INTRODUCTION

DEPOSITORY
The depositories are important intermediaries in the securities market that now deals in scrip-less trading. In India, the DEPOSITORY ACT, 1992 defines a depository as A company formed and registered under the Companies Act, 1956 and which has been granted certificate of registration under sub-section (IA) of section 12 of the Securities and Exchange Board of India Act, 1992.

Therefore, most of the intermediaries like Merchant Bankers, CR Agencies, R & T Agents, Depositories, etc who deal in the securities market are registered and regulated by SEBI. A separate Code of Conduct is prescribed for each intermediary, which is regulated by SEBI. An investor should be very careful while selecting an intermediary. He should choose only that intermediary which is subject to regulatory discipline of SEBI. While selecting an intermediary, one should also take into account the following factors which are of prime importance when services are concerned since these Institutions/ Intermediaries were setup for smooth functioning of the securities market. They enable the issuers of securities to interact with the investors in the primary and secondary market. The factors are: Cost of Services provided by Intermediary Quality of Services provided by Intermediary Track record of Intermediary Location of Intermediary Investors / Clients Convenience A depository is a company where shares of an individual are held in electronic form at the request of the holder. This eliminates the physical form of holding.

A depository can provide various services demanded by the investors relating to recording of allotment of securities in the DEMAT form, transfer of ownership of securities, Rematerialisation and various other services which will be discussed latter.

So a depository is just another form of a custodial service, the only difference being that the securities are held in an electronic form.

Just as one opens a bank account in order to avail of the services of a bank, an investor opens a depository account with a depository participant in order to avail of depository facilities. A depository is very much similar to a bank in many of its operations. For better understanding of a depository system let us differentiate between a bank and a Depository. BANK / DEPOSITORY (An Analogy)

BANK Holds funds in accounts Transfers funds between accounts Transfers without handling cash Safekeeping of money

DEPOSITORY Holds securities in accounts Transfers securities between accounts Transfers securities Safekeeping of securities without handling physical

BANK / DEPOSITORY (The Difference) BANK Either of holders can sign instructions Minimum balance to be maintained Entitled for interest Uses balances in accounts Nomination is kept confidential DEPOSITORY All joint holders to sign instructions No minimum balance required No interest Doesnt uses the balances in accounts Signature and photograph of the nominee to be provided

NEED FOR DEPOSITORY SYSTEM

India has the largest number of listed companies, investor population and substantial volume of trade in the world today. As a result of this investors have to face a lot of problems relating to: Bad delivery. Delay in transfer of shares. Duplicate / Fake / Forged certificates. Loss in transit / Theft / Mutilation. Large paperwork. Disputes on corporate actions. Longer settlement cycles. Heavy stamp duties on transfer.

To obviate these problems the Depositories Act 1996 was enacted to provide for the establishment of depositories with the objective of ensuring free transferability of securities with speed accuracy and safety by making: -

a) Securities of public limited companies freely transferable subject to certain exceptions. b) Dematerializing the securities in the depository mode.

c) Provision for maintenance of ownership records in a book entry form.

ADVANTAGES OF DEPOSITORY SYSTEM: Share certificates, on dematerialization, are cancelled and the same will not be sent back to the investor. The shares, represented by dematerialized share certificates are fungible and, therefore, certificate numbers and distinctive numbers are cancelled and become non-operative. The depository system and dematerialized securities offer paperless trading and transfer of shares through the use of technology. It enables processing of share trading and transfers electronically without involving share certificates and transfer deeds, thus eliminating the paper work involved in scrip-based trading and share transfer system. Transfer of dematerialized securities is immediate and unlike in the case of physical transfer where the change of ownership has to be informed to the company in order to be registered as such, in case of transfer in dematerialized form, beneficial ownership will be transferred as soon as the shares are transferred from one account to another. The investor is also relieved of problems like bad delivery, fake certificates, shares under litigation, signature difference of transferor and the like. There is no need to fill a transfer form for transfer of shares and affix share transfer stamps. There is saving in time and cost on account of elimination of posting of certificates. The threat of loss of certificates or fraudulent interception of certificates in transit that causes anxiety to the investors, are eliminate. Besides the convenience of "anytime" transfer of securities, the on-line facility has increased the users' options in utilizing securities received for subsequent transactions, particularly, for meeting delivery obligations consequent to sale of securities. The introduction of on-line, inter-depository transfers also enables investors to reduce the counter-party risk especially for high value transactions, as funds and securities

