fundamentals of depositories

7/30/2019 Fundamentals of Depositories

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THE DEPOSITORIES


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A depository is a central location for keeping securities

In other words it is a facility for holding securitieseither in certificated or uncertificated form

In today's electronic world it is transfer of ownership in

electronic mode In other words it is a place where securities are stored,

recorded on behalf of investors

A depository works as a nominee, custodian on behalf

of investors. This is leading to a system of immobilization and

dematerialization of share certificates


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Group of 30 private sector recommended theformation of central depository in order toprovide speed and accuracy to stock exchange

In Indian stock exchange there was notransparency, bad deliveries, delay in transfer,forgery

The depository system aims at replacing the

manual system of transfer by simple book entriessystem


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Objectives of a Depository

Reduce the time for transfer of securities

Avoid the risk of settlement

Enhance liquidity and efficiency Reduce cost of transaction for the investor

Create a system for central handling of

securities Promotes countrys competitiveness by

complying with international standards


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Activities of Depository

Accepting deposit of securities for custody

Making computerized book entry

Providing for withdrawal of securities

Distribution of dividend and interest

Redemption of securities on maturity BENIFITES TO INVESTORS:-

Eliminates paper work

The risk of bad deliveries, fraud, will not exist

It shortens settlement time and investor can increase its volume

Investor can change portfolio more frequency

Distribution of dividends,interest,etc becomes easier

The cost of transfer is less a share transfers are exempted fromstamp duty


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Benefits to companies

The company will be able to know the particulars ofbeneficial periodically

Investors complaints will be less

It will be possible to send annual reports without delay

BENEFITS TO CAPITAL MARKET The capital market will be more transparent as trading,

clearing and settlement are done through computers

The market becomes automated due to use of computersand telecommunication

Confidence of investors improves

Foreign investor will start participating

It increases the volume of trade by number and value


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Steps Involved In Depository Process

Immobilization of shares which means convertingphysical certificates into electronic data

Share certificates-depository-book entry

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statement of account On receiving share certificates the depository sends

them to registrar and transfer agent for registering

With in prescribed time registrar transfers the scrips in

the name of depository In case of fresh issue the applicant must give

depository account particulars


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Registration

Registration of Depository with sebi is must

THE application for registration must be submitted in prescribed form along withfee of 50000.

The sponsor of a depository can be

1 Public financial institution

2 Banks

3 Foregin banks operating in India

4 Recognised stock exchange

5 Institutions engaged in financial services.

SEBI prohibits depository to carry on any activity other than that of depository

At 51%of equity capital should be held by a depository and holding of NRI shouldbe maximum of 49%

A depository is required to pay an annual fee or RS10000

With 1year of registration depository should apply for commencement of business


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Certificate of commencement

of business With 1year of registration with sebi depository is required to apply for

commencement of business. While granting certificate SEBI considers ;-

The net worth of the depository is not less than 100crores

The bye laws of depository are approved by sebi

The automated data is protected against unauthorized use, alteration or

destruction The depository has a detailed operation manual explaining ifs functioning

It has made adequate arrangements including insurance and to indemnifythe owner incase of any loss caused due to negligence of depository or DPor its employee

The grant of certificate must be in the interest of investor

The SEBI should make physical verification of the infrastructure facilities ofthe depository


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SEBI (Depository And Participants)

Act;1996 Features of the Act;-

Issue of securities through electronic media

The act provides for the creation of depository

Institution registered under the companies act

Having minimum net worth of 100crores

DEPOSITORY PARTIPANTS-As per act a depository will deal with the issuerthrough a DP.It is the link between the investors and depository or he isthe agent of the depository

As per SEBI commercial banks, financial Institutions stock exchange canact as DP

A choice is to given to the investor as to physical securities and having a

depository based ownership. The investor can switch from depositorymode to non-depository mode and vice versa

The act does not provide for a stamp duty. At the time of issue ofsecurities the issuing company will pay the stamp duty on the total


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Ownership records maintained by depository or DP will be accepted as legal evidence

DEPOSITORY CONSTITUENTS

1.Depository 2.DP 3.Benificial owner 4.Issuer

Depository is a custodian of securities and helps in transfer of shares and have no right oversecurities. He should have an adequate mechanism for reviewing,monitoring,and evaluatingrecords

DEPOSITORY PATICIPANT

It is the link between depository and the owner of securities. The depository and DP are to beregistered with SEDI

Provide statement of accounts, reconcile his records with depository on daily basis and submitperiodic returns

THE BENEFICIAL OWNER;-He is the real owner of the securities and has all the rights and liabilitiesassociated with it.

Issuer is the company which issues securities. He gives choice to investors regarding holding thesecurities in physical form or demat form

The investor is free to exercise this option either at the time of applying or later on An investor will have to open an account with the depository and is issued a client number

T


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Drawbacks

1 Multiple depositories----A depository is a serviceinstitution so investor wants better service at reduced cost.

The cost of capital i.e. 100 crores will be born by theinvestor.

A single depository system should be present as it reducescost and inter depository movement of messages

2.Inter depository competition will hamper the interest ofthe investors

3The retail investor wants to hold the securities in scrip

form because of old habit, lack of awareness or tax evasion. As long as demat is made compulsory the investors will

hold shares in scrip form


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Remedial Measures

SEBI has undertaken a public awarenessprogram me

To increase the volume sebi has made

dematting compulsory for institutionalinvestor

SEBI has allowed delivery of demat securities

in physical form as well .An investorpurchasing shares in physical segment may getdelivery in demat shares

fundamentals of depositories

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