INDEX

CHAPTER NO. PARTICULARS PAGE NO.

Declaration

Guide certificate

Acknowledgement I

Preface II

1. Introduction to Depository 1

2. Review of Literature 14

3. Research Methodology 21

4. Working of Depository System 23

5. Conceptual Knowledge of Depositories‟ In India 34

6. Depository Accountand its Types 46

7. Analysis & Interpretation 56

8. Findings and Suggestions 67

9. Conclusion 68

Bibliography

Annexure

6
 LIST OF TABLES

TABLE NO. PARTICULARS PAGE NO.

1 Duration of Holding and Trading in Securities (In Years) 56

2 Modes of Trading Used by Investor. 57

3 Different Areas of Investment in Securities Market. 58

4 Factors Important for a Trading Company to Enhance The 58

Loyalty of Its Customers.
5 Time Duration in Which Depository Participant Contacts its 59
Customers

6 Reasonability of Service Charges of DEMAT A/C 60

7.1 KMO and Bartlett's Test 61

7.2 Correlation Matrix for V1to V6 Variables 62

7.3 Inverse of Correlation Matrix for V1to V6 Variables 63

7.4 Communalities Table 63

7.5 Total Variance Table 63

7.6 Rotated Component Matrix 65

7.7 Factors Influencing Different Functions and Services that an 65

Investor Should be Aware of While Trading Through the
DEMAT Account

8 Personal Details 66
 LIST OF FIGURES

FIGURENO. PARTICULARS PAGE NO.

1 Duration of Holding and Trading in Securities (In Years) 56

2 Modes of Trading Used by Investor. 57

3 Different Areas of Investment in Securities Market. 58

4 Factors Important for a Trading Company to Enhance The 58

Loyalty of Its Customers.
5 Time Duration in Which Depository Participant Contacts its 59
Customers

6 Reasonability of Service Charges of DEMAT A/C 60

7.1 Screen Plot Graph 64

7.2 Component Plot Graph 64

 CHAPTER-1
INTRODUCTION TO DEPOSITORY
INTRODUCTION TO DEPOSITORY

A significant development of the 20th century particularly in its later part is expansion of
financial market world over which mostly was driven by globalization, technology,
innovations and increasing trade volume. India has not been an exception with probably
largest number of listed companies with a very large investor population and ever increasing
volumes of trades.
However, this continuous growth in activities increased problems associated with stock
trading. Most of these problems arose due to the intrinsic nature of paper based trading and
settlement, like theft or loss of share certificates. This system required handling of huge
volumes of paper leading to increased costs and inefficiencies. The process beginning from
buying shares through the stock exchanges till getting the certificates duly endorsed in the
buyer‟s name was indeed quite complex and time-consuming and was riddled with a variety
of problems. Growing number of investors participating in the capital market has increased
the possibility of being hit by a bad delivery, The cost and time spent by the brokers for
rectification of these bad deliveries tends to be higher with the geographical spread of the
clients. The increase in trade volumes lead to exponential rise in the back office operations
thus limiting the growth potential of the broking members. The inconvenience faced by
investors (in areas that are far flung and away from the main metros) in settlement of trade
also limits the opportunity for such investors, especially in participating in auction trading.
The physical form of holding and trading in securities also acted as a bottleneck for broking
community in capital market operations. Risk exposure of the investor also increased due to
this trading in paper. Some of these associated risks were: delay in transfer of shares,
possibility of forgery on various documents leading to bad deliveries, legal disputes etc., and
possibility of theft of share certificates, prevalence of fake certificates in the market,
mutilation or loss of share certificates in transit. Thus, the system of security transactions was
not as investor-friendly as it ought to be. In this scenario dematerialized trading under
depository system is certainly a welcome move. This popular financial service emerged in
Germany first time.
Meaning of depository
A depository is an organisation 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.

Depositories Act, 1996

The Depositories Act, 1996 provides for the establishment of depositories in securities with
the objective of ensuring free transferability of securities with speed, accuracy and security
by (a) making securities freely transferable subject to certain exceptions; (b)
dematerialization of the securities in the depository mode; and (c) providing for maintenance
of ownership records in a book entry form. In order to streamline the settlement process, the
Act envisages transfer of ownership of securities electronically by book entry. The Act has
made the securities of all companies freely transferable in the depository mode, restricting the
company‟s right to use discretion in effecting the transfer of securities. The other procedural
and the transfer deed requirements stated in the Companies Act have also been dispensed
with.

Eligibility Criteria for a Depository – Any of the following may promote a depository:

1. A public financial Institution as defined in section 4A of the Companies Act, 1956;

2. A bank included in the Second Schedule to the Reserve Bank of India Act, 1934;
3. A foreign bank operating in India with the approval of the Reserve Bank of India;
4. A recognised stock exchange;
5. An institution engaged in providing financial services where not less than 75% of the
equity is held jointly or severally by these institutions;
6. A custodian of securities approved by Government of India, and
7. A foreign financial services institution approved by Government of India.

The promoters of a depository are also known as its sponsors. A depository company must
have a minimum net worth of Rs. 100 crore. The sponsor(s) of the depository have to hold at
least 51% of the equity capital of the depository company. Participants of that depository, if
any, can hold the balance of the equity capital. However, no single participant can hold, at
any point of time, more than 5% of the equity capital. No foreign entity, individually or
collectively either as a sponsor or as a DP, or as a sponsor and DP together, can hold more
than 20% of the equity capital of the depository.
Registration– As per the provisions of the SEBI Act, a depository can deal in securities only
after obtaining a certificate of registration from SEBI. The sponsors of the proposed
depository should apply to SEBI for a certificate of registration in the prescribed form. On
being satisfied with the eligibility parameters of a company to act as a depository, SEBI may
grant a certificate of registration subject to certain conditions.

Commencement of Business – A depository that has obtained registration as stated above,

can function only if it obtains a certificate of commencement of business from SEBI. A
depository must apply for and obtain a certificate of commencement of business from SEBI
within one year from the date of receiving the certificate of registration from SEBI.
SEBI grants a certificate of commencement of business if it is satisfied that the depository
has adequate systems and safeguards to prevent manipulation of records and transactions.
SEBI takes into account all matters relevant to the efficient and orderly functioning of the
depository. It particularly examines whether :

1. The depository has a net worth of not less than Rs. 100 crore;
2. The Bye-Laws of the depository have been approved by SEBI;
3. The automatic data processing systems of the depository have been protected against
unauthorised access, alteration, destruction, disclosure or dissemination of records
and data;
4. The network, through which continuous electronic means of communication are
established between the depository, participants, issuers and issuers' agents, is secure
against unauthorised entry or access.
5. The depository has established standard transmission and encryption formats for
electronic communication of data between the depository, participants, issuers and
issuers' agents;
6. The physical or electronic access to the premises, facilities, automatic data processing
systems, data storage sites and facilities including back-up sites, and to the electronic
data communication network connecting the DPs, issuers and issuers' agents is
controlled, monitored and recorded;
7. The depository has a detailed operational manual explaining all aspects of its
functioning, including the interface and method of transmission of information
between the depository, issuers, issuers' agents, DPs and beneficial owners;

12
 8. The depository has established adequate procedures and facilities to ensure that its
records are protected against loss or destruction and arrangements have been made for
maintaining back-up facilities at a location different from that of the depository;
9. The depository has made adequate arrangements including insurance for
indemnifying the beneficial owners for any loss that may be caused to such beneficial
owners by the wrongful act, negligence or default of the depository or its participants
or of any employee of the depository or participant;
10. The granting of certificate of commencement of business is in the interest of investors
in securities market.

Agreement between Depository and Issuers – If either the issuer (a company which has
issued securities) or the investor opts to hold his securities in a demat form, the issuer enters
into an agreement with the depository to enable the investors to dematerialise their securities.

No such agreement is necessary where :

i. Depository, is the issuer of securities, or;
ii. The State or Central Government is the issuer of government securities.

Where the issuer has appointed a registrar to the issue or share transfer, the depository enters
into a tripartite agreement with the Issuer and Registrar & Transfer (R&T) Agent, as the case
may be, for the securities declared eligible for dematerialisation. At present, NSDL is
discharging the responsibility of R&T Agent for the securities issued by State and Central
Governments.

Rights and Obligations of Depositories – Depositories have the rights and obligations
conferred upon them under the Depositories Act, the regulations made under the Depositories
Act, Bye-Laws approved by SEBI, and the agreements made with the participants, issuers
and their R&T agents.

Every depository must have adequate mechanisms for reviewing, monitoring and evaluating
the depository's controls, systems, procedures and safeguards. It should conduct an annual
inspection of these procedures and forward a copy of the inspection report to SEBI. The
depository is also required to ensure that the integrity of the automatic data processing
systems is maintained at all times and take all precautions necessary to ensure that the records
are not lost, destroyed or tampered with. In the event of loss or destruction, sufficient back up
of records should be available at a different place. Adequate measures should be taken,
including insurance, to protect the interests of the beneficial owners against any risks.
Every depository is required to extend all such co-operation to the beneficial owners, issuers,
issuers' agents, custodians of securities, other depositories and clearing organisations, as is
necessary for the effective, prompt and accurate clearance and settlement of securities
transactions and conduct of business.

The depository should indemnify beneficial owners of securities for any loss caused to them
due to the negligence of the DP. However, where the loss is caused due to the negligence of a
DP, the depository shall have the right to recover it from such DPs.

Bye-Laws– A depository is required to make Bye-Laws governing its operations. The Bye-
Laws have to be in conformity with the Depositories Act and the regulations made
thereunder, and need to be approved by SEBI before becoming effective.