can move simultaneously - where funds will move through the banking system and securities move on-line, through depositories. The securities received in one payout on one depository can be made available for an immediate subsequent pay-in through the other depository. The securities received in the NSDL/CDSL account would be immediately available to meet the pay-in obligations, using the multiple, convinent pay-in options like early pay-in, normal pay-in, BO-level pay-in, and auto pay-in available in THE NSDL/CDSL SYSTEM

DEPOSITORY SYSTEM

This section deals with the depository system prevailing in India and Abroad. The basic functions of depository system all over the world remains the same, the only difference is in their regulatory body which will differ country to country due to various reasons like different tax laws, bye rules, regulatory body, etc.

In this section I, have discussed in detail the depositories operating in India. Depository System Abroad has also been discussed in brief carefully highlighting the important features. I have not stressed much on the depositories abroad as this is out of scope of this report.

DEPOSITORY SYSTEM IN INDIA

As all of you are aware is a depository, its advantages and problems associated with it, now understand in detail the working of depository in India.

TYPES OF DEPOSITORIES IN INDIA

Presently there are only 2 Depositories in INDIA.

1) National Securities Depository Limited (NSDL) 2) Central Depository Services (India) Limited (CDSL) These depositories provide services to its investors through their respective DPs.

NSDL
The National Securities Depository Limited (NSDL) is an organization established to provide electronic depository facility for securities traded in the equity and the debt market. NSDL is an organization promoted by the Industrial Development Bank of India (IDBI), Unit Trust of India (UTI)andthe National Stock Exchange Limited (NSE).

Securities Exchange Board of India (SEBI) has registered NSDL on June 7, 1996 as India's first Depository to facilitate settlement of securities in dematerialized form. NSDL had commenced its operations on November 6, 1996.

CDSL

Central Depository Services of (India) Ltd. was the second depository to be granted the commencement certificate by SEBI on 8 February1999. Bombay Stock Exchange, Inaugurated on 15 July 1999 was setup in association with BOI, BOB, HDFC BANK, and SBI.

Saturday, December 14, 2002 marked the beginning of a new phase in the history of the depository system in India with the commencement of "on-line inter-depository transfers". This facility enables transfer of securities between the two depositories any time during the specified business hours. Their feature-set is highly modern, and ahead of many other depositories in India and abroad. Almost all securities settlement is done using these depositories. NSDL has one of the lowest charge structures amongst depositories in the world. Both the depositories are interconnected. It is possible to transfer shares from one depository to another. This is known as INTER-DEPOSITORY TRANSFERS.

The functions of both the depositories are the same but major portion of the work is handled by NSDL therefore NSDL has been discussed in detail.

MEASURES TAKEN BY SEBI

There are several measures that were taken by SEBI in order to promote trading and settlement in dematerialized way. ISSUE OF DIRECTIVE: -The SEBI issued directive to the companies included in the list of securities for dematerialization to effect compulsory dematerialized trading for all investors and institutional investors on the scheduled dates announced and to sign agreements and complete all formalities with both the depositories and establish connectivity on time so that dematerialization could proceed on schedule. COMPULSORY TRANSFER AND DEMAT: -Companies whose shares are being traded compulsorily in dematerialized form by all investors, are required to compulsorily provide for transfer and dematerialization of securities simultaneously. This will help the investors in reducing the time taken for transfer of shares. AMMENDMENT OF SEBI REGULATION: -The SEBI (Depositories and Participants) Regulation, 1996 was amended to include registrars to an issue or share transfer agents in the eligible category to become a depository participant. DIRECT ELECTRONIC CONNECTIVITY: -The branch offices of DPs that are handling more than 5000 accounts shall either have direct electronic connectivity with the depository or with office of depository participant that is connected live to the depository. This would adequately equip the infrastructure of the depository participant branches so that the reach of the DPs could be increased and the branches could serve the investors better, while ensuring that the branches have adequate control systems. SAME R & T AGENTS TO BE APPOINTED: -Every company is required to appoint the same registrars and share transfer agents for both the depositories. ACCEPTANCE OF PARTIAL DEMAT REQUEST: -The registrars and share transfer agents are required to accept partial dematerialization requests and will not reject or send back the complete lot of dematerialization request to the DPs in cases

