Ib&fs module 2

Depository System
Module 2
8/18/2016
KIRAN S, ASSISTANT PROFESSOR, BGS INSTITUTE OF TECHNOLOGY ,
BG NAGAR1

Depository System: Objectives, activities,
interacting systems, role of depositories and their
services, Advantages of depository system -NSDL
and CDSL. The process of clearing and settlement
through Depositories, Depository Participants.
Regulations relating to Depositories-SEBI
(Depositories and Participants) Regulations 1996-
Registration of depository and participant- Rights
and Obligations of depositories and participants-
Recent amendments Custodial services- The Stock
Holding Corporation of India Limited
8/18/2016
KIRAN S, ASSISTANT PROFESSOR, BGS
INSTITUTE OF TECHNOLOGY , BG NAGAR2

 Depository system
 Definition and meaning
 The term depository is defined as “a central location
for keeping securities on deposit”. It is also defined as
‘a facility for holding securities either in certificated or
uncertificated from to enable book entry transfer of
securities’
 It is understood from the above two definitions that’s
the depository is a place where securities are stored
recorded in the book on behalf of the investors.
 In recent times, the volume of securities and the size
of the business handled have increased manifold.
Hence the present day depositories are fully
automated to serve the customer faster and accurate.
8/18/2016

 Therefore, a depository can be defined as “an institution
which transfers the ownership of securities in electronic
mode on behalf of its member.
 A depository is a nominee who keeps the scraps the on
behalf of the investors. He undertakes the custodian role.
The depository leads the capital market towards scrip less
system through immobilization and dematerialization of
share certificates. Immobilization of securities means
stopping the physical movement. The number physical
certificate that pass between company and customer
become negligible as lodged and the immobilized
certificates are registered in the name of depository
nominee. Dematerialization means issuing the certificates.
The depository operates the computerized book entry
transfer for the securities. This results in a speedier and
more liquid trading environment. The depository also
undertakes the trade and settlements processing through
8/18/2016

Objectives
 Objectives of a Depository
 A depository enables the capital market to achieve the
following objectives:
 Reduce the time for transferred of securities
 Avoid the risk of settlement of securities.
 Enhance liquidity and efficiency.
 Reduce cost of transaction for the investor.
 Create a system for the central handling of all
securities.
 Promote the country’s competitiveness by complying
with global standards.
 Provide services infrastructure in a capital market.
8/18/2016

 Activity of the Depository
 The main activities of the depository are as
follows:
 Accepting deposit of securities of custody.
 Making computerized book entry deliveries of
securities which are immobilized in its custody.
 Creating computerized book entry pledge of
securities in its custody.
 Providing for withdrawal of securities.
 Undertaking corporation actions like distribution
of dividend and interest.
 Redemption of securities on maturity.
8/18/2016

interacting systems
 Interaction Institutions
There are three institutions that are interacting in a depository
system.
 The central depository.
 Share registrar and transfer agent.
 Clearing and settlement Corporation.
1. Central depository
 The central depository is a nominal who holds the securities on
behalf of the investors and maintains records related to that in an
electronic mode.
2.Share Registrar and Transfer Agents
 The register is an institution that controls the issuance of
securities. The transfer agent is one who retains the names and
addresses of registered securities owners and reregisters traded
securities in the names of new owners.
3.Clearing and Settlement Corporation
 It is a centre to do trade matching and settle the funds and
exchange securities. 8/18/2016

Depository Process
1. Immobilization of Shares
Immobilization of shares is the first step in the depository process. In the immobilization
process the share certificate are submitted to the depository which converts the physical
certificate into electronic data and start issuing statement of accounts for the holding of the
investors or shareholders
The immobilization process is illustrated in the following figure
Share certificates depository
Statement of account book entry
8/18/2016

 The step involved in the process of converting the
existing paper certificate into an electronic mode
is as follows:
 The stock exchange will notify through an
advertisement after which the investors may
deposit their shares into the central depository
through an authorized depository agent with
whom the investors’ accounts will be maintained
 On receipt of the share certificate the depository
or the depository agent sends the certificate to
the registrar and transfer for registering
depository nominee name.
 Within a prescribed period the registrar will
transfer the scrip’s after conforming that the share
are good for disposition in the name of the
depository nominee and returns it for safe
custody with the depository. The depository will
credit the account of the investor with the
8/18/2016

