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CENTRAL UNIVERSITY OF SOUTH BIHAR

SCHOOL OF LAW AND GOVERNANCE

FINANCIAL MARKET REGULATION (LAW 456)

ASSIGNMENT ON: OVERVIEW OF SEBI (DEPOSITORIES
AND PARTICIPANTS) REGULATION, 1996

SUBMITTED TO- MRS NITU KUMARI

FACULTY, SLG CUSB

SUBMITTED BY- VISHAL RANJAN

B.A. LLB 8TH (SEMESTER)
CUSB1613125059
SESSION: 2016-2021
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CONTENT

Sr TITLE Page
No. No.

1 List of Abbreviations 3

2 Acknowledgement 4

3 Objectives 5

4 Introduction 6-7

5 Background 7

6 Certificate of commencement of business 7-8

7 Parties to a depository 8-9

8 Agreement between depository and participant 9

9 Depositories to indemnify loss in certain cases 10

10 Benefits of depository 12-13

11 Conclusion 14

12 Bibliography 15
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LIST OF ABBREVIATIONS

 SEBI – Securities and Exchange Board of India

 NSDL – National Securities Depository Limited

 NCD’s - Non-Convertible Debentures

 CDSL – Central Depository Services (India) Limited


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ACKNOWLEDGEMENT

At this point of time I would like to express my gratitude to all those who gave me their support
to complete this project.

I am grateful to my FMR Law teacher who is Mrs Nitu Kumari, for giving me permission to
commence this project in the first instance and to do necessary study and research. I want to
thank law faculty members and other faculty members for all their professional advice, value
added time, effort and enterprise help, support, interest and valuable hints that encouraged me to
go ahead with my project.

I am deeply indebted to my colleagues for their meticulous planning, layout, presentation and
above all for their consideration and time.

My heartfelt appreciation also goes to seniors and my classmate for their stimulating suggestions
and encouragement which helped me at each level of my research and in writing of this project.

Especially, I would like to give my special thanks to my parents, family members and god whose
patient love enabled me to complete this project in this pandemic situation.

I have tried my best to enclose practical approach of FMR Law and also theoretical approach to
my project.

(Signature of the Student)

Vishal Ranjan

OBJECTIVES
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After going through this unit, you will be able to:

 Know the meaning of Depository.

 Know the background of depository
 Describe about the parties in the depositories
 Distinguish between Depository and Participant
 Describe the benefits of depository.

INTRODUCTION
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The word ‘depository’ is defined as “the party of the institution (example- bank or trust
company) receiving a deposit. One with whom anything is lodged in trust, as ‘depository’ is the
place where it is put. The obligation upon the depositary is that he keeps the thing with
reasonable care and upon request restores it to the depositor.” A depository holds securities (like
shares, debentures, bonds, Government Securities, units etc.) of investors in electronic form.
Besides holding securities, a depository also provides services related to transactions in
securities. It acts as a trustee of the owner since the securities are entrusted with him in trust. He
is also the agent of the owner of the securities.

According to sub-section (1A) of section 12 of the SEBI 1 Act, 1992;"depository" means a

company formed and registered under the Companies Act, 1956 and which has been granted a
certificate of registration under sub-section (1A) of section 12 of the Securities and Exchange
Board of India Act, 1992.

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 is 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 de-mat account through any DP for
dematerialization of his holdings and transferring securities. The depository system envisages a
deposit of securities by the various investors with the depository. This would take the form of a
transfer by the various investors with the depository. This would take the form of a transfer by
the holder of securities in favour of depository. Once the shares are lodged with the depository,
their transfer would be through book entry transfers in accounts maintained by the depository.
Thus the main functions of a depository are to dematerialize the securities and enable their
transaction in book entry form.

In the absence of depositories, which provide for maintenance of ownership records in a book
entry form, every share transfer is required to be accomplished by physical movement of share
certificates to, and registration with, the company concerned.

