DEPOSITORIES

Depositories are governed by the Depositories Act, 1996 which came into force on 20th
September 1995, thereby giving it a retrospective effect.

Definition

Statutory Definition: According to section 2(e) of the Depositories Act, 1996, A Depository
means a company, formed and registered under the Companies Act and which has been
granted a certificate of registration under section 12 (1A) of Securities and Exchange Board of
India Act (SEBI Act), 1992- without which no depository, custodian depository participant,
stock broker etc. can buy, sell or deal in securities.

Ordinary definition: A Depository is an organisation where the securities of an investor are

held in electronic form at his request through the medium of a Depository Participant (DP).
The relationship between the DPs and the depository is governed by an agreement made
between the two under the Depositories Act.

 The securities can be shares, debentures, mutual funds, derivatives etc. ( rest mentioned in
regulation 28 of SEBI Regulations 1996.
i. [A derivative is basically a financial instrument whose value is derived from the
value of an underlying security. The derivative itself is a contract between two or
more parties based upon the asset or assets. Its price is determined by fluctuations
in the underlying asset. The most common underlying assets include stocks, bonds,
commodities, currencies, interest rates and market indexes.
 There are two Depositories – 1) National Securities Depository Limited (NSDL) 2) Central
Depository Service (India) Limited (CDSL)
 Depository Participants are agents or representatives, who act as intermediaries between the
investors and depositories. They maintain the investors security account balance and
intimates him about the status of the securities. It facilitates the investors to open a De-mat
account. The largest and first DP in India is Stock Holding Corporation of India Limited
(SHCIL) registered with NSDL.
 The registration of a depository as well as a DP is dealt with under the SEBI (Depositories
and Participants) Regulation 1996.

 SERVICES PROVIDED BY THE DEPOSITORIES:

i. Dematerialization.
ii. Rematerialization
iii. Transfer of securities
iv. Change in beneficial ownership
v. Settlement of trades
vi. Corporate action benefits to the DP Accounts
vii. Pledging & Unpledging of securities.
 viii. Services related to the transaction of securities.
ix. Maintaining record of securities
x. Settlement of off-market transactions

REGISTRATION OF DEPOSITORIES

Step I: Grant of certificate of Registration

 Regulation 2 (g)- “sponsor” means any person or persons who, acting alone or in
combination with another person proposes to establish a depository and undertakes to
perform the obligations of a sponsor under these regulations.
 It is provided under regulation 3 of the SEBI (Depositories and Participants) Regulation
1996. The application for the grant of certificate of registration should be made by the
sponsor in Form A accompanied by the draft bye-laws of the depository that is proposed to
be set-up, along with a fee of Rs. 50,000 payable by way of a DD or bankers cheque to
SEBI, Mumbai. The application by the sponsor shall be considered only if it follows
regulation 6 which states that only a Public financial institutions, scheduled commercial
banks, foreign banks operating in India with approval of RBI, State financial corporations,
custodians, stock exchange, body Corporate a body corporate engaged in providing
financial services etc. and also the applicant must be a fit and proper person according to
the SECURITIES AND EXCHANGE BOARD OF INDIA (INTERMEDIARIES)
REGULATIONS, 2008- the criteria is
(a) integrity, reputation and character;
(b) absence of convictions and restraint orders;
(c) competence including financial solvency and net worth
 If there is any anomaly regarding the application, it can be rejected but only after giving an
opportunity to the sponsor to rectify the same within 30 days. This period can be extended
if necessary to enable the sponsor to remove the objections stated by the board.
 If all the qualifications in regulations 3 and 6 along with FORM A are satisfied, then the
certificate shall be granted in FORM B to the depository under regulation 7. And the
depository shall pay the registration fee as mentioned in PART A of the Second Schedule
(1crore by DD or bankers cheque payable to SEBI) within 15 days of the intimation. An
annual fee of 50 lakhs must be paid by the depository.

