CHAPTER 1 INTRODUCTION

Dematerialisation or demat is the process of converting the securities held in physical form into an electronic record form or to directly allot securities in electronic record form. These electronic records of securities are shown as electronic balances in the demat accounts of investors. Any investor can open a demat account through a Depository Participant (DP). The DP is an agent of the depository and provides a link between the account holder or Beneficial Owner (BO), the Issuing Company, CDSL (Central Depository Services (India) Ltd.), the BOs broker and the Stock Exchange. CDSL publishes from time to time an updated list of DPs registered with it. Demat also refers to a Dematerialized account. Just as you have to open an account with a bank if you want to save your money, make cheque payments etc, you need to open a Demat account if you want to buy or sell stocks. So it is just like a bank account where actual money is replaced by shares. You have to approach the DPs (remember, they are like bank branches), to open your Demat account. Lets say your portfolio of shares looks like this: 40 of Infosys, 25 of Wipro, 45 of HLL and 100 of ACC. All these will show in your Demat account. So you dont have to possess any physical certificates showing that you own these shares. They are all held electronically in your account. As you buy and sell the shares, they are adjusted in your account. Just like a bank passbook or statement, the DP will provide you with periodic statements of holdings and transactions.

Dematerialisation of your holdings is not mandatory. You can hold your securities either in Demat form or in physical form. You can also keep part of your holdings
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(in the same scrip) in Demat form & part in physical form. However, a select list of securities announced by SEBI can be delivered only in Demat form in the stock exchanges connected to NSDL. This research project will thus focus on the Demat system in India. It will look into how the demat system actually works and what are pros and cons of such a system. Also it will look into the various aspects that are considered while going for the demat system by the investors.

LITERATURE REVIEW
BOOKS REFERRED:-

Taxman, Company Law & Practice, Majumdar A K. & Dr. Kapoor G.

K.,Taxman Publication Pvt. Ltd., (2003)

Ramaiya A., Guide to Company Law, 16th Edn., Wadhwa Publication.

Singh Avtar, Company Law, 13th Edn., Eastern Book Company, Lucknow, 2001. ARTICLES REFERRED: Demat Account Opening, Available at https://www.cdslindia.com/downloads/Investors%20Guide.pdf last visited on 11th March, 2013. Dematerialization, Available at https://nsdl.co.in/services/demat.php last visited on 11th March, 2013. Dr. Singh Jasbir, AWARENESS OF CUSTOMERS REGARDING DEMAT ACCOUNT, Available at http://www.ijtbm.com/webmaster/upload/May_2012_Kanta.pdf last visited on 11th March, 2013.
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 Demat

Account

Opening,

Available

at

http://www.cdslindia.com/downloads/faq/Demat%20CDSL%20Way%20%20II%20-%20Account%20Opening.pdf last visited on 11th March, 2013. Demat System in India, Available at last

http://www.scribd.com/doc/30692690/Demat-System-in-India-sumesh visited on 11th March, 2013.

RESEARCH TITLE AN ANALYSIS OF THE DEMAT SYSTEM IN INDIA

RESEARCH AIM
To know the concepts of the Demat System in India and to know how this system works and is useful for different kinds of investors and what are the benefits and flaws of it for both, the companies and the investors.

RESEARCH OBJECTIVE
To know the concepts of the Demat System in the Indian scenario. To find out what are the advantages and disadvantages of such a system. To find out what are the preferences of a investors while choosing such a system. To analyze how decisions are made by the companies and the investors regarding the demat system of securities and what authorities govern it.

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RESEARCH HYPOTHESIS
The Demat System has revolutionized the Indian securities exchange system and it saves a lot of time and money of the investors and is a lot more convenient method of exchanging securities and thus, is a boon to the securities market.

RESEARCH QUESTIONS
What are the concepts of Demat System, CDSL etc? What are the advantages and disadvantages of such a system? Which are the different authorities that govern such a system? What are the different preferences of investors and companies while going for Demat system and what do they exactly look for while making a decision?

RESEARCH METHODOLOGY
The Project report is based on Doctrinal research carried out on the basis of secondary sources. The researcher has developed the research problem in consultation with Dr. Pranav Saraswat. Thereafter information was collected from the library sources, online database, case studies and with reviews from the faculty members.