Registration of transfer of securities with depository:

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

The process often involves long delays and a significant portion of transactions end up as ‘bad
delivery’ due to faulty completion of paperwork. In many cases the process of transfer would
take much longer than the two months stipulated in the Companies Act 2, and a significant
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Securities and Exchange Board of India
2
1876
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proportion of transactions would end up as bad delivery due to faulty compliance of paper work.
Theft, forgery, mutilation of certificates and other irregularities were rampant. In addition, the
issuer has the right to refuse the transfer of a security. All this added to costs and delays in
settlement, restricted liquidity and made investor grievance redressal time consuming and, at
times, intractable.

BACKGROUND:

The Depositories and participants, Act initially came into force as an ordinance viz. The
Depositories Ordinance, 1995 promulgated on 7th January 1996. It was designed to provide a
legal framework for establishment of depositories to record ownership details in book entry
form. The Act also made consequential amendments in the Companies Act, 1956; the Securities
and Exchange Board of India Act, 1992; the Indian Stamp Act, 1899; the Income tax Act, 1961;
and the Benami Transactions (Prohibition) Act3.

The Depositories and Participants Act, 1996 was enacted with the objective of ensuring free
transferability of securities with speed, accuracy, and security, by making securities of public
companies freely transferable subject to certain exceptions by restricting company’s right to use
discretion in effecting the transfer securities and dispensing with the transfer deed and other
procedural requirements under the Companies Act.

The Depositories and Participants Act, 1996 is an Act to provide for regulation of depositories in
securities and for matters connected therewith or incidental thereto.

CERTIFICATE OF COMMENCEMENT OF BUSINESS:

No depository shall act as a depository unless it obtains a certificate of commencement of

business from SEBI4.

The Act provides for establishment of one or more depositories. Every depository is required to
be registered with the Securities and Exchange Board of India (SEBI) and will have to obtain a
Certificate for commencement of business on fulfillment of such conditions as may be
prescribed. The Board shall not grant it certificate under sub-section (1) unless it is satisfied that
the depository has adequate systems and safeguards to prevent manipulation of records and
transactions.

Investors opting to join the system will be required to be registered with one or more participants
who will be the agents for the depository. Investors will have the choice of continuing with the
existing securities certificates or opt for the depository mode. Under Section 3 (1) of the Act the
depository is required to obtain a certificate of commencement of business from the Securities
and Exchange Board of India. According to section (3) the Board shall not grant a certificate

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1988
4
Securities and Exchange Board of India
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under sub-section (1) unless it is satisfied that the depository has adequate systems and
safeguards to prevent manipulation of records and transactions.

The Depository Act provides for the establishment of depositories like the (NSDL 5) and the
Central Depository Services Limited providing depository services in the electronic form for
securities traded in equity and debt markets.

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 organizations, as is necessary for the effective, prompt
and accurate clearance and settlement of securities transactions and conduct of business.

PARTIES TO A DEPOSITORY:

In a depository system, the following parties are involved

I. the depository,
II. the beneficial owner;
III. the participant;
IV. the issuer.

A depository would render service connected with the recording of allotment of securities or
transfer of ownership of securities in its record. The service is availed of by the beneficial owner
of the securities which are eligible to be dealt with by the depository system and in respect of
which the service is availed of. The beneficial ownership would be pertaining to the securities of
an issuer i.e. a person making an issue of securities. Section 1(1) (j) defines ‘registered owner’6

The participant means a person through whom the beneficial owner of the securities would avail
of the depository service and is the custodial agencies like banks, financial institutions as well as
large corporate brokerage firms.

AGREEMENT BETWEEN DEPOSITORY AND PARTICIPANT:

A depository shall enter into an agreement with one or more participants as its agent. Any
person, through a participant, may enter into an agreement, in such form as may be specified by
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National Securities Depository Limited
6
depository whose name is entered as such in the name of issuer.
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the bye-laws, with any depository for availing its services. The relationship and dealings between
the depository and the participant will be governed by an agreement and the participant is as
agent of the depository vide Section 4 (1) of the Act.

Depository Participants includes brokers, banks, insurance companies, Stock Exchange clearing
cells, the Reserve Bank of India, financial institutions, institutional managers, fund managers etc.

Section 41 of the Companies Act lays down two modes of acquiring membership of a company
and in both an entry of the name of a person as a member in the register of the members of the
company is a condition precedent for a person to be regarded a member of the company.
However to facilitate the beneficial owner of shares, on whose behalf the depository holds the
shares, to be recognized as members, Section 41 in its new subsection 3 provides that every
person holding equity share capital of a company and whose name is entered as a beneficial
owner in the records of a depository shall be deemed to be a member of the concerned company.