Depository– Every depository is required to maintain the following records and documents.
These have to be preserved for a minimum period of five years.
1. Records of securities dematerialised and rematerialised.
2. The names of the transferor, transferee, and the dates of transfer of securities.
3. A register and an index of beneficial owners.
4. Details of the holdings of the securities of beneficial owners as at the end of each day.
5. Records of instructions received from, and sent to, participants, issuers, issuers' agents and
beneficial owners.
6. Records of approval, notice, entry and cancellation of pledge or hypothecation.
7. Details of participants.
8. Details of securities declared to be eligible for dematerialisation in the depository.
9. Such other records as may be specified by SEBI for carrying on the activities as a
depository
Comparison between banks and depository-
Similarity:
1. Promoted by reputed persons and institutions: Both bank and depository are Promoted
by persons and institutions ofrepute and good standing. For e.g.-HDFC bank was
promoted by housing Development Corporation Ltd. and similarly NSDL is promoted
by Industrial Development Bank of India Limited (IDBI), Unit Trust of India (UTI)
and National Stock Exchange of India Limited (NSE).
2. Renders safe keeping services: Both banks and depository provide safe keeping
services. Banks provides safe custody of cash and locker facility for keeping valuable
articles to its clients. Depositories also provide safe keeping of shares, debentures,
bonds, government securities, mutual fund units to its clients.
3. Central office and branches:Like bank every depository has one central office which is
the main office and other branch offices which are situated in different cities and
follow the guidelines of central office.
4. Charge of fees- banks charge fees for locker facilities to its clients, similarly depository
charges fees for safe keep of share certificates in electronic form.
5. Transfer of funds and securities : Funds/securities are transferred only at the instruction
of the account holder
6. Written confirmation of transfer (of shares and currencies )
7. Account is operated by power of attorney: a person under power of attorney can
operate the account.
8. Customers are entitled to get statement s of accounts
9. Nomination facility : in case of bank accounts customer can nominate any person to
whom account will be transferred in case of death of the person similarly in case of
depository, a customer can nominate a person to whom the shares will be transferred.
10. Currencies (in case of banks ) and shares (in case of depositories) when held do not
have any distinctive number
Differentiation:
Bank Account Vs. Demat Account

A Bank A Depository (like CDSL)

For opening a bank account, such as a
savings bank account, a minimum balance
has to be deposited along with the account
A customer having an account with a bank
is called as an Account Holder.
A bank is entitled to use funds lying in the
savings or current deposit accounts of the
customers in the normal course of business customers and hence does not pay any interest
and pays interest to them for the use.
A bank account can be operated upon
“jointly”, or, by “either or survivor” of the
account holders or by “any one/two/three
of", the joint account holders.
In the bank account, addition or deletion
of name(s) of one or more of the account
holders is permitted.
In the bank account, there is no
requirement of execution of an agreement
between the bank and account holder at
the time of opening the account
A demat account is opened by an investor
without any securities, i.e. with zero balance.
An account holder of the depository is called
as Beneficial Owner (of the securities).
A depository is not entitled to use the
securities lying in the demat accounts of the
to them.
A demat account can be opened, operated
upon only by ALL the account holders
JOINTLY, at present.
In the demat account, addition or deletion of
name(s) of one or more of the account holders
(beneficial owners) is NOT permitted.
In demat account, the beneficial owners is
required to sign a DP-BO agreement before
opening the demat account.

Immobilization and Dematerialization

Conversion of securities from physical (paper) form to electronic form can be achieved by
two methods Immobilization or Dematerialization.
Under the immobilization method, after giving credit of the securities in electronic form,
physical certificates are stored or lodged with an organization, which acts as a custodian – a
securities depository. Subsequent transactions in such immobilized securities take place
through book-entries.
Under the dematerialization method, the securities, issued in physical form are destroyed and
exactly equal numbers of securities are created in the depository system, which are credited
into the account of the investor. Unlike physical securities, the securities converted into
electronic form do not have any distinctive numbers and they are treated as equal and
replaceable in all ways i.e. securities in electronic form are fungible. All subsequent
transactions (transfer of ownership) of such securities take place in book-entry form.
India has adopted dematerialization method whereas immobilization has been adopted by
some of the countries like Hong Kong and USA. Japan has adopted both, dematerialization as
well as immobilization for achieving a paper-less securities market.
Whether a country has adopted immobilization or dematerialization, the investor has a right
to get the securities converted back into physical form through a process called as
rematerialisation, in case of need.

Availing of various services offered by a depository

A depository in India cannot open a demat account of an investor and / or provide services to
such a person directly. For opening a demat account or availing the services offered by the
depository, a person is required to approach a Depository Participant (DP) who is an agent of
the depository, complete the account opening formalities as per the Depositories Act, SEBI
regulations, depository byelaws. Thereafter, the investor can receive securities in the demat
account as well as tender the securities held by him / her in physical form for
dematerialization to the DP (as explained in the subsequent part) and hold the same in book
entry form in the account.

When an investor holds securities in physical form, his / her name is recorded as registered
owner in the books of the company. As per the laws currently in force in India, when the
securities are converted in electronic form by way of dematerialization, name of the
depository is registered in the books of the company as registered owner. However, the
investor continues to be the real owner of the securities and is entitled to receive all the
benefits such as dividend, interest, bonus shares etc. in respect of the said security and as
such is called as Beneficial Owner (BO) under the depository system.

Today “demat” has become a common word. The institutional and individual investors
spread all over India are found to be making an extensive use of the depository participant
services for holding their securities in electronic form.
LEGAL FRAMEWORK

Introduction
The depositories in India are regulated under the following legal framework:
• The Depositories Act, 1996
• SEBI (Depositories and Participants) Regulations, 1996
• Companies Act, 1956
• Securities and Exchange Board of India Act, 1992
• Prevention of Money Laundering Act, 2002
Apart from the above-mentioned Acts and Regulations, following govern the business and
operations of a depository.
• Bye Laws of the depository
• Operating Instructions of the depository
The Depositories Act, 1996 gives power to depositories to make bye-laws
But such bye laws should be consistent with the provisions of this Act and the SEBI
Regulations. Such bye-laws shall provide for:

a) The eligibility criteria for admission and removal of securities in the depository;
b) The conditions subject to which the securities shall be dealt with;
c) The eligibility criteria for admission of any person as a participant;
d) The manner and procedure for dematerialisation of securities;
e) The procedure for transactions within the depository;
f) The manner in which securities shall be dealt with or withdrawn from a depository;
g) The procedure for ensuring safeguards to protect the interests of participants and beneficial
owners;
h) The conditions of admission into and withdrawal from a participant by beneficial owner;
i) The procedure for conveying information to the participants and beneficial owners on
dividend declaration, shareholder meetings and other matters of interest to the beneficial
owners;
j) The manner of distribution of dividends, interest and monetary benefits received from the
company among beneficial owners;
k) The manner of creating pledge or hypothecation in respect of securities held with a
depository;
l) Inter se rights and obligations among the depository, issuer, participants, and beneficial
owners;
m) The manner and the periodicity of furnishing information to the Board, issuer and other
persons;
n) The procedure for resolving disputes involving depository, issuer, company or a beneficial
owner;
o) The procedure for proceeding against the participant committing breach of the regulations
and provisions for suspension and expulsion of participants from the depository and
cancellation of agreements entered with the depository;
p) The internal control standards including procedure for auditing, and monitoring.
Reviewing
SEBI (Depositories and Participants) Regulations, 1996

Board (SEBI) grants a certificate of registration to a depository subject to the following

conditions, namely:
a) The depository shall pay the registration fee specified within fifteen days of receipt of
intimation from the Board;
b) The depository shall comply with the provisions of the Act, the Depositories Ordinance,
the bye-laws, agreements and these regulations;
c) The depository shall not carryon any activity other than that of a depository unless the
activity is incidental to the activity of the depository;
d) the sponsor shall, at all times, hold at least fifty one per cent of the equity capital of the
depository and the balance of the equity capital of the depository shall be held by its
participants;
e) No participant shall at any time, hold more than five per cent of the equity capital of the
depository;
f) If any information previously submitted by the depository or the sponsor to the Board is
found to be false or misleading in any material particular, or if there is any change in such
information, the depository shall forthwith inform the Board in writing;
g) The depository shall redress the grievances of the participants and the beneficial owners
within thirty days of the date of receipt of any complaint from a
Participant or a beneficial owner and keep the Board informed about the number and the
nature of redressals:
h) The depository shall make an application for commencement of business under regulation
14 within one year from the date of grant of certificate of registration under this regulation;
and
i) The depository shall amend its bye-laws as directed by SEBI.

Certificate of Commencement of Business

The Board shall take into account for considering grant of certificate of commencement of
business, the following points, namely, whether
a) The depository has a net worth of not less than rupees one hundred crore;
b) The bye-laws of the depository have been approved by the Board;
c) The automatic data processing systems of the depository have been protected against
unauthorised access, alteration, destruction, disclosure or dissemination of records and data:
d) the network through which continuous electronic means of communications are
established between the depository, participants, issuers and issuer‟s agents is secure against
unauthorised entry or access;
e) The depository has established standard transmission and encryption formats for electronic
communications of data between the depository, participants, issuers and issuers‟ agents;
f) the physical or electronic access to the premises, facilities, automatic data processing
systems, data storage sites and facilities including back up sites and facilities and to the
electronic data communication network connecting the depository, participants, issuers and
issuer‟s agents is controlled, monitored and recorded;
g) the depository has a detailed operations manual explaining all aspects of its functioning,
including the interface and method of transmission of information between the depository,-
issuers, issuers‟ agents, participants and beneficial owners;
h) the depository has established adequate procedures and facilities to ensure that its records
are protected against loss or destruction and arrangements have been made for maintaining
back up facilities at a location different from that of the depository;
i) the depository has made adequate arrangements including insurance for indemnifying the
beneficial owners for any loss that may be caused to suchbeneficial owners by the wrongful
act, negligence or default of the depository orits participants or of any employee of the
depository or participant; and
j) The grant of certificate of commencement of business is in the interest of investors in the
securities market.
The Board shall, before granting a certificate of commencement of business makes a
Depository
Physical verification of the infrastructure facilities and systems established by the
Depository.

Record of Services by Depository Participant (DP)

i) Types of records
Every participant shall maintain the following records and documents, namely:
a) Records of all the transactions entered into with a depository and with a beneficial owner;
b) Details of securities dematerialised, rematerialised on behalf of beneficial owners with
whom it has entered into an agreement;
c) Records of instructions received from beneficial owners and statements of account
provided to beneficial owners; and
d) Records of approval, notice, entry and cancellation of pledge or hypothecation, as the case
may be.
Every participant shall make available for the inspection of the depository in which it is a
participant all records referred above. Every participant shall allow persons authorised by the
depository in which it is a participant to enter its premises during normal office hours and
inspect its records.
Every participant shall intimate the Board the place where the records and documents are
maintained.
The participant shall preserve records and documents for a minimum period of five years.
ii) Where records are kept electronically by the participant, it shall ensure that the integrity of
the data processing systems is maintained at all times and take all precautions necessary to
ensure that the records are not lost. Destroyed or tampered with and in the event of loss or
destruction, ensure that sufficient back up of records is available at all times at a different
place.
iii) If a participant enters into an agreement with more than one depository, it shall maintain
the specified records separately in respect of each depository.
iv) No participant shall assign or delegate its functions as participant to any other person,
without the prior approval of the depository.

