NATIONAL LAW INSTITUTE UNIVERSITY

BHOPAL

Project Topic : Working mechanism of Depository System under

Indian Scenario.

Submitted To : Asst. Prof. Padma Singh. Submitted by : Amber Siddiqui.

Roll.No.- BA.LLB. 36

1
 INDEX

REVIEW OF LITERATURE ------------------------------------------------------------3

RESEARCH METHODOLOGY---------------------------------------------------------5
OBJECTIVE OF STUDY -----------------------------------------------------------------5
INTRODUCTION---------------------------------------------------------------------------6
DEMATERALIZATION-----------------------------------------------------------------12
D-MAT ACCOUNT-----------------------------------------------------------------------13
DIAGRAMATIC REPRESENTATION ----------------------------------------------15
REMATERIALIZATION----------------------------------------------------------------16
CENTRAL DEPOSITORY SECURITIES LIMITED-----------------------------20
CONCLUSION -----------------------------------------------------------------------------22
BIBLIOGRAPHY--------------------------------------------------------------------------23

2
 REVIEW OF LITERATURE

New system eliminates the paper work, facilitates the automatic and transparent trading in scrip, shorten
the settlement period and ultimately contributes to the liquidity of investment in securities. This system is
also known as scripless trading system.1

Dematerialization- It is a process of conversion of physical share certificate into electronic form. So,
when a shareholder uses the dematerialization facility, company take back the shares, through depository
system and equal numbers of shares are credited in his account in e-form2.

In a span of about nine years, investors have switched over to electronic [demat] settlement and National
Securities Depository Limited (NSDL) stands at the centre of this change. In order to provide quality
service to the users of depository, NSDL launched a certification programme in depository operations in
May 1999. This certification is conducted using NCFM infrastructure created by NSE and is called "NSDL
- Depository Operations Module".3

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
Regulations4.

1
L.M Bhale, Financial institution and market,volume 21st,Page No.254-260.
2
V.K bhalla, Investment managment, volume 20th, Page No. 234-256.
3
Shakshi S Gupta, Financial Service, volume 19th, Page no. 325-390.
4
A.Ramaiya, The giude to the companies Act, 18th edition.Pg no. 289-321
3
 CDSL:A Depository facilitates holding of securities in the electronic form and enables securities
transactions to be processed by book entry by a Depository Participant (DP), who as an agent of the
depository, offers depository services to investors. According to SEBI guidelines, financial institutions,
banks, custodians, stockbrokers, etc. are eligible to act as DPs.5

In Probir Kumar Misra v. Ramani Ramaswamy

It was held that after the Depositories Act, 1996, such depositors who are holding equity share capital of
the company and whose name is entered as beneficial owner are also deemed to be members of the
company, thus making them members under the Act6.

5
Sourab tripathi, Depository system,
http://www.mbaknol.com/investment-management/advantages-and-disadvantages-of-the-depository-system/ (29th november,2016,
7:25pm)
6
Kumar Shushil, The working of Depository System, Indian Law Journal ISS 6512.
4
 RESEARCH METHODOLOGY

Although India adopted multi-depository system model to provide competitive and healthy depository
system for surpass services to Investors. There is a chance to various entities to enter into Depository
system but only two organizations National Securities Depository Ltd (NSDL) and Central Depository
Services Ltd (CDSL) are providing depository services presently.

The data has been collected from the following sources:-

Data is collected from the website of NSDL (www.nsdl.co.in) and CDSL (www.cdsl.ac.in), website of
Indian central depository system (CDS), published reports of NSDL and Govt. of India, Depository
Act-1996, SEBI Act-1992, and Capital Market Services, published books and printed material on financial
services or Intermediaries

OBJECTIVE OF STUDIES

1) To understand the basic term and process in Depository system.

2) To understand the four player under Depository system.
3) To present legislative measures of dematerialization and to understand the present status of
dematerialization in India.
4) To understand the concept of Rematerialization.
5) To analysis the bare section of Depository Act 1996.

5
 INTRODUCTION

One of the biggest problem faced by Indian capital market is the manual and paper based settlement
system. This system placed a lot of difficulties for the purchaser as well as for the seller in the form of
delayed settlement, long settlement period, high level of trade fail, high cost of transaction, bad deliveries.
Moreover, a large number of transaction end up as bad deliveries due to faulty compliance of paper work,
mismatch of signature on transfer deeds. Besides, theft, fraud, misrepresentation have become rampant.