Regulation 26 of the SEBI (Depositories and Participants) Regulations, 1996 states that
depositories, participants, issuers, and issuer’s agent, in addition to the rights and obligations laid
down in the Depositories Act and the bye laws shall have the rights and obligations arising from
the agreements entered into by them.

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

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

DEPOSITORIES TO INDEMNIFY LOSS IN CERTAIN CASES:

Any loss caused to the beneficial owner due to the negligence of the depository or the
participant, the depository shall indemnify such beneficial owner.

In order to protect the interests of the beneficial owners of the securities handled by the
depository, section 16 of the Act seeks to require the depository to indemnify loss suffered by the
beneficial owner due to the negligence of the depository or the participant. A sine qua non for
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claiming the compensation shall be ‘negligence’ on the part of the depository or the participant,
as the case may be. Where loss due to the negligence of the participant is indemnified by the
depository, the depository shall have the right to recover the same from such participant.

According to Section 18 of the Act the Board, on being satisfied that it is necessary in the public
interest or in the interest of investors so to do, may, by order in writing - (a) call upon any issuer,
depository, participant or beneficial owner to furnish in writing such information relating to the
securities held in a depository as it may require; or (b) authorize any person to make an enquiry
or inspection in relation to the affairs of the issuer, beneficial owner, depository or participant,
who shall submit a report of such enquiry or inspection to it within such period as may be
specified in the order. Further the Board may in the interest of investors and to prevent the affairs
of depository being conducted in a manner detrimental to the investors or the securities market, it
may issue such directions (a) to any depository or participant or any person associated with the
securities market; or (b) to any issuer as may be appropriate in the interest of investors or the
securities market.

The SEBI came out with the Security and Exchange Board of India (Depositories and
Participants) Regulations, 1996 regulating various facets of law relating to depositories. The
rules govern areas such as registration of depository, grant of certificate of commencement of
business, registration of participants, and details regarding rights and obligations of depositories,
participants, issuers, manner of registrants.

Surrender of certificate of security:

Any person who has entered into an agreement under section 5 shall surrender the certificate of
security, for which he seeks to avail the services of a depository, to the issuer in such manner as
may be specified by the regulations.

The issuer, on receipt of certificate of security under sub- section (1), shall cancel the certificate
of security and substitute in its records the name of the depository as a registered owner in
respect of that security and inform the depository accordingly.

A depository shall, on receipt of information under sub-section (2), enter the name of the person
referred to in sub-section (1) in its records, as the beneficial owner.

Fungible-

“With respect to goods and Securities, those of which any unit is by nature or usage of trade, the
equivalent of any other like unit, Where the subject of obligation is a thing if a given class, the
thing is said to be fungible; i.e. the delivery of any object which answers to the generic
description which will satisfy the terms of the obligation.”
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Section 9 (1) All securities held by a depository shall be dematerialized and shall be in a fungible
form.

Options to receive security certificate or hold securities with depository:

Every person subscribing to securities offered by an issuer shall have the option either to receive
the security certificates or hold securities with a depository.

Furnishing of information and records by depository and issuer.

Every depository shall furnish to the issuer information about the transfer of securities in the
name of beneficial owners at intervals

Power of Board to call for information and enquiry.

The Board, on being satisfied that it is necessary in the public interest or in the interest of
investors so to do, may, by order in writing, call upon any issuer, depository, participant or
beneficial owner to furnish in writing such information relating to the securities held in a
depository as it may require; or authorize any person to make an enquiry or inspection in relation
to the affairs of the issuer, beneficial owner, depository or participant, who shall submit a report
of such enquiry or inspection to it within such period as may be specified in the order.

Penalty for delay in dematerialization or issue of certificate of securities.

If any issuer or its agent or any person, who is registered as an intermediary under the provisions
of section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), fails to
dematerialize or issue the certificate of securities on opting out of a depository by the investors,
within the time specified under this Act or regulations or bye-laws made there under or abets in
delaying the process of dematerialization or issue the certificate of securities on opting out of a
depository of securities, such issuer or its agent or intermediary shall be liable to a penalty of one
lakh rupees for each day during which such failure continues or one crore rupees, whichever is
less.