RESEARCH SCOPE
The researcher has tried to briefly cover the concept of Demat System in India and has tried to analyze the advantages and disadvantages of the system which helps the investors and the companies to make the decision.
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CHAPTER 2 DEMAT SYSTEM IN INDIA

2.1 CONCEPT OF DEMAT SYSTEM Indian capital market has seen unprecedented boom in its activity in the last 15 years in terms of number of stock exchanges, listed companies, trade volumes, market intermediaries, investor population, etc. However, this surge in activity has brought with it numerous problems that threaten the very survival of the capital markets in the long run, most of which are due to the large volume of paper work involved and paper based trading, clearing and settlement. Until the late eighties, the common man kept away from capital market and thus the quantum of funds mobilized through the market was meager. A major problem, however, continued to plague the market. The Indian markets were drowned in shares in the form of paper and hence it was problematic to handle them. Fake and stolen shares, fake signatures and signature mismatch, duplication and mutilation of shares, transfer problems, etc. The investors were scared and were under compensated for the risk borne by them. The century old system of trading and settlement requires handling of huge volumes of paper work. This has made the investors, both retail and institutional, wary of entering the capital market. However, lack of modernization become a hindrance to growth and resulted in creation of cumbersome procedures and paper work. However, the real growth and change occurred from mid-eighties in the wake of liberalization initiatives of the Government. The reforms in the financial sector
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were envisaged in the banking sector, capital market, securities market regulation, mutual funds, foreign investments and Government control. These institutions and stock exchanges experienced that the certificates are the main cause of investors` disputes and arbitration cases. Since the paper work was not matching the rapid growth so there was a need for a better system to ensure removal of these impediments. Government of India decided to set up a fully automated and high technology based model exchange that could offer screen-based trading and depositories as the ultimate answer to all such reforms and eliminate various bottlenecks in the capital market, particularly, the clearing and settlement system in stock exchanges.1 A depository in very simple terms is a pool of pre-verified shares held in electronic mode which offers settlement of transactions in an efficient and effective way. Dematerialized securities (Demat in short) are securities that are not on paper and a certificate to that effect do not exist. They exist in the form of entries in the book of depositories. Essentially, unlike the traditional method of possessing a share certificate to the effect of ownership of shares, in the demat system, the shares are held in a dematerialized form. This system works through a depository who is registered with the Securities and Exchange Board of India (SEBI) to perform the functions of a depository as regulated by SEBI. Under Section 68 B of the Companies Act, inserted by the Companies (Amendment) Act, 2000, it is mandated that every Initial Public Offer (IPO) made by a listed company in the excess of Rs. 10 Crores has to be issued in dematerialized form by complying with the requisite provisions of the Depositories Act, 1996.

Depositories Act, 1996: also in (19996) 3 Comp LJ 261 (St.) and SEBI (Depositorries and Participants)

Regulations, 1996: (1996) 3 LJ 13 (St.) [1-19],

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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. Dematted securities do not have any certificate numbers or distinctive numbers and are dealt only in quantity, i.e., the securities are replaceable. Investors can de-materialize only those certificates that are already registered in their names and are in the list of securities admitted for dematerialization. These are: shares, scrips, stocks, bonds, debentures, stock or other marketable securities of a like nature in or of any incorporated company or other body corporate, units of mutual funds, rights under collective investment schemes and venture capital funds, commercial paper, certificate of deposit, securities debt, money market instruments and unlisted securities, underlying sharing of American Depository Receipts and Global Depository Receipts issued to non-resident holders.2 Dematerialization is the process of converting physical holdings into electronic form with the depository wherein the share certificates are shredded and corresponding entry of the number of shares is done in the opened with the depository. The securities held in dematerialized form are fungible; that is, they 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.

SEBI (Depositories and Participants) Regulations, 1996: see (1996) 3 Comp LJ 13 (St.)

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Following requisites are necessary for dematerialization of securities: 1. Investors should have a depository account. 2. Securities should be from the eligible list of securities issued by the depository.3 3. Securities must be in the name of the account holders and owned by him. 4. Separate demat requisition form is required for each issuer company. 5. DRF4 should be signed by all the holders so as to match specimen signature.

2.2 CONCEPT OF DEPOSITORY SYSTEM Your money may be held in the form of liquid cash at your home or may be deposited in a bank. The bank holds your funds in the electronic form and subsequently debits or credits the account, depending on your issuance of cheques or deposit of cheques. The advantages of safety and convenience of dealing with a bank overweigh the reasons for holding liquid cash in your home. Your financial assets such as Equity Shares may be compared to the above example. You may hold physical share certificates in your home and be exposed to the various risks of lack of safety, mutilation, loss etc. Alternatively, you may deposit your shares in an organization called a Depository, which holds your shares in the electronic form. A Depository is a securities "bank," where dematerialized physical securities are held in custody, and from where they can be traded. This facilitates faster, risk-free and low cost settlement. Thus, a Depository is akin to a bank and performs activities similar in nature.