However, as a consequence of various reforms measures India has shown tremendous growth in capital
market. The old manual system of transfer and settlement has failed to growing volume of paper that has
loaded the market. Thus, to eliminate the paperwork, facilitate scrip less trading, improve liquidity in
market, it was found necessary to replace the old system of settlement and transfer system with new system
of depositories.

Thus, new system eliminates the paper work, facilitates the automatic and transparent trading in scrip,
shorten the settlement period and ultimately contributes to the liquidity of investment in securities. This
system is also known as scripless trading system7.

MEANING OF DEPOSITORY

A depository is an organization which holds securities (like shares, debentures, bonds,government

securities, mutual fund units etc.) of investors in electronic form at the request of the investors through a
registered Depository Participant. It also provides services related to transactions in securities.8

There are four player in Depository system

1. The Depository Participant
2. The beneficial owner.
3. The issuer.
4. The depository.

7
Kumar Shushil, The working of Depository System, Indian Law Journal ISS 6512.
8
Rabia Chaudhry, Depository system, https://www.scribd.com/presentation/105132983/Depository-System, (last acess on 25th
november,2016,5.38 PM.)
6
1. Depository

Depository functions like a securities bank, where the dematerialized physical securities are traded and
held in custody. This facilitates faster risk free and low cost settlement. Depository is much like a bank and
performs many activities that are similar to a bank depository:
1. Enables surrender and withdrawal of securities to and from the depository through the process of
demat and remat,
2. maintains investors holdings in electronic form,
3. Effects settlement of securities traded in depository mode on the stock exchanges, carries out
settlement of trades not done on the stock exchanges (off market trades).

In India a depository has to be promoted as a corporate body under Companies Act, 2013. It is also to be
registered as a depository with SEBI. It starts operations after obtaining a certificate of commencement of
business from SEBI. It has to develop automatic data processing systems to protect against unauthorised
access. A network to link up with depository participants, issuers and issuers agent has to be created.
Depository, operating in India, shall have a net worth of rupees one hundred crore and instruments for
which depository mode is open need not be a security as defined in the Securities Contract (Regulations)
Act 1956. The depository, holding securities, shall maintain ownership records in the name of each
participant. Despite the fact that legal ownership is with depository, it does not have any voting right
against the securities held by it. Rights are intact with investors9.

There are two depositories in India at present i.e.

1.NSDL: National Securities Depository limited
2.CDSL: Central Depository Services (India) Limited

2. Depository Participants (DP):

A DP is investors representative in the depository system and as per the SEBI guidelines, financial
institutions/banks/custodians/stock brokers etc. can become DPs provided they meet the necessary
requirements prescribed by SEBI. DP is also an agent of depository which functions as a link between the
depository and the beneficial owner of the securities. DP has to get itself registered as such under the SEBI
Act. The relationship between the depository and the DP will be of a principal and agent and their relation
will be governed by the bye-laws of the depository and the agreement between them. Application for
registration as DP is to be submitted to a depository with which it wants to be associated. The registration

9
Id.
7
granted is valid for five years and can be renewed. As depository holding the securities shall maintain
ownership records in the name of each DP, DP in return as an agent of depository, shall maintain
ownership records of every beneficial owner (investor) in book entry form.
A DP is the first point of contact with the investor and serves as a link between the investor and the
company through depository in dematerialisation of shares and other electronic transactions. A company is
not allowed to entertain a demat request from investors directly and investors have to necessarily initiate
the process through a DP10.

Eligibility criteria for depository participants:

The following entities are eligible for becoming depository participant in accordance with
Regulation 19 of the SEBI (Depositories and Participants) Regulations, 1996.

1) A public financial institution as defined in Section 4A of the Companies Act, 1056.

