide a copy of “ URF “ to pledge.

c) The pledgee will instruct his DP to accept the unpledge request by

submitting the copy of “Unpledged Request Form “. The pledgee’d DP

can access the “ Unpledge setup” online.

d) On acceptance / Rejection of the unpledge request, the status is changed

from “setup” to “Accepted” or “Rejected”.

SETTLEMENT OF SECURITIES IN DEMAT FORM :

Settlement; An investor who trades in any security on a stock exchange will have

to do so through a clearing member. A Beneficial Owner (BO) who holds an

account in CDSL will be able to settle all his settlement obligations directly from

his account through his DP. The DP is required to process the instruction received

from the BO’s within the time period as specified by CDSL.

Post Settlement ; During settlement, due to abnormal conditions, securities get

credited to various special purpose accounts. These securities have to be

transferred out of these accounts as laid down in the Byelaws of CDSL. Such

transfers are allowed by execution of instructions of the transferor. The CMs who

wants to transfer the securities out of designated accounts, in which such transfers

are allowed, can do so by giving the instructions to the DP / CH and the

instructions will be executed by CDSL.

OFF MARKET TRADES :

> An Off market trades arises when a BO elects to sell / Transfer securities

to another BO without using the settlement mechanism of any exchange.

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> Off Market trades are the deals generally for bulk quantities of securities,

which are negotiated by the CMs outside the exchange. These trades may

be informed to the respective stock exchanges through their CMs Trading

terminals but the exchange mechanism to settle the transaction is not

used.

> For this identical & matching instructions from both the parties including

confirmation that money has been paid / received has to be received by

CDSL before CDSL effects the actual Debit / Credit.

Features

> All Depositaries Participants (DP) registered with CDSL will be eligible

for conforming the obligations of all the Beneficial Owners (BO) who have

opened account in CDSL through that DP.

> All the DPs will be able to execute the instructions to transfer the securities

as per the instructions of tier BOs. However all such instructions will be

governed by the Byelaws of CDSL.

PROCEDURE FOR SETTLEMENT

The procedure for selling dematerialized securities through any stock exchange is

similar to the procedure for selling physical shares. However, the procedure for

delivery of securities is much simpler when compared to the sale of securities in

physical segment. In case of sale of demat security, immediately on receipt of

intimation of execution of trade from broker, the seller should issue instructions to

the DP with whom he maintains his demat account, for delivery of security either

directly to the Clearing Corporation / Clearing House or to the brokers clearing

account, as advised by his broker.

a) The BO informs the CM the details of the securities in which he wants

to trade and gives him the details of his BO account which he wants to

settle the trade.

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b) After the trade is put through and the CM receives the Net ISIN wise

obligations, he informs the CH the details of all the BO accounts for

whom he has traded. He will do this by using his front-end system with

CH. Each BO wise obligation that the CM informs to the CH will be

allotted a unique obligation - ID and Sr. No.

c) The CM will inform the details of the obligation - ID and Sr. No to the

BO and request him to confirm the obligations through his DP.

d) On receipt of the information from the CM, the BO will fill in the

confirmation slip / form and delivery it to his DP. He will have to fill in

the settlement - ID, obligation - ID, Serial Number, CM ID, ISIN,

Quantity, Type of Transaction (i.e. buy or sell)

e) The DP will first verify the signature of the BO or his power of

attorneys as the case may be on the slip / form and if it tallies, he will

enter the confirmation on his front - end.

f) The DP will receive report of the status of all obligations confirmation

and he will have to scrutinize the mismatched / unmatched obligation

confirmations.

g) In case of mismatch of obligations the DP will immediately contact the

BO and he and inform him of the Mismatch so as to enable the BO to

correct the error. He will take a fresh instruction from his BO.

h) The DP can do the above confirmation process for all the unconfirmed

and mismatched obligations upto the time notified by the Ch. After the

expiry of the time, the unmatched and mismatched obligations are

transferred for the settlement through the CM principal account.

i) The Depository participant will confirm the instructions received from

the CM if the CM wants to settle the trade through the CM principal

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account. Hr will follow the same procedure that he follows for

confirmations (mentioned above).

j)After the time for confirmation is over the confirmed sales obligations

are sent by CH to CDSL for earmarking. The DP will not be allowed to

enter any confirmation after the allotted time for that settlement.