Penalty for failure to reconcile records.

If a depository or participant or any issuer or its agent or any person, who is registered as an
intermediary under the provisions of section 12 of the Securities and Exchange Board of India
Act, 1992 (15 of 1992), fails to reconcile the records of dematerialized securities with all the
securities issued by the issuer as specified in the regulations, such depository or participant or
issuer or its agent or intermediary shall be liable to a penalty of one lakh rupees for each day
during which such failure continues or one crore rupees, whichever is less.

BENEFITS OF DEPOSITORY:
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The depository system gives a less risky settlement with implementation of collateral bases
payment systems and greater profits from increased trading volume which are made possible by
NCDS7 systems with reduced operational costs per transaction and reduced risk. There is an
improved cash flow from not having funds tied up for long periods. Further forgery and
counterfeit have been eliminated with attendant reduction in settlement risk from bad deliveries.
The system has led to an opportunity for development of retail brokerage business and for
development of more sophisticated custodial services which can be offered to the smaller
investor. There are now standardized communications between NCDS, registrars and other
intermediaries. Also, there is an ability to arrange pledges without movement of physical scrip
and further increase overall level of trading activity, liquidity and profits.

Although India had a vibrant capital market which is more than a century old, the paper-based
settlement of trades caused substantial problems like bad delivery and delayed transfer of title till
recently. The enactment of Depositories Act in August 1996 paved the way for establishment of
NSDL, the first depository in India. This depository promoted by institutions of national stature
responsible for economic development of the country has since established a national
infrastructure of international standard that handles most of the trading and settlement in
dematerialized form in Indian capital market. The procedure relating to depositories is mainly
governed by the regulations and bye laws that are framed by the SEBI and the depositories under
the power provided by the Depositories Act.

There are immense benefits to the public by reduction of risks associated with loss, mutilation,
theft and forgery of physical scrip. Further there is an elimination of financial loss owing to loss
of physical scrip and greater liquidity from speedier settlements and reduction in delays in
registration. There will be greater opportunities for investment offered by new instrument and
services that can be provided only when NCDS is implemented and faster receipt of benefits and
rights resulting from corporate actions. There is also an improved protection of shareholder’s
rights resulting from more time communications from the issuer and reduced transaction costs
through greater efficiency.

The system provides Up-to-date knowledge of shareholder’s names and addresses. And there
will be savings in costs of new issues from reduction in printing and distribution costs. It may
also lead to increased efficiency of registrar and transfer agent functions and better facilities for
communication with shareholders, conveying benefits of corporate actions and information
notices. Furthermore there will be an improved ability to attract international investors without
having to incur the expenditure of issuance in overseas markets. Immobilization of securities is
done by storing or lodging the physical security certificates with an organization that acts as a
custodian - a securities depository. All subsequent transactions in such immobilized securities
take place through book entries. The actual owners have the right to withdraw the physical
securities from the custodial agent whenever required by them.

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Non-Convertible Debentures
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Rule 28- The following securities shall be eligible for being held in dematerialized form in a
depository:-

i. shares, scrip’s, stocks, bonds, debentures, debenture stock or other marketable securities
of a like nature in or of any incorporated company or other body corporate;
ii. units of mutual funds, rights under collective investment schemes and venture capital
funds, commercial paper, certificates of deposit, securitized debt, money market
instruments.

CONCLUSION:

Thus I would like to conclude that the SEBI Act was passed in 1992. The SEBI has framed
regulations under SEBI Act and Depository Act for registration and regulations of all market
intermediaries, for prevention of unfair trade practices and insider trading. The Depository and
participants Act, 1996 which provides for the establishment of depositories like NSDL and
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CDSL8 to curb the irregularities in the capital market and protect the interests of the investors
and paved a way for an orderly conduct of the financial markets through the free transferability
of securities with speed, accuracy and transparency.

BIBLIOGRAPHY:

Websites

 en.wikipedia.org

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Central Depository Services (India) Limited
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 http://www.sebi.gov.in
 https://www.rna-cs.com/an-insight-into-the-depositories-act-1996/