2) A bank included in the second schedule of the Reserve Bank of India Act, 1934.
3) A foreign bank, operating in India with the approval of Reserve Bank of India.
4) A state financial corporation established under the provisions of section 3 of the State Financial
Corporations Act, 1951.
5) An institution engaged in providing financial services, promoted by any of the four institutions
mentioned above.
6) A custodian of securities, who has been granted a certificate of registration by SEBI under Section
12(1A) of the SEBI Act, 1992.
7) A clearing corporation or a clearing house of a stock exchange.
8) A stockbroker having a minimum net worth of rupees TWO CRORES. The aggregate value of the
portfolio of securities, of the BOs, held in dematerialized form in a depository through him, shall not
exceed 100 times of the net worth of the stockbroker. (Not applicable for DPs whose net worth is Rs.
ten crores). In case the stockbroker seeks to act as a participant in more than one depository, he shall
comply with the net worth criteria separately with each such depository.
9) A non-banking finance company, having a net worth of not less than rupees fifty lakhs provided that
such company shall act as a participant only on behalf of itself and not on behalf of any other person.
Provided further that a non-banking finance company may act as a participant on behalf of any other
entity, if it has a net worth of Rs. fifty crores in addition to the net worth specified by any other
authority.
10) A registrar to an issue or share transfer agent who has a minimum net worth of
11) Rupees ten crores and who has been granted a certificate of registration by SEBI.

10
id.
8
Characteristics of depository participant:
1. Acts as an Agent of Depository
2. Directly deal with customer
3. Functions like Securities Bank
4. Account opening
5. Facilitates dematerialization
6. Instant transfer on pay out
7. Credits to investor in IPO, rights, bonus
8. Settles trades in electronic segment

3. ISSUER / Companies:
The issuer is the co. which issues the securities. It maintains a register for recording the names of the
registered owners of securities and the depositories. The issuer sends a list of shareholders who opt for the
depository system. And only that co.s can issue the securities which are registered under stock exchanges11

4.BENEFICIAL OWNER/ INVESTOR:

Beneficial owner is a person whose name is recorded as such with a depository. It means a person who is
engaged in buying and selling of securities issued by the companies and is registered his/ her securities
with the depository in the form of book entry. And he/ she has all the rights and liabilities associated with
the securities.

Facilities offered by depository system:

1)Dematerialization: It is a process of conversion of physical share certificate into electronic form.

So, when a shareholder uses the dematerialization facility, company take back the shares, through
depository system and equal numbers of shares are credited in his account in e-form.
2)Rematerialization: Rematerialization is the exact reverse of Dematerialization. It refers to the process of
issuing physical securities in place of the securities held electronically in book-entry form with a
depository12.

Other Services:

11
Id
12
id
9
a)Pledging Dematerialized Shares: Dematerialized shares could be pledged; in fact, this is more
advantageous as compared to pledging share certificates. After loan is repaid one can request for a closure
of pledge by instructing ones DP through a standard format. The pledgee on receiving the repayment as
well as the request for closure of pledge will instruct his DP accordingly. Even the locked-in securities can
be pledged. The pledger continues to remain the beneficiary holder of those securities even after the
securities are pledged.
b)Initial Public Offerings: Credits for public offers can be directly received into demat account. In the
public issue application form of depository eligible companies, there will be a provision to indicate the
manner in which securities should be allotted to the applicant. One is to mention ones client account
number and the name and identification number of DP. All allotment due to investor will be credited into
required account.
c)Receipt of Cash/non-cash Benefits: When any corporate event such as rights or bonus or dividend is
announced for a particular security, depository will give the details of all the clients having electronic
holdings in that security as of the record date to the registrar. The registrar will then calculate the corporate
benefits due to all the shareholders. The disbursement of cash benefits such as dividend/ interest will be
done directly by the registrar. In case of non-cash benefits, depository will directly credit the securities
entitlements in the depository accounts of all those clients who have opted for electronic allotment based
on the information provided by the registrar.

d)Stock Lending and Borrowing: Through the depository account securities in the demat form can be
easily lent/ borrowed. Securities can be lent or borrowed in electronic form through an approved
intermediary, who has opened a special intermediary account with a DP. Instructions are to be given to
DP through a standard format (which is available with DP) to deposit securities with the intermediary.
Similarly to borrow securities from the intermediary, one has to instruct DP through a standard format
(which is available with your DP).

e)Transmission of Securities: Transmission of securities due to death, lunacy, bankruptcy, insolvency or

by any other lawful means other than transfer is also possible in the depository system. In the case of
transmission, the claimant will have to fill in a transmission request form, (which is available with the DP)
supported by valid documents.

f)Freezing Account with DP: If at any time as a security measure one wishes that no transaction should be
effected in ones account, one may advise ones DP accordingly. DP will ensure that account of such
investor is totally frozen until further instructions from him.