3 4

NSDL/CSDL agencies. Demat Requisition Form.

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Comparison Of Depository System With Physical Share System The risk of loss, mutilation is common for physical certificates and completely removed in electronic shares. Handling of a large number of physical certificates is ended in the Depository mode. In the electronic segment, there are no bad delivers as in physical segment. There is no stamp duty payable in electronic shares compared to the duty of 0.50% in the physical segment while transferring ownership. In loans against shares, banks usually charge a lower interest rate and margin money than in the physical share certificates. Settlements in the Stock Exchanges have commenced in the electronic segment and have proven to be far more efficient and convenient compared to physical shares.

Benefits of Depository System 1. Elimination of Bad Deliveries. In the Depository environment, once holdings of an investor are dematerialized, the question of bad delivery does not arise. Hence after dematerialization, Depository / Depository Participants cannot hold the Dematerialized Securities "Under Objection ". As per claims of NSDL, in the physical environment, about 20% of delivered stock constitutes bad deliveries. Of these, about 1% is ultimately absorbed by the system as bad delivery cost. Rectification of objection always involves extensive follow up by the investor. This means that in the physical environment, every fifth person taking delivery of stock gets securities, the genuineness to which there is a doubt whereas he parts with genuine funds.

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2. Elimination of all Risks of Physical Certificates. Physical Certificates are usually exposed to security risks due to theft of Stocks. The buyers of the Securities are also exposed to mutilation and / or loss of certificates during movements through and from the registrars. This requires the investor to incur additional burden for obtaining Duplicate Certificates including cost of advertisements, etc. This problem does not arise in the Depository Environment. 3. Special concession from Govt. of India for Stamp Duty. Section 30 of the Depositories Act, 1996, has made special provision, which exempt the Transfer of Equity Instruments & Units of Mutual Funds in the Depository from incidence of Stamp Duty. In case of Physical mode of Transfer of Equity instruments & Units of Mutual Funds, the buyers had to shell out for Stamp Duty @ 0.5% of the purchase cost. 4. Immediate Transfer and Registration of Securities. In the Depository environment, investors (Clients) become Legal Owner of the Securities once the Securities are credited to the investors account with the Depository Participants on pay out, here in after the investors becomes the Beneficial Owner of the Depository. The Depository System has relived the Buyer of the Securities from the exercise of sending the Securities to the Issuer for getting the securities transferred to his own name as Depository itself is the registered owner of Dematerialized Stocks is empowered to effect transfer of Ownership. In the Physical mode of Transfers usually takes around three to four months and is rarely completed within the statutory framework of two months. The delay in the process might expose the investor to opportunity cost due to delay in transfer. The Transferee is further exposed to risk of loss of Securities in transit.
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5. Shorter settlement Cycle. The Depository affects transfers through Book Entry, and usually follows rolling settlement cycle of T+3. In the T+3 settlement, all trades are settled on the 3rd working day from the trade day. This enables faster turnover of stock and prompt liquidity to the investor. 6. Pay-in and Pay-out of Securities / Funds on the same day for Demat trades. As mentioned above, in the Demat Segments the settlement of trades (both securities and funds) is on the 3rd working day from the trade day. This enables the Client / Buyer who makes the payments on the 3rd working day, to receive the securities in his Accounts with his/her D.P. on the same day in the evening and a Seller / Client who delivers the securities on the 3rd working day to receive the funds on the same evening. 7. Faster Disbursement of Non Cash Corporate Benefits like Rights, Bonus, etc. The Beneficial Owner who opts for Demat Credit of Securities for Bonus / Rights, these non-cash corporate entitlements are credited to Client's A/c with D.P. electronically. This ensures faster disbursement of entitlements and reduces the risk of loss of certificates in transit. 8. Reduction in Rate of interest on Loans Granted. Some market friendly Banks / Financial institutions provide loans at confessional rates against pledge of dematerialized securities. The pledge of dematerialized stock provides the institution with greater control and opportunity for recovery in case of default by the loanee. The Dematerialized Stocks further enable the

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institution hassle free transaction, while getting securities registered in their (Bank / Institutions) name at the time of book closure. 9. Reduction in Brokerage by many brokers for Trading in Dematerialize Securities Some brokers provide concession in Brokerage for Dematerialized Stocks, as dealing in dematerialized securities reduces Brokers back office work of handling paper and other incidental risk. 10. Reduction in handling of huge volumes of paper. This is due to the electronic form of the securities. The dematerialization of securities would drastically bring a reduction in the paperwork. 11. Elimination of problems related to change of address of investor, transmission, etc. In case of change of address or transmission of demat shares, investors are saved from undergoing the entire change procedure with each company or registrar. Investors have to only inform their DP with all relevant documents and the required changes are effected in the database of all the companies, where the investor is a registered holder of securities. 12. Periodic status reports. The investors receive the Statement of Holding and Transaction Statement regularly. This enables them to have a better control over their operations.