Advantages of Depository
services
 Benefit to investors
 This system will eliminate paper work.
 This risk of bad deliveries, fraud and misplaced,
mutilated and lost share certificates will not exist.
 This electronic media will shorter settlement time.
 Investors will change portfolio more frequently.
 The distribution of dividends, interest and other
benefits will be speedier.
 Cost of transfer is less as the share transfer.
 Faster payment in case of sale of shares.
8/18/2016

 Benefits to companies
 The companies will be able to know the particulars of
beneficial owners and their holdings periodically.
 At the time of declaration of dividends, bonus etc.
there will not be any rush for transfer related activities
for the companies.
 Benefit to the capital market
 The capital market will be more transparent as the
trading, clearing and settlement mechanism have to
be highly automated and interlinked with the
depository among them.
 The market will be highly automated and efficient due
to the above two aspect.
 The foreign investor will start participating in the
market resulting in a more buoyant capital market.
 The existence of depository will result in increase in
the volume of trade both by number and value. 8/18/2016

National Securities Depository Ltd. (NSDL)
 The first depository in India – the national
Securities Depository Limited (NADL) was
established in 1996. It has been promoted by the
Industry Development Bank of India (IDBI), Unit
Trust of India (UTI) and National Stock Exchange
(NSE). NSDL started operational in November
1996 and made significant progress since then.
 NSDL performance a wide range of secured
related functions through the DPs:
8/18/2016

 Maintenance of individual investors’ beneficial
holding in an electronic form.
 Dematerialization and Dematerialization of
securities.
 Account transfer for settlement of trade in
electronic shares.
 Allotment in the electronic from in case if initial
public offerings
 Distribution of non cash corporate actions.
 Facility for freezing/looking of investor accounts.
 Facility for pledge and hypothecation of
securities.
Right now, seven stock Exchange-the NSE, BSE,
CSE, DES, OTCEL, Ludhiana and Bangalore Stock
Exchange have established connectivity with
8/18/2016

Central Depository Services (India) Ltd
(CDSL)
 The CSDL has been set up by Bombay stock
exchange and co-sponsored by SB, Bank of
India, Bank of Baroda and HDFC Bank. It
commenced its operational on March 22, 1999.
 Up to March 2000,680 companies made available
their shared for demat. The market value of
dematerializes securities amounts to Rs, 8,188
crore. The no. beneficial owners stood at 284545.
 As on April 2008 there were 422 depository
participate with 5771 DP services centers. The no
of investor account was 52, 68,932.6063
companies made available their share for demat
as on April 2008.
8/18/2016

 Objective of CDSL
 To accelerate growth of script less trading.
 To make a major trust on individual investors to
participate in depository services.
 To create a competitive environment which will be
responsive to the user’s interest and demands
 To enhance liquidity
8/18/2016

The process of clearing and settlement
through Depositories, Depository
Participants
Meaning of depositary participants: the act
envisages that a depositary will interface with the
users through a set of depositary participant . They
are persons dealing directly with the depositary for
their clients.
The dp is crucial link between the investor and the
depositary.
The depositary will therefore be responsible for the
acts of omission and commission on the part of the
depositary participant.
8/18/2016

Depositary process in India
There are four constituents in this system:
1. The depository
2. The depositary participant
3. The beneficial owner
4. The issuer
 The depository: the depository is entrusted with
the securities for effecting the transfer of
ownership of the securities. He is the custodian of
his client’s securities.the depository has no right
over the security except with the transfer of it.
8/18/2016

 The depository participant: the dp is the link
between the depositors and the owners of the
securities. He is deemed as an agent of the
depository. The depository therefore is
responsible for the acts of omission and
commission on the part of the DP.
 The depository and DP are registered with SEBI
which regulates their functioning.
 Clearing houses of recognised stock exchanges,
non banking financial companies with minimum
networks and banks including foreign banks are
eligible to become DP.
8/18/2016

 The beneficial owner: the beneficial owner is the
real owner of the security. He lodges his
securities with the depository in the form of book
entries. He has all rights and liabilities associated
with the securities.
 The issuer: it is the company which issues the
security.
The issuer first gives the investors a choice of
holding their securities either in the physical form or
the scripless form (through the depository).
The investors make their choice and communicate
to the issuing company at the time of initial offer
itself.
The issuing company intimates the depository
details about the allotment of securities.
The name of the depository is entered by the issuer
as the registered holder of the security.
8/18/2016