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Benefits of Depository System:

1)This system will eliminate paper work as the book entry system does not need physical movement of
certificates for transfer process.
2)The risk of bad deliveries, fraud and misplaced, mutilated and lost share certificates will not exist.
3)The electronic media will shorten settlement time and hence the investor can save time and increase the
velocity of security movement.
4)Investors will be able to change portfolio more frequently.
5)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.
6)The market will be highly automated and efficient due to the usage of computing and telecommunication
technology for the back office activities for all the capital market players13.

Disadvantage of Depository system.

Lack of control: Trading in securities may become uncontrolled in case of dematerialized securities.
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.

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:

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.

13
Sourab tripathi, Depository system,
http://www.mbaknol.com/investment-management/advantages-and-disadvantages-of-the-depository-system/ (29th november,2016, 5:35
pm)
11
1.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.
2.Promoters of some companies dematerialised shares in excess of the companys issued capital.
Certain investors pledged shares with banks and got the same shares reissued as duplicates.

3.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 chargeof ensuring full compliance by these companies.14

DEMATERIALISATION PROCESS

DEPOSITORY
NDSL PARTICIPANT

REGISTRAR INVESTOR

1.Appointing DP:
Any investor who intends to transact through depository system has to engage one depository participant
(DP). He can approach a DP of his choice and open an account with him just like one opens an account
with a bank. Investor gets an identification number called Client ID (just as one gets ones bank account
number) which serves as a reference point for all his transactions with D.P.
Every investor before getting his holding dematerialised has to enter into an agreement with the depository
through a participant. This step is necessary whether investor already has securities or securities are yet to
be issued in a fresh issue. The investor contracts only with that depository which accepts his security in
depository mode since it is not necessary that all eligible securities must be in depository mode and with
all the depositories. The decision on whether or not to hold securities within the depository mode and if in
depository mode, with which depository or participants, would be entirely with the investor.

14
Id.
12
2.Request for Demat
After any agreement is entered for getting securities dematerialised and his account is opened, the investor
makes an application to depository participants in form called Dematerialisation Request Form (DRF) to
be provided by the DP and hands over his share certificates duly cancelled by writing surrendered for
dematerialisation to them for demat. The DP will accept certificates registered only in investors name.
The request for dematerialisation with the depository participants is sent to the depository through
depository network with which DP is connected.
Simultaneously DP submits the securities certificates to the issuer company or its Registrar of transfer.

3.Approach the Company or Registrar of Transfer

The depository will electronically intimate the issuer or its Registrar and transfer agent of the
dematerialisation request. The issuer or the Registrar and transfer
Agent has to verify the validity of the security certificates as well as the fact that the DRF has been made
by the person recorded as a member in its Register of Members. If the issuer or its Registrar is satisfied, it
dematerialises the scrip and updates its record.

4.Confirmation of Demat
The Registrar to transfer or the concerned company when satisfied with the case of demat has to inform the
depository of the completion of dematerialisation authorising an electronic credit for that security in favour
of the investor.

5.Crediting the Clients Account

DP credits investors account with the number of shares so dematerialised and thereafter investor hold the
securities in electronic form. If there is rejection of demat request then such credit is not given. After
crediting the account, the client is sending the necessary information in form of a statement like we get
bank statement after bank transactions15.

Demat Account

Demat account is a safe and convenient means of holding securities just like a bank account is for funds.
Today, practically 99.9% settlement (of shares) takes place on demat mode only. Thus, it is advisable to
have a Beneficiary Owner (BO) account to trade at the exchanges.