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CHAPTER 3 ANALYSIS OF THE DEMAT SYSTEM

3.1

GOVERNING AUTHORITIES OF THE DEMAT SYSTEM

The Dematerialization is back bone of the Depository. The term depository is explained as "a depository is an Organization which holds Securities in Dematerialized Form i.e. by way of Electronic Records & which enables Securities Transactions to be processed by Book Entry ". The Section 9 (1) of Depositories Act, 1996 state that "all securities held by a depository shall be dematerialized and shall be in a fungible form ", which implies that without dematerialization the depository cannot function. At present, there are two Depositories in India, National Securities Depository Limited (NSDL) and Central Depository Services (CDSL).

National Securities Depository Limited (NSDL) National Securities Depositories Ltd. (NSDL) was set up as the first depository in the country having various depository participants registered with it. NSDL was inaugurated on 8th November 1996. It was set up with an initial capital of Rs.124 crore, promoted by Industrial Development Bank of India (IDBI), Unit Trust of India (UTI), National Stock Exchange of India Ltd. (NSEIL) and the State Bank of India (SBI). The actual trading in dematerialized securities started at National Stock Exchange on 26th December 1996.
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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 standard that handles most of the trading and settlement in dematerialized form in 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, minimize risk and reduce costs. NSDL plays a quiet but central role in developing products and services that will continue to nurture the growing needs of the financial services industry. 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. Under the provisions of the Depositories Act, NSDL provides various services to investors and other participants in the capital market like, clearing members, stock exchanges, banks and issuers of securities. These include basic facilities like account maintenance, dematerialization, rematerialisation, settlement of trades through market transfers, off market transfers & inter-depository transfers, distribution of non-cash corporate actions and nomination/transmission. The
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Depository System, which links the issuers, depository participants (DPs), NSDL and clearing corporation/ clearing house of stock exchanges, facilitates holding of securities in dematerialized form and effects transfers by means of account transfers. This system, which facilitates scripless trading, offers various direct and indirect benefits to the market participants. Depository is a facility for holding securities, which enables securities transactions to be processed by book entry. In addition to the core services of electronic custody and trade settlement services, NSDL provides special services like pledge, hypothecation of securities, automatic delivery of securities to clearing corporations, distribution of cash and non-cash corporate benefits, stock lending, distribution of securities to allottees in case of public issues, Internet-based services for clearing members 'SPEED' & Internet based services for account holders 'SPEED-e'. NSDL has taken the initiative for providing the facility of enabling brokers to deliver contract notes to custodian / fund managers electronically through its STEADY facility. STEADY (Securities Trading - information Easy Access and DeliverY) was launched by NSDL on November 30, 2002. STEADY is a means of transmitting digitally signed trade information with encryption across market participants electronically and efficiently, through Internet.

Central Depository Services Ltd. (CDSL) The second depository, Central Depository Services (India), was promoted by the Stock Exchange, Mumbai (BSE) jointly with leading banks such as State Bank of India, Bank of India, Bank of Baroda, HDFC Bank, Standard Chartered Bank, Union Bank of India and Centurion Bank. CDSL got the certificate of
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commencement on 8th February 1999 and commenced limited operations at Bombay Stock Exchange, of opening accounts and processing Demat request from 22nd March 1999. The initial capital of the company is Rs.104.50 crores. All leading stock exchanges like the National Stock Exchange, Calcutta Stock Exchange, Delhi Stock Exchange, the Stock Exchange of Ahmedabad, etc have established connectivity with CDSL. CDSL was set up with the objective of providing convenient, dependable and secure depository services at affordable cost to all market participants. Some of the important milestones of CDSL system are: CDSL received the certificate of commencement of business from SEBI in February 1999. Honorable Union Finance Minister, Shri Yashwant Sinha flagged off the operations of CDSL on July 15, 1999. Settlement of trades in the Demat mode through BOI Shareholding Limited, the clearinghouse of BSE, started in July 1999. As at the end of July 2003, over 4600 issuers have admitted their securities (equities, bonds, debentures, commercial papers), units of mutual funds, certificate of deposits etc. into the CDSL system.