Step II: Grant of Certificate of commencement of Business

Requisites for grant of certificate of commencement of business to a Depository by SEBI:

 As per regulation 10, the application for grant of certificate of commencement of business
(FORM C) has to be made within one year of receiving the certificate of registration under
regulation 7. Similar to the provision mentioned above if all the requisites are fulfilled the
certificate shall be granted otherwise an opportunity is given in writing to the applicant to
remove the discrepancies within 30 days.
 R. 12- The Board has the power to call upon the depository or an authorised representative
in person for clarifications regarding matters relevant to the grant of certificate.
 The considerations are provided under regulation 13 of the SEBI (Depositories and
Participants) Regulation 1996.
a) The depository should have a net worth of not less than 100 crores.
b) The bye-laws should be approved by the board.
c) the automatic data processing systems of the depository have been protected against
unauthorised access, alteration, destruction, disclosure or dissemination of records
and data;
d) the network through which continuous electronic means of communications are
established between the depository, participants, issuers and issuers’ agents is secure
against unauthorised entry or access;
e) the depository has established standard transmission and encryption formats for
electronic communications of data between the depository, participants, issuers and
issuers’ agents;
f) the physical or electronic access to the premises, facilities, automatic data processing
systems, data storage sites and facilities including back up sites and facilities and to
the electronic data communication network connecting the depository, participants,
issuers and issuers’ agents is controlled, monitored and recorded;
g) the depository has a detailed operations manual explaining all aspects of its
functioning, including the interface and method of transmission of information
between the depository, issuers, issuers’ agents, participants and beneficial owners;
h) the depository has established adequate procedures and facilities to ensure that its
records are protected against loss or destruction and arrangements have been made
for maintaining back up facilities at a location different from that of the depository;
i) the depository has made adequate arrangements including insurance for
indemnifying the beneficial owners for any loss that may be caused to such
beneficial owners by the wrongful act, negligence or default of the depository or its
participants or of any employee of the depository or participant; and
j) the grant of certificate of commencement of business is in the interest of investors
in the securities market.
 The board shall conduct physical verification of the infrastructure facilities before granting
the commencement of business certificate. If the board is satisfied, then it shall grant the
certificate in Form D. In case the board is nto convinced, they can direct the depository to
conform to the matters mentioned Or they can reject the application after giving the
applicant an opportunity of being heard. Such a rejection along with the grounds shall be
notified within 30 days of taking such decision.

REGISTRATION OF PARTICIPANT

1) initial registration

 Regulation 16- The application shall be made to the Board through the Depository
concerned in FORM E along with the fee of Rs. 15,000. The depository forwards the
application to the Board within 30 days along with recommendations and certifies that the
applicant has fulfilled all the eligibility criteria as per their bye-laws.
 The certificate is granted if the participant is a fit and proper person, has adequate
infrastructure, systems, safe guards and trained staff to carry on activity as a participant and
follows the criteria of the depository. In other circumstances, an opportunity is given for
rectification within 30 days of communication in this regard.
 According to SEBI guidelines, Public financial institutions, scheduled commercial banks,
foreign banks operating in India with approval of RBI, State financial corporations,
custodians,
 stock brokers) etc can be DPs. (net worth-min 50 lakhs and the aggregate value of
portfolio of securities of BO through him should not be more than 100 times the
net worth of the stock broker- regulation 19. A stock broker can be a participant for
more than one depository, but he has to separately fulfil the above-mentioned
criteria. If the net worth is 10 crores, then the aggregate value is not applicable.
 Non- banking finance company- net worth 50 lakhs.
 Registrar to a issue or share transfer agent- net worth 10 crores who has a certificate
of registration under sec 12(1) of the Act.
 Once the initial certificate of registration is granted, an annual fees of Rs.1000 is to be paid
and it is valid for five years of its issue to the applicant.

2) Permanent Registration

 A participant who has been granted an initial registration certificate has to apply for the
permanent registration certificate before three months of expiry of the former, through the
depository in which it is a participant. The application has to be accompanied by the
application fees of Rs.15,000 as under PART A of Second Schedule in the manner
mention in PART B.
 This application is dealt with in the same manner of the initial application. If satisfied a
permanent registration certificate is granted in FORM F and intimated to the applicant and
within 15 days of the intimation the registration fees of 2 lakhs had to be paid.
HOW TO CREATE A DEMAT ACCOUNT/ PROCESS OF DE-MATERIALISATION

 De-materialisation is the process by which physical certificates of an investor are converted

to equivalent number of securities in electronic form.
 An investor can have multiple De-mat accounts. A De-mat accounts is opened on the same
lines of that of a bank account. Prescribed forms available with the DP are filled. Standard
agreements are to be signed by the client and the DP which will have the rights and
obligations of parties as prescribed by provisions of the Depositories Act, 1996, SEBI
(Depositories and Participants) Regulations, 1996, Rules and Regulations of Securities and
Exchange Board of India (SEBI), Circulars/ Notifications/Guidelines issued there under,
Bye Laws and Business Rules/Operating Instructions issued by the Depositories and
relevant notifications of Government Authorities as may be in force from time to time.)