Agreement by Issuer
Every issuer whose securities have been declared as eligible to be held in dematerialised form
in a depository shall enter into an agreement with the depository.

Records to be maintained by Depository

Every depository shall maintain the following records and documents, namely:
a) Records of securities dematerialised and rematerialized;
b) The names of the transferor, transferee, and the dates of transfer of securities;
c) A register and an index of beneficial owners;
d) Records of instructions received from and sent to participants, Issuers, issuers‟ agents and
beneficial owners;
e) Records of approval, notice, entry and cancellation or pledge or hypothecation, as the case
may be;
f) Details of participants;
 CHAPTER-2
REVIEW OF LITERATURE
REVIEW OF LITERATURE

T. Koshy, 1997, “Depository in the Debt Market:The Unfinished Agenda”

Though the Indian capital market is over 100 years old, it continues mainly as a market for
equity related products. Debt is more or less financed through banks and financial
institutions, although in the recent past, financial markets are playing an increasingly
significant role. Even the Government securities market essentially consists of primary issues
and inter-institutional trades.However, due to a variety of institutional and regulatory reasons,
the Indian debt market has not been able to achieve even a fraction of its true
potential.Although an exemption in stamp duty may appear to be against the interests of State
Governments – owing to a loss in revenue – the resultant increase in liquidity will go a long
way in improving their fund raising efforts as also of their state financial institutions and
municipalities for infrastructure projects. The National Securities Depository Limited
(NSDL) has already taken up this matter with the State Governments. NSDL has requested
for a revenue- neutral policy change which will imply the levying of a one-time charge at the
time of issue and eliminating duty at the time of transfer.This research paper explain different
advantages whichdebt market participants will enjoy if they join the NSDL

LC Gupta, Naveen Jain, 2003, “Indian Securities Depository system, what has
Gone Wrong?”
Unknowingly and unintentionally‟ the share depository system is adversely affecting million
of small investors and hurting the equity market‟s growth by causing such investors to
gradually withdraw from the market. This paper attempts to explain how this has come about
and what corrective action is needed

Trinath Tadakamalla, 2004, "Dematerialized Securities"

Dematerialized securities are securities that are not on paper and a certificate to that effect
does 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 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. This article explains Dematerialized securities and
Dematerialization process.

Iti Jain& Sudhanshu Roy, 2004, “Dematerialisation of Securities”

This paper is mainly a study of the „dematerialisation‟ process in the Indian capital market,
which was introduced through the aforesaid enactment. The paper is divided into five parts.
First part introduces the depository system in India and also looks at the need and objectives
of the depository system in India. Second part introduces the process of dematerialisation
looking at the players involved in dematerialisation. Third part further dissects the demat
process and looks at the procedure involved in dematerialisation of securities. Second last
part looks at the pros and cons of dematerialisation while the last part finally concludes the
paper evaluating the success and failure of the dematerialisation in the Indian capital market.

Dr. M. T. Raju, Dr. Prabhakar R. Patil, 2005, “Dematerialisation of Equity Shares in

India: Liquidity, Returns and Volatility”
Dematerialisation of shares is an important milestone in the annals of Indian Capital Markets.
Understanding and measuring the impact of it on various segments is necessary since it
stirred the microstructure of Indian capital markets in general and stock exchanges in
particular. Demand and Supply forces determine prices of a product. Liquidity plays an
important role in the interplay of demand and supply forces. The impact of dematerialisation
on liquidity in the Indian stock exchanges is quantified and analysed. Quality of shares
changed for better owing to dematerialisation and thus investors are expected to earn higher
returns as a natural step, albeit, for some time only. Changes in quality of shares are expected
to cause changes in demand and supply for shares, which in turn, influences the levels in
share prices (volatility). All these three issues are studied in the present paper. Liquidity and
returns improved substantially in the post-demat period while volatility was very much below
the daily changes permitted.
Prof.G. Vasudha, 2006, “Dematerialisation: An Introduction”
Dematerialisation is the process of converting the physical form of shares into electronic
form. Prior to dematerialisation the Indian stock markets have faced several problems like
delay in the transfer of certificates, forgery of certificates etc. Dematerialisation helps to
overcome these problems as well as reduces the transaction time as compared to the physical
segment. The article discusses the procedures, advantages and problems of dematerialisation.
The Indian Stock markets have seen a major change with the introduction of depository
system and scrip less trading mechanism. There were various problems like inordinate
delays in the transfer of share certificates, delay in receipt of securities and inadequate
infrastructure in banking and postal segments to handle a large volume of application and
storage of share certificates .To overcome these problems physical dealing in securities
should be eliminated . The Indian stock market introduced the system of dematerialisation
recognizing the need for scrip less trading.

Narendra Jadhav, 2007,“Development of SecuritiesMarket – The Indian Experience”

Well-developed securities markets are the backbone of any financial system. Apart from
providing the medium for channelizing funds for investment purposes, they aid in pricing of
assets and serve as a barometer of the financial health of the economy. The Indian securities
markets have witnessed reforms in the post-liberalization era in terms of market design,
technological developments, settlement practices and introduction of new instruments. The
markets have achieved tremendous stability and as a result, have attracted huge investments
by foreign investors. There still is tremendous scope for improvement in both the equity
market and the government securities market. However, it is the corporate debt market,
which needs to be given particular emphasis given its importance for providing long-term
finance for development.

Nidheesh K B , 2008,“Demat Processing in India”

A new phase in the Indian stock markets began in the 1970s, with the introduction of Foreign
Exchange Regulation Act (FERA) that led to divestment of foreign equity by the
multinational companies, which created a surge in retail investing. The early 1980s witnessed
another surge in stock markets when major companies such as Reliance accessed equity
markets for resource mobilisation that evinced huge interest from retail investors. A new set
of economic and financial sector reforms that began in the early 1990s gave further impetus
to the growth of the stock markets in India. As a part of the reform process, it became
imperative to strengthen the role of the capital markets that could play an important role in
efficient mobilisation and allocation of financial resources to the real economy. Towards this
end, several measures were taken to streamline the processes and systems including setting
up an efficient market infrastructure to enable Indian finance to grow further and mature. The
importance of an efficient micro market infrastructure came into focus following the
incidence of market abuses in securities and banking markets in 1991 and 2001 that led to
extensive investigations by two respective Joint Parliamentary Committees. The Securities
and Exchange Board of India (SEBI), which was set up in 1988 as an administrative
arrangement, was given statutory powers with the enactment of the SEBI Act, 1992.

Objectives of the study is To study and analyse the process of Dematerialisation and
Investors opinion towards Demat Processing., To know and explain procedure for opening of
Demat account and process of dematerialization of securities to eliminate the problem related
with physical holdings of securities., To explain the advantages of Dematerialisation of
securities, convince and make them to dematerialize their securities., To know the problem
faced by the investor and reason for physical holdings of securities without dematerialization
of securities., To give awareness among the investors about Demat and to make them to open
Demat Account.

Dr. Kirit Somaiya, 2008, “Story of Demat Scams”

21st Century India is moving in the direction of becoming a Developed Country. Importance
on the growth, Government investment in infrastructure from the year 2000 has changed the
picture of Indian economy. Rs 1,00,000 crore Government spending on the core and
infrastructure industries during 2001-03, has created a boom in the Indian Economy. Indian
industries have gained self-confidence to compete with the world. The boom in the economy
resulted in the boom in finance industry and that of Capital Market. It is unique in India that
every bull run in the Capital Market has got supplemented by a scam. Harshad Mehta Scam
– 1992, the scam of CRB-NBFC, the plantation companies and the Ketan Parekh Scam.It is
the sad part of the Indian Capital Market that every IPO boom has a scam. It was during
1986-88, the primary market momentum had a mini-scam of mini-steel plants and mini-
cement plant public issues. These companies tapped the market, fooled the Small Investors,
collected hundreds of crores of Rupees, diverted the funds. Small Investor was the loser.This
paper is mainly a study of the difrent Demat Scams that take place in India 2006
NISM ,2010“Workbook for NISM-Series-VI: Depository Operations Certification
Examination”
This workbook has been developed by the certification team of NISM. This workbook has
been developed by NISM in cooperation with the Examination Committee for Depository
Operations Examination consisting of representatives from National Securities Depository
Limited (NSDL) and Central Depository Services Limited (CDSL). This workbook has been
developed to assist candidates in preparing for the National Institute of Securities Markets
(NISM) Certification Examination for Depository Operations. It provides basic information
about indian capital market, working and functions of depository.

Central Depository Services (India) Limited, 2010, “Inspection Manual”

CDSL has formulated bye laws, operating instructions and also it comes out with
amendments regularly through communiqués. It is very crucial for depository to ascertain
whether the RTA so registered carries on the operations in the overall interest of the capital
market and the investors. To achieve this objective, CDSL conducts regular Inspection of its
DPs and RTAs through their own staff and independent firms of professionals.
The underlying focus of these inspections is to improve the operations of the RTA, to verify
whether RTA are aware of and adhere to the Act, Rules, Regulations, various communiqués
issued by CDSL and to ensure better and efficient record keeping by them so that better
services are provided to the investor.

Prof. Sultan Singh &Sakshi Goyal, 2011, “Analysis of Factors Affecting the Decision
Making of the Investors in Depository System”
The present study is an attempt to study the factors affecting the decision making of the
investors in depository system. The primary data are collected with the help of pre-tested
structured questionnaire on five point Likert scale from 294 respondents (investors) of
different age, gender, education, occupation, income from the cities like Gurgoan,
Chandigarh and New Delhi, selected on the basis of convenience sampling. The data
collected have been analysed with the help of various descriptive statistics like frequency and
present and the results are tested by the use of ANOVA technique. Most of the investors are
of the view that shorter settlement period, safety of securities with the depositories, attitude
of the staff available with the DPs, timely services provided by the DPs to the investors,
reduction in transaction cost, repatriation of sales proceeds of shares/debentures by NRIs are
some of the factors which affects the decision making of the investors in depository system.
Opening demat account with DPs is easy but they charge for providing this service.
Converting the securities into electronic from and selling the securities on behalf of the
minors are difficult in the system. But they are of the view that T+3 and ruling settlement is
the result of the depository system. The education of the investors plays an important role in
decision making where the difference in the opinions of the investors is found significant in
most of the cases, followed by other factors such as occupation, age, etc.