The following are the major benefits of having an account with CDSL. I. Convenience

Wide DP Network: CDSL has over 200 DPs spread around 114 cities/towns across the country, offering convenience for an investor to select a DP based on his location. On-line DP Services: The branches of a DP can also be directly connected to CDSL thereby providing on-line and efficient depository service to investors

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Wide Spectrum of Securities Available for Demat: More than 4600 companies have admitted their equity into CDSL. Further, CDSL has also admitted an entire gamut of debt instruments viz. bonds, debentures, commercial paper, government securities, certificate of deposits, etc. Thus an investor can hold almost all his securities in one account with CDSL. Competitive Fees Structure: CDSL has kept its tariffs very competitive to provide affordable depository services to investors. CDSL also does not collect any custody fees or ISIN fees from its DPs. Internet Access: A DP, which registers itself with CDSL for Internet access, can in turn provide demat account holders with access to their account on the Internet.

II.

Dependability

On-line Information to Users: CDSL's system is based on centralized database architecture; DPs can thus provide on-line depository services with to-the-minute status of the investor's account. Convenient to DPs: The entire database of investors is stored centrally at CDSL. If there are any system-related issues at DPs end, the investor is not affected, as the entire data is available at CDSL. Contingency Arrangements: CDSL has made provisions for contingency terminals, which enables a DP to update transactions, in case of any system related problems at the DP's office. Meeting User's Requirements: Continuous updating of procedures and processes in tune with evolving market practices is another hallmark of CDSL's services. Audit and Inspection: CDSL conducts regular audit of its DPs to ensure compliance of stringent operational and regulatory requirements. Dormant Account Monitoring: CDSL has in place a mechanism for monitoring dormant accounts.
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Helpdesk: DPs and investors obtain clarifications and guidance from CDSL's prompt and courteous help line facility.

III.

Computer Systems

Computer Systems: CDSL has installed state-of-the-art computer system and data storage devices. All data is stored at CDSL and is auto mirrored separately and also transmitted to a Disaster Recovery site. Data is also backed up on digital linear tapes, which are stored in fireproof cabinets at the main and disaster recovery sites. Unique BO Account Number: Each BO in CDSL is allocated a unique account number, which ensures that at the time of transfer of securities if the transferor's account number is wrongly entered, the transaction will not go through the CDSL system, unless corrected. Data Security: CDSL ensures the security and integrity of all data by encrypting all communications between CDSL and its users. Claims on DP: If any DP of CDSL goes into liquidation, the creditors of the DP will have no access to the holdings of the BO. Insurance Cover: CDSL has obtained adequate insurance cover in the unlikely event of any loss to a BO due to the negligence of CDSL or its DP.

3.2

FACTORS AFFECTING DECISION MAKING OF INVESTORS

A demat account has become a necessity for all categories of investors because of the following factors: a. SEBI has made it compulsory for trades in all listed scrips to be settled in demat mode. Although, trades upto 500 shares can be settled in physical form, physical settlement is virtually not taking place for the apprehension of bad
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delivery on account of mismatch of signatures, forgery of signatures, fake certificates etc. b. It is a safe and convenient way to hold securities compared to holding securities in physical form. c. No stamp duty is levied on transfer of securities held in demat form. d. Instantaneous transfer of securities enhances liquidity. e. It eliminates delays, thefts, interceptions and subsequent misuse of certificates. f. Change of address, registration of Power of Attorney can be effected across companies by one single instruction to the DP. g. Each share is a market lot for the purpose of transactions - so no odd lot problem. h. Any number of securities can be transferred / delivered with one delivery instruction. Therefore, paperwork and signing of multiple transfer forms is done away with. i. It facilitates taking loans / advances against securities. j. Immediate credits in case of any allotment in bonus, rights issues and IPOs.

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CHAPTER - 4 CONCLUSION AND SUGGESTIONS

Over the last decade, the Indian capital market has been growing by leaps and bounds. India has the largest number of listed companies in the world today. It also boasts of a large number of shareholders, about 32 million. Paradoxically, the problems associated with transactions, clearing and settlement were also on the rise. Simultaneously, they expose the investors to greater risks. Indian market thus required a new system that would eliminate all problems of investors and would give them healthy environment, and would strengthen their faith in the capital market, which was very low due to scams. Inordinate delay in investigation of these scams and escape of wrongdoers from law created doubts in the minds of investors. The position has substantially improved after the introduction of the depository system. The present study was undertaken with objectives to study the investment criteria of different personnel and awareness among customers about Demat, benefits of the Demat account, awareness of the Demat a/c and efforts which were made for improvement of Demat account. Demat is gaining ground in India. More and more banks / Financial institution are encouraging the people to go for opening a Demat Account besides the varies freebies and rewards rolled out, customer feel convenient to in share market through Demat Account just because of Dematerialization of shares and securities from physical form to electronic form in order to avoid manipulation.

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