1. The interested investor has to approach any DP registered with one of the depositories.
2. Dematerialisation Request Form (DRF) along with the share certificates in the name of
the investor are surrendered for dematerialisation (sec. 6). An acknowledgement from
the DP on handing over the share certificate(s) must be obtained.
3. The DP will verify that the form is duly filled in and the number of certificates, number
of securities and the security type (equity, debenture etc.) are as given in the DRF. The
DP will scrutinize the form and the certificates. This scrutiny involves the following:
a) Verification of Client's signature on the dematerialisation request with the
specimen signature (the signature on the account opening form). If the signature
differs, the DP should ensure the identity of the client.
b) Compare the names on DRF and certificates with the client account.
c) Paid up status
d) ISIN (International Securities Identification Number) – for every ISIN a
separate DRF must be filled. ISIN is a unique 12-digit alphanumeric
identification number allotted for a security (e.g.- INE383C01018). Equity fully
paid up, equity-partly paid up, equity with differential voting /dividend rights
issued by the same issuer will have different ISINs.
e) Lock - in status. (When a company initiates an initial public offering, there may
be locked-in stipulations on shares held by founders, promoters, and other early
backers of the company. This is to prohibit these people, as insiders within the
company, from selling or transferring shares during the IPO period. This
period might last 90 days or even several years from the time of the public
offering. As insiders, founders and other early shareholders can naturally be
privy to information about the company that could be used for an unfair
 advantage if they were permitted to trade those shares during an IPO. A locked-
in period mitigates the possibility of such manipulation by restricting their
trades.)
f) Distinctive numbers (it is to differentiate the particular serial Number of shares,
your distinctive number shows from which number to which serial number you
bought.)
4. The DP electronically transmits the DRF to the depository.
5. The DP also sends the physical DRF and share certificates to the Company/RTA. If
the form and security count is in order, the DP will generate Dematerialisation Request
Number (DRN) and shall send the electronic request to the Company’s RTA.
6. The depository electronically transmits thee De-mat request to the company/ RTA.
7. The company checks the authenticity of the request and confirms it to the depository.
The company/issuer/RTA replaces the name of the investor with the name of the
depository as the registered owner of the securities in its records
8. The depository confirms dematerialisation to the DP.
9. Investors account with the DP is credited with shares in electronic form. Further the
DP will hold the shares in the dematerialised form on behalf of the shareholder as
Trustee and the shareholder will become beneficial owner of these dematerialised
shares.
10. DP sends statement of transaction to the investor.

 Various documents must be submitted for creating a De-mat account can vary depending
upon who the client is, individual, HUF, Corporate, Proprietary firms etc.
 According to the most recent amendment in the Regulation 40 SEBI (Listing Obligations
and Disclosure Requirements) Regulations, 2015 on 8th June 2018, except in cases of
transmission or transposition of securities, requests for effecting transfer of securities will
only be processed if the securities are held in the dematerialized form with a depository.
This amendment will come into force from 5th December 2018.

REMATERIALIZATION – Conversion of electronic shares into physical shares.

1. The beneficial owner sends the request for Rematerialization (RRF) to the depository
participant.
2. DP intimates the depository of such request electronically.
3. Depository confirms the Rematerialization request to the company.
4. Company updates the account, prints share certificates and confirms it to the depository.
5. Depository updates the account and send it to the DP.
6. Company dispatches the share certificates/ security certificates to the holder thereof.
7. DP also sends the intimation about Rematerialization to tis client.

THE BENEFITS OF TRADING THROUGH A DP AND DEPOSITORY ARE

ENUMERATED BELOW:

i. A safe and convenient way to hold securities;

ii. Immediate transfer of securities;
iii. No stamp duty on transfer of securities;
iv. Elimination of risks associated with physical certificates such as bad delivery, fake
securities, delays, thefts etc.
v. Reduction in paperwork involved in transfer of securities;
vi. Reduction in transaction cost;
vii. No odd lot problem, even one share can be traded;
viii. Nomination facility;
ix. Change in address recorded with DP gets registered with all companies in which
investor holds securities electronically eliminating the need to correspond with each of
them separately;
x. Transmission of securities is done by DP eliminating correspondence with companies;
xi. Automatic credit into demat account of shares, arising out of
bonus/split/consolidation/merger etc;
xii. Holding investments in equity and debt instruments in a single account.