NSDL, 2011“Handbook for NSDLDepository Operations Module” (published by

NSDL),
This handbook has been divided into four volumes for readers' convenience. The first
volumegives an overview of the Indian capital market and NSDL depository system. The
second volume deals with admission procedure for different business partners of NSDL, their
obligations, practices, systems and procedures to be followed by them and benefits and safety
of depository system. The third volume helps in acquiring a working level understanding of
certain basic services offered by NSDL like account opening, dematerialisation, and transfer
of securities and related operations. The last volume deals with special services offered by
NSDL like Pledge, Stock Lending and Borrowings, Corporate Actions, National Savings
Certificates / Kisan Vikas Patra (NSC/KVP) in demat form, Warehouse Receipts, Market
Participants and Investor Database (MAPIN) and Tax Information Network (TIN).
The procedures explained in the handbook are based on the Depositories Act, Securities and
Exchange Board of India (Depositories & Participants) Regulations and Byelaws & Business
Rules of NSDL. The book contains illustrations, flow charts and checklists for better
Understanding of various concepts and procedures. A sample test paper is given at the end of
the fourth volume to help the candidates appearing for NCFM test form an assessment of
their preparedness. A thorough understanding of this handbook will form a good base for
qualifying the certification test.
Readers may like to visit NSDL website www.nsdl.co.in for updates and to know the new
procedures introduced or changes brought about in the existing procedures. A feedback form
is given at the end of the fourth volume. Readers may give their feedback, which will be of
great help in enhancing the value of this Handbook in its subsequent editions.
Atin Kumar Das on April 9, 2011, “Law relating to Depositories with Special Reference
to India: An Analytical Study”
This article explains different laws that regulate working of depositories in India. Article
explains the Depositories Act-1996, SEBI (Depositories and Participants) Regulations- 1996,
Companies Act- 1956, Securities and Exchange Board of India Act- 1992 ,Prevention of
Money Laundering Act-2002. Apart from the above-mentioned Acts and Regulations it also
explains Bye Laws of the depository, Operating Instructions of the depository
 CHAPTER-3
RESEARCH METHODOLOGY
RESEARCH METHODOLOGY

Research Methodology refers to search of knowledge. One can also define research
methodology as a scientific and systematic search for required information on a specific
topic. In Research Methodology we study the various steps that are generally adopted by a
researcher in his research problem along with the logic behind them..

In a research various methods are used. The selection of method depends on the nature of
problem selected and kind of data necessary for the solution.

OBJECTIVES OF THE STUDY

To study the working system of depository in India

To study the conceptual knowledge system of depository in India
To provide information about the types of accounts that can be opened in depository.
To know about the investors views regarding NSDL‟s services in India

Research Design Used In the Project:-

The research design used in this research is „exploratory research‟.

Exploratory research: is one type of research design, which has as its primary objective the
provision of insights into and comprehension of the problem situation confronting the
research.

Exploratory research was performed to gain detailed knowledge and understanding of the
functioning of depository in the country by using both primary and secondary data.

Source of Data:-

PRIMARY SOURCE OF DATA: the primary data is in the form of questionnaire which
is used to gather investor‟s views about depository system‟s services in India. The
sampling method used was basically convenience sampling.

Sample size: The study is based on sample size of 60 people who have de-mat account in
NSDL.
 SECONDARY SOURCE OF DATA: For this project secondary data is also used.
Secondary data is the data compiled by someone other than the user. It includes
publisheddata in the form of documents, research papers, web pages and other
organisational records.

It is recommended to use secondary data in order to avoid duplicating of effort, running up

unnecessary costs, and tiring of informants.

Types of secondary data used-

In this project the secondary data used was of the following types

1. Internal secondary data – the data which is available within the organisation – was
obtained from the website of Ludhiana Stock Exchange „www.lse.org‟.
2. External secondary data is the data which is obtained from sources external to the
organisation as commercial publications, government publications, professional
organisations, trade associations professional marketing research agencies etc.

All secondary data used in this project was in the electronic form, and was obtained from the
internet.

Computerised databases used in this project

1. Bibliographical data base is the one which is obtained from journals, government
publications, magazines, newspapers etc. Such online publications were accessed to
obtain definitions of terms used in this article.
2. Full text database was obtained from the websites of NSDL and CDSL to get the details
of working of depository.
 CHAPTER-4
WORKING OF DEPOSITORY
SYSTEM
DEPOSITORY SYSTEM

Depository system essentially aims at eliminating the voluminous and cumbersome paper
work involved in the scrip-based system and offers scope for „paperless‟ trading through
state-of-the-art technology. It is an institution which maintains an electronic record of
ownership or securities. The storage and handling of certificates is hence immediately
eliminated which generates a reduction in costs like back office cost for handling,
transporting and storing certificates.

Depositary participant is an institution akin to bank for securities. When an investor hands
over securities to a depository participant, investor‟s account is credited. The investor‟s
depository system account will show their holdings. His account is updated for his
transactions of sale and purchase but without physical movement of scripts or transfer deeds.
In depository system, share certificates belonging to the investors are dematerialised
(demats). Dematerialisation or “Demat” is a process whereby investors‟ securities like
shares, debentures etc., are converted into electronic data and stored in computers by a
Depository. Securities registered in investor‟s name are surrendered to depository participant
(DP) and these are sent to the respective companies who will cancel them after
“Dematerialization” and credit investor‟s depository account with the DP. The securities on
Dematerialization appear as balances in one‟s depository account. These balances are
transferable like physical shares. If at a later date, investors wish to have these “demat”
securities converted back into paper certificates, the Depository does this and their names are
entered in the records of depository as beneficial owners. The beneficial ownership will be
with investor but legal ownership will be with the depository. Consequently, benefits like
interest, dividend, and rights: bonus and voting rights will be with investors. Since depository
is to get securities transferred in its name, the depository name will be registered in the
ownership register maintained by the company. Thus, instead of name of several owners, the
name of depository figures in the register of company.
Since transfer will be affected only in depository, register of company need not be updated on
every transactions of sale or purchase of company‟s share. It alleviates the hardships
currently faced by the investors and it also offers option for converting the shares from
electronic to physical or paper form through a process of rematerialisation (remat).
Depository system is, indeed, time tested and long prevalent in many advance countries and
has been playing a significant role in stock markets around the world.
Constituents of Depository System
The depository system comprises of:
i) Depository
ii) Depository Participants (DPs)
iii) Companies/issuer
iv) Investors

i) 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:

a) Enables surrender and withdrawal of securities to and from the depository through the
process of „demat‟ and „remat‟,
B) maintains investors‟ holdings in electronic form,
c) Effects settlement of securities traded in depository mode on the stock exchanges,
D) 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, 1956. 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 issuer‟s agent has to be
Created.

Depository, operating in India, shall have a net worth of rupees one hundred croreand
instruments for which depository mode is open need not be a security as definedin the
Securities Contract (Regulations) Act 1956. The depository, holding securities,shall maintain
ownership records in the name of each participant. Despite the factthat legal ownership is
with depository, it does not have any voting right against thesecurities held by it. Rights are
intact with investors.
There are two depositories inIndia at present i.e.
1. NSDL: National Securities Depository limited
2. CDSL:Central Depository Services (India) Limited

ii) 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 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 DP.

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.
• A public financial institution as defined in Section 4A of the Companies Act, 1056.
• A bank included in the second schedule of the Reserve Bank of India Act, 1934.
• A foreign bank, operating in India with the approval of Reserve Bank of India.
• A state financial corporation established under the provisions of section 3 of the State

• An institution engaged in providing financial services, promoted by any of the four

institutions mentioned above.
• A custodian of securities, who has been granted a certificate of registration by SEBI under

• A clearing corporation or a clearing house of a stock exchange.

• 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
who‟s 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.
• 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.
• A registrar to an issue or share transfer agent who has a minimum net worth of
Rupees ten crores and who has been granted a certificate of registration by SEBI

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

iii) 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 those co.‟s can issue the securities
which are registered under stock exchanges
iv) 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 depository.

Other Services

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 one‟s 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 one‟s 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 one‟s account, one may advise one‟s DP accordingly. DP
will ensure that account of such investor is totally frozen until further instructions from him.

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 players.

DEMATERIALISATION PROCESS

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.

ii) 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 investor‟s 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

it‟s Registrar of transfer.

iii) 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.

iv) 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.

v) Crediting the Client‟s Account

DP credits investor‟s 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 transactions.
Demat Account

Definition:

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.

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 time.

Opening a Demat Account

to start dealing in securities in electronic form, one needs to open a demat account with a DP
of his choice. An investor already having shares in physical form should ensure that he gets
the account opened in the same set of names as appearing on the share certificate; otherwise a
new account can be opened in any desired pattern by the investor.

Opening a Demat Account Documents to be attached

Getting started
1. Choose a DP
2. Fill up an account opening form
provided by DP, and sign an
agreement with DP in a standard
format prescribed by the depository.
3. DP provides the investor with a copy
of the agreement and schedule of
charges for his future reference.
4. DP opens the account and provides the
investor with a unique account
number, also known as Beneficiary
Owner Identification Number (BO
ID).
1. Passport size photographs
2. Proof of residence (POR) - Any one of
Photo Ration Card with DOB / Photo
Driving License with DOB / Passport
copy / Electricity bill / Telephone bill
3. Proof of identity (POI) - Any one of
Passport copy / Photo Driving License
with DOB / Voters ID Card / PAN
Card / Photo Ration Card with DOB
4. PAN card

Note:

1. The agreement required to be signed by the investor details the rights and duties of the
investor and DP.
2. DP may revise the charges by giving a 30 days prior notice. SEBI has rationalized the
cost structure for isation by removing account opening charges, transaction charges
for credit of securities and custody charges, effective from January 28, 2005.
Re materialisation process

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.
Thedepository updates its records and communicates to DP to incorporate
necessarychanges in the account of the client.
 CHAPTER-5
CONCEPTUAL KNOWLEDGE OF
DEPOSITORIES‟ IN INDIA
CONCEPTUAL KNOWLEDGE OF DEPOSITORIES‟ IN INDIA

There are two depositories inIndia at present i.e.

