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. At present two Depositories viz. National Securities Depository Limited (NSDL) and
Central Depository Services (India) Limited (CDSL) are registered with SEBI. The minimum
networth stipulated by SEBI for a depository is Rs 100 crore.

A Depository Participant (DP) is an agent of the depository through which it interfaces with the
investor and provides depository services. Public financial institutions, scheduled commercial banks,
foreign banks operating in India with the approval of the Reserve Bank of India, state financial
corporations, custodians, stock-brokers, clearing corporations /clearing houses, NBFCs and Registrar
to an Issue or Share Transfer Agent complying with the requirements prescribed by SEBI can be
registered as DP. Banking services can be availed through a branch whereas depository services can
be availed through a DP.

As per the available statistics at BSE and NSE, 99.9 per cent transactions take place in dematerialised mode
only. Therefore, in view of the convenience of trading in dematerialised mode, it is advisable to have a
beneficial owner (BO) account for trading at the exchanges.

However to facilitate trading by small investors (Maximum 500 shares, irrespective of their value) in physical
mode the stock exchanges provide an additional trading window, which gives one time facility for small
investors to sell physical shares which are in compulsory demat list. The buyer of these shares has to demat
such shares before further selling.

First an investor has to approach a DP and fill up an account opening form. The account opening
form must be supported by copies of any one of the approved documents which serve as proof of
identity (POI) and proof of address (POA) as specified by SEBI. Apart from these PAN card has to
be shown in original at the time of account opening.u

— Courtesy www.sebi.gov.in

... contd.
A project report on depository system - Document
Transcript
1. Projectsformba.blogspot.com A STUDY ON DEPOSITORY SYSTEM ABSTRACTA
depository system where is a place to deposit something for safekeeping as bank inwhich
funds or securities are deposited by other under the terms of depositoryagreements. The
principal function of a depository is to dematerialize securities andenable their
transactions in book-entry form. The securities are transferred by debiting thetransferor’s
depository account and crediting the transferee’s depository account.The main objective
is to study the trading and settlement procedure in the exchange withparticular online
procedure and manual procedure that existed before online trading. Theanother objective
of the study the greater benefits of the depositories. The study ofdematerialization of
shares procedures, demat account, transfer of securities and tradingand settlement of
demat securities. The study of services provided by NSDL.The inception of the
depository system in the Indian Capital Market has been only duringthe 90’s. However,
when it has finally arrived it was a welcome change for the investorswho were bogged
down with many a problem of scrip based trading. The role played bythe companies in
encouraging its shareholders to convert their stock into electronic form.Their attitude of
being receptive to changing conditions, and to go in for “demat” is a stepin the right
directions.
2. Projectsformba.blogspot.com CONTENTSCHAPTER Page No. 1. INTRODUCTION 1 -
9 1.1 Introduction 1.2 Objectives of the study 1.3 Scope and period of the study 1.4
Methodology 1.5 Plan of the study 1.6 Limitations of the study 2. REVIEW OF
LITERATURE 10 - 14 3. COMPANY PROFILE 15 - 19 4. ANALYSIS AND
INTERPRETATION 20 - 77 4.1 The Indian Capital Market 4.2 Depository System 4.3
Overview of NSDL 4.4 Overview of CDSL 5. SUMMARY AND CONCLUSIONS 78 -
80 6. RECOMMENDATIONS 81 BIBLIOGRAPHY
3. Projectsformba.blogspot.com CHAPTER I INTRODUCTION
4. Projectsformba.blogspot.com Chapter-I INTRODUCTION1.1. INTRODUCTION TO
DEMATERIALISATION OF SECURITIESDEMATERIALISATION OF SECURITIES
:Dematerialization is relatively a new concept introduced in the securities market. It
isbasically a process by which the physical certificates of an investor
aretaken/surrendered-by/to the company/registrar and actually destroyed and an
equivalentnumber of securities are credited in the depository account of the investor on
request ofthe investor. To overcome the problems associated with settlement of physical
sharecertificates and to provide electronic depository facilities for securities traded in
theequity and the debt markets, the process of dematerialization of shares was
evolved.DEFINITION:Dematerialization is a process by which a client can get physical
certificates convertedinto electronic balances maintained in its account with the
depository participants.Securities held in dematerialization form are fungible i.e. they do
not bear anydistinguishable features.The securities held in dematerialization form are
fungible. They do not bear anydistinguishable features like number, folio number or
certificate number. 1
5. Projectsformba.blogspot.comEach of the securities dematerialized in the NSDL/CDSL
depository bears a distinctiveISIN- an identification number. International securities
number (ISIN) is unique for eachsecurity issued in any of the International Standards
Organization (ISO) membercountries in accordance with the ISIN standards (ISO
616).There are five main parties involved in the process of dematerialization as follows:
1) The Investor – He is one who wishes to convert his physical holdings into electronic
form. 2) Depository Participant – It is a representative in the depository system and it
maintains the client’s securities account balance. 3) Depository – Depository is an
organization where securities of shareholders are held in electronic form at the request of
the shareholder through the medium of the depository participant. 4) Registrar and Share
Transfer Agents – They provide the facility of dematerialization of shares of the company
held by the shareholder. They enter into the tripartite agreement with NSDL and the
company whose shares are to be dematerialized. 2
6. Projectsformba.blogspot.com 5) Company – It is the company whose shares, debentures,
etc are traded with the depository in the demat form.ADVANTAGES OF
DEMATERIALISATION OF SECURITIES :TO THE COMPANY: Less paper work.
 Reduced cost. Better and faster facility for share transfer. No legal consequences
for non compliance of rules and regulations.TO THE INVESTOR: Less paper work.
No filing of transfer deeds and lodging. No bad delivery of shares. No loss of share
certificates. No forgeries and frauds. Faster and easier trading of shares. Exemption
of stamp duty. No courier/postal charges.SECURITIES ELIGIBLE FOR
DEMATERIALISATION :The entire depository system in India is governed by the rules
made by the marketregulations – SEBI. According to the SEBI (Depositories and
Participants) regulations,1996, the following securities are eligible for holding in
dematerialized form. 3
7. Projectsformba.blogspot.comShares, scripts, stocks, bonds, debenture stocks or other
marketable securities of similarnature or any incorporated company or body corporate
including underlying shares ofADR’s and GDR’s. Units of mutual funds, rights under
collective investment schemes,venture capital funds, commercial paper, certificate of
deposit, securitized debt, moneymarket instrument and unlisted securities.A list of
securities available for demat in NSDL/CDSL depository is made known to allDP’s by
way of circulars sent through e-mails. The information is also put up onNSDL/CDSL
website and in the monthly information bulletin.HISTORY OF STOCK
EXCHANGES :The stock exchange operating in the 19th century were those of Bombay
set up in1875 and Ahmedabad set up in 1894. Those were organized as voluntary non
-profit making association of brokers to regulate and protect their interests. Beforethe
control on securities trading becomes a central subject under the constitutionin 1950, it
was a state subject and Bombay securities contract (control) act of1925 used to regulate
trading in securities. Under this Act, the Bombay stockexchange was reorganized in 1927
and Ahmedabad in 1937. 4
8. Projectsformba.blogspot.comDEFINITION OF STOCK EXCHANGE :“A stock
exchange means any body are individual whether incorporated or not,constituted for the
purpose of assisting, regulating or controlling the business ofbuying, selling in
securities”.It is an association of members brokers for the purpose of self -regulation
andprotecting the interest if its members.It can operate only by the government under the
securities contract (regulation)Act 1956. The recognition is granted under section 3 of the
 act by the centralgovernment, ministry of finance.BY LAWS :Beside the above Act, the
securities contract (regulations) rules were also made in1957 to regulated certain matters
of trading on the concerned with the followingsubjects.Opening / closing of stock
exchanges, timing of trading regulation of blank transfers,regulation of badla / carry
forwards, control of settlement and other activities of stockexchange , fixation of
margins, regulation of brokers trading, brokerage charges,trading rules on the arbitration
and settlement of disputes, settlement and clearingof trading etc., 5
9. Projectsformba.blogspot.comSECURITIES AND EXCHANGE BOARD OF INDIA
(SEBI) :SEBI was setup as an autonomous regulatory authority by the government of
Indiain 1998 “ to protect the interests of investors in securities and promote
thedevelopment of, and to regulate the securities market for matters connected therewith
or incidental there to “. It is empowered by two acts namely the SEBI Act1992 and
securities contract (regulation) Act 1956, to perform the function ofprotecting investor’s
rights and regulating the capital markets.SECURITIES AND EXCHANGE BOARD OF
INDIAACT, 1992SEBI Act, 1992 provides for establishment of Securities and Exchange
Board OfIndia (SEBI) with statutory powers for a) Protecting the interests of investors in
securities. b) Promoting the development of the securities market and. c) Regulating the
securities market.Its regulatory jurisdiction extends over corporate in the issuance of
capital andtransfer of securities, in addition to all intermediaries and persons associated
withsecurities market. SEBI has been obligated to perform the aforesaid function bysuch
measures as it thinks fit. In particular, it has powers for regulating thebusiness in stock
exchanges and any other securities markets registering andregulating the working of
stock brokers, sub - brokers etc. 6
10. Projectsformba.blogspot.comPromoting and regulating self regulatory organizations
prohibiting fraudulent andunfair trade practices calling for information from, undertaking
inspection,conducting inquires and audits of the stock exchanges, mutual funds and
otherpersons associated with the securities market and intermediaries and self
regulatoryorganizations in the securities market performing such functions and
exercisingaccording to Securities Contracts (Regulations) Act, 1956, as may be delegated
toit by the Central Government.1.2 OBJECIVES OF THE STUDY :1. To study the
trading and settlement procedure in the Exchange with particular online procedure and
manual procedure that existed before online trading.2. To study various benefits of
Depositories.3. To study the concept of Dematerialization of shares i.e., procedure, demat
account, transfer of securities and trading and settlement of demat securities.4. To study
the services provided by NSDL and CDSL.1.3 SCOPE AND PERIOD OF THE
STUDY :Scope of the study:The scope of the study gives a detail description of the
following activitiesInter Connected Stock Exchange and its function.Dematerialization of
securities.Online trading procedure. 7
11. Projectsformba.blogspot.comPeriod of the study:The study covers a period of three years.
As demat trading operations have been startedsince 1996. The study covers the traditional
way of conducting the transaction in thedepositories and its conversion into
Dematerialization since 1996.1.4 METHODOLOGY OF STUDY :For the preparation of
any project report the collection of relevant data is very muchessential there are basically
two broad methods for collecting data which are followed ina new report this method
ofPrimary data collection,Secondary data collection.Primary data is collection by meeting
the concerned people through consultation apersonal observation.Information relating to
 secondary data is collected from printed materials, text books andfrom internet.1.5 PLAN
OF THE STUDY :According to plan of the study the project report consists of 6
chapters:Chapter 1 covers introduction to dematerialization of securities it consists of
demat ofsecurities, definition, advantages, history of stock exchange, definition of stock
exchange,Stock Exchange Board of India, objectives of the study, scope and period of the
study,methodology, limitations of the study. 8.
12. Projectsformba.blogspot.comChapter2 Review of literatureChapter 3 company
profile.Chapter 4 analysis and interpretation it consists of the Indian Capital Market,
DepositorySystem, overview of NSDL.Chapter 5 consists of summary and
conclusions.Chapter 6 consists of recommendations.Bibliography.1.6 LIMITATIONS OF
THE STUDY:The observation drawn are of past and present years only, they don’t imply
for future use.The study confines to the past 3 years and present system of the trading
procedure in theISE and the study is confined to cover all the related issues in brief. The
data is collectedfrom the primary and the secondary sources and thus is subjected to
slight variation thanwhat the study includes in reality. Hence accuracy and correctness
can be measured onlyto the extent of what the sample group has furnished. 9
13. Projectsformba.blogspot.com Chapter-II REVIEW OF LITERATURE
14. Projectsformba.blogspot.com Chapter-II REVIEW OF LITERATURE1.
DEMATERIZATION OF EQUITY SHARES IN INDIA1:Overview:In the present study,
an attempt has been made to measure changes in the liquidity,returns and volatility before
and after demat of shares. Volume of shares traded isconsidered as a surrogate for
liquidity. Continuously compounded returns are used todenote returns and standard
deviation is calculated as a proxy for volatility measure.Scope and Period :Study
considered first three phases only starting from January 4, 1999 till April 5, 1999.Further,
it is intended to have minimum of six months of post-demat period which willgive
reasonable number of data points for statistical and econometric analysis. Selectionof the
companies for the study is made by using random sampling
technique.Conclusion:Dematerialization of shares was a major change in the Indian
securities markets and it haswide ramifications on various sectors of the capital markets.
In order to rightlyunderstand and appreciate the implications, there is a need to make a
scientific study of1 Dr. Prabakar R. Patil 10
15. Projectsformba.blogspot.comthe impact that dematerialization generated on the market
microstructure of Indian stockexchanges.Dematerialization definitely increased volumes
traded thus providing higher liquidity. Atthe same time, control group recorded negative
growth or lesser growth in the number ofshares traded, definitely suggesting the positive
impact of dematerialization on liquidity.Dematerialized shares by and large provided in
most cases abnormal returns in short-run.Not only did they earn abnormal returns but also
they are statistically significant. Theabnormal returns taper off over a period. This
abnormal returns are a phenomenon of ashort term in nature due to any event in the
capital markets. Non-demat (control group)companies, in fact, mostly posted negative
returns in the study periodFindings:• To classify a stock market either as a matured
market or emerging market one of the important parameters is liquidity. Higher liquidity
provides opportunity for easy entry and exit options to the investors.• More number of
shares traded per trade is yet another sign to indicate better liquidity. More and more
institutional players appear to be participating in a bigger way in post- demat period in
the market indicating increased level of confidence in the Indian stock market. 11
16. Projectsformba.blogspot.com• Ultimate test of any stock market is the returns to the
investor. Generally, always though not possible, investors expect to earn abnormal
returns on their investments..• Volatility and returns go hand-in-hand. Higher volatility
sometimes brings higher positive returns. In the study period, volatility as a whole
(index) slightly increased and concurrently the companies studied also had higher
volatility.• On the whole, dematerialization played a very positive role in further
modernization of Indian capital market by providing higher liquidity, higher returns and
lower volatility.2. DEMATERIALIZATION PROCESS IN THE INDIAN CAPITAL
MARKET2 :Overview:Dematerialization is the process of conversion of physical
certificates into electronicbalances maintained with the depository participant. The
securities held in dematerializedform are fungible is they do not bear any distinguish
features. In investor should firstopen an account with a DP and than request for a
dematerialization of his certificates bysubmitting the same to the participant.
Dematerialization is a process by which physicalcertificates are converted into electronic
form. The certificates are returned toissuer/registrar by the beneficial owner (BO) through
his depository participant (DP) andone then defaced/destroyed and an equitant no. of
securities are credited in the BO’s2 -P.V. Nishanth 12
17. Projectsformba.blogspot.comsecurities account maintained by the depository, Indian has
opted for dematerializationroute which is a better option is view of the given the huge
paper work involved.Scope and period:The Indian Capital Market has witnessed
numerous changes in the recent past as seenearlier. Traditionally stock market booms and
decline have resulted in a no. of problemsfor lay investor. A close introspection of these
problem will reveal that most of them aredue to intrinsic nature of the paper based trading
and settlement system. Thus the mainobjective of this study is to analyze trend in growth
of dematerialize process in the IndianCapital Market. Data’s were collected from the
website of Bombay Stock Exchangeduring the period of 1998 to 2000.Conclusion:Indian
economy have been globalize and the capital market have been linked to theinternational
financial market. Foreign individuals and institutional investors haveencouraged to
participant into it. So there, is a need for raising the Indian Capital Marketinto the
international standards in terms of efficiency and transparency. One suchmeasure is the
passing out the depository Act during the year 1996.Dematerialization of securities and
under this system is one of the major steps aimed atimproving and modernizing the
capital market and entrancing the level of investorsprotection measured which aims at
eliminating the bad deliveries and forgery of sharesand expediting the transfer of shares.
13
18. Projectsformba.blogspot.comFindings:• Shares, scrip, stocks, bounds, debentures, stock
or other marketable securities of any incorporated company or other body corporate.•
Units of mutual funds, right under collective investment schemes and venture capital
funds, commercial paper, certificate of deposit, securities debt, money market instrument
and unlisted form in a depository.• The rapid growth in number, volume of value of
securities in the Indian capital market exposed the limitation of handling securities in the
physical/paper mode.• The present system of settlement based on physical delivery of
paper certificates was probably adequate in the past when there was small number of
investors participating in the transaction of the capital market. 14
19. Projectsformba.blogspot.com Chapter-III COMPANY PROFILE
20. Projectsformba.blogspot.com Chapter-III COMPANY PROFILEPROFLE OF INTER
CONNECTED STOCK EXCHANGE:ORIGIN :Inter-connected Stock Exchange of
India Limited (ISE) has been promoted by 14Regional Stock Exchanges to provide cost-
effective trading linkage / connectivity toall the members of the participating Exchanges,
with the objective of widening themarket for the securities listed on these Exchanges. ISE
is a national-level stockexchange and provides trading, clearing, settlement, risk
management andsurveillance support to its Traders and Dealers. ISE aims to address the
needs ofsmall companies and retail investors with the guiding principle of optimizing
theexisting infrastructure and harnessing the potential of regional markets, so as
totransform these into a liquid and vibrant market through the use of state-of-the-
arttechnology and networking.The participating Exchanges of ISE have in all about 4500
stock brokers, out ofwhich more than 200 have been currently registered as Traders on
ISE In orderto leverage its infrastructure and to expand its nationwide reach, ISE has
alsoappointed around 450 Dealers across 70 cities other than the participatingExchange
centers. These Dealers are administratively supported through the regionaloffices of ISE
at Delhi (north), Kolkata (east), Coimbatore (south) and Nagpur(central), besides
Mumbai (West). 15
21. Projectsformba.blogspot.comISE has also floated a wholly-owned subsidiary, ISE
Securities & ServicesLimited (ISS), which has taken up corporate membership of the
National StockExchanges of India Ltd. (NSE) in both the Capital Market and Futures &
Optionssegments and The Stock Exchange, Mumbai in the Equities segment, so that
theTraders and Dealers of ISE can access other markets in addition to the ISEmarket and
their local market. ISE thus provides the investors in smaller cities aone-stop solution for
cost – effective and efficient trading and settlement insecurities. With the objective of
broad basing the range of its services, ISE hasstarted offering the full suite of DP
facilities to its Traders, Dealers and theirclients.OBJECTIVES:• Create a single
integrated national level solution with access to multiple markets for providing high cost-
effective service to millions of investors across the country.• Create a liquid and vibrant
national level market for all listed companies in general and small capital companies in
particular.• Optimally utilise the existing infrastructure and other resources of
participating Stock Exchanges, which are under-utilised now.• Provide a level playing
field to small Traders and Dealers by offering an opportunity to participate in a national
market having investment-oriented business. 16
22. Projectsformba.blogspot.com• Reduce transaction cost.• Provide clearing and settlement
facilities to the Traders and Dealers across the Country at their doorstep in a
decentralized mode.• Spread demat trading across the Country.SALIENT FEATURES
:Network of Intermediaries :As at the beginning of the financial year 2003-04, 548
intermediaries (207 Tradersand 341 Dealers) are registered on ISE. A broad base of
members forms thebedrock for any Exchange, and in this respect, ISE has a large pool of
registeredintermediaries who can be tapped for any new line of business.Robust
Operational System :The trading, settlement and funds transfer operations of ISE and ISS
arecompletely automated and state-of-the-art systems have been deployed.
Thecommunication network of ISE, which has connectivity with over 400
tradingmembers and is spread across 46 cities, is also used for supporting the
operationsof ISS. The trading software and settlement software as well as the
electronicfunds transfer arrangement established with HDFC Bank and ICICI Bank,
 giveISE and ISS the required operational efficiency and flexibility to not only handlethe
secondary market functions effectively, but also leveraging them for newventures. 17
23. Projectsformba.blogspot.comSkilled and experienced manpower :ISE and ISS have
experienced and professional staff, who have wide experience inStock Exchanges /
Capital market institutions, with in some cases, the experiencegoing up to nearly twenty
years in this industry. The staff has the skill – setrequired to perform a wide range of
functions, depending upon the requirementsfrom time to time.Aggressive pricing
policy :The philosophy of ISE is to have an aggressive pricing policy for the
variousproducts and services offered by it. The aim is to penetrate the retail market
andstrengthen the position, so that a wide variety products and services having appealfor
the retail market can be offered using a common distribution channel. Theaggressive
pricing policy also ensures that the intermediaries have sufficientfinancial incentive for
offering these products and services to the end – clients.Trading, Risk Management and
Settlement Software Systems :The ORBIT (Online Regional Bourses Inter-Connected
Trading) and AXIS(Automated exchange Integrated Settlement) software developed on
the Microsoft NTplatform, with consultancy assistance from Microsoft, are the most
contemporary ofthe trading and settlement software introduced in the country. The
applications havebeen built on a technology platform, which offers low cost of
ownership, facilitiessimple maintenance and supports easy up gradation and
enhancement. The softwares 18
24. Projectsformba.blogspot.comare so designed that the transaction processing capacity
depends on the hardwareused; capacity can be added by just adding inexpensive
hardware, without anyadditional software work.Vibrant Subsidiary Operations :ISS, the
wholly-owned subsidiary of ISE, is one of the biggest Exchangesubsidiaries in the
country. On any given day, more than 250 registeredintermediaries of ISS trade from 46
cities across the length and breath of thecountry. The peak turnover recorded by ISS was
Rs.150 Crore on February 28,2001. BOARD OF DIRECTORS1. Prof. P. V. Narasimham
Public Interest Director2. Shri V. Shankar Managing Director3. Dr. S. D. Israni Public
Interest Director4. Dr. M. Y. Khan Public Interest Director5. Mr. P. J. Mathew
Shareholder Director6. M. C. Rodrigues Shareholder Director7. Mr. M. K. Ananda
Kumar Shareholder Director8. Mr. T.N.T Nayar Shareholder Director9. Mr. K. D. Gupta
Shareholder Director10. Mr. V. R. Bhaskar Reddy Shareholder Director11. Mr. Jambu
Kumar Jain Trading Member Director 19
25. Projectsformba.blogspot.com Chapter-IV ANALYSIS AND INTERPRETATION
26. Projectsformba.blogspot.com Chapter-IV ANALYSIS AND INTERPRETATION4.1
THE INDIAN CAPITAL MARKET:INTRODUCTION & NEED FOR THE
STUDY:The capital market consists of primary and secondary markets.The primary
market deals with the issue of new instruments by the corporatesector such as equity
shares, preference shares and debt instruments. Central andstate governments, various
public sector industrial units (PSUs), statutory and otherauthorities such as state
electricity boards and port trusts also issue bonds /instruments.The primary market in
which public issue of securities is made through aprospectus is a retail market and there
is no physical location. The secondarymarket or stock exchange is a market for trading
and settlement of securities thathave already been issued.The secondary market consists
of 23 stock exchanges including the National StockExchange, Over-the-Counter
Exchange of India (OCTEI) and Inter ConnectedStock Exchange of India Ltd. The
 secondary market provides a trading place forthe securities already issued, to be bought
and sold. 20
27. Projectsformba.blogspot.comCapital Market Participants:There are several major players
in the primary market. These include the merchantbankers, mutual funds, financial
institutions, foreign institutions investors (FIIS)and individual investors. In the secondary
market, there are the stock brokers(who are members of the stock exchanges), the mutual
funds, financial institutions,foreign institutional investors (FIIS), and individual investors.
Registrars andTransfer Agents, Custodians and Depositories are Capital market
intermediariesthat provide important infrastructure services for both primary and
secondarymarkets.India Capital Market has witnessed rapid growth in the past. The
Marketcapitalization which was 5,800 Crores ( 80 – 81 ) has increase to 5,41,050
Croresin 95 – 96. The liberalized environment and open market economy of early
1990’scoupled with securities scam brought forth the loopholes and the inefficiencies
ofIndian Capital Markets.Even when the capitals Markets had grown many folds, both in
terms of numberof players in the market as well as volume and value of transactions,
thesettlement systems followed at the stock exchange did not show any signs
ofimprovement in terms of efficiency and systems and procedures. The entry ofForeign
Institutional Investors into the Indian Capital Markets amplified the needfor Capital
Market reforms in India. 21
28. Projectsformba.blogspot.comMany of the ills faced by the then Capital Markets were
related to Handling ofpaper and paper based securities settlement systems.• Delays in
settlement cycle.• Bad Deliveries.• Stolen, Fake and Forged shares.• Delays and other
difficulties faced while transferring the shares, disbursing corporate benefits plagued the
capital market in the early years of 1990s.Therefore it is said that even though Indian
Capital Market has been growing bothin terms of listed Co’s & number of shareholder,
problems associated with tradesettlements have also been on the rise.As a result of this,
investors have to face a lot on inconvenience in effectingregistration of securities in their
favour and to ensure that they receive theirrightful share of dividend, bonus, rights and
other benefits. The large number in thecapital market have also given rise to a large
amount of paper work bringing withit the associated problems. With a view to put an end
to all these ills and torestore confidence of the public at large, the Government of India
paved the wayfor setting up of Depository by promulgating an ordinance in September
1995,which was subsequently passed by the both houses of the parliament in August1995
to become “THE DEPOSITORIES ACT 1996” 22
29. Projectsformba.blogspot.comSecurities and Exchange Board of India notified, the SEBI
(Depositories &participants) Regulations , 1996 under the ordinance in May 1996 in
order toprovide regulatory frame work for the Depositories.State Bank of India, giving an
example of its proactive role, for the betterment ofsociety at large, co-promoted “National
Securities Depository Limited (NSDL), thefirst Depository of the country with the
participation of UTI, NSE, IDBI, NationalSecurities Depository Limited was registered
on the 7 th of June 1996 withsecurities and exchange Board of India as the first
depository of India.Market Regulation :It is important to ensure smooth working of
capital, as it is the arena where theplayers in the economic growth of the country. Various
laws have been passedfrom time to time to meet this objective. The legislative frame
work before SEBIcame into being consisted of three major Acts governing the Capital
Markets: 1. The Capital Issues Control Act 1947 , which restricted access to the securities
 market and controlled the pricing of issues. 2. The Companies Act, 1956, which sets out
the code of conduct for the corporate sector in relation to issue, allotment and transfer of
securities, and disclosures to be made in public issues. 23
30. Projectsformba.blogspot.com 3. The Securities Contracts (Regulation) Act, 1956 , which
regulates transactions in securities through control over stock exchanges. In addition, a
number of other Acts, e.g., the Public Debt Act, 1942, the Income Tax Act, 1961 , the
Banking Regulation Act, 1949, have substantial bearing on the working of the securities
market.Securities and Exchange Board of India:The Securities and Exchange Board of
India (SEBI) is the regulatory authority inIndia established under section 3 of SEBI Act,
1992. SEBI Act, 1992 provides forestablishment of securities and Exchange Board of
India (SEBI) with statutorypowers for (a) Protecting the interests of investors in securities
(b) Promoting thedevelopment of the securities market and (c) Regulating the securities
market. Itsregulatory jurisdiction extends over corporates in the issuance of capital
andtransfer of securities, in addition to all intermediaries and persons associated
withsecurities market. SEBI has been obligated to perform the aforesaid functions bysuch
measures as it thinks fit. In particular, it has powers for:• Regulating the business in stock
exchanges and any other securities markets.• Registering and regulating the working of
stock brokers, sub-brokers etc.• Promoting and regulating self-regulatory organizations.•
Prohibiting fraudulent and unfair trade practices. 24
31. Projectsformba.blogspot.com• Calling for information from, undertaking inspection,
conducting inquiries and audits of the stock exchanges, intermediaries, self-regulatory
organizations, mutual funds and other persons associated with the securities market.With
the objective of improving market efficiency, enhancing transparency,checking unfair
trade practices and bringing the Indian market up to internationalstandards, a package of
reforms consisting of measures to liberalise, regulate anddevelop the securities
market.National Stock Exchange:The National Stock Exchange was set up in 1995 as a
first step in reforming thesecurities market through improved technology and introduction
of best practices inmanagement. It started with the concept of an independent governing
body withoutany broker representation thus ensuring that the operators interests were
notallowed to dominate the governance of the exchange.Before the NSE was set up,
trading on the stock exchanges in India used to takeplace through open outcry without
use of information technology for immediatematching or recording of trades. This was
time consuming and inefficient. Toobviate this, the NSE introduced screen-based trading
system (SBTS) where amember can punch into the computer the quantities of shares and
the prices atwhich he wants to transact. SBTS electronically matches the buyer and seller
in an 25
32. Projectsformba.blogspot.comorder-driven system or finds the customer the best price
available in a quote-drivensystem, and hence, cuts down on time, cost and risk of error,
as well as on the chances offraud. SBTS enables distant participants to trade with each
other, improving the liquidityof the markets.Depository System:The erstwhile settlement
system on Indian stock exchanges was also inefficientand increased risk, due to the time
that elapsed before trades were settled. Thetransfer was by physical movement of papers.
There had to be a physicaldelivery of securities- a process fraught with delays and
resultant risks.To obviate these problems, the Depositories Act, 1996 was passed. It
provides forthe establishment of depositories in securities with the objective of ensuring
freetransferability of securities with speed, accuracy and security. It does so by
 (a)Making securities of public limited companies freely transferable subject to
certainexceptions; (b) Dematerializing the securities in the depository mode; and
(c)Providing for maintenance of ownership records in a book entry form.Testing and
CertificationA critical element of financial sector reforms is the development of a pool
ofhuman resources having the skills and expertise to provide quality
intermediationservices in each segment of the industry. In order to dispense quality 26
33. Projectsformba.blogspot.comintermediation, personnel working in the industry need to
(a) follow certain codeof conduct usually achieved through regulations and (b) possess
requisite skills andknowledge generally acquired through a system of testing and
certification.Capital Market Intermediaries :There are several institutions, which facilitate
the smooth functioning of thesecurities market. They enable the issuers of securities to
interact with the investorsin the primary as well as the secondary arena.Merchant
Bankers:Among the important financial intermediaries are the merchant bankers.
Theservices of merchant bankers have been identified In India with just
issuemanagement. The services provided by merchant bankers depend on theirinclination
and resources – technical and financial. Merchant bankers ( Catergory 1)are mandated by
SEBI to manage public issues ( as lead managers ) and openoffers in take - over. These
two activities have major implications for the integrityof the market. Merchant banks are
rendering diverse services and functions. Theseinclude organizing and extending finance
for investment in projects, assistance infinancial management, acceptance house business,
raising Euro-dollar loans andissue of foreign currency bonds. However, since they are
one of the majorintermediaries between the issuers and the investors. 27
34. Projectsformba.blogspot.comCredit Rating Agencies:The 1990’s saw the emergence of a
number of rating agencies in the Indian marketThese agencies appraise the performance
of issuers of debt instruments like bondsor fixed deposits. The rating of an instrument
depends on parameters like businessrisk, market position, Operating efficiency, adequacy
of cash flows, financial risk,financial flexibility, and management and industry
environment.R & T Agents – Registrars to issue:R & T Agents form an important link
between the investors and issuers in thesecurities market. A company, whose securities
are issued and traded in the market,is known as the Issuer. The R & T Agent is appointed
by the Issuer to act on itsbehalf to service the investors in respect of all corporate actions
like sending outnotices and other communications to the investors as well as dispatch of
dividendsand other non – cash benefits. R & T Agents perform an equally important role
inthe depository system as well.Stock Brokers:Stock brokers are the intermediaries who
are allowed to trade in securities on theexchange of which they are members. They buy
and sell on their own behalf aswell as on behalf of their clients. 28
35. Projectsformba.blogspot.comStock brokers are the intermediaries who are allowed to
trade in securities on theexchange of which they are members. They buy and sell on their
own behalf aswell as on behalf of their clients.Custodians:In the earliest phase of capital
market reforms, to get over the problems associatedwith paper – based securities, large
holding by institutions and banks were soughtto be immobilized. Immobilization of
securities is done by storing or lodging thephysical security certificates with an
organization that acts as a custodian asecurities depository. All subsequent transactions in
such immobilized securities takeplace through book entries. The actual owners have the
right to withdraw thephysical securities from the custodial agent whenever required by
them.Mutual Funds:Mutual funds are financial intermediaries, which collect the savings
 of smallinvestors and invest them in a diversified portfolio of securities to minimize
riskand maximize returns for their participants. Mutual funds have given a major fillipto
the capital market – bothPrimary as well as secondary. The units of mutual funds, in turn,
are alsotradable securities. Their price is determined by their net asset value (NAV)
whichis declared periodically. 29
36. Projectsformba.blogspot.comThe operations of the private mutual funds are regulated by
SEBI with regard totheir registration, operations, administration and issue as well as
trading.Depositories:The depositories are an important intermediaries in the securities
market that isscrip-less or moving towards such as. In India, the Depositories Act defines
adepository to mean “a company formed and registered under the companies Act,1956
and which has been granted a certificate of registration under sub-section(IA) of section
12 of the securities and Exchange Board of India Act, 1992. ” Theprincipal function of a
depository is to dematerialize securities and enable theirtransactions in book-entry
form.Dematerialization of securities occurs when securities, issued in physical form,
aredestroyed and an equivalent number of securities are credited into the
beneficiaryowner’s account. 30
37. Projectsformba.blogspot.com4.2 DEPOSITORY SYSTEM :Meaning of the term ”
Depository “Depository means a place to deposit something for safekeeping as bank in
whichfunds or securities are deposited by other under the terms of depositoryagreements.
The Depositories Act, 1996 defines a depository to mean “a Companyformed and
registered under the companies Act, 1956 and which has been granteda certificate of
registration under sub-section (IA) of section 12 of the Securitiesand Exchange Board of
India Act, 1992.The principal function of a depository is to dematerialize securities and
enabletheir transactions in book-entry form. The securities are transferred by debiting
thetransferor’s depository account and crediting the transferee’s depository account.The
SEBI Regulations, 1996, SEBI has notified regulations on 16 th May 1996,which specify
the norms for the functioning and Operations of depository systemis very similar to a
banking environment.Eligibility Criteria for a Depository:Any of the following may
promote a Depository:A public financial institution as defined in section 4A of the
Companies Act,1956;A bank included in the second schedule to the Reserve Bank of
India Act, 1934;A foreign bank operating in India with the approval of the Reserve Bank
of India;A recognized stock exchange; 31
38. Projectsformba.blogspot.comAn institution engaged in providing financial services where
not less than 75% ofthe equity is held jointly or severally by these institutions;A
custodian of securities approved by Government of India, andRegistration:As per the
provisions of the SEBI Act, a depository can deal in securities onlyafter obtaining a
certificate of registration from SEBI. The sponsors of theproposed depository should
apply to SEBI for a certificate of registration in theprescribed form.Commencement of
Business:A Depository that has obtained registration as stated above, can function only if
itobtains a certificate of commencement of business from SEBI. A Depository mustapply
for and obtain a certificate of commencement of business from SEBI withinone year from
the date of receiving the certificate of registration from SEBI.Agreement between the
Depository and Issuers:If either the issuer ( a company which has issued securities ) or
the investor optsto hold his securities in a demat form, the issuer enters into an agreement
withthe depository to enable the investors to dematerialize their securities. No
 suchagreement is necessary where the state or Central Government is the issuer
ofgovernment securities. 32
39. Projectsformba.blogspot.comDepository Participants:A Depository participant (DP) is
described as an agent of the depository. They arethe intermediaries between the
depository and the investors. The relationshipbetween the DPs and the depository is
governed by an agreement made betweenthe two under the Depositories Act. In a strictly
legal sense, a DP is an entitywho is registered as such with SEBI under the provisions of
the SEBI Act. Asper the provisions of this Act, a DP can offer depository related services
onlyafter obtaining a certificate of registration from SEBI.The regulations have selected
various categories of market participants who areeligible to become depository
participants who have a well established customerinterface network.These categories
are:- a) Public Financial Institutions. b) Scheduled Banks. c) RBI approved Foreign
Banks Operating in India. d) State Financial Corporations. e) Certified Custodians of
Securities. f) Clearing corporations of Stock Exchanges. g) Registered Stock Brokers. h)
Non-Banking Financial Companies. 33
40. Projectsformba.blogspot.comServices provided by a DP :Following services can be
availed of through a DP:  Dematerialization, i.e., getting physical securities converted
into electronic form. Rematerialization, i.e., getting electronic securities balances held
in a BO account converted into physical form. To maintain record of holdings in the
electronic form.  Settlement of trade by delivering / receiving underlying securities
from / BO accounts. Settlement of off-market trades i.e., transactions between BOs
entered outside the stock exchange.  Providing electronic credit in respect of securities
allotted by issuers under IPO or otherwise. Receiving on behalf of demat account
holders non-cash corporate bonus such as, allotment of bonus and rights share in
electronic form or securities ensuring upon consolidation, stock spilt or merger /
amalgamation of companies. Pledging of dematerialized securities & facilitating
security lending and browsing, if the DP is registered as an “Approved Intermediary” for
the purpose. 34
41. Projectsformba.blogspot.com IN PHYSICAL FORM IN DEPOSITORYCUSTODY
CUSTODYSpace required for storage and safety. No space requiredExclusive manpower
to be allocated. This function can be clubbed with other functions. No exclusive
manpower required.Insurance ID required. No insurance required.Laborious inventory
verification during Periodic statement of Holding is madeinternal stock taking and
statutory available by the DP’s. Easy verificationaudits. for audit.No custody charges if
using own Custody charges vary from 5-15 basispremises (at the cost of more points
depending upon DP selected.productive uses). However, custodianscharge 20-40
points.Risk of theft, forgery, mutilation etc. No r isk of theft, forgery, mutilation
etc.Pledging of shares is cumbersome. Pledging is safe and easy.Receipt of corporate
benefits needs Faster and hassle-free receipt ofmonitoring and risks of loss in transit
corporate benefits.not ruled out.Inconvenience in portfolio shuffling and Convenient
portfolio shuffling andtransaction within the group since buy / adjustments within the
group sincesell adjustments need movement of delivery is through a single
instrumentspaper. registration instant and costs less (no stamp duty). 35 SELLING:
42. Projectsformba.blogspot.com Higher brokerage Lower brokerage. NSE brokers charge
half the brokerage on electronic trades compared to physical form. Transaction only in
market lots No market lot concept. Jumbo lots need to be split into No stamp duty.
 market lots for selling. Off-market transactions are costly Facility for Off-market
transactions and risky. especially within the group. Valuable executive time spent in
Flexibility to put future dated delivery / meeting delivery / receipt schedules receipt
instructions helps in better time of brokers / stock exchanges, management delivery is I
the form of a signing, stamping and delivery of single instruction. TD’s. BUYING :
Higher brokerage Lower brokerage. Stamp duty @ 50 basis point. No stamp duty. Post
and handling charges for No postage and handling charges. lodgments and transfers. Cost
involved in follow up / Guaranteed good delivery. rectification of bad deliveries /
objections. Opportunity cost for delay in Immediate transfer, therefore no transfer of
shares. opportunity cost. Problems involved in monitoring the No such problems. validity
of D’s signature on TD’s etc. 36Services of Depository:A Depository established under
the Depositories Act can provide any serviceconnected with recording of allotment of
securities or transfer of ownership of
43. Projectsformba.blogspot.comsecurities in the record of a depository. Any person willing
to avail the servicesof the depository can do so by entering into an agreement with the
depositorythrough any of its participants. A depository can provide depository services
onlythrough a DP. A depository cannot directly open accounts and provide services
toclients. Every depository in its bye-laws must state which securities are eligible
fordemat holding. Generally, the following securities are eligible for dematerialization:
(a) Shares, scrips stocks, bonds, debentures, debenture stock or other marketable
securities of a like nature in or of any incorporated company or other body corporate. (b)
Unit of mutual funds, rights under collective investment schemes and venture capital
funds, commercial paper, certificates of deposit, securitised debt, money market
instruments, government securities and unlisted securities. (c) Securities admitted to
NSDL depository are notified to all DPs through circulars sent by email everyday.
Investors are informed about these securities through NSDL’s website-www.nsdl.co.in -
and NEST update-a monthly newsletter of NSDL. 37
44. Projectsformba.blogspot.comFunctions of Depository: 1) Dematerlization: One of the
primary functions of depository is to eliminate or minimize the movement of physical
securities in the market. This is achieved through dematerilization of securities. 2)
Account Transfer: The depository gives effects to all transfers resulting from the
settlement of trades and other transactions between various beneficial owners by
recording entries in the accounts of such beneficial owners. 3) Transfer and Registration:
A transfer is the legal change of ownership of a security in the records of the issuer. For
effecting a transfer, certain legal steps have to be taken like endorsement, execution of a
transfer instrument and payment of stamp duty. 4) Corporate Actions: A depository may
handle corporate actions in two ways. In the first case, it merely provides information to
the issuer about the persons entitled to receive corporate benefits. In the other case,
depository itself takes the responsibility of distribution of corporate benefits. 5) Pledge
and Hypothecation: Depositories allow the securities placed with them to be used as
collateral to secure loans and other credits. In a manual environment, borrowers are
required to deliver pledged securities in physical form to the lender or its custodian.
These securities are verified for authencity and often need to be transferred In the name
of lender. 38
45. Projectsformba.blogspot.com 6) Linkages with clearing system: Whether it is a separate
clearing corporation attached to a stock exchange or a clearing house (department) of a
 stock exchange, the clearing system performs the functions of ascertaining the pay-in
(sell) or pay-out (buy) of brokers who have traded on the stock exchange.DEPOSITORY
PROCESS IN INDIA:The system consists of four constituents. They are I) The
Depository ii) thedepository participants, iii) the beneficial owner and iv) the issuer.The
Depository :- The depository is entrusted with securities for effecting the transfer
ofownership of the securities. He is the custodian of his clients “ securities “.
Thedepository has no right over the security except with the transfer of it.The Depository
participants :- The depository participants is the link between thedepositories and the
owner of securities. He is deemed an agent of the depository. Thedepository, therefore is
responsible for the acts of omission and commission on the partof the DP. The
depository, therefore is responsible for the acts of omission andcommission on the part of
the DP. The depository and DP are registered with SEBI,which regulates their
functioning.The Beneficial owner :- the beneficial owner is the real owner of the security.
He lodgeshis securities with the depository in the form of book entries. He has all rights
andliabilities associated with the securities.The issuer :- It is the company, which issues
the security. 39
46. Projectsformba.blogspot.comThe issuer avails choice to the investors for holding
securities either in physical form orthrough the depository, which makes the investor to
choose and communicate back to theissuing company at the time of initial offer itself.
Then the issuer intimates the depositorydetails about the allotment of securities. The
depository in turn records the names ofallottes of the securities in their records as the
beneficial owners. The name of thedepository is entered by the issuer as the registered
holder of the security. The investor isfree to alter his choice either at the time of applying
for securities or at any timethereafter. An investor who wishes to avail himself of the
services will have to open anaccount with depository through a DP. The investor has to
enter into an agreement withthe DP after which he is issued a client
number.DEMATERIALISATION:One of the methods for preventing all the problems
that occur with physical securities isthrough dematerialization (demat). India has adopted
the demat route in which the bookentry is made electronically against securities that are
cancelled. The share certificates areshredded (i.e., its paper form is destroyed) and a
corresponding credit entry of the numberof securities (written on the certificates) is made
in the account opened with theDepository participant (DP).Each security is identified in
the depository system by ISIN and short name. For example,a person owing 100 shares in
ABC Ltd. in physical form will record his ownership asbelow: 40
47. Projectsformba.blogspot.comCompany Name: ABC Ltd.No. of Shares:100Distinctive
Nos.: 932654701 to 932654800Certificate No.: ABC001263Folio No.:
A658542International Securities Identification Number (ISIN):Each of the securities
dematerialized in the NSDL depository bears a distinctive ISIN –an identification
number. International Securities Identification Number (ISIN) is aunique identification
number for each security issued in any of the international standardsorganization (ISO)
member countries in accordance with the ISIN standard (ISO 6166).Securities that can be
dematerialized:The entire depository system in India is governed by the rules made by
the marketregulator – SEBI. According to the SEBI (Depositories and participants)
Regulations,1996, the following securities are eligible for holding in dematerialized form.
1) Shares, scripts, stocks, bonds debentures, debenture stock or other marketable
securities of similar nature of any incorporated company or body corporate including
 underlying shares of ADRs and GDRs. 2) Units of mutual funds, rights under collective
investment schemes and venture capital funds, commercial paper, certificate of deposit,
securitised debt, money market instruments and unlisted securities. 41
48. Projectsformba.blogspot.comA list of securities available for demat in NSDL depository
is made known to all DPs byway of circulars sent through email.Physical form of
securities can be converted into book entry form in NSDL depositorysystem only if the
company which has issued the securities, has entered into anagreement with NSDL to
offer demat facility. PROCEDURE FOR DEMATERIALISATION Investor D.P. R&T
Depository Agent 42
49. Projectsformba.blogspot.comClient / investor submits the DRP (Demat Request Form)
and physical certificates toDP.DP checks whether the securities are available for demat.
Clients defaces thecertificates by stamping ‘Surrender for Dematerialization’. DP
punches two holes on thename of the company and draws two parallel lines across the
face of the certificate.DP enters the demat request in his system to be sent to
DEPOSITORY.DP dispatches thephysical certificates along with DRF to the R & T
agent.Depository records the details of the electronic request in the system and forward
therequest to the R & T agent.R & T agent, on receiving the physical documents and the
electronic request, verifies andchecks them. Once the R & T agent is satisfied,
dematerialization of the concernedsecurities is electronically confirmed to
Depository.Depository credits the dematerialized securities to the beneficiary account of
the investorand the DP electronically the DP issues a statement of transactions to the
client. 43
50. Projectsformba.blogspot.com DEMATERIALISATION PROCESS SHARE HOLDER
DEPOSITORY PARTICIPANT OPENS CLIENT ACCOUNT NUMBER
DEMATERIALISATION REQUEST FORM (DRF) In duplicate to DP DP TO
DEPOSITORY (FORM DEMATERLISATION) DRF +SHARE CERTIFICATE TO
ISSUER COMPANY / STA (IN 7 DAYS) ISSUER COMPANY / STA verifies records
and authorities ELECTRONIC CREDIT (with in 15 days) STA intimates DP Authorizing
dematerialization of investors physical holdings and adjustment of physical holdings
depository will add dematerialized holding to BENEFICIAL OWNERS ACCOUNT 44
51. Projectsformba.blogspot.comRE-MATERIALISATION:Rematerialization is the exact
reverse of dematerialization. It refers to the process ofissuing physical securities in place
of the securities held electronically in book-entry formwith a depository. Under this
process, the depository account of a beneficial owner isdebited for the securities sought to
be re- materialized and physical certificates for theequivalent number of securities is / are
issued.A beneficial owner holding securities with a depository has a right to get his
electronicholding converted into physical holding at any time. The beneficial owner
desiring toreceive physical security certificates in place of the electronic holding should
make arequest to the issuer or its R & T Agent through his DP in the prescribed re-
materilizationrequest form (RRF).Upon receipt of the request, the DP verifies the balance
available to the extent of therequest contained in the RFR and electronically intimates the
request to the depository.The depository there up on blocks the balance of the DP and
intimates the RFR to theissuer or the RTA.Upon the acceptance of the RFr, the issue
company or the RTA issues share certificationwithin 30 days. 454.3 OVERVIEW OF
NSDL :
52. Projectsformba.blogspot.comNational Securities Depository Limited: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 largestIndian mutual fund and
the National Stock Exchange (NSE) – the largest stock exchangein India, sponsored the
setting up of NSDL and subscribed to the initial capital. NSDLcommenced operations on
November 8, 1996.Ownership:NSDL is a public limited company incorporated under the
Companies Act 1956. NSDLhad a paid up equity capital of Rs.105 crore. The paid up
capital has been reduced toRs.80 crore since NSDL has bought back its shares of the face
value of Rs.25 crore in theyear 2000. However, its net worth is above the Rs.100 crore, as
required by SEBIregulations.The following organizations are shareholders of NSDL as
on March 31, 2002: 1. Industrial Development Bank of India. 2. Unit trust of India. 3.
National Stock Exchange. 4. State Bank of India. 5. Global Trust Bank Limited. 46
53. Projectsformba.blogspot.com 6. Citibank NA. 7. Standard Chartered Bank. 8. HDFC
Bank Limited. 9. The Hong kong and Shanghai Banking Corporation Limited. 10.
Deutsche Bank. 11. Dena Bank. 12. Canara Bank.Management of NSDL:NSDL is a
public limited company managed by a professional Board of Directors. Theday-to-day
operations are conducted by the Managing Director. To assist the MD in hisfunctions, the
Board appoints an Executive Committee (EC) of not more than 15members. The
eligibility criteria and period of nomination, etc. are governed by the bye-laws of
NSDL.Bye-laws of NSDL :Bye-laws of National Securities Depository Limited have
been framed under powersconferred under section 26 of the Depositories Act 1996 and
approved by Securitiesand Exchange Board of India. The bye-laws contain fourteen
chapters and pertain to theareas listed below. 47
54. Projectsformba.blogspot.com 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 12. Appeals 13.
Conciliation 14. ArbitrationFunctions :-NSDL performs the following functions through
depository participants (DPs): • Enables the surrender and withdrawal of securities to and
from the depository (dematerialization and re-materialization). • Maintains investor
holdings in the electronic form. • Effects settlement of securities traded on the exchanges.
48
55. Projectsformba.blogspot.com • Carries out settlement of trades not done on the stock
exchange (off-market trades). • Transfer of securities. • Pledging / hypothecation of
dematerialized 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. • Dematerialization • Off-market Trades. • Settlement
in dematerialized securities. • Receipt of allotment in the dematerialized form. •
Distribution of corporate benefits. • Re-materialization. • Pledging and hypothecation
facilities. • Freezing / locking of investor’s account. • Stock lending and borrowing
facilities.
56. Projectsformba.blogspot.com 49Fees 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 atwo- tier fee
structure.Inspection, Accounting and Internal Audit :NSDL obtains audited financial
reports from all its DPs once every year. NSDL alsocarries out periodic visits to the
offices of its constituents – R & T agents, DPs andclearing corporations - -to review the
operating procedures, systems maintenance andcompliance 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 inpractice.The Board of Directors appoints a Disciplinary Action
Committee (DAC) to deal withany matter relating to DPs clients, issuers and R & T
agents. The DAC is empowered tosuspend or expel a DP, declare a security as ineligible
on the NSDL, freeze a DP accountand conduct inspection or call for records and issue
notices.
57. Projectsformba.blogspot.com 50Settlement of Disputes:All disputes, differences and
claims arising out of any dealings on the NSDL, irrespectiveof whether NSDL is a party
to it or not, have to be settled under the Arbitration andConciliation act 1996. Technology
and Connectivity Electronic Linkage ISSUER Exchange NSDL (CC / CH ) DP DP
BROKER/CM INVESTOR INVESTOR BROKER/CMThis figure depicts the electronic
connectivity of NSDL with its business partners –DPs, Issuer companies / R & T Agents
and stock Exchanges / Clearing Corporations.Connectivity between NSDL and business
partners can be through V-sat or leased line.No two business partners have direct linkage
to each other in the NSDL system.DP has database (account details) of its investor
clients. This helps DP to service clientseffectively . NSDL also has this database. Every
transaction is recorded in NSDLdatabase as well as DP database. Both these databases
are reconciled on a daily basis. 51
58. Projectsformba.blogspot.comMaintenance of Accounts at the Central System:The NSDL
central system known as DM maintains accounts of all account holders in thedepository
system. All the transactions entered at any point in the computer systemconnected to it
are first effected in the central system and subsequently at theseComputers. Thus, the
central system of NSDL has the records of all details of everytransaction conducted in the
depository system.Distributed Database:Each of the computer systems connected to
NSDL system has its own database relatingto its clients. This helps in giving prompt and
accurate service to the clients. Howevereach of the databases is reconciled with the data
at the central system everyday in order toensure that the data in the distributed database
tallies with the central database.Common Software:NSDL develops software required by
depository participants, Companies, R&T Agentsand clearing corporations for
conducting depository operations. Thus, the computersystems 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 coordination, communication and control andprovide service to their clients. Such
exclusive software is called “back office software“.DPM system given NSDL gives
“export and import” facility to take out the transactiondetails to be used by back office
software and to feed in transaction details generatedfrom the back office software.
59. Projectsformba.blogspot.com 52Account Opening :Any investor who wishes to avail
depository services must first open an account with adepository participant of NSDL. The
process of opening a demat account is very similarto a bank account. The investor can
open an account an account with any depositoryparticipant of NSDL. An investor may
 open an account with several DPs or he may openseveral accounts with a single DP.
There are several DPs offering various depository-related services. Each DP is free to fix
its own fee structure. Investors have the freedomto choose a DP based on criteria like
convenience, comfort, service levels, safetyreputation and charges. After exercising this
choice, the investor has to enter into anagreement with the DP. The form and contents of
this agreement are specified by thebusiness rules of NSDL. In this chapter we deal with
the procedure for account openingunder the NSDL system.Types of AccountsType of
depository account depends on the operations to be performed. There arethree types of
demat accounts which can be opened with a depository participantviz. (a) Beneficiary
Account (b) Clearing Account and (c) Intermediary Account.
60. Projectsformba.blogspot.com 53 Types of Accounts Beneficiary Owner Account
Clearing Member Account Intermediary Account House Non – House A DP may be
required to open three categories of accounts for clients –Beneficiary Account, Clearing
Member Account and Intermediary Account.A Beneficiary Account is an ownership
account. The holders / s of securities inthis type of account own those securities.The
Clearing Member Account and Intermediary Account are transitory accounts.The
securities in these accounts are held for commercial purpose only.A Clearing Member
Account is opened by a broker or a Clearing Member forthe purpose of settlement of
trades.An Intermediary Account can opened by a SEBI registered intermediary for
thepurpose of stock lending and borrowing.
61. Projectsformba.blogspot.com 54Beneficiary Account:This is an account opened by
investors to hold their securities in dematerializedform with a depository and to carry out
the transactions of sale and purchase ofsuch securities in book- entry form through the
depository system. A beneficiaryaccount holde r is legally entitled for all rights and
liabilities attached to thesecurities (i.e. equity shares, debentures, government securities,
etc.) held in thataccount. Therefore, the account is called “beneficial owner account “. A
beneficiaryaccount can be in the name of an individual, corporate, HUF, Minor,
Bank,Financial Institution, Trust, etc. or the broker himself for the purpose of hispersonal
investments in demat form. The account is opened with a DP.Documents for
Verification:For the purpose of verification, all investors have to submit the
followingdocuments along with the prescribed account opening form.Proof of Identity :-
A beneficiary account must be opened only after obtaining aproof of identity of the
applicant.Proof of address :- The account opening form should be supported with proof
ofaddress such as verified copies of ration card / passport / voter ID / PAN card /driving
license / bank passbook. 55
62. Projectsformba.blogspot.comIn case any account holder fails to produce the original
documents for verificationwithin the aforesaid period of 30 days, it must be immediately
brought to thenotice of NSDL. Failure to produce the original documents within the
prescribedtime would invite appropriate action against such account holders, which
couldeven include freezing of their accounts.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 areexplained 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, if applicable 7. Details of nomination 8. Specimen signatures
56
63. Projectsformba.blogspot.comClearing Member Account:The entities that are authorized
to pay in and receive the pay out from a clearingcorporation / clearing house against
trades done by them or their clients are knownas clearing members. CMs are identified in
the system through their CM-BP ID.All 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.Intermediary Account:As per SEBI
Regulations on Stock lending and borrowing, only an approvedintermediary can lend and
borrow stocks from clients. This intermediary borrowsfrom lenders and lends to
borrowers. Intermediaries registered with SEBI asapproved intermediary may open an
intermediary account with a DP of its choice,for executing stock lending and borrowing
transactions made through them. Anintermediary account may be opened only after
obtaining registration from SEBIunder an approved Stock Lending Scheme, and getting
the approval of thedepository for opening the account. 57
64. Projectsformba.blogspot.comClosure of Account:Closure on client’s request – A DP can
close a depository account on receipt ofan application in the prescribed format. The
application should be made by theaccount holder or by all the joint-holders. An account
can be closed only whenthere is no balance in the account. In case there is any balance in
the accountsought to be closed, the following steps are necessary. (a) Re-materialization
of all securities standing to the credit of the account at the time of making the application
for closure; or (b) Transferring the balance to the credit of another account opened by the
same account holder (s) either with the same participant or with a different
participant.Freezing of Accounts:Accounts freezing means suspending any further
transaction from a depositoryaccount till the account is de-frozen. A depository account
maintained with a DPmay be frozen in certain cases. 1. If a written instruction is received
from the client by the DP, requesting freezing of account; or 2. If written instructions are
received from the depository pursuant to an order of the Central or State Government,
SEBI, or any order by the court, tribunal, or any statutory authority. 58
65. Projectsformba.blogspot.comAn account may be frozen only for debits (preventing
transfer of securities out ofthe account ). By freezing an account for debits only, no
securities can be debitedfrom the account , however, the client can receive securities in
his account. Anaccount can also freezed for debits as well as credits (preventing any
movementof balances out of the account ). No transaction can take place in such an
accountuntil it is reactivated. A frozen account may be de-frozen or re-activated, by
taking thereverse steps. 1. On the valid written request of the account holder where he
had requested freezing. 2. On directions of depository made in pursuance of the order of
the appropriate authority.The DP should immediately inform the client about change in
status of theaccount from ‘active’ to ‘suspended’ and vice-versa.TRADING AND
SETTLEMENT:Settlement of off-market transactions :Any trade that is cleared and
settled without the participation of a clearingcorporation is called off-market trade.
Transfer from one beneficiary account toanother due to a trade between them is called
off-market transaction. Large dealsbetween institution, trades among private parties,
transfer of securities between aclient and sub-broker, large trades in debt instruments are
normally settled throughoff-market route. 59
66. Projectsformba.blogspot.com Off – Market Trade NSDL DP 1 DP 1 SELLER BUYE R
1. Seller gives delivery instructions to his DP to move securities from his account to the
buyer’s account. 2. Buyer automatically receives the credit of the securities into his
account on the basis of standing instruction for credits. 3. Buyer receives credit of
securities Into his account only if he gives receipt instructions, if standing instructions
have not been given. 4. DP needs to be extra careful in verifying the signature of the
client if unusual quantities of securities are being debited to the account. 5. Funds move
from buyer to seller outside the NSDL system. 60
67. Projectsformba.blogspot.comSettlement of Market-Transaction :A market trade is one
that is settled through participation of a ClearingCorporation. In the depository
environment, the securities move through accounttransfer. Once the trade is executed by
the broker on the stock exchange, the sellergives a delivery instructions to his DP to
transfer securities to his broker’saccount. Market Settlement - Demat Shares 61
68. Projectsformba.blogspot.comThe broker has then complete the pay-in before the deadline
prescribed by thestock exchange. The broker removes securities form his account to CC /
CH of thestock exchange concerned, before the deadline given by the stock exchange.The
CC / CH gives pay – out and securities are transferred to the buying broker’saccount. The
broker then gives delivery instructions to his DP to transfer securitiesto the buyer’s
account. The movement of funds takes place outside the NSDLsystem. 1. Seller gives
delivery instructions to his DP to move securities from his account to his broker’s
account. 2. Securities are transferred from broker’s account to CC on the basis of a
delivery out instruction. 3. On pay - out, securities are moved from CC to buying broker’s
account. 4. Buying broker gives instructions and securities move to the buyer’s account.
62
69. Projectsformba.blogspot.comCENTRAL DEPOSITORY SERVICES (INDIA) LTD.
(CDSL) Benefits of opening an account with CDSL system 1) The unique centralized
database of CDSL enables DPs to debit / credit securities instantaneously to the
Beneficial Owner’s account thereby avoiding any transit position. 2) CDSL’s unique
client ID number ensures debit / credit of securities only to the intended account, as the
system does not accept a transaction, where account number is keyed in incorrectly. 3)
CDSL offers a facility to the clearing House / Clearing Corporation under which
securities sold purchased by any BO on BSE can be directly delivered from / received in
the BO account without routing them through the broker’s pool account. 4) CDSL does
not collect any custody fees from its DPs. Thus BOs can except a lower charge in respect
of securities held in CDSL accounts. The transaction cost of settlement of securities
through CDSL is lower in most cases. ACCOUNT TYPES WITHIN CDSL The account
structure in CDSL is designed to meet the following objectives. To maintain proper
records. To Segregate accounts of Beneficial Owners from each other and form the
depository participants. To enable RTA / Issuers to access an index of all accounts, this
represents the balances of all holdings in a particular ISIN (International Security
Identification Number). To enable Depository Participants to enquire about only those
Beneficial Owner accounts that do they service. The Beneficial Owner master file
account details and the current and historic details of transactions and balances will be
available to DPs. To provide a flexible accounting structure to support the settlement
requirements of the market. To account for dematerialized securities at BO level. 63
70. Projectsformba.blogspot.comFEATURES :- 1) All beneficial Owner accounts are
operated at Depository Participant level, however data is maintained at CDSL Level. 2)
BOs do not have direct access to CDSL system, except through “ Smartcards “ for
enquiry purpose, as and when provided.PROCEDURE FOR OPENING DEMAT
ACCOUNT :- The process of opening a demat account through a DP of CDSL is very
easy andsimple. It is similar to the opening of a bank account. 1. Investor as choose a DP
from the list of CDSL DPs published in CDSL Infoline or accessible through the CDSL
website www.cdslindia.com 2. The investor should submit an application form to the DP.
3. Before demat account is opened, the investor will have to execute an agreement on a
stamp paper to be provided by the DP, which defines the rights and obligations of both,
the investors and the DP. 4. On opening an account, a unique BO ID (Beneficial Owner
Identification) Number is allotted, which should be quoted in all future transactions. 5.
Under the Depository system, there is no restriction on opening more than one BO
account in the same or identical names with the same or other DPs subject to the
condition that all requirements are compiled with. 6. There is also no compulsion on any
investor to open this demat account with the same DP as that of his broker, Investor can
open account with the DP of his choice and carry on his trading activity through a broker
of his choice. Where any DP offers special charge with the brokers DP may have some
advantages. However a BO belonging to any one of the categories specified under the
CDSL Bye laws need not enter into an agreement with the DP, if the DP has entered into
an agreement with the BO pursuant to securities & Exchange Board of India (Custodian
of securities) Regulations 1996. The BO Categories are as under: 64
71. Projectsformba.blogspot.com Public Financial Institutions as defined in section 4A of
the Companies Act, 1956. A Bank included for the time being in the second schedule
to the Reserve Bank of India Act, 1951.  Foreign Bank operating in India with the
approval of RBI.  State Financial Corporation established under the provisions of
section 3 of the State Financials Corporations Act, 1951. An Institution engaged in
providing financial services, promoted by any of the Institutions mentioned herein above,
jointly and severally. A Custodian of securities who has been granted a certificates of
Registration by the Board under sub-section (1A) of section 12 of the SEBI Act, 1992.
Foreign Institutional Investor as defined under section 2(f) of the SEBI (Foreign
Institutional Investors) Regulations, 1995. A Mutual Funds as defined under Section
2(q) of the SEBI (Mutual Funds) Regulations, 1992 and Registered with SEBI under
regulation 9 thereof.DEMATERIALISATION OF SECURITIES : Objectives :- To
enable Beneficial Owners to convert their scripts existing in physical form toelectronic
balances in accounts maintained by CDSL, through DPs.Features :- Dematerialization is
a process by which the scrips existing in paper form areconverted into electronic balances
maintained in securities accounts held by the BO witha DP of CDSL. However, to
Dematerialize the share certificates an investor has to Fill up a Dematerialization request
form, which is available with the DP. Submit share certificates along with the forms
(Write “Surrendered for Demat” on the face of the certificate before submitting it for
demat). Receive credit for the dematerialized shares within 15 days. 65
72. Projectsformba.blogspot.com Only those securities held in the form of certificates
registered in one’s name individually or jointly can be dematerialized. Moreover, the
securities must belong to the list of securities admitted for dematerialization at CDSL.
Securities held in street name (Market deliveries) cannot be dematerialized. If one wants
 to dematerialize the securities of a company that is not admitted with CDSL, then the
investor should request the company to have that security admitted with CDSL and once
that has been done, he can get it dematerialized. SEBI has laid down a separate procedure
for simultaneous transfer and demat of share’s in one’s favour. The transfer cum demat
facility is available only in respect of securities of those issuer companies, who have
entered into special arrangement with the depositories. After the company / RTA has
transferred the shares in the name of the Transferee, it will send option letter to the
transferee to ascertain whether he wishes to have them dematerialized. Incase the
transferee opts to receive them in demat mode; he will submit the option letter along with
the DRF to the DP. DP will forward the DRF and the option letter to the company / RTA,
whereupon company / RTA will demat them and the BO account will be credited. In
demat form the market lot is one share and therefore, there is no question of odd lot.
Dematerialized shares do not have any distintives or certificate numbers. In demat all
shares are fully fungible, which means that any 100 shares of a company are similar to
any other 100 shares of that company. While CDSL does not levy any charges for
dematerialization of securities, DPs collect dematerialization charge together with
postage / courier charges.REFERENCE TO LAW : Depositories Act, 1996 Section 6 –
Surrender of Certificate of Security. SEBI (Depositories and Participants) Regulations,
1996.  SEBI Regulations 27 – Depository to declare specific securities eligible. SEBI
Regulations 28 – Securities eligible for dematerialization. SEBI Regulations 29 –
Agreement between depository and Issuers. 66
73. Projectsformba.blogspot.com SEBI Regulation 38 – Records to be maintained. SEBI
Regulation 53 – Agreement by Issuer. SEBI Regulation 54 – Manner of surrender of
Certificate of security.PROCEDURE FOR DEMATERIALIZATION :- 1. To
Materialize any physical security, one will have to open a demat account with a DP of
one’s Choice. 2. Thereafter, all one has to do is to fill in a DRF (Demat Request Form)
and submit the same with the shares / securities Certificates to the DP for
dematerialization. 3. DP defaces and sends these certificates to the Issuer / Registrar who
credits an equivalent number of securities in the demat account maintained with CDSL.
For each scrip, a separate DRF has to be used. 4. The investor shall fill up the following
details in the DRF : • Investors account number with the DP • DP ID • DP Name • ISIN •
Name of the Issuer • Type of the Security • Total quantity to be maintained • Name (s) of
the holder (s) • Certificate Details : Folio No., Distinctive Nos., Certificate Nos., No. of
Securities • Lock in status. 5. The registered holder (s) shall sign the DRF. • As per the
specimen signature (s) recorded with the DP and • As per the specimen signature (s)
recorded with the Issuer / RTA. 6. The Investor shall also surrender the physical
certificate to be dematerialized along with the duly filled DRF to the DP. Immediately on
receipt of DRF along with the scripts the DP should give the counter acknowledgement to
the BO 67
74. Projectsformba.blogspot.com 7. The DP shall verify the following : • Whether the DRF is
complete. • Whether the Certificate details mentioned on the DRF and on the Certificate
enclosed, tally. • Whether the name (s) of the holder (s) and the order of the names of the
holders appearing on the certificates exactly tally with those records under the BO
Account maintained with CDSL. • Whether all the holders have signed the DRF and the
signatures of the account holders tally with those recorded by the DP. • If there is any
discrepancy in any of the details, the DP will get it rectified from the investor and the
 error free DRFs will be taken up for further processing by the DP. 8. The DP shall
capture the details from the DRF & Certificate through the front-end system provided by
the CDSL and shall generate the DRN on the same day or latest by the next working day
from the date of receipt of DRF. 9. In case the Securities are in “ Lock – In “ status the
following details need to be specified: Lock in Reason  Lock in Release date. 10. The
DP shall then write down the DRN on the DRF and deface the certificates by affixing a
rubber stamp “ Surrendered for Dematerialization “. The DP has to take proper care that
the stamp should be affixed in such a manner that no material information such as
distinctive numbers, Folio Nos., etc., on the Certificate is smudged or becomes illegal.
11. The DP shall then mutilate the certificates, by punching two holes at the top of the
certificates. 12. The DP shall then give a “System Generated acknowledgement” of the
demat request to the BO. This acknowledge will contain details such as BO A/c No., BO
Names, ISIN, Name of the Issuer & Type of Security, Quantity, Distinctive / Certificate /
Folio No., Date of request, DRN. The DP shall authorize this acknowledgement by
putting his seal / rubber stamp & Signature of the authorized signature (may be printed on
the letterhead of the DP). 68
75. Projectsformba.blogspot.com 13. CDSL shall electronically send the DRF data to the
issuer / RTA after the DRN is generated. The process is done automatically by the
system. 14. The DRF shall be authorized by the DP by putting his seal & signature. The
certificates & the original DRF shall be sent to the issuer / RTA along with a covering
letter printed on the DPs letterhead. This covering letter content will be generated by the
CDSL system. A copy of the DRF is to be maintained by the DP for its own reference
and records. 15.The DP then shall capture the dispatch details on the front – end system
such as the dispatch reference no., dispatch date, name of the courier, etc. The DP must
dispatch the physical documents within a maximum of 2 days from the date of DRN
Generation. 16. For items marked confirmed from the Issuer / RTA, CDSL activates the
balances in the BO account and they will be treated as fully dematerialized securities. 17.
The DP will print the statement of holding for the BO account for which the balances
have been activated by CDSL and mail / delivery the same to the BO. 18. The
dematerialized process must be completed within 15 days or as specified by the CDSL
from time to time. 19. Incase of rejection of certificates, unless there is a compelling
reason, the RTA / Issuer will print fresh certificates in lieu of the defaced certificates and
return the same under the objection to the DP concerned , along with an appropriate
rejection letter.PLEDGE OF DEMAT SECURITIES :Objectives : The pledging function
in CDSL will help in meeting the following objectives. Allow a BO ( pledgor) to use
his dematerialized securities as collateral for a pledge transaction with a pledge. Allow
un-pledging function and release the pledged stock. The pledging function comes to an
end, when the pledge obligation is fulfilled or as agreed between the pledgor and the
pledge. Allow pledge invocation by the pledge. 69
76. Projectsformba.blogspot.comFeatures :- The pledgor or an acquisition does not treat
pledging as a disposal by the pledge. Beneficial interest in the securities pledged remains
will the pledgor. There is no approved intermediary organization involved in
pledging as with securities lending.REFERENCE TO LAW :-Depositors Act 1996
Section 12 – pledging of securities held in a depository.SEBI (Depositories and
Participants) Regulations 1996 :- Regulations 58 – Manner of creating
pledge.Definitions : Pledge :- “ Pledge means placing of securities as collateral by a
 person (pledgor) infavour of another person (pledge) against an obligation. A pledge
creates a right ofinvocation of the beneficial ownership in the securities pledged by the
pledgor in favourof the pledge for non fulfillment of obligations by the pledgor as stated
in the pledgeagreement. Pledge includes hypothecation”.Pledgor :- “A person who
pledges his securities in favour of the pledge”.Pledgee :- “ A person in whose favour the
securities have been pledged by the pledgor “.PLEDGING OF DEMAT SECURITIES :-
Not only the demat securities can be pledged, in demat form the BO may beable to get
higher loan amounts, with reduced margins & lower rate of interest. In respectof pledged
securities, banks give advance to the extent of Rs. 20.00 Lacs at a reducingmargin of 25%
as against the amount upto Rs. 10.00 Lakhs with 50% margin that isadvanced incase of
physical holdings. Some banks even charge lower interest rate foradvances against
dematted securities. Moreover procedure for pledging securities indemat form is more
convenient both for the pledgor and the pledgee.Procedure for pledging securities :- 1.
The pledgor and the pledgee must have Beneficial Owner accounts with CDSL. These
accounts can be with the same DP or with different DPs. 2. The pledgor has to fill up the
“ Pledge Request Form “ (PRF) in duplicate. The pledge may countersign the PRF. 70
77. Projectsformba.blogspot.com 3. One copy of PRF should be given to the DP for setting
up the pledge and second copy shall be sent to the pledgee. 4. One receipt of the PRF, the
pledgor’s DP verifies that the securities to be pledged are unencumbered and there is a
depository system and a unique pledge sequence no. will be generated. 5. The pledgee’s
DP has the facility to access the request online. 6. Based on the pledgee’s DP either
accepts or rejects the request using the accept / reject flag.PROCEDURE OF UN-
PLEDGING THE SECURITIES IN DEPOSITORYSYSTEM :- a) The pledgor through
his DP makes a request for unpleding the pledged securities by submitting the “ Unpledge
Request Form “ (URF). The DP sets up an un-pledged request in the depository system.
b) The pledgor should provide a copy of “ URF “ to pledge. c) The pledgee will instruct
his DP to accept the unpledge request by submitting the copy of “Unpledged Request
Form “. The pledgee’d DP can access the “ Unpledge setup” online. d) On acceptance /
Rejection of the unpledge request, the status is changed from “setup” to “Accepted” or
“Rejected”.SETTLEMENT OF SECURITIES IN DEMAT FORM : Settlement : An
investor who trades in any security on a stock exchange will have to do sothrough a
clearing member. A Beneficial Owner (BO) who holds an account in CDSLwill be able
to settle all his settlement obligations directly from his account through hisDP. The DP is
required to process the instruction received from the BO’s within the timeperiod as
specified by CDSL. Post Settlement : During settlement, due to abnormal conditions,
securities get credited tovarious special purpose accounts. These securities have to be
transferred out of theseaccounts as laid down in the Byelaws of CDSL. Such transfers are
allowed by executionof instructions of the transferor. The CMs who wants to transfer the
securities out ofdesignated accounts, in which such transfers are allowed, can do so by
giving theinstructions to the DP / CH and the instructions will be executed by CDSL. 71
78. Projectsformba.blogspot.comOFF MARKET TRADES :- An Off market trades arises
when a BO elects to sell / Transfer securities to another BO without using the settlement
mechanism of any exchange. Off Market trades are the deals generally for bulk
quantities of securities, which are negotiated by the CMs outside the exchange. These
trades may be informed to the respective stock exchanges through their CMs Trading
terminals but the exchange mechanism to settle the transaction is not used. For this
 identical & matching instructions from both the parties including confirmation that
money has been paid / received has to be received by CDSL before CDSL effects the
actual Debit / Credit.Features :- All Depositaries Participants (DP) registered with CDSL
will be eligible for conforming the obligations of all the Beneficial Owners (BO) who
have opened account in CDSL through that DP.  All the DPs will be able to execute the
instructions to transfer the securities as per the instructions of tier BOs. However all such
instructions will be governed by the Byelaws of CDSL.PROCEDURE FOR
SETTLEMENT :- The procedure for selling dematerialized securities through any stock
exchange issimilar to the procedure for selling physical shares. However, the procedure
for deliveryof securities is much simpler when compared to the sale of securities in
physical segment.In case of sale of demat security, immediately on receipt of intimation
of execution oftrade from broker, the seller should issue instructions to the DP with
whom he maintainshis demat account, for delivery of security either directly to the
Clearing Corporation /Clearing House or to the brokers clearing account, as advised by
his broker. a) The BO informs the CM the details of the securities in which he wants to
trade and gives him the details of his BO account which he wants to settle the trade. b)
After the trade is put through and the CM receives the Net ISIN wise obligations, he
informs the CH the details of all the BO accounts for whom he has traded. He will do this
by using his front-end system with CH. Each BO wise obligation that the CM informs to
the CH will be allotted a unique obligations – ID and Sr. No. 72
79. Projectsformba.blogspot.com c) The CM will inform the details of the obligation – ID
and Sr. No to the BO and request him to confirm the obligations through his DP. d) On
receipt of the information from the CM, the BO will fill in the confirmation slip / form
and delivery it to his DP. He will have to fill in the settlement – ID, obligation – ID,
Serial Number, CM ID, ISIN, Quantity, Type of Transaction (i.e. buy or sell ) e) The DP
will first verify the signature of the BO or his power of attorneys as the case may be on
the slip / form and if it tallies, he will enter the confirmation on his front – end. f) The DP
will receive report of the status of all obligations confirmation and he will have to
scrutinize the mismatched / unmatched obligation confirmations. g) In case of mismatch
of obligations the DP will immediately contact the BO and he and inform him of the
Mismatch so as to enable the BO to correct the error. He will take a fresh instruction from
his BO. h) The DP can do the above confirmation process for all the unconfirmed and
mismatched obligations upto the time notified by the Ch. After the expiry of the time, the
unmatched and mismatched obligations are transferred for the settlement through the CM
principal account. i) The Depository participant will confirm the instructions received
from the CM if the CM wants to settle the trade through the CM principal account. Hr
will follow the same procedure that he follows for confirmations (mentioned above). j)
After the time for confirmation is over the confirmed sales obligations are sent by CH to
CDSL for earmarking. The DP will not be allowed to enter any confirmation after the
allotted time for that settlement.Note :- Unmatched : The obligations are matched on
obligation – ID and Sr. No incase nocorresponding record is found it is considered as un-
matched.Mismatched : If a corresponding is found and the other particulars (i.e.
settlement ID, CM –ID,ISIN, Quantity and type of transaction (buy or sell) are same in
both the records theobligations is considered as matched else it is considered as
mismatched).Miscellaneous : Based on the confirmations, the earmarking obligations and
 the instructionsreceived from CH, CDSL, will debit and credit the BO accounts at the
time of settlement. 73
80. Projectsformba.blogspot.comPost Settlement : The rules for release of securities by a DP
from CM unified settlement (CM pool)Account and CM principal Accounts, which are
maintained by the DepositoryParticipants are as under :Transfer from CM Unified
Settlement (CM Pool) Account : (Credit of securities by the CM in mixed mode
settlement) The transfer from this account is allowed to any BO account or the
principal account of the CM through whom the trade has taken place. If the buyer client
of the CM is not able to accept the demat mode, the CM will transfer the securities to
his principal account and rematerialize them for delivery to the client. The CM must
transfer the securities out of the CM unified settlement (CM pool) account within
weeks of the receipt of the securities in the account.Transfer of securities from the CM
principal Account : The transfer from this account is allowed to the account of any BO
or to any other CM principal account. The transfer from this account to settlement Lein
(CM Escrow) Account, settlement Escrow (CH Escrow) Account, settlement Default (CH
pool) Account or unified settlement (CM pool) accounts will not be allowed. The
account will be treated as a BO account of the CM and all functionalities available to a
BO account are allowed.Off Market Transfer : 1) The BOs enter into an off Market
transactions with each other. Both these BOs instruct their respective DPs in a prescriberd
format about the trade details such as : Transaction Date, ISIN, Quantity, Buy / Sell,
Settlement Date an Counter party BO-ID. After receiving instructions from the BO the
DP will enter the same on his front – end terminal. 2) The receiving Bo has to give
instructions to its DP for all Off- Market Trades even if has exercised the purchaser
Waiver Option at time of account opening. 74
81. Projectsformba.blogspot.com 3) CDSL receives the details entered by the DP CDSL will
check each transaction individually on the basis of the instruction received for matching
of trades. CDSL cannot settle the transaction until the details entered by both the DPs
tally. 4) CDSL will ensure that the cash Received / Given Yes / No / NA field is marked
if the cash received / given field is matched and enough free balance for the ISIN is
available in the seller BO account then the off market transaction is settled by Debit /
Credit to the respective BO accounts. 5) If the cash received field specifies “No” the
matching will not be allowed. 6) The DP is given reports of the status of all trades entered
by them. Incase of mismatched trades the DP is allowed to modify the details of the
transaction till the date of settlement. 7) If the transaction is matched the trade are locked
in and cannot be modified by the DPs. If the transaction are not matched, the DP should
inform the BO about all mismatch / unmatched transactions. 8) Only transaction that are
matched can be settle through book entry transfer on a specified settlement date. 9)
Cancellation of matched trade : in this case both BOs put the request with their DPs for
cancellation of the matched trade before the settlement date. DPs on receiving the
instructions will enter the request in the front – end terminal. The DPs will have put in all
the details of the matched trade for cancellation i.e., Trade IOD, Transaction Date, ISIN,
Settlement Date, etc., CDSL will delete the transaction only if the details match with the
actual transaction. 10) At the given time (i.e. on execution date) all the matched trades are
debited or credited to the respective BO accounts. If balance at the time of debit is
insufficient, the transaction will not be executed.Reconciliation : The daily
reconciliation safeguards erroneous omission of the entry of any instructions. The DP
 will have to ensure that the total instructions received are equal to the instructions
executed + instructions pending. 75
82. Projectsformba.blogspot.com The daily reconciliation safeguards against omission in
modification of matched obligations. The DP will have to ensure that the total
mismatched + un-mismatched obligations are equal to theDEMATERIALISATION OF
DEMAT SECURITIESObjectives : To convert the electronic balances of BOs into
physical form.Features : Dematerialization is a process by which the securities held in
electronic form are converted into paper mode securities by the Beneficial Owners. The
issuer / RTA issues new certificates with generally different distinctive numbers. The
new certificates may be issued under new folio number or in the existing folio, if the
investor already has one with the company. Remat does not amount to a transfer and
does not attract any stamp duty.  A beneficial owner can remat his holdings even if it is
an odd lot.Reference to Law :Depositories Act 1996 Section 14 – Option to opt out in
respect of any security.SEBI (Depositories and Participant) Regulations 1996 Regulations
33 – Withdrawal by the participant. Regulations 44 – Transfer or withdrawal by the
beneficial owner.Procedure :- 1) A BO who wishes to have his dematerialized holding of
securities in CDSL rematerialized, will fill; in the Rematerialized Request Form (RRF)
and submit the same to his DP. All joint holders should sign the RRF, if applicable. The
RRF has a pre-printed number on it. 76
83. Projectsformba.blogspot.com 2) DP verifies the details as mentioned in the RRF with the
BO master maintained. a) The debit of the RRF are keyed in the DP Front-end system
and the RRN is generated on the same day or latest by the next working day from the date
of receipt of RRF. This can be done only in on-line mode. When the request is setup the
system generates a Rematerialization request number (RRN) for each such request. b) On
successful setup of remat request, the quantity of securities to be rematerialized is
transferred from “Free Balance” or “Lock-inbalance” as the cause may be to “Pending
Remat Confirmation”. c) RRFs which have been set up can be modified any time before
the same is accessed by the RTA / Issuer on-line access or downloads by RTA / Issuer).
d) The RRN is noted on the RRF and the same is sent to the issuer / RTA along with
other documents mentioned in annexure 18 if any. This is done within two days of receipt
of RRf. The DP will retain a copy of the RRF for his records and send the original RRF
to the Issuers / RTAs. The DP must authorize the RRF with his seal and signature. e) The
proposed Remat balance in flagged for ageing analysis and for follow up CDSL and the
DP.Reconciliation : The following reconciliation will have to be done on a daily basis by
the DP. Remat requests received = Requests electronically logged in and RRFs sent +
Request electronically logged in but RRFs not sent + Request received but electronically
not logged in. Remat pending = Remat Quantity electronically logged in remat quantity
confirmed – Remat Quantity rejected + Remat Quantity not logged in electronically. 77
84. Projectsformba.blogspot.com Chapter-VSUMMARY AND CONCLUSIONS
85. Projectsformba.blogspot.com Chapter-V SUMMARY AND CONCLUSIONS5.1
SUMMARY:The inspection of the Depository system in the Indian Capital Market has
been onlyduring the 90’s. However, when it has finally arrived it was a welcome change
for theinvestors who were bogged down with many a problem of scrip based trading.The
beginning of the Depository System was rather a modest one with doubts beingraised
about its capability. However, it solved many problems that confronted theinvestors and
removed all such misconceptions.The growth of the Depository participants has seen a
 sea change both in the size of DPsand in the number of locations. During the period
starting 1998 the nuber of Depositoryparticipants were 56. However, the growth was not
restricted to the volume of depositoryparticipant. The quantity and the value of shared
being converted into electronic formare also a matter worth giving thought.In 1998, the
quantity and value was 1901 and 18,500 respectively. However, thingsunderwent a
radical change by the end of year 200. The Market capitalization of “ Demat“ shares was
more than 1744 million shares, whose values was mammoth Rs.18,500Billions. 78
86. Projectsformba.blogspot.comThe primary players in the whole process are companies.
The role played by thecompanies in encouraging its shareholders to convert their stock
into electronic form.Their attitude of being receptive to changing conditions, and to go in
for “Demat “ is astep in the right directions”.Many eyebrows were raised about the
trading and settlement process once the stock getsconverted into electronic form.
However, it was proved that their fears are concocted.Thus we encourage all the investors
to avail this service of “ Demat “ and take IndianCapital Market to a new height. The
concocted fears of the investors can be put to sleepand they can join in the already
moving hand wagon.5.2 CONCLUSIONS:The demat account opening is same as bank
account, i.e. single or joint accounts or withnominee. Some amount has to be paid (i.e.
350/- per year+25) for the demat account. Foreach transaction the DP’s may charge
nearly Rs.30 + brokerage/commission is common.The growth rates of demat account
holder in increasing over years. The Indian system ofcapital market is a Two Tire
System. Indian government allows holding securities in anyform i.e. either in physical
securities or in electronic (demat) form. The transaction ofsecurities is completely (i.e.
99.99) done through electronic format. 79
87. Projectsformba.blogspot.comThe investors rarely utilize the Rematerialisation Request
Form. Investors are not awareof the services offered by depositories. Most of the
speculators do not utilize demataccount in day-to-day online trading. They trade through
broker pool account.Dematerialization process can be done through online trading by
utilizing computers. 80
88. Projectsformba.blogspot.com Chapter-VI RECOMMENDATIONS
89. Projectsformba.blogspot.com Chapter-VI RECOMMENDATIONS• Volume of paper
work is small but it is very complicated to maintain data in system so try to reduce that by
regular audit and updating data• Most of DPs do not have the necessary infrastructure to
handle the high workload of transactions lending to many errors by DPs, so by giving full
infrastructure information to every DP can avoid this problem.• The pool a/c does not
know the true owner of the shares and hence dividends are paid to the broker instead of
owners, by this broker can do any manipulations or any fraud with the owner, for this the
owner can loose his dividend. Hence for this try to pay the dividend directly to the
owner.• If the shares are forged which delivered by the broker the shareholder can loose
that system and have to receive another lot of issued shares from the broker in 21 days,
this system stands abused as soon as possible.• The online trading is easy to work but it is
costly to maintain and difficult to learn.• It is known that stock exchanges are conducting
classes on the awareness of the depository system of NSDL and CDSL. But it is not
known by public. Information about the classes must be given news papers and media. 81
90. Projectsformba.blogspot.com BIBILOGRAPHY
91. Projectsformba.blogspot.com BIBILOGRAPHYBOOKSTitle of the book
AUTHORFinancial markets and services Gordon and NatarajanSEBI bharath
ChandraWEB