where only a part of the request was to be rejected. If a DP has sent information about dematerialization electronically to a Registrar but physical shares are not received, the registrar will accept the dematerialization request and carry out dematerialization on the indemnity given by the DP and proof of dispatch of document given by DP SETTING UP A STANDING COMMITTEE: - co-chaired by the Managing Directors of NSDL and CDSL was formed which will meet at least once a month to resolve issues between DPs, registrars and depositories which may arise from time to time. The other members of the committee are SHCIL, HDFC Bank, Standard Chartered Bank, Integrated Enterprises (I) Ltd Karvy Consultants, ICICI Ltd. PROMOTION OF CONCEPT OF DEPOSITORY: -CDSL and NSDL shall be required to persuade major DPs to open branches in cities where DP services are not available. REDUCED SETTLEMENT CYCLE: - The settlement cycle has been reduced from T + 3 in April 2002 to T + 2 in April 2003 within a period of two years. There has been a drastic change in the trading and settlement of funds due to this reduced period which was earlier T + 5. Now SEBI is planning to introduce T + 1 within a short period.

COUNTERPARTY RISK MINIMISED: -NSCCL is setup in case either of the party i.e., buyer or the seller makes default in making payment or delivery of securities. NSCCL guarantees the execution of the trade

THE FUNCTION OF A DEPOSITORY The principal function of a depository is to provide a facility for investors to hold and transfer securities in dematerialised form and in book-entry form. The securities are transferred by debiting the transferors depository account and crediting the transferees Depository account company which hold funds or securities deposited by others, and where exchange of these securities A take place. Functions: Bank or Safekeeping: Securities may be in dematerialized form, book-entry only form (with one or more "global" certificates), or in physical form immobilized within the depositories. Deposit and Withdrawal: Supporting deposits and withdrawals involves the relationship between the transfer agent and/or issuers and the deopsitories. It also covers role within the underwriting process or listing of new issues in a market. Dividend, interest, and principal processing, as well as corporate actions including proxy voting Paying and transfer agents, as well as issuers are involved in these processes, depending on the level of services provided by the depositories and its relationship with these entities. Other services: Depositories offer additional services aside from those considered core services. These services include Securities lending and Borrowing, Matching, and Repo Settlement Pledge - Central depositories provide pledging of share and securities. Every country is required to provide legal framework to protect the interest of the pledgor and pledge.

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Terminologies

Dematerialization-A process of converting physical shares into dematerialized shares. Rematerialization - A process of converting dematerialized shares into physical shares. Depository - An organization which holds securities of investors in electronic form. Depository Participant - An agent of depository to act as an interface between the investor and the depository. Beneficial Owner The investor who enjoys the benefits of owning the securities. Registered Owner - A depository in whose name the securities are registered Beneficiary Account: -A beneficial owners account is an ownership account. The holder/(s) of securities in this type of account owns the securities Clearing member account -This account is opened by a broker or by a clearing member for the purpose of settlement of trades executed on a recognized stock exchange. Clearing house/corporation Clearing Corporation/House is an entity responsible for clearing and settlement of trades done by clearing members on a Recognized stock exchange. A Clearing Corporation / Clearinghouse of a stock exchange is admitted to the depository system for clearing and settlement of securities traded on the irrespective stock exchanges. For electronic settlement of securities in demat form, the concerned CC/CH of the stock exchange needs to have electronic connectivity with the depository

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