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

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.
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,

2005.
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
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
48
12. Appeals
13. Conciliation
14. Arbitration
Amendments 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
and
filing 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 :
_ Enables the surrender and withdrawal of securities to and from the depository
(dematerialisation and rematerialisation).
_ Maintains investor holdings in the electronic form.
_ Effects settlement of securities traded on the exchanges.
_ Carries out settlement of trades not done on the stock exchange (off-market trades).
_ Transfer of securities.
_ Pledging/hypothecation of dematerialised securities.
_ Electronic credit in public offerings of companies or corporate actions.
_ Receipt of non-cash corporate benefits like bonus rights, etc. in electronic form.
_ Stock Lending and Borrowing.
Services Offered by NSDL
NSDL offers a host of services to the investors through its network of DPs:
_ Maintenance of beneficiary holdings through DPs
_ Dematerialisation
_ Off-market Trades
_ Settlement in dematerialised securities
_ Receipt of allotment in the dematerialised
form _ Distribution of corporate benefits _
Rematerialisation
_ Pledging and hypothecation facilities
_ Freezing/locking of investor's account
_ 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 twotier 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.
Technology and Connectivity in NSDL

System View of NSDL Depository System

Account holders (investors) open account with the DPs. The account details, entered in a
computer system maintained by Depository Participants called DPM, are electronically
conveyed to the central system of NSDL called DM. Companies who have agreed to offer
demat facility to their shareholders use a computer system called DPM (SHR) to connect to
the NSDL central system. DPM (SHR) may be installed by the company itself or through its
R&T Agent. This system is used to electronically receive demat requests, confirm such
requests or to receive beneficial owner data (Benpos) from the depository. Stock exchanges
receive pay-in (receiving securities against sales made by brokers) or to payout (giving
securities to brokers against their purchases) using a computer system connected to NSDL
called DPM (CC).
All the computer systems installed by DPs (DPM-DP), companies (DPM-SHRs), and stock
exchanges (DPM-CC) are connected to NSDL central system (DM) through V-SAT (very
small aperture terminal) or leased lines. These are collectively called Business Partner
Systems. Any transaction conducted by any computer system in the NSDL depository system
which is targetted to reach any other computer system first gets recorded in DM and then will
reach the target. No two business partners' systems can communicate to each other without
passing through the DM.

Maintenance of Accounts at the Central System

The NSDL central system known as DM maintains accounts of all account holders in the
depository system. All the transactions entered at any point in the computer system connected
to it are first effected in the central system and subsequently at these computers. Thus, the
central system of NSDL has the records of all details of every transaction conducted in the
depository system.

Distributed Database

Each of the computer systems connected to NSDL system has its own database relating to its
clients. This helps in giving prompt and accurate service to the clients. However each of the
databases is reconciled with the data at the central system everyday in order to ensure that the
data in the distributed database tallies with the central database.

Common Software

NSDL develops software required by depository participants, companies, R&T Agents and
clearing corporations for conducting depository operations. Thus, the computer systems used
by all the entities will have common software given by NSDL. However, depending on the
business potential, branch networks and any other specific features, DPs may develop
software of their own for co-ordination, communication and control and provide service to
their clients. Such exclusive software is called "back office software". DPM system given by
NSDL gives "export and import" facility to take out the transaction details to be used by back
office software and to feed in transaction details generated from the back office software.
Connectivity

The computer system used by DPs, companies, R&T Agents and stock exchanges may be
connected to NSDL central system through V-SAT network or leased line network. NSDL
uses NSE's V-SAT network for the connectivity purposes. Thus, V-SATs used by NSE
brokers can connect to NSDL if the software supplied by NSDL is used. V-SAT uses
satellites for communication purposes. Some business partners may connect using leased
lines provided by MTNL/ BSNL. V-SAT or leased line connections are called primary
connectivity. If primary connectivity fails for any reason, BPs must have the ability to
connect through other means. Such other means are PSTN lines, ISDN lines, POP
lines(normal telephone lines) through which they can dial in to the NSDL system and
conduct their transactions.

NSDL Facts & Figures

As on May 31, 2011

Number of certificates eliminated (Approx.) 962.49 crore

Number of companies in which more than 75% shares are

3090
dematted

Average number of accounts opened per day since November

3679
1996

82% of all pincodes in the

Presence of demat account holders in the country
country
Central Depositary 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

1) Honourable Union Finance Minister, Shri Yashwant Sinha flagged off the operations of
CDSL on july 15,1999.

2) Settlement of trades in the demat mode through BOI Shareholding Limited, the clearing
house of BSE, started in july 1999.

3) 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.

4) 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 system.
Shareholders of CDSL

CDSL was promoted by Bombay Stock Exchange Limited (BSE) in association with Bank of
India, Bank of Baroda, State Bank of India and HDFC Bank. BSE has been involved with
this venture right from the inception and has contributed overwhelmingly to the fruition of
the project. The initial capital of the company is Rs.104.50 crores. The list of shareholders
with effect from 11th December, 2008 is as under.

A professional Board of Directors with vast and varied experience in capital markets
and banking is at the helm of affairs at CDSL.

Board of Directors

Mr. S S Thakur Chairman

Mr. V V Raut Managing Director and Chief Executive Officer

Mr. P S Reddy Executive Director

Mr. M. R. Mayya Independent Director

Mr. Madhu Kannan Sponsor Director – Bombay Stock Exchange Limited

Mr. L. P. Aggarwal Sponsor Director – Bombay Stock Exchange Limited

Mr. Prakash R. Kacholia Sponsor Director – Bombay Stock Exchange Limited

Mr. Anjan Barua Sponsor Director - State Bank of India

Mr. A. D. M. Chavali Sponsor Director - Bank of Baroda

Mr. A. R. Kuppuswamy Sponsor Director - Bank of India

Management Team

Mr. V V Raut Managing Director and Chief Executive Officer

Mr. P S Reddy Executive Director

Mr. Pramod Deshpande Chief Technology Officer

Mr. Cyrus Khambata Sr.Vice President.

Business Development(Currently on deputation to CDSL Ventures
Ltd. as CEO with effect from 7-12-2006)

Mr. Jitendra Chad Vice President.

Information Technology

Ms. Nayana Ovalekar Vice President.

Audit, Inspection & Compliance

Mr. Bharat Sheth Vice President.

Accounts & Administration

Mr. Sunil Alvares Vice President.

Business Development

Mr. Ramkumar K. Vice President.

Operations

Mr. Jignesh Gandhi Vice President.

New Projects

Mr. Satish Budhakar Vice President.

Legal & Company Secretary
FEE STRUCTURE OF CDSL

CDSL fees structure to its depository participants is as follows:

SR.NO
. Details of Charges CDSL

1 Account Opening Charges NIL

2 Account Maintenance Charges NIL for individuals

Rs.500/- p.a. to Corporates

3 Transaction Charges Rs.6/- **

Market & Off-Market

4 Transaction Charges Clearing Flat charge of Rs.500/- per month on CM accounts

Member Accounts
for pay-in and pay-outs received from CH

5 Custody Charges NIL

6 Demat Charges NIL

7 Remat Charges Rs.10/- per 100 securities or part quantity or

Rs. 10/- per cert. whichever is higher.

8 Pledge/Hypothecation Charges Pledge acceptance - Rs.12/- per request. Unpledge

acceptance - Rs.12/- per request. Pledge Invocation
Acceptance -Nil

9 Internet Facility 'easi' Rs.20,000/- one time for registration

10 Internet Facility 'easiest' Rs.30,000/- one time for registration Rs.1,150/-p.a.

for renewal of digital signature

Monthly charges for DPs or its branches w.e.f. 1st May, 2006

For Main DPs: Rs.3,000/- per month or the amount of the actual bill for a given
month whichever is higher.

For DP-Branches: Rs.2,000/- per month or the amount of the actual bill for a given
month whichever is higher.
Fees for Clearing Members
CDSL collects only Rs. 500/ - per month from its DPs for a CM except for CM
Investors Securities Account.

The following tariff structure will be effective from Wednesday, April 01, 2009.

Monthly Transaction bill amount Rate per

(@Rs.6/-per transaction) Debit Transaction
(in Rs.) (in Rs.)
More than Rs.15 lakhs 4.75
More than Rs.4 lakhs and upto Rs.15 lakhs 5.00
More than Rs.1 lakh and upto Rs.4 lakhs 5.50
Upto Rs.1 lakh 6.00
 CHAPTER-6
DEPOSITORY ACCOUNT AND ITS
TYPES
TYPES OF ACCOUNTS
Type of depository account depends on the operations to be performed. There are three
types Of demat accounts which can be opened with a depository participant viz.

(a) Beneficiary Account

(b) Clearing Member Account
(c) Intermediary Account.

1. Beneficiary Account:

This is an account opened by investors to hold their securities in dematerialised form with a
depository and to carry out the transactions of sale and purchase of such securities in book
entry form through the depository system. A beneficiary account holder is legally entitled for
all rights and liabilities attached to the securities (i.e. equity shares, debentures, government
securities, etc.) held in that account. Therefore, the account is called beneficial owner
account".
A beneficiary account can be in the name of an individual, corporate, Hindu Undivided
Family (HUF), minor, bank, financial institution, trust, etc. or the broker himself for the
purpose of his personal investments in demat form. The account is opened with a DP.
A new sub-type viz. "Margin Account" has been added to the Client type‟s viz.; 'Resident'
and 'Body Corporate' under Client Maintenance Module in DPM Application Software
(DPMAS). The new sub-type "Margin Account" is added to enable Clearing Members (CMs)
to open beneficiary accounts to hold securities for client margin purposes.
New sub-types are also added to enable promoters to separately hold securities issued as
"Promoter" of the company.

House account vs. non-house account –

An account opened by a DP for the custody of and transactions in its own investments is
referred to as a house account, and all other beneficiary accounts are referred to as non-
house account. DPs are required to open house accounts for their own investments to prevent
co-mingling of their assets with that of their clients.
Neither the Depositories Act nor the regulations made under the Act lay down any
specifications about who can open a beneficiary account. Since all beneficial owners are
deemed to be members of a company (under section 41(3) of the Companies Act), only those
who are eligible to become members of a company under the Companies Act, can open a
beneficiary account with a depository. Thus, all legal entities with the exception of
partnership firms can open an account in the depository system.