15
A.Ramaiya, The giude to the companies Act, 18th edition.Pg no. 289-321.
13
Benefits Of Demat Account:

1. A safe and convenient way of holding securities (equity and debt instruments both).
2. Transactions involving physical securities are costlier than those involving dematerialised securities
(just like the transactions through a bank teller are costlier than ATM transactions). Therefore, charges
applicable to an investor are lesser for each transaction.
3. Securities can be transferred at an instruction immediately.
4. Increased liquidity, as securities can be sold at any time during the trading hours (between 9:55 AM
to 3:30 PM on all working days), and payment can be received in a very short period of time.
5. No stamp duty charges.
6. Risks like forgery, thefts, bad delivery, delays in transfer etc., associated with physical certificates,
are eliminated.
7. Pledging of securities in a short period of time.
8. Reduced paper work and transaction cost.
9. Odd-lot shares can also be traded (can be even 1 share).
10. Nomination facility available.
11. Any change in address or bank account details can be electronically intimated to all companies in
which investor holds any securities, without having to inform each of them separately.
12. Securities are transferred by the DP itself, so no need to correspond with the companies.
13. Shares arising out of bonus, split, consolidation, merger etc. are automatically credited into the
demat account of the investor.
14. Shares allotted in public issues are directly credited into demat account of the applicants in quick
time16.

16
Kumar Shushil, The working of Depository System, Indian Law Journal ISS 6512.
14
 DIGRAMATIC REPRESENTATION.

The investors approches the

DP with the share certificate
and complete a securities
deposit form

If no acconts exists the investor DP check and confirm

to complete a Security Account if investor already
Opening Form Opening Form holds a CSD account.
and submits the completed
form to the Dp who opens the
account.

Dp will capture the share information and

quantities into CDS. The captured information
will await varification by the transfer
secretary of the issuing company. The DP will
also send the copies of Securities Deposit
form and physical shares to the Transfer
Secretary for verification.

Are the certificates

TS will need to clear all the authentic ?
issues with broker/custodian
and resolve.

TS will confirm the deposit and credit in

investors CSD account will reflect. The TS
will proceed to deface the share
certificate and file it.

15
 Rematerialisation
Rematerialisation is a process of converting electronic holdings of investor back into share
certificates in paper form. The process of rematerialisation is also carried out through DP and the
process has to be completed within a period of 30 days. Thus, once security is dematerialised it is not
necessary that investor is to continue in depository mode for all times to come. He can switch over to
remat whereby he gets back physical possession of security scripts. The client of DP has to submit a
request for remat. This request is forwarded for necessary action to depository. The depository confirms
the rematerialisation request to the Registrar and Transfer Agents. The Registrar updates the accounts
and prints the desired certificate. The depository is informed by Registrar and certificate is sent to the
investor. The depository updates its records and communicates to DP to incorporate necessary changes
in the account of the clien17t.

National Securities Depository Limited

In a span of about nine years, investors have switched over to electronic [demat] settlement and
National Securities Depository Limited (NSDL) stands at the centre of this change. In order to provide
quality service to the users of depository, NSDL launched a certification programme in depository
operations in May 1999. This certification is conducted using NCFM infrastructure created by NSE and
is called "NSDL - Depository Operations Module". The programme is aimed at certifying whether an
individual has adequate knowledge of depository operations, to be able to service investors. Depository
Participants are required to appoint at least one person who has qualified in the certification programme
at each of their service centres. This handbook is meant to help the candidates in their preparation for
the certification programme.

National Securities Depository Limited is the first depository to be set-up in India. It was incorporated
on December 12, 1995. The Industrial Development Bank of India (IDBI) - the largest development
bank in India, Unit Trust of India (UTI) - the largest Indian mutual fund and the National Stock
Exchange (NSE) - the largest stock exchange in India, sponsored the setting up of NSDL and
subscribed to the initial capital. NSDL commenced operations on November 8, 1996.