Depository participant
 Depository institution: the act provides for
creation of one or more depository institutions
registered under the companies act and pre
dominantly owned by the market participants.
 The minimum net worth of a depository should be
100 crores.
 Depository participant:
In India, a Depository Participant (DP) is
described as an agent of thedepository. They are
the intermediaries between the depository and the
investors. The relationship between the DPs and
the depository is governed by an agreement made
between the two under the Depositories Act.
8/18/2016

 In India, a Depository Participant (DP) is
described as an agent of the depository. They are
the intermediaries between the depository and
the investors. The relationship between the DPs
and the depository is governed by an agreement
made between the two under the Depositories
Act. In a strictly legal sense, a DP is an entity who
is registered as such with SEBI under the sub
section 1A of Section 12 of the SEBI Act. As per
the provisions of this Act, a DP can offer
depository-related services only after obtaining a
certificate of registration from SEBI. As of 2012,
there were 288 DPs of NSDL and 563 DPs of
CDSL registered with SEBI 8/18/2016

SEBI (depositories and participants )regulation
act 1996
the depositories ordinance was promolgumate in
september 1995. following the issue of ordinance ,
the SEBI circulated a consultative paper seeking
views from the public on the framework of
depository system.
This was followed by issue of the SEBI
(depositories and participants) regulations which
was promulgamated by the government in May
1996
The features of the act and the regulations are
briefed here under.
8/18/2016

 Depository participant : the SEBI has proposed that
the following entities could be permitted to be
registered as DP’s: commercial banks, financial
institutions ,stock exchanges, financial services
companies owned to the extent of 75% by any of the
above mentioned institutions as well as companies
registered abroad providing custodial service. Or
settlement services in the securities market and
approved by the central government.
 investor’s choice: an investor is given the option
between holding physical securities as at present and
having a depository based ownership record. Such as
exercised by the investor either at the time of an initial
offer of securities by a co indicating his choice in the8/18/2016

 Free transferability: the act has made free
transferability of shares. Once the agreed condition is
made by the buyer , he is automatically entitled to all
the rights associated with the economy.
 Rights of transferee: the act provides that the
transferee of a security will be entitled to all the rights
including voting rights asssociated with the
security.company law board can suspend the voting
rights in respect securities so transferred.
 Fungibility:each share in a company shall be
distinguished by a appropriate number.
 No stamp duty: no need of stamp is required to deal
with secondary market.
8/18/2016

 Depository records as legal evidence: the
ownership records maintained by the depository
or the participants will be accepted a prima facie
evidence in legal proceedings. The depository
records will receive the same treatment as
available to banks under the bankers book
evidence act.
8/18/2016

Rights and Obligations of
depositories and participants
The below are the rights obligations of depositories
and depository participant
 A depository has to be registered under sebi
 A depository should enter into an agreement with
dp as its agent
 The issuer would cancel the certificate and
substitute , in its records , the name of the
depository as a registered owner in respect of
that security.
8/18/2016

 The depository would record the name of the
person surrendering the certificate as the
beneficial owner.
 On receipt of information from any Dp, a
depository would register the transfer of security
in the name of the transferee.
If a benefecial owner / transferee seeks to have the
custody of such security, the depository would
inform the issuer company. Person who is receiving
the securities have the option either to receive the
certificate or hold them with a depository.
 All securities held by the depository would be
dematerialised and would be in fungible form. A
depository would be deemed to be the registered
owner for the purposes of transfer of owner
 Every depository should maintain the index and
register of beneficial owners in the manner 8/18/2016

 A beneficial owner , with the prior approval of
depository , can create pledge/hypothetication
held in a depository that would make entries in
its records accordingly. This entry would be
evidence of pledge and hypothecation.
8/18/2016

Registration of depository and
participant
 Registration of depository: depositories must
be registered with the SEBI. The application for
the grant of certificate of registration, in the
prescribed form, should be accompanied by an
application fee of Rs 50,000 together with the
draft bye laws of the proposed depository.
 The obligations applicable to :
1. Financial institution
2. Bank
3. Foreign bank operating in India
4. Recognised stock exchange
8/18/2016

 Body corporate engaged in financial service
Eligibility for acquiring /holding shares:
The fit and proper person can directly or indirectly acquire / hold shares
/voting rights of a depository. Acquisition of shares individually or together
with persons acting in shareholding pattern of 2%.
Conditions for registration:
Payment of registration fee or Rs 25,00,000 within 15 days
Compliance with the provisions of the depositories act
Prohibition on carrying on any activity other than that of a depository
Compliance with the share holding and governance structure requirements
At least 51% of the equity capital of the depository has to be held by the
sponsors . No participant can hold more than 5% . However ,stock
exchange sponsor cannot hold more than 24%.
No resident/non resident person, other than a sponsor would at any time
individuals together with persons acting in concert hold more than 5% of
the equity capital for a depository.
8/18/2016