Documents for Verification

I. Non-body Corporate Investors: For the purpose of verification, all non-body corporate
investors have to submit the following documents, as prescribed by SEBI, along with the
stipulated account opening form.
A beneficiary account must be opened only after obtaining a proof of identity and address of
the applicant. An authorised official of the Participant should verify the photocopies of any of
following documents submitted with their corresponding originals and put his/her signature
on them with remarks "verified with original" before proceeding to open the account.
(a) Proof of Identity (POI)-

I. Passport
II. Voter ID card
III. Driving license
IV. PAN card with photograph
V. MAPIN card (SEBI vide its Circular No. MRD/DoP/Cir-08/2007 dated June 25, 2007 has
communicated its decision to discontinue with the requirement of Unique
Identification Number (UIN) under the SEBI (Central Database of Market Participants)
Regulations 2005 (MAPIN regulations)/circulars.

a) Central/State Government and its Departments,

b) Statutory/Regulatory Authorities,
c) Public Sector Undertakings,
d) Scheduled Commercial Banks,
e) Public Financial Institutions,
f) Colleges affiliated to Universities (this can be treated as valid only till the time the
applicant is a student),
g) Professional Bodies such as ICAI, ICWAI, ICSI, Bar Council etc., to their
Members; and
h) Credit cards/Debit cards issued by Banks.

(b) Proof of address (POA) –

I. Ration card
II. Passport
III. Voter ID card
IV. Driving license
V. Bank passbook
Bank passbook is one of the Proof of Address (POA) being submitted by applicant(s)
To the DP at the time of opening depository account. In this regard, procedure is as
Follows,

(i) Computer generated original bank statement:

DPs may accept the computer generated original bank statement as POA if Neither obtaining
the copy of bank passbook nor attestation (stamp and signature) Of the authorised official of
the bank on the original bank statement is feasible. Provided such original bank statement is
printed on the stationery of the bank Carries logo & name of the bank, displays the name,
address and bank Transactions/holdings of the Client for the latest quarter ending.

(ii) Computer generated bank statement on plain paper:

DPs may accept the computer generated bank statement which is printed on a Plain paper as
POA provided it clearly mentions the name, address and bank Transactions/holdings of the
Client for the latest quarter ending. Provided such A bank statement is duly attested (signed
and stamped) by the authorised official Of the bank mentioning the name and designation of
such authorised official. In both the aforesaid circumstances, DPs are advised as follows:
a) Obtain a cancelled cheque in original and signature of the applicant(s) (all
The holders in case of joint holdings) on the bank statement.
b) The bank statement should be of the latest quarter ending e.g. depository
Accounts opened in the month of April, May and June should be supported
By the bank statement of the quarter ending March 31.

Capturing of landmark details

Clients prefer to write landmark details viz., name of the building/mall/junction/
School/garden/hotel/bank/railway station/company name/bus depot etc. with the Preceding
words such as 'nearby', 'adjacent to', 'behind', 'next to', 'opposite to' “Off' etc. in the account
opening form as it facilitates for easy location of their Addresses and prompt delivery of
various communications to be received by The Clients. In this context, procedure is as
follows,

A. At the time of opening demat accounts:

DPs should ensure compliance with the various guidelines/circulars issued By NSDL on
account opening and after satisfying itself, may capture the Address including landmark
details in the DPM System as provided by the Clients in the account opening forms.

B. Change in landmark details:

In case of change (addition/deletion/modification) in the landmark detailsAlready captured in
the DPM system at the time of opening demat accounts, DPs may limit the changes to the
landmark details after obtaining a request From the Clients on a plain paper, which is signed
by all the holder(s) (in Case of joint holdings). DPs are advised to note that the primary
address Captured in the DPM system as mentioned in the proof of address, at the Time of
opening demat accounts should remain intact, limiting the changes To the landmark details.
VI. Verified copies of
a) Electricity bills (not more than two months old),
b) Telephone bills (not more than two months old) pertaining to only Landline telephones
(other than Fixed Wireless Phone) irrespective of the service provider can be accepted by
DPs as POA. (DP may ascertain the fact that such telephone number exists in the name of the
entity, by making a call or by any other means) and
c) Leave and License Agreement / Agreement for sale.
VII. Self-declaration by High Court & Supreme Court judges, giving the new
address In respect of their own accounts.
VIII. Identity card/document with address, issued by
a) Central/State Government and its Departments,
b) Statutory/Regulatory Authorities,
c) Public Sector Undertakings,
d) Scheduled Commercial Banks,
e) Public Financial Institutions,
f) Colleges affiliated to Universities (this can be treated as valid only till the time The
applicant is a student) and
g) Professional Bodies such as ICAI, ICWAI, Bar Council etc., to their Members. In case of
joint holdings, POI and POA documents must be collected in respect of all Account holders.
The aforesaid documents are the minimum requirement for opening a BO Account.
Participants are advised to exercise due diligence while establishing the identity of the person
to ensure the safety and integrity of the depository system. Participants can apply stricter
criteria and accordingly, decide to accept, select documents out of the list of documents
prescribed by SEBI, as proof of identity/address.

II. For Corporate Investors: For the purpose of verification, all corporate investors have to
submit the following documents as prescribed by SEBI along with the stipulated account
opening form.
(1) Memorandum & Articles of Association (MOA & AOA), Board resolution for opening
demat account and the list of authorised signatories along with their specimen signatures and
photographs, etc.
(2) Introduction by an existing account holder or by the applicant's bank.
(3) Proof of address of the corporate, evidenced by the document registered with Registrar of
Companies or acknowledged copy of Income Tax Return or Bank Statement or Leave and
License Agreement/Agreement for sale.

An authorised official of the Participant shall verify the proof of address with the original
documents and affix his/her signature on the documents submitted by the Client, while
exercising such due diligence.

Common Information

The process of opening an account with a depository, nature of such an account, and various
factors to be considered for opening a depository account is explained below. Some details
are common to all types of accounts. These are:

1. Name of the holder

2. Date of birth (for individual accounts)

3. Occupation

4. Address & phone/fax number

5. Bank details like name of bank, type of account (current/savings), account number, branch
address, MICR, etc.

6. PAN number

7. Details of nomination (for individual accounts only)

8. Specimen signatures

9. MAPIN UIN (s)

10. E-mail address

11. Mobile number

12. Address for communication

2. Clearing Member Account:

The entities that are authorised to pay in and receive the pay out from a Clearing Corporation
(CC)/ Clearing House against trades done by them or their clients are known as clearing
members (CM). CMs are identified in the system through their CM-BP-ID. All pay-in and
pay-out transactions are carried out through their accounts.

There are two types of clearing members:

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

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

Procedure to Open a Clearing Member Account

The steps undertaken to open the account are same as those of individuals, difference lies in
the type of form and details to be filled in and documents to be submitted. The only major
difference is that the clearing member has to first register it with the clearing corporation and
obtain a CCCM- ID. The clearing account is identified by the combination of CC-CM-ID
given by the clearing corporation, CM-BP-ID given by the depository and the Client-ID
given by the DP.

Before opening a clearing account, the DP should send to the depository the clearing
member's account opening form. The Depository then allots the CM-BP-ID. Based on the
CM-BP-ID so allotted, the account gets activated. The DP then generates Client-ID and
communicates the date of opening the account in DPM system to the depository.

Details to be filled in the form are:

1. Name of the Clearing Member

2. Company's short name, if any

3. Address of the registered office, telephone number, fax number, e-mail, if any
4. Name and address of the authorised signatories, their designations and telephone numbers,
status code, sub-status code

5. Bank account particulars, bank name and its branch, current account number, RBI
reference number, RBI approval date, PAN/ GIR number

6. Signatures of Authorised signatory (ies)

Details of Introducer - If an existing client has introduced a new client to the DP his signature
is required on the form. In other cases, the DP may ask for details that it considers
appropriate. A separate enclosure has to be attached to the account opening form specifying
the following details:

1. Name and address of the clearing member

2. Name and address of the clearing corporation

3. Clearing Corporation Id (CC-ID)

4. Clearing Member Id (CM-ID)

5. Stock Exchange clearing code

6. SEBI Registration number

7. Trade name

8. Copy of Board Resolution for authorised signatories should also be submitted.

Generally, there will be only one CM account per broker for a stock exchange.

Checklist for a Clearing Member Account

• Ensure that all compulsory fields in the account opening form have been entered.

• Ensure that a copy of the board resolution for authorised signatories has been enclosed in
case of corporates.

• Ensure that required letter from Stock Exchange giving CC-ID is enclosed.

• Ensure CM is informed of standing instruction facility for receipt.

• Ensure CM is informed that in case of delivery to CC instruction, either of the joint-holders

can sign the instruction.

• If the forms are received at the branch of a DP, ensure that the account opening form along
with required references is dispatched to head office in a proper and timely manner. If
required, retain a copy.

• Ensure follow up with head office in case defined deadline in respect of account opening is
not met.
The clearing account should only be used for clearing and settlement purposes and not for
any other purpose, e.g., holding of securities. All the securities received in a settlement
account should be transferred to respective beneficial accounts as soon as possible, but in no
case later than the time prescribed by the depository/ stock exchange/SEBI in this regard. The
opening of clearing member account constitutes a "standing instruction" to receive credits
from the clearing corporation when there is a pay-out.

Intermediary Account: An intermediary account can be opened by a SEBI registered

intermediary for the purpose of stock lending and borrowing. The clearing member account
and the intermediary account are transitory accounts. The securities in these accounts are
held for a commercial purpose only.

Client types

There are several client types in the depository system and different codes are allotted to
them.