17
Rabia Chaudhry, Depository system, https://www.scribd.com/presentation/105132983/Depository-System, (last acess on 28th
november,2016,5.38 PM.)
16
Ownership
NSDL is a public limited company incorporated under the Companies Act, 1956. NSDL had a paidup
equity capital of Rs. 105 crore. The paid up capital has been reduced to Rs. 80 crore since NSDL has
bought back its shares of the face value of Rs. 25 crore in the year 2000. However, its net worth is
above the Rs. 100 crore, as required by SEBI regulations.
The following organisations are shareholders of NSDL as on March 31, 2015.
1.Industrial Development Bank of India
2.Administrator of the Specified Undertaking of the Unit Trust of India - DRF
3.National Stock Exchange
4.State Bank of India
5.Oriental Bank of Commerce
6.Citibank N.A.
7.Standard Chartered Bank
8.HDFC Bank Limited
9.The Hongkong and Shanghai Banking Corporation Limited
10.Deutsche Bank A.G.
11.Dena Bank
12.Canara Bank

Management of NSDL:

NSDL is a public limited company managed by a professional Board of Directors. The day-today
operations are conducted by the Chairman & Managing Director (CMD). To assist the CMD 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 in this regard.

Bye-Laws of NSDL:
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
4.Executive Committee
5.Business Rules
17
 6.Participants
7.Safeguards to protect interest of clients and participants.
8.Securities
9.Accounts/transactions by book entry
10.Reconciliation, accounts and audit
11.Disciplinary action
12.Appeals
13.Conciliation

ArbitrationAmendments to NSDL Bye-Laws require the approval of the Board of Directors of NSDL
and SEBI.

Business Rules of NSDL

Amendments to NSDL Business Rules require the approval of NSDL Executive Committee andfiling
of the same with SEBI at least a day before the effective date for the amendments.

Functions:
NSDL performs the following functions through depository participants:
1) Enables the surrender and withdrawal of securities to and from the depository (dematerialisation and
rematerialisation).
2) Maintains investor holdings in the electronic form.
3) Effects settlement of securities traded on the exchanges.
4) Carries out settlement of trades not done on the stock exchange (off-market trades).
5) Transfer of securities.
6) Pledging/hypothecation of dematerialised securities.
7) Electronic credit in public offerings of companies or corporate actions.
8) Receipt of non-cash corporate benefits like bonus rights, etc. in electronic form.
9) Stock Lending and Borrowing.18

Services Offered by NSDL:

NSDL offers a host of services to the investors through its network of DPs:
1. Maintenance of beneficiary holdings through DPs
2. Dematerialisation
3. Off-market Trades
4. Settlement in dematerialised securities

18
Supra note 1.
18
5. Receipt of allotment in the dematerialised form
6. Distribution of corporate benefits
7. Rematerialisation
8. Pledging and hypothecation facilities
9. Freezing/locking of investor's account
10. Stock lending and borrowing facilities

Fee 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 ineligible on the NSDL system, freeze a DP account and conduct inspection or call
for records and issue notices.
If a DP is aggrieved by the action of the DAC, it has the right to appeal to the EC against the action of
the DAC. This has to be done within 30 days of the action by DAC. The EC has to hear the appeal
within two months from the date of filing the appeal. The EC has the power to stay the operation of the
orders passed by the DAC. The information on all such actions has to be furnished to SEBI.

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.

19
 Central Depository Securities Limited

A Depository facilitates holding of securities in the electronic form and enables securities transactions to be
processed by book entry by a Depository Participant (DP), who as an agent of the depository, offers
depository services to investors. According to SEBI guidelines, financial institutions, banks, custodians,
stockbrokers, etc. are eligible to act as DPs. The investor who is known as beneficial owner (BO) has to
open a demat account through any DP for dematerialisation of his holdings and transferring securities.
The balances in the investors account recorded and maintained with CDSL can be obtained through the DP.
The DP is required to provide the investor, at regular intervals, a statement of account which gives the
details of the securities holdings and transactions. The depository system has effectively eliminated
paper-based certificates which were prone to be fake, forged, counterfeit resulting in bad deliveries. CDSL
offers an efficient and instantaneous transfer of securities.
CDSL was promoted by Bombay Stock Exchange Limited (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 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
Honourable 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 clearing house of
BSE, started in july 1999.
All leading stock exchanges like the National Stock Exchange, Calcutta Stock Exchange, Delhi
stock Exchange, The Stock Exchange, Ahmedabad, etc have established connectivity with CDSL.
As at the end of Dec 2007, over 5000 issuers have admitted their securities (equities, bonds, debentures,
commercial papers), units of mutual funds, certificate of deposits etc. into the CDSL system19.