 The combined holdings of all non resident persons in the
equity capital of a depository could be upto a maximum of
49%
 Governance of depositories: the elements of the
regulatory framework are: board, disclosures and
corporate governance, conditions of appointment of
directors.
 Governing board, disclosures and corporate governance:
 Conditions of appointment of directors: minimum of 3
years or extend period for the appointment of a director.
 Appointment of a managing director: prior approval of
SEBI would be required for appointment of service
 Certificate of commencement of business:
within a year of registration with the SEBI, the depository is
required to apply for a certificate of commencement of
business.
The below conditions are considered
1. The depository should has a net worth of not less than
Rs 100 crore.
2. The bye laws of the depository have been apporved by
SEBI 8/18/2016

 Net worth certificate: the depository should
submit an audited net worth certificate duly
approved by an approved auditor.
 Code of conduct: code of conduct that is rules
and regulations has to be implemented .
8/18/2016

Registration of participants
Registration of participants
 An application for initial registration as a participant
should be made to the SEBI in the prescribed form
together with a fee of Rs 5000, through the
depository. The depository should forward the
application to the SEBI within 30 days along with its
recommendations and certifying that the participant
applicant complies with the eligibility criteria, including
adequate infrastructure.
 consideration of application for initial
registration:
All matters which are relevant to or related to the
efficient and orderly functioning of a participant would
be taken into account by the SEBI for granting
registration.
1. The applicant should be an eother financial
institution or a bank or a foreign bank, state finance
8/18/2016

 Is eligible to be admitted as a participant of the
depository through which it has applied .
 Has adequate infrasturcutre ,systems, safeguards
and trained stuff to carry on as a participant.
 Is registered in the interest of the investors and the
securities market and pant.
 Is registered in the interest of the ivnestors and the
securities marked
 Is a fit and proper person
Conditions: the participant should pay a registration
fee of Rs 1,00,000 within 15 days and comply with the
provisions of the depositories act.
8/18/2016

 Certificate of permanent registration-
Three months before the expiry of the period of
initial registration, the participant should apply for
permanent registration through the concerned
depository together with the specified fee and
accompanied by details of changes that have taken
place in the information submitted to the SEBI.
Code of conduct for participants:
The participant holding a permanent registration
form should follow certain code of conduct
8/18/2016

Stock holding corporation of India
limited(SHCI)
Stock Holding Corporation of India Ltd (SHCIL),
India’s largest custodian and depository participant
based in Mumbai, Maharashtra. It was established
in 1986 under the Government of India as public
limited company. It is owned by the India's leading
Banks and Financial Institutions such as, SU-UTI,
IFCI Ltd., LIC, GIC, NIA, NIC, UIC, and
TOICL. SHCIL is known for its online trading
portal with investors and traders.
8/18/2016

StockHolding pioneered custodial services in India
in 1988 and presently is supported from 189 offices
in India. Stock Holding has been the largest
Custodian, by Assets and transaction volumes for
more than two decades. It presently holds USD 185
Billion of Assets under custody, thus making it the
largest custodian in India (the second ranked
custodian has AUC of about USD 110 Billion) with
the deepest pool of expertise. Stock Holding’s 600
man-years of Custodial expertise and its reach,
experience ensures our commitment and
dedication to delivering high quality solutions and
services to our client’s advantage. This also reflects
our robust Operational processes and procedures
8/18/2016

 StockHolding is the first Custodian to offer
Technology based solutions, since inception
especially in the area of Custody & Clearing. Our
Technology solutions are driven by an in-house
development team that has deep exposure to
capital markets and thus have the ability to
customise solutions in the shortest time to our
clients benefit. Presently we roll out Standard,
Regulatory, and customized reports to our clients,
thereby making us probably the most diverse in
our abilities as well. Needless to say, we are the
PREFERRED Custodian of the Large Institutional
Investors in India 8/18/2016

8/18/2016

Services of SHCL
 On board registration
 Securities escrow account
 Income collections
 Reporting
 Risk management
 Government debt
 Valuation services
 Tax coordination
 Collateral management
 Derivatives
 Fund accounting services
 Securities lending and borrowing
8/18/2016

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