These are listed below:

1. Resident

_ Ordinary
_ Hindu Undivided Family (HUF)

2. Financial Institutions (FI)

_ Government-sponsored FI
_ State Financial Corporation
_ Others

3. Foreign Institutional Investors (FIIs)

_ Mauritius-based
_ Others

4. Non-resident Indian (NRI)

_ Repatriable
_ Non-Repatriable
5. Body Corporate

_ Domestic Company
_ Overseas Corporate Body (OCB)
_ Government Company
_ Central Government
_ State Government
_ Co-operative Body
_ Non-Banking Finance Companies (NBFC)
_ Non-NBFC
_ Broker
_ Foreign Bodies
_ Group Companies
_ OCB-NonRepatriable
_ Foreign Venture Capital
_ Limited Liability Partnership
_ Others

6. Clearing Member (CM)

7. Foreign National

8. Mutual Fund

9. Trust

10. Bank
 CHAPTER-7
ANALYSIS & INTERPRETATION
ANALYSIS
I used a structured questionnaire for eliciting the required responses relating to Depository
Services. Respondents chosen for this research are only those who have a DEMAT account
with any depositary participant. 60 respondents were approached for this purpose, out of
which 38 were male and 22 were female respondents. All the respondents co-operated with
the researcher in filling the questionnaire.
The various responses were classified, and tabulated. A simple statistical analysis was made
by the researcher. An attempt is made to present the analysis which covers various aspects of
Depository Services that affect a customer‟s opinion related to depository system‟s services.
Statement No. 1 - Duration of holding and trading in securities (in years)?
The purpose of this question is to determine how long the investor has been investing in
securities.
Table-1
(Shows the frequency and the percentage of respondents holding and trading in securities).
Male investors Female investors
Time (In years) Frequency Percentage Frequency Percentage
Below 5 years 17 45 19 86
5-10 years 15 39 3 14
10-15 years 5 13 0 0
Above 15 years 1 3 0 0
Total 38 100 22 100
Graph-1
(Shows the percentage of respondents holding and trading in securities)

100

50 Male investor’s Percentage

0 Female investor’s Percentage
Below 5 5-10 years 10-15 Above 15
years years

Analysis and Interpretation: from above table and graph it is clear that 45% of males and
86% of females are trading in security market for a period of less than 5 years and no female
is trading for a period more than 10 years.
This shows that females have recently developed knowledge, skills and confidence required
for starting trading in stock market as compared to males who were trading in stock market
for more than decade.
Statement No.2 - Usual modes of trading used byinvestor.
The purpose of this statement is to know about the respondent‟s preference regarding
different methods of trading.
Table-2
(Sows the frequency and percentage of usual modes of trading used by different respondents)
Male Female
Modes of trading Frequency Percentage Frequency Percentage
Online trading 13 34 5 23
Trading through broker 12 32 8 36
Both 13 34 9 41
Total 38 100 22 100

Graph-2
(Showing percentage of usual modes of trading used by different respondents)

60
40
20
0 Male Percentage
Online Trading Both Female Percentage
trading through
broker

Analysis and Interpretation: from the above table and graph it is clear that the number of
males using online trading mode, trading through brokers and both, is 34%, 32% & 34%
respectively. While in case of females, there is no significant difference in the investors using
online trading mode, trading through brokers, and both, which is 23%, 36% 41%
respectively.
This shows that each mode of trading has its relative advantages and disadvantages. No
method of trading is absolutely perfect. Choice of the method depends on the personal choice
and convenience of investor.

Statement No.3 - Different areas of investment in securities market.

The purpose of this statement is to know about respondent‟s preference regarding different
securities in which he/she wants to invest.
 Table-3
(Shows the frequency and percentage of respondent‟s preferred area of investment)
Male Female
Area of investment Frequency Percentage Frequency Percentage
Mutual funds 13 34 6 27
Government bonds 0 0 0 0
Equity shares 25 66 16 73
Total 38 100 22 100

Graph-3
(Shows the percentage of respondent‟s preferred area of investment)

80
60
40
20
Male Percentage
0
Female Percentage

Analysis and Interpretation: from above table and graph it is clear that majority of males
and females investors invest in equity shares (66% in case of males and 73% in case of
females). Hence it is clear that equity shares are most preferred source of investment as
compared to mutual funds and government bonds.
Statement No.4 - Factors important for a trading company to enhance the loyalty of its
customers.
The purpose of this statement is to know about factors, which according to the respondents,
must be present in a depositary participant to enhance their loyalty.
Table-4
(Shows the frequency and percentage of respondent‟s opinion in respect of the most
important factor required by a trading company to enhance the loyalty of the customers)
Male Female

Factors Frequency Percentage Frequency Percentage

Provides maximum profit 20 53 7 32

Provides tips from time to time 3 8 6 27

No hidden charges 12 32 3 14

Promptness of service 3 8 6 27

Total 38 100 22 100

 Graph-4
(Shows the percentage of respondents, in whose opinion, out of the given factors, which
is the most important factor required by a trading company to enhance the loyalty of its
customers)

60
40
20 Male Percentage
0 Female Percentage
Provides Provide tips No hidden Promptness
maximum from time to charges of service
profit time

Analysis and interpretation: from above table and graph it is clear that 53% of male
investors and 32% of female investors prefer a depositary participant which provides the
maximum profit. This shows that most of the investors consider providing maximum profits
as the major criteria while selecting a depository participant.

Statement No.5 - Time duration in which depository participant contacts its customers
The purpose of this statement is to know that how frequently a depository participant contacts
its customers.
Table-5
(Shows the frequency and percentage of respondents with respective time durations in which
depository participant contacts them)
Male Female
Duration Frequency Percentage Frequency Percentage
Daily 9 24 3 14
Weekly 13 34 13 59
Monthly 13 34 6 27
Yearly 0 0 0 0
Never 3 8 0 0
Total 38 100 22 100

Graph-5
(Shows the percentage of respondents with respective time durations in which depository
participant contacts them)
 60
40
Male Percentage
20 Female Percentage
0
Daily Weekly Monthly Yearly Never

Analysis and interpretation: from above table and graph it is clear that most of the
depositary participants contact their customers weekly. This shows that depository system is
very efficient and depository participants contact their customers regularly.

Statement No.6 - Reasonability of service charges of DEMAT a/c

The purpose of this statement is to find out the fraction of the customers that regard the
service charges of a DEMAT a/c as reasonable.
Table-6
Do you find the DEMAT service charges reasonable? Frequency Percentage
Yes 58 96.7
No 2 3.3
Total 60 100

Graph-6
Do respondents find the DEMAT service charges reasonable?

Percentage

Yes
No

Analysis and interpretation: Almost all therespondents (96.7%) find service charges levied
by the depository participant as reasonable. This shows that service charges levied are fair
and reasonable.
Statement No.7 - Awareness level regarding different functions and services provided
by depository system?
Formulation of problem - objective of asking this group of questions from respondents is to
determine the different functions and services that an investor should be aware of while
trading through the DEMAT account.
The problem may be solved with help of factor analysis.
Factor analysis is a general name denoting a class of procedures primarily used for data
reduction and summarization.
Using factor analysis, I will endeavor to summarize the different variables which are related
to the given problem, and to represent them in terms of a few underlying factors.
A sample of 60 respondents was used. The sampling method used was basically convenience
sampling. The respondents were asked to express their degree of awareness regarding the
following statements, on a 5-point scale. (1=extremely aware, 5= not aware).

V1. Procedure of Account Opening.

V2. International Security Identification Number (ISDN).
V3. Transaction Statement of DEMAT Account.
V4. Nomination Facility
V5. Re-materialization of DEMAT Securities.
V6. Lending and Borrowing of DEMAT Securities.
V7. Freezing of DEMAT Account.
V8. Knowledge about NSDL or CDSL.
V9. Knowledge about Depositaries Act 1996.

Table-7.1KMO and Bartlett's Test

Kaiser-Meyer-Olkin Measure of Sampling Adequacy. .686
Bartlett's Test of Sphericity Approx. Chi-Square 105.944
df 36
Sig. .000

Test of significant-
a. The value of KMO statistic is =0.686 which is greater than 0.5
b. Chi-square statists is = 105.944 with 36 degree of freedom, hence the null
hypothesis that the population correlation matrix is an identity matrix, is rejected and
alternate hypothesis (that there is correlation between the variables) is accepted by
Bartlets‟s test of sphericity.
Conclusion: factor analysis can be considered for analyzing the correlation matrix

Correlation Matrixafor v1to v6 variablesTable-7.2

VAR0000 VAR0000 VAR0000 VAR0000 VAR0000 VAR0000 VAR0000 VAR0000 VAR0000
1 2 3 4 5 6 7 8 9
VAR0000 1.000 .077 .160 .503 .319 .196 .364 .267 .161
1
VAR0000 .077 1.000 .304 .173 .097 .211 .134 .316 .382
2
VAR0000 .160 .304 1.000 .159 -.029 .274 -.046 .326 .155
3
VAR0000 .503 .173 .159 1.000 .333 .512 .339 .378 .125
4
Correlatio

VAR0000 .319 .097 -.029 .333 1.000 .300 .214 .151 .384
5
n

VAR0000 .196 .211 .274 .512 .300 1.000 .169 .222 .231
6
VAR0000 .364 .134 -.046 .339 .214 .169 1.000 .173 .088
7
VAR0000 .267 .316 .326 .378 .151 .222 .173 1.000 .290
8
VAR0000 .161 .382 .155 .125 .384 .231 .088 .290 1.000
9
VAR0000 .279 .111 .000 .006 .067 .002 .020 .109
1
VAR0000 .279 .009 .094 .231 .052 .154 .007 .001
2
VAR0000 .111 .009 .112 .414 .017 .364 .005 .118
3
VAR0000 .000 .094 .112 .005 .000 .004 .001 .170
4
1 -tailed)

VAR0000 .006 .231 .414 .005 .010 .050 .126 .001

5
(
Si
g.

VAR0000 .067 .052 .017 .000 .010 .099 .044 .038

6
VAR0000 .002 .154 .364 .004 .050 .099 .094 .253
7
VAR0000 .020 .007 .005 .001 .126 .044 .094 .012
8
VAR0000 .109 .001 .118 .170 .001 .038 .253 .012
9

a. Determinant = .147
 Inverse of Correlation Matrix for v1to v6 variablesTable-7.3
VAR0 VAR0 VAR0 VAR0 VAR0 VAR0 VAR0 VAR0 VAR0
0001 0002 0003 0004 0005 0006 0007 0008 0009
VAR00001 1.542 .142 -.239 -.649 -.248 .233 -.339 -.061 -.096

VAR00002 .142 1.337 -.278 -.084 .089 -.050 -.155 -.188 -.435

VAR00003 -.239 -.278 1.317 .109 .209 -.340 .214 -.311 -.004

VAR00004 -.649 -.084 .109 1.982 -.209 -.772 -.193 -.428 .271

VAR00005 -.248 .089 .209 -.209 1.413 -.227 -.069 .042 -.497

VAR00006 .233 -.050 -.340 -.772 -.227 1.544 -.048 .104 -.164

VAR00007 -.339 -.155 .214 -.193 -.069 -.048 1.249 -.067 .053

VAR00008 -.061 -.188 -.311 -.428 .042 .104 -.067 1.395 -.255

VAR00009 -.096 -.435 -.004 .271 -.497 -.164 .053 -.255 1.446

Communalities Table-7.4

Initial Extraction
VAR00001 1.000 .579

VAR00002 1.000 .567

VAR00003 1.000 .694

VAR00004 1.000 .720

VAR00005 1.000 .699

VAR00006 1.000 .412

VAR00007 1.000 .446

VAR00008 1.000 .499

VAR00009 1.000 .788

Table-7.5 Total Variance Explained

Initial Eigenvalues Extraction Sums of Squared Loadings

omponent Total % of Variance Cumulative % Total % of Variance Cumulative %
1 2.929 32.541 32.541 2.929 32.541 32.541
2 1.395 15.503 48.044 1.395 15.503 48.044
3 1.080 11.999 60.043 1.080 11.999 60.043
4 .902 10.021 70.064
5 .753 8.367 78.431
6 .636 7.062 85.493
7 .527 5.857 91.350
8 .464 5.155 96.505
9 .315 3.495 100.000
 Graph-7.1
screen plot graph

Determination of number of factors: on the bases of eigenvalue table and screen plot graph
it is clear there are 3 factors whose eigenvalue (variance) are greater than 1.0; hence 3 factors
are selected to find correlation between 9 variables.