Important Sections Under Depository Act 1996

Section 2(g) "participant" means a person registered as such under subsection (1A) of section 12 of the
Securities and Exchange Board of India Act, 1992 (15 of 1992);

Section 3. Certificate of commencement of business by depositories.

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Kumar Shushil, The working of Depository System, Indian Law Journal ISS 6512.
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 (1) No depository shall act as a depository unless it obtains a certificate of commencement of business
from the Board.
(2) A certificate granted under sub-section (1) shall be in such form as maybe specified by the regulations.
(3) The Board shall not grant it certificate under sub-section (1) unless it is satisfied that the depository has
adequate systems and safeguards to prevent manipulation of records and transactions:
Provided that no certificate shall be refused under this section unless the depository concerned has been
given a reasonable opportunity of being heard.

Section 4 Agreement between depository and participant.

(1) A depository shall enter into an agreement with one or more participants as its agent.
(2) Every agreement under sub-section (1) shall be in such form as may be specified by the bye-laws.

Section 5 Services of depository.

Any person, through a participant, may enter into an agreement, in such form as may be specified by the
bye-laws, with any depository for availing its services.

Section 7. Registration of transfer of securities with depository.

(1) Every depository shall, on receipt of intimation from a participant, register the transfer of security in the
name of the transferee.
(2) If a beneficial owner or a transferee of any security seeks to have custody of such security, the
depository shall inform the issuer accordingly.

Section 17. Rights and obligations of depositories, etc.

(1) Subject to the provisions of this Act, the rights and obligations of the depositories, participants and the
issuers whose securities are dealt with by a depository shall be specified by the regulations.

Chapter IV deals with penalties under this act.

Cases
In Probir Kumar Misra v. Ramani Ramaswamy20
It was held that after the Depositories Act, 1996, such depositors who are holding equity share capital of
the company and whose name is entered as beneficial owner are also deemed to be members of the
company, thus making them members under the Act.

20
SC(1998)
21
Northern Projects Ltd. v. Blue Coast Hotels and Resorts Ltd.21

It was contended that only persons holding equity shares can be members of the Company in terms of
Section 41(3) of the Act. This was rejected by Court and it was stated that Sub-section (3) of Section 41 is
therefore only in addition to Section 41(1) and Section 41(2) and not in derogation or substitution of the
first two subsections. The word shareholder and member is used in the same connotation under the Act
and the Section covers the third category of equity shareholders who are neither subscribers as
contemplated by Sub-section (1) nor whose names are entered in the register of members as contemplated
under Sub-section (2) of Section 41

CONCLUSION

The Depository Act which provides for the establishment of depositories like NSDL and CDSL to curb the
irregularities in the capital market and protect the interests of the investors and paved a way for an orderly
conduct of the financial markets through the free transferability of securities with speed, accuracy and
transparency. The research reveals the goodwill and and reputation of depository system among customer.
But there is need to strengthen this depository system by spreading awareness about the service offered by
NSDL, CSDL and its trading company through advertisement and by expanding the more branches of this
system all over the country and also by tapping the potential customers through innovative means.

SUGGESTIONS AND RECOMENDATIONS

1) Regular statement of the holding should be made available at regular intervals.

2) The statement of holding should be provided with the sale and purchase of the shares.
3) Awareness of functioning of this system should be spread to the pubic through advertisement
4) Clear picture of the deduction made by the depository participant or the charges levied on the
customers should be provided in black and white.
5) Proper feedback should be taken into consideration. For e.g calls should be made when accounts is
opened.
6) The e-broking service should be introduced.

21
SC(1996)
22
 BIBLIOGRAPHY

1. https://www.scribd.com/presentation/105132983/Depository-System
2. A.Ramaiya, The giude to the companies Act, 18th edition.Pg no. 289-321.
3. http://www.mbaknol.com/investment-management/advantages-and-disadvantages-of-the-depository-sys
tem/
4. Kumar Shushil, The working of Depository System, Indian Law Journal ISS 6512
5. L.M Bhale, Financial institution and market,volume 21st,Page No.254-260.
6. V.K bhalla, Investment managment, volume 20th, Page No. 234-256.
7. Shakshi S Gupta, Financial Service, volume 19th, Page no. 325-390.
8. A.Ramaiya, The giude to the companies Act, 18th edition.Pg no. 289-321

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