demat services in India

Depository Participant Department

1 Meaning of Depository:
The depository act 1996 defines a depository to mean “ a co formed and registered under companies act 1956” and which has been granted certificate of registration under sub-section IA of section 12 of the SEBI act 1992.
The term depository means a place where something is deposited for safekeeping, a bank in which other deposits, funds or other deposit securities, usually under the term of specific depository agreement. Depository means one who receives a deposit of money, securities instrument or other properties a person to whom something is entrusted, or trusty, person or a group entrusted with the preservation or safekeeping of something a depository is an organization where the securities of share holders are held in the electronic form, depositories hold electronic custody of securities on the settlement days.
National securities depository limited (NSDL) promoted by IDBI. NSDL is the first depository of the country. Later on central depository services ltd. CDSL was promoted by BSE, bank of India, Bank of Baroda etc.






2 The Depository System:
Depository system is concerned with conversion of securities from physical to electronic form, settlement of trades in electronic segment, electronic transfer of ownership of share and electronic custody of securities, the system results in instant transfer as compared to 6 & 8 weeks under physical mode.
In depository system, there is no physical scrip & as such most of the problems of fraudulent transfer, take certificate share loss etc. virtually disappear. Electronic transfer is faster in comparison to paper work. Stamp duty is exempted and turns over and liquidity enhances manifold.

3 In India only TWO Depository have got Registration from SEBI:
v NSDL
It is first depository in India, registered on 7th June 1996 with SEBI and commenced operations on 8th Nov 1996. 4 major institutions perform NSDL - Unit Trust of India, Industrial Bank of India, National Stock Exchange, State Bank of India. The depository has now become one of the critically important institutions providing infrastructure support of Indian Capital Market. Within 4 full years of operations, its investor’s accounts rose to 37 lakh and the number of depository participants connected to it are 189. this shows the spread of awareness about the depository system in general and NSDL in particular.




v CDSL
It is the second depository in India, secured its certificate of commencement of business on Feb 8 1999 from SEBI. The BSE Stock Exchange in association with Bank of India Promotes CDSL, Bank of Baroda, State Bank of India and HDFC bank. The BSE has been involved with this venture right from the inception and has contributed overwhelmingly to the fruition of the project.
Over 2 years of its operations 144 depository participants are registered with it and 77000 investor accounts. The main objective of CDSL is of accelerate scrip less trading and to create a competitive environment, which will be responsive to use interests and concern.
A depository participant is representative agent of depository system. As per SEBI guidelines, financial institutions, banks etc can become the participant in the depository. Accordingly every participant is to be registered with SEBI and obtain a certificate registration under SEBI.

4 Functions of depository participant:
Depository participants are required to perform certain function as laid down in the rules and by laws of NSDL.
ü Account opening and its administration.
ü Dematerialization – conversion of physical holdings into electronic form.
ü Materialization - Conversion of electronic holdings into physical form.
ü Clearing and settlement of trades.
ü Daily report generation of beneficiary accounts and downloading the same to NSDL.
ü Daily uploading database of all accounts fro NSDL.
ü Daily reconciliation.
ü Record and bookkeeping.
ü Auditing system security.
ü Grievance handling.
ü Uploading and disseminating all the latest updated info about demat to all its beneficiary account holders.
ü New issuer allotments – IPO (Initial Public Offerings).
ü Facilitating pledging of securities etc.

5 Procedure for becoming a depositary participant:
The body corporate in order to become a depositary participant has to complete the necessary formalities such as.
I. Security deposit and initial fee payable.
II. Submit the form ‘E’ asks for details information about organization.
III. Form ‘E’ asks for detailed information about the organization.
IV. Its infrastructure, capacity insurance detail, MOU, Articles of association ltd.

6 DP of LSE Securities Ltd.:
Dp of LSE securities ltd. is established on 8 August 2000. Depositary Participant (DP) is a market intermediate where the securities of shares holders are held in electronