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Depository System
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- 2. Meaning, need andbenefits of depository system in India An effective and fully developed depository system is essential for maintaining and enhancing the efficiency of a mature capital market Before introduction of Depository system, the problems faced by investors and corporates in handling large volume of paper were as follows: Bad deliveries Fake certificates Loss of certificates in transit Mutilation of certificates Delays in transfer Long settlement cycles Mismatch of signatures Delay in refund and remission of dividend etc The Depositories Act defines a depository as a company formed and registered under the Companies Act, 1956 and which has been granted a certificate of registration under subsection (1A) of section 12 of Securi ties and ExchangeBoard of India Act, 1992.´A depository is a firm where in the securities of an investor are held in an electronic form in the same way as a bank holds money. It carries out the transactions of securities by means of book keeping entry, without any physical movement of securities. Depository system essentially aims at eliminating the voluminous and cumbersome paper work involved in the script- based system and offers scope for “paperless”trading through state-of-the-art technology. It is an institution which maintains an electronic record of ownership of securities.
- 3. NEED FOR DEPOSITORYSYSTEM In India the need for setting up a depository was realized after the large scale of irregularities in securities transactions of 1992 exposed the limitations of the prevailing system. Therefore, the need for depository system was realised for the growth of primary market, which would reduce the time between the allotment of shares and transfer of entitlements arising out of each allotment. The idea of setting up of a depository and the introduction of script less trading and settlement for improving the efficiency and eliminating the various problems associated with dealings in physical certificates. A depository system benefits the investing public, the issuers of securities, the intermediaries and the nation as a whole. The depository system in our country was initiated by the Stock Holding Corporation of India Limited (SHCIL) in July,1992. The Depositories Act was passed by the parliament in the August,1996. Which lays down the legislative frame work for facilitating the dematerialisation and book entry transfer of securities in a depository. The Act provides that a depository, which is required to be a company under the Companies Act,1956, and depository participant i.e. agents of the depository need to be registered with Stock Exchange Board of India (SEBI).The depository shall carry out the dematerialization of securities and the transfer of beneficial ownership through electronic book entry. The investors, however, have the option to hold securities in physical or dematerialized form, or to rematerialize securities previously held in dematerialized form. SEBI has notified the regulations in May,1996, with regard to norms for registration of depositories and participants, the eligibility criteria for admission of securities to a depository. The National Securities Depository Limited (NSDL), the first depository in India which has been promoted by IDBI, UTI and NSE. It has commenced its operation from November 8,1996.To begin with only the capital market segment of NSE has been associated with the NDSL as only
- 4. BENEFITS Benefits of depositorysystem – •Elimination of bad deliveries, elimination of risks associated with physical certificates, Immediate transfer & registration of securities •Faster disbursement of non cash benefits rights, bonus etc. Reduction in brokerage, Reduction in handling of paper & periodic reports to investor •Elimination of problems related to change of address of investor, transmission etc. Benefits To the nation: •Growing and more liquid markets •Increase in competitiveness in the international market place attracting many investors •Improved prospects for privatisation of public sector units by creating a conducive environment •Considerable reduction in delay •Minimises settlement risk and fraud restoring investors’ faith in the capital markets To the investing public •Reduction of risks associated with loss, mutilation, theft and forgery of physical scrip •Elimination of financial loss from loss of physical scrip •Greater liquidity from speedier settlements •Reduction in delays in registration •Faster receipt of corporate benefits •Reduced transaction costs through greater efficiency To issuers: •Up-to-date knowledge of shareholders’ names and addresses •Reduction in printing and distribution costs of new issues •Easy transfer of corporate benefits •Improved ability to attract international investors without having to incur expenditure of issuance in overseas markets
- 5. Depositories in India Presentlythere are two Depositories working in India: National Securities Depository Limited (NSDL) It was registered by the SEBI on june 7 1996 as India’s first Depository to facilitate trading and settlement of securities in the demat form. It is promoted by IDBI, UTI, NSE Central Depository Services (India) Limited (CSDL) It commenced its operations during feb 1999 and was promoted by Stock Exchange Mumbai in association with Bank of Baroda, Bank of India, SBI and HDFC Bank At present 10 Stock Exchanges are connected to the Depositories NSE The SE , mumbai Calcutta Stock Exchange Delhi SE Ludhiana SE Bangalore SE Over the counter exchange of India Madras SE Inter connected SE Ahmedabad SE Market trade: trade done settled through a SE and clearing corporation. Off market trades: trades done privately without involvement of stock brokers and SE Again investor may either choose to invest privately, through SB or DP
- 6. Constituents of aDepository System Depository Depository Participant (DP) Securities, Issuers and Registrars and Share Transfer Agents Stock Exchanges and Stock Brokers Clearing Corporation/ Clearing House and Clearing Members Banking system Investors
- 7. Depository : itis an organisation where the securities are held in electronic form and carries out the securities transaction by book entry. DP : DP is an agent of the depository and functions as the interacting medium between the depository and the investor.He should be registered with the SEBI. Must possess requisite qualifications prescribed by the concerned depository of which he is a participant He is responsible for maintaining the investors’ securities a/c with the depository and handles them as per the investors written instructions He is linked to a broker who trades on behalf of investors To avail their services an account similar to a bank a/c has to be opened with the DP As per SEBI Regulations , financial institutions, banks, custodians, stock brokers etc can become DP’s However investors may choose DP’s of their choice and also deal with 1 or more DP;s at a time Securities, Issuers and Registrars and Share Transfer Agents: eg: an agreement between the depository , issuer of security and the designated registrar/ share transfer agents for the underlying security in the cases of issues like transfer of
- 8. Stock Exchanges andStock Brokers SE is an organised market for dealings in securities commonly referred as secondary market.one of its main functions is price discovery i.e to cause prices to reflect currently avalable information about a security SB are members of SE primarily engaged in 2 main activities i.e buy and sell securities for their clients charging a comm and as dealers or traders and dealers they buy and sell on their own a/c for trading gains Clearing Corporation/ Clearing House and Clearing Members A clearing corporation is a central organisation created to facilitate efficient , fast and economical settlement of transactions at a SE . it being an internal department of a SE is an independent entity The members of Clearing Corporation brokerage firms, banks or other financial institutions who are called as clearing members. Eg:all trades done at NSE & OTCEI are settled through
- 9. Banking system Depositoryessentially plays a dual role i.e of a depository and a limited bank It maintains current a/c’s for participants and executes fund transactions relating to securities transactions for participants Investors :may be individuals or corporates who have acquired shares either in primary market or in secondary market
- 10. Facilities offered byDepository System Opening of depository system Dematerialisation Rematerialisation Settlement of trades in dematerialised securities Account transfer Transfer ,transmission and transposition Pledge and hypothecation Redemption or repurchase Stock lending and borrowing Corporate action Account freezing Nomination Demat of debt instruments Dealing in govt securities
- 11. Opening of depositorysystem: SEBI has made compulsory trading of shares of all the companies listed in stock exchanges in demat form w.e.f 2nd jan 2002 Hence if the investor wants to trade in respect of the companies which have established connectivity with NSDL & CSDL, he may have to open a beneficiary a/c Beneficiary a/c is an a/c opened by the investor or a broker with a DP of his choice to hold shares in demat form and undertake scripless trading For opening demat a/c, the following documents are required: Demat opening form duly filled Address proof photograph Once a demat a/c is opened investor must sign an agreement with the DP and the investor will be allotted an account no. called as client identity No minimum balance is required The investor is provided with a transaction statement by his DP at regular intervals based on which the investor will know
- 12. Dematerialisation It meansconversion of the physical certificates into dematerialised holdings at the request of the investor Only shares registered in the name of the a/c holder are accepted for dematerialisation at the depository Procedure: First open a demat a/c or security a/c with any DP of investor’s choice Obtain a/c no. from his DP A dematerialisation request form (DRF) to be submitted to the DP who intimates depository of the request DP then submits the certificate along with the DRF to the registrar who confirms the demat request Registrar validates the request, updates records ,destroys the certificates and informs depository who in turn credits the DP a/c Depository participant updates the investor a/c and informs the investor Once the company is admitted into depository system, an ISIN (international securities identification number) is allotted by the depository. This no. is unique for each security of the company that is admitted in the depository The entire process takes about 15 days time. However when large no. of certificates are submitted from institutions, it takes upto 30 days for demat An investor may demat a part of his holdings and hold the balance in physical mode for the same security Demat shares are fungible because they do not have any distinctive or certificate numbers
- 13. Rematerialisation It meansconversion of demat holdings back into certificates If the investors wish to get the securities in physical form ,all he has to do is to request DP for remat Procedure : Investor must fill up a remat request form (RRF) The DP will forward the request to depository after verifying that the shareholder has the necessary balances Depository will in turn intimate the registrar RTA (registrar & transfer agent) will print the certificates and dispatch the same to the investor Settlement of trades in dematerialised securities The following stock exchanges have been admitted on the depository to conduct this activity NSE The SE , mumbai Calcutta Stock Exchange Delhi SE Ludhiana SE Bangalore SE Over the counter exchange of India Madras SE Inter connected SE Ahmedabad SE
- 14. Account transfer Depositorygives effect to all transfers resulting from the settlement of trades and other transactions that take place between various beneficial owners. Buying of securities: It is similar to buying of physical securities Procedure: Investor purchases securities in any of the SE connected to Depository through a broker Investor pays broker Broker pays clearing corporation On the pay – out day broker receives credit for securities He gives instructions to DP to debit clearing a/c and credit clients a/c Investor receives shares into his a/c Investor has to make sure that the broker transfers the securities into his a/c before the book closure Or else the company may hive corporate benefits to the broker Selling of securities: procedure Investor sells securities in any SE linked to depository through a broker Investor gives instruction to DP to debit his a/c and credit broker’ a/c Before the pay-in day, investor’s broker transfers the securities to clearing corporation Broker receives payment from SE Investor receives payment from broker Sale in demat form is similar to sale under physical mode Transfer: Depository being electronically linked to DP’s, issuer company or registrar & transfer agent and the clearing corporation of the SE, serves as an integrated set up for maintenance of investor a/c’s Hence , here transfer of securities occur merely by passing book entries in the records of the depository as and when instructed by the beneficial owners
- 15. Transmission: the claimantwill have to fill a TRF i.e a transmission request form supported by documents like death certificate, succession certificate etc The DP after verifying that the application is genuine, will transfer securities to demat a/c of claimant Demat transmission all the formalities can be completed in one go Transposition Security certificates for this purpose must be submitted along with TRF and DRF to the DP Pledge and hypothecation Depositories allow the securities placed with them to be used as collateral to secure loans and other credits Pledging demat securities is easier and advantageous than pledging physical securities Procedure: Both borrower (pledger) and lender (pledgee) must have depository a/c’s Details of securities to be pledged should be submitted by the pledger to his DP in a standard format Pledgee should confirm the request through his DP Once this is done, securities are pledged.then the financial transactions between pledger and pledgee are handled outside the depository system After the loan is repaid, the borrower can request for a closure of pledge by instructing his DP
- 16. Redemption or repurchase This occurs when the securities are surrendered to the issuer either on maturity or in pursuance of an option given by the issuer , in lieu of agreed consideration. The consideration may be in cash or new securities in lieu of existing securities Procedure: RRF (repurchase request form) is used instead of remat RF Client may be paid in cash or new securities in lieu of existing securities Stock lending and borrowing It involves lending and borrowing of securities under an approved scheme It is executed through approved intermediaries duly registered with SEBI under the securities lending act 1997 Intermediaries may deal in a depository system only through a special a/c known as intermediary a/c opened with a participant Corporate action Nomination Like shares in physical form, shares in electronic form also can be nominated Nomination can be made only by individuals holding beneficiary a/c Minor can nominate only through guardian It can be made demat a/c wise and not security wise
- 17. Demat of debtinstruments Debt instruments can also be held in demat form Instruments like bonds, debentures, CP’s, CD’s From oct 31st 2001, RBI has mentioned that banks and financial institutions shall make investment in deb and bonds only in demat form Investor need not open separate demat a/c for demat of debt or instruments Procedure for demat of debt instruments is same as that of equity shares The investor has to ensure that before the certificates are handed over to the DP for demat, he marks ‘surrendered for dematerialisation’ on the face of the certificates Dealing in govt securities A subscriber to govt securities who opts for SGL securities may open an SGL a/c with RBI or any other approved entity on its own a/c are held in SGL 1 a/c and investments held on a/c of other clients are held in SGL 2 a/c Safety features in depository To ensure safety to the investors the following measures are existing: DP cannot effect any debit or credit in the demat a/c of the investor the valid authorisation of the investor Regular reconciliation between DP and depositories Periodic inspection by depositories of the office of DP and registrar ( RTA) All investors have a right to receive their statement of a/c’s periodically from the DP If the depository goes bankrupt, the creditors of the DP will have no access to the holdings in the name of the clients of the DP. Such investors may however transfer their holdings to another DP Compulsory internal audit of operations of DP by practicing Chartered Accountant every quarter Steps to be taken for safe keeping and back up of data at all levels
- 18. National Securities DepositoryLimited National Securities Depository Limited (NSDL) is an Indian central securities depository based in Mumbai. It was established on 8 November 1996 as the first electronic securities depository in India with national coverage based on a suggestion by a national institution responsible for the economic development of India .It has established a national infrastructure using international standards that handles most of the securities held and settled in dematerialised form in the Indian capital market. Although India had a vibrant capital market which is more than a century old, the paper-based settlement of trades caused substantial problems such as bad delivery and delayed transfer of title. The enactment of Depositories Act in August 1996 paved the way for establishment of National Securities Depository Limited (NSDL), the first depository in India. It went on to establish infrastructure based on international standards that handles most of the securities held and settled in de-materialised form in the Indian capital markets. In the depository system, securities are held in depository accounts, which are similar to holding funds in bank accounts. Transfer of ownership of securities is done through simple account transfers. This method does away with all the risks and hassles normally associated with paperwork. Consequently, the cost of transacting in a depository environment is considerably lower as compared to transacting in certificates. In August 2009, number of Demat accounts held with NSDL crossed one crore. NSDL is promoted by Industrial Development Bank of India Limited (IDBI) - the largest development bank of India, Unit Trust of India (now, Administrator of the Specified Undertaking of the Unit Trust of India) and National Stock Exchange of India Limited (NSE) - the largest stock exchange in India. Some of the prominent banks in the country have taken a stake in NSDL. Other Shareholders Axis Bank Limited State Bank of India Oriental Bank of Commerce Citibank Standard Chartered Bank HDFC Bank Limited The Hongkong and Shanghai Banking Corporation Limited Deutsche Bank Dena Bank Canara Bank Union Bank of India
- 19. Stock Holding Corporationof India Limited Stock Holding Corporation of India Ltd (SHCIL), India’s largest custodian and depository participant based in Mumbai,Maharashtra. It was established in 1986 under the Government of India as public limited company. It is owned by the India's leading Banks and Financial Institutions such as, SU-UTI, IFCI Ltd., LIC, GIC, NIA, NIC, UIC, and TOICL.SHCIL is known for its online trading portal with investors and traders. It is also responsible for e-stamping system around India. Stock Holding Corporation of India (SHCIL), the country's first and one of the largest security
- 20. DEBT MARKET The debtmarket is any market where trading of debt instruments/ securities take place. A market where fixed income securities are issued and trade is called Debt Market Govt. needs large amount of money to carry out many welfare activities Govt. raise money by issuing govt. securities (.i.e. Debt Securities) Debt Market is vast in nature The turnover of Debt Market is greater than Equity Market in all over the world Total size of Indian Debt market is in the rang of $91 bn to $100 bn i.e. approximately 30% of Indian GDP
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- 22. Indian Debt MarketStructure Regulators SEBI, RBI Market segment The Sovereign Issuer The Public Sector The Private Sector Central Govt. State Govt. Issuers Instruments GOI dated securities, T-Bills, state Govt.securities index bonds, Zero compound bonds Investors RBI DFI Govt. Agencies & State Govt. Bodies PSU Commercial Bank, DFI Govt. bonds, Debentures PSU bond, Debentures, CP CD, Debentures, Bonds Banks Pension Funds FII Corporates Individuals Provident Funds Insurance companies, Trusts, Mutual Funds Corporate Pvt. Sectors Banks Bonds, Debentures, CP Bonds, Debentures, CD & CP
- 23. Market Segment Market Segment Govt. Securities PublicSector Unit Bond Corporate Securities
- 24. PARTICIPANTS Participants Central & StateGovt. RBI Primary Dealer Public Sector Undertaking Banks Mutual Funds Foreign Institutional Investors Charitable Institutes & Trusts
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- 27. Central Govt. Securities •T-Bill •CallMoney •CD •CP Government Securities Market (G-Sec Market): It consists of central and state government securities. It means that, loans are being taken by the central and state government. It is also the most dominant category in the India debt market. Features of Government Securities Debt Instru -ment Issued By RBI Maturity Fixed rate Of Interest Issued at Face Value Liquidity Safety investment Exemption on Tax IIs are the main participa nt Features of Government Securities
- 29. Certificates ofDeposit CDs are short-term borrowings issued by all scheduled banks and are freely transferable by endorsement and delivery. Introduced in 1989 Maturity of not less than 7 days and maximum up to a year. FIs are allowed to issue CDs for a period between 1 year and up to 3 years Subject to payment of stamp duty under the Indian Stamp Act, 1899 Issued to individuals, corporations, trusts, funds and associations They are issued at a discount rate freely determined by the market/investors Commercial Papers Short-term borrowings by corporates, financial institutions, primary dealers from the money market Can be issued in the physical form (Usance Promissory Note) or demat form Introduced in 1990 When issued in physical form are negotiable by endorsement and delivery and hence, highly flexible Issued subject to minimum of Rs. 5 lacs and in the multiple of Rs. 5 lacs after that Maturity is 7 days to 1 year Unsecured and backed by credit rating of the issuing company Issued at discount to the face value
- 30. Call money market Is an integral part of the Indian money market where day-to-day surplus funds (mostly of banks) are traded. The loans are of short-term duration (1 to 14 days). Money lent for one day is called ‘call money’; if it exceeds 1 day but is less than 15 days it is called ‘notice money’. Money lent for more than 15 days is ‘term money’ The borrowing is exclusively limited to banks, who are temporarily short of funds. Call loans are generally made on a clean basis- i.e. no collateral is required The main function of the call money market is to redistribute the pool of day-to-day surplus funds of banks among other banks in temporary deficit of funds The call market helps banks economise their cash and yet improve their liquidity It is a highly competitive and sensitive market It acts as a good indicator of the liquidity position Call Money Market Participants Those who can both borrow and lend in the market – RBI , banks and primary dealers Once upon a time, select financial institutions viz., IDBI, UTI, Mutual funds were allowed in the call money market only on the lender’s side These were phased out and call money market is now a pure inter-bank market (since August 2005) Bill Market Treasury Bill market- Also called the T-Bill market These bills are short-term liabilities (91-day, 182-day, 364-day) of the Government of India It is an IOU of the government, a promise to pay the stated amount after expiry of the stated period from the date of issue They are issued at discount to the face value and at the end of maturity the face value is paid The rate of discount and the corresponding issue price are determined at each auction RBI auctions 91-day T-Bills on a weekly basis, 182-day T-Bills and 364-day T-Bills on a fortnightly basis on behalf of the central government
- 31. Players in GovernmentSecurities Central & State Government Commercial Banks, RBI, SBI, Cooperative Banks. Specialized Financial Institutions Like:- IDBI, IFCI, SFC etc. Joint Stock companies. Non Banking Financial Companies. Investing institutions like:- LIC, GIC & UTI. Provident Funds Individuals (w.e.f. Dec., 2001)
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- 33. It consistsof Financial Institutions bonds, Corporate bonds and debentures and Public Sector Units bonds. These bonds are issued to meet financial requirements at a fixed cost. Features of Bond Instruments 1. Higher Risky 2. High Rate of Return 3. Taxable Bonds issued by corporations or government are usually taxable Bonds issued by state governments or municipalities are usually exempt from tax 4. Maturity 5. INTEREST RATES
- 34. Secondary Market ForDebt Market Trading Platform Trading System Trading Settlement Clearing House
- 37. PRIMARY ISSUANCE PROCESS Stategovernment securities Issuance process of T.bills Issue in conversion of T.bills Issue of securities through tap sale Issue of securities with Pre announced Coupon Rate Issue Through Auction
- 38. Market Segment Primary marketSecondary market
- 39. PRIMARY MARKET Itis that market in which shares, debentures and other securities are sold for the first time for collecting long term capital. This market is concerned with new issues. Therefore the primary market is also called “new issue market”. In this market, the flow of funds is from savers to borrowers. Hence, it helps directing in the capital formation of the country
- 40. Secondary Market Segments Secondarymarket NSE BSE BSE deal with debt marketNSE deal with debt market Wholesale debt market Retail debt market
- 41. Clearing and Settlement Clearing Clearing is all steps of the post-trade processes apart from the final settlement — i.e. apart from the final payment and change in ownership. Settlement Settlement is the last step in the post-trade process. Settlement is a two way process which involves transfer of funds and securities on the settlement date. Salient features of Clearing and Settlement in Debt Market segment Clearing and settlement of all trades in the Debt Market shall be subject to the Bye Laws, Rules and Regulations of the Capital Market Segment and such regulations, circulars and requirements etc. as may be brought into force from time to time in respect of clearing and settlement of trading in Debt Market (Government securities). Settlement in Debt Market is on T + 2 Rolling basis viz. on the 2nd working day. For arriving at the settlement day all intervening holidays, which include bank holidays, NSE holidays, Saturdays and Sundays are excluded. Typically trades taking place on Monday are settled on Wednesday, Tuesday's trades settled on Thursday and so on. NSCCL shall compute member obligations and make available reports/data by T+1. The existing clearing bank accounts shall be used for funds settlement. STRIPS Separate Trading of Registered Interest and Principal Securities (STRIPS) It is that whose interest and principal portions of the security have been separated, or "stripped"; these may then be sold separately in the secondary market. Example--a Treasury note with 10 years remaining to maturity consists of a single principal payment, due at maturity, and 20 interest payments, one every six months over a10 year duration. When this note is converted to STRIPS form, each of the 20 interest payments and the principal payment becomes a separate security. Features of STRIPS STRIPS let investors hold and trade the individual interest and principal components of eligible Treasury notes and bonds as separate securities. STRIPS are popular with investors who want to receive a known payment on a specific future date. It is issued at discount. These are zero coupon instrument with single maturity value.