Graph-7.2
Component plot graph

Component plot for the 9 variables is shown in the above graph. It gives a rough idea that
how 9 the variables will be divided among the 3 factors.
Table-7.6Rotated Component Matrix

Variables Component
1 2 3
V1. Procedure of Account Opening .751 .109 .055
V2. International Security Identification Number -.044 .605 .445
(ISDN)
V3. Transaction Statement of DEMAT Account .022 .827 -.098
V4. Nomination Facility .800 .281 .043
V5. Rematerialization of DEMAT Securities .456 -.160 .682
V6. Lending and Borrowing of DEMAT Securities .469 .392 .197
V7. Freezing of DEMAT Account .656 -.083 .092
V8. Knowledge About NSDL or CDSL .308 .615 .158
V9. Knowledge About Depositaries Act 1996 .008 .257 .850
The above table shows the correlation between the factors and the variables.
Analysis and interpretation:
Naming of the factors: on the basis of my findings, the three factors are named
as Factor - 1. - Basic functions and services. Factor - 2. - Transections and
knowledge related functions.
Factor - 3. - Other services.
The variables are divided into 3 factors as follows:

Table-7.7 Factors influencing different functions and services that an investor should be
aware of while trading through the DEMAT account

Factor Label Statements Factor

(% variance explained) Loadings

V1. Procedure of Account Opening .751

1-Basic functions and
services V4. Nomination Facility .800
(42.78%)
V6. Lending and Borrowing of DEMAT Securities .469

V7. Freezing of DEMAT Account .656

V2. International Security Identification Number (ISDN) .605

2- Transections and
knowledge related functions V3. Transaction Statement of DEMAT Account .827

and services V8. Knowledge About NSDL or CDSL .615

(32.73)
V5. Re-materialization of DEMAT Securities .682
3- Other services
(24.49) V9. Knowledge About Depositaries Act 1996 .850
Statement No.8.-Personal details: (Table-8)

Demographics Number of Respondents Percentage of Respondents

Gender:
Male 38 63.3
Female 22 36.6
TOTAL 60 100
Education qualification:
Under graduate 0 0
Graduate 20 33.3
Post graduate 40 66.7

TOTAL 60 100
Age group (in years):
18-30 47 78.3
30-40 7 11.7
40-50 6 10
Above 50 0 0
TOTAL 60 100

Analysis and Interpretation: from demographic profile it is clear that 63% of the
respondents are male and 20% respondents are female. Most of the respondents are post
graduate (66.7%) and most of them are between age group of 18-30, that is 78.3%. Hence it
shows that most of the respondents are educated and are young.
 CHAPTER-8
FINDINGS AND SUGGESTIONS
Findings:

On the basis of data analysis following are the findings of the research-

1. Most of the respondents (60%) are trading for less than five less than five years.
2. Most of the DEMAT a/c holders use both the modes of trading (i.e.- online trading
and trading through broker).
3. Most of the investors (68%) invest in equity shares.
4. 45% of respondents affirm that they will choose a depositary participant which
provides them maximum profits.
5. Most of the depository participants contact their customers weekly.
6. Almost all the respondents (96%) are satisfied with the service charges.
7. Most of the respondents are aware of the basic functions of DEMAT A/c(like
procedure of account opening,transaction statement of DEMAT Account, nomination
facility, Re-materialization of DEMAT Securities etc.) but most of them do not have
any knowledge about NSDL,CDSL and Depositaries Act 1996.
8. There are more number of male respondents (63.3%) as compare to female
respondents (36.6%)
9. The educational statuses of most of the respondents who hold a DEMAT a/c are post
graduate (63%).
10. Most of respondents are between age group of 18-30, that is 78.3%.

Suggestion:

1. Since dematerialization has a great bearing on the creation and protection of wealth
and investment earnings of an investor, DPs must increase their efforts in promoting
enhanced services in general, and in those involving security and safety in particular.
2. To encourage the existing and prospective shareholders, all efforts should be made to
ensure good returns, in addition to providing greater security and safety.
3. Since the investors expect better service form depository participants, it should
provide them value-added services.
4. The processing of the DEMAT account opening should be made fast and non-tedious.
5. The DEMAT a/c holder should be given basic information about NSDL, CDSL
and Depositaries Act 1996.
CONCLUSION

On the whole, my project on a study of working of depository system in India was

worthwhile and enlightening, as I got the opportunity to learn a lot about the capital market. I
got to know about the process of dematerialization, account opening and how the customers
perceive regarding services of depository system etc.
BIBLIOGRAPHY
 BIBLIOGRAPHY
REFERENCES:

1. Prof. Sultan Singh &Sakshi Goyal, (2011), “Analysis of Factors Affecting

the Decision Making of the Investors in Depository System” available at:
http://www.skirec.com/42/1.abstract
2. P Mohana Rao,(1999) “Dematerialisation”, available at:
http://myicwai.com/knowledgebank /fm13.pdf
3. NSDL‟s Guide to Depositories, available at:
http://www.nsdl.co.in/guideto depositories.pdf.
4. NSDL,( 2011) “Handbook for NSDL Depository Operations Module” (published
by NSDL), available at:
https://nsdl.co.in/downloadables/Capital%20Markets%20and%20NSDL%20Overview
.pdf
5. Central Depository Services (India) Limited, (2010), “Inspection Manual” ,available
at: http://www.cdslindia.com/downloads/CDSL_Inspection_Manual/CDSL-Inspection-
Manual-Version%2019%20-%2031.12.2011.pdf

6. NISM (2010)“Workbook for NISM-Series-VI: Depository Operations Certification

Examination” , available at:
http://nism.ac.in/index.php?option=com_phocadownload&view=category&id=22:doce
&download=119:download-workbook&Itemid=1.pdf
7. Dr. Kirit Somaiya, (2008), “Story of Demat Scams” , available at:
http://www.docstoc.com/docs/2297987/Story-of-Demat-Scam-100000-Bogus-
Demat-Ac-Bank-Ac-Cornering.pdf
8. Narendra Jadhav, (2007), “Development of Securities Market – The Indian
Experience” , available at:
http://drnarendrajadhav.info/drnjadhav_web_files/Published%20papers/Development
%20of%20Securities%20Market%20by%20Narendra%20jadhav.pdf
9. Iti Jain& Sudhanshu Roy, (2004), “Dematerialisation of Securities” , available
at:www.scribd.com/doc/37698913/dematerlization
10. Dr. M. T. Raju, Dr. Prabhakar R. Patil, (2005), “Dematerialisation of Equity Shares
in India: Liquidity, Returns and Volatility”, available
at:www.utiicm.com/Cmc/PDFs/2001/prabhakar_patil2001.pdf
 WEBSITES
www.nsdl.co.in/

investor.sebi.gov.in/faq/dematfaq.html

www.cdslindia.com/

en.wikipedia.org/wiki/Depository_participant
www.investorwords.com/1413/depository.html

finance.indiamart.com/india.../sebi_depositories_custodians.html
www.cochinstockexchange.com/aboutdp.html

www.sbicapsec.com/depository.aspx
www.hsbc.co.in/1/2/corporate/hsbc-securities-services/depository

www.lse.co.in/LSESL_New/Depository.aspx

www.lse.co.in/

en.wikipedia.org/wiki/Ludhiana_Stock_Exchange_Association

http://www.legalserviceindia.com/articles/dematerialized_securities.htm 2004

http://www.indianmba.com/Faculty_Column/FC435/fc435.html

BOOK

Malhotra,N.K“ Marketing Research” Pearson Publication 6th edition (2010) , New Delhi,

Topic-Factor analysis Page no:(,587-601), Exploratory research design Page no: (97-121)
ANNEXURE

88
 QUESTIONNAIRE

Respected Sir/Madam
I am Hiresh Ahluwalia, a student of MBA 4th semester, DAV institute of engineering and
technology, Jalandhar and I am conducting a survey for doing research on “Investors
Opinions on Depository System‟s Services in India”. Your valuable opinion and
cooperation will of immense help to me in my research.
I assure you that the data provided by you will be used only for academic and research
purposes and will be kept confidential.
Note- this questionnaire is to be filled only by the respondents who have a DEMAT account.

1. Do you indulge in share trading?

Yes No

2. Do you own DEMAT account?

Yes No

3. Since how long are you holding and trading in the securities?

0-5yrs 5-10yrs

10-15yrs Above 15

4. What is your usual mode of trading?

Online trading

Trading through broker

Both

5. Which is your most preferred area of investment?

Mutual Funds

Government Bonds

Equity Shares
 Others (Please Specify) ……...…………………………….
6. According to you which one is the most important factor for a trading company to
enhance the loyalty of customers?

Provide maximum profit

Provide tips from time to time

No hidden charges

Promptness of service

Others (Please Specify) ……...…………………………….

7. Do you find service charges reasonable for operating through DEMAT?

Yes No

8. How frequently does your depository participant contact you?

Daily

Weekly

Monthly

Yearly

Never why ………………………….

9. Rate your awareness level regarding different functions and services provided
by depository system?

Extremely Highly Somewhat Not

Statements Aware Aware Aware Aware Aware
(5) (4) (3) (2) (1)

1. Procedure of Account
Opening
2. International Security
Identification Number
(ISDN)
3. Transaction Statement of

90
 DEMAT Account
4. Nomination Facility

5. Rematerialization of
DEMAT Securities
6. Lending and Borrowing
of DEMAT Securities
7. Freezing of
DEMAT Account
8. Knowledge About
NSDL or CDSL
9. Knowledge About
Depositaries Act 1996

10. Rate your Agreement level in respect of the following statements?

Highly Agree Neutral Disagree Highly

Statements Agree Disagree
(5) (4) (3) (2) (1)

EMAT Account is the most secure

rm of keeping securities
2. There is Quick Transfer of
Ownership in case of
DEMAT Securities
3. Depositary System reduces
chances of Bad Delivery

4. Depositary System
reduces Paper Work to be
done by Broker