Over the last fifteen years, the depository system has grown steadily. Along

the way, the regulatory framework in place, consisting of the Regulations, the

various circulars issued by SEBI, the byelaws and circulars of the Depositories

have undergone several changes and have been strengthened to address the

regulatory challenges that have emerged over time. However, as is the case in the

growth of any regulatory system, despite the steady growth to maturity, there

always remained considerable scope for constant learning and consequent

refinement of the framework. The issues that further needed to be addressed came

to the fore when SEBI detected a wide scale misuse of the depository system in

what is generally referred to as the IPO scam.

To derive the fullest extent of the benefit of the fully automated systems in

the depository, it was equally important to strengthen the human interface

primarily for verifying that the beneficial owner in the records in the depository

system truly corresponded with an actual person or legal entity. Firstly, the person

admitted to the depository system would have to verified and found genuine and

secondly the actual persons who have control over the ownership of shares would

need to be identified. This called for continuous improvements to the KYC regime

prevalent in the securities market.

In response to the deficiencies and weaknesses that were observed over these

years, SEBI felt that Depositories should assume greater responsibility in the

interest of investors and integrity of the market and carry out necessary changes so

that chances of misuse of its systems are minimal. The systemic issues that were

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addressed at different points in time over this period of evolution and growth of the

depositories are summarized under four heads below:

• Strengthening of KYC Norms

• Audit procedures and Systems Audit

• Improving disclosures and Surveillance

• Strengthening of the Regulatory Framework for Depositories

Strengthening of KYC Norms

1. PAN has been made mandatory for opening of dematerialized accounts with

effect from 31st March 2006.

2. The Depository Participants are required to obtain a photocopy of the PAN

card of applicants) and verify the same with the original PAN card.

3. Further, PAN card details of demat account holder(s) are cross checked with

the details appearing on the website of the Income Tax Department (ITD for

the same PAN).

4. In respect of accounts that are opened till March 31, 2006, account holders

were advised to get verification of PAN done as is the case with new

account (as per Para above), at the earliest but not later than October 1, 2006

(later extended till December 31, 2006) in respect of all account holders)

otherwise the accounts were to be frozen for debits.

5. With effect from January 1, 2007, all PAN non-compliant accounts have

been frozen. It was directed that PAN non-compliant accounts which do not

have any security balances should be closed latest by November 15, 2008.

6. The depositories have advised the DPs to verify whether the account

opening documents submitted by the investor in respect of such accounts

viz: proof of identity and proof of residence are available, the copies of these

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documents have been verified with the originals and KYC norms prescribed

by SEBI have been followed.

7. The PAN compliance status as on 15th November, 2009 is as shown in the

Table below:

Table 5.3: The PAN compliance status as on 15th November, 2009

Depository Total no. of accounts

PANcompliant

Frozen A/cs. As on given date

NSDL 1,02,18,478 97,22,273 4,96,205

CDSL 61,73,489 60,84,082 89,407

Table 5.4: The progress of PAN compliance on frozen accounts as on 15th

November 2009

Depository PAN non Compliant account as on 01/01/07

Unfrozen A/cs. Since 01-01-07 afterfurnishing

PAN

Frozen A/cs. as on given date

No. of A/cs. With nil holdings (from column 4)

No. of A/cs. With holdings (from column4)

NSDL 37,44,849 32,48,644 4,96,205 17,306 4,78,899

CDSL 6,06,945 5,17,538 89,407 3,697 85,710

Source: www.sebi.gov.in

bCONCLUSIONS:

The demat account opening is same as bank account, i.e. single or joint accounts

or with nominee. Some amount has to be paid (i.e. 250/- per year+25) for the

demat account. For each transaction the DP’s may charge nearly Rs.30 +

brokerage/commission is common. The growth rates of demat account holder in

increasing over years. The Indian system of capital market is a Two Tire System.

Indian government allows holding securities in any form i.e. either in physical

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securities or in electronic (demat) form. The transaction of securities is

completely (i.e. 99.99 %) done through electronic format. Most of the

speculators do not utilize demat account in day-to-day online trading. Finally it

can be concluded that depository system in India has resulted new dimension in

securities trading. There are only two depositories in India till date , the need of

hour is to open some other DPs to facilitate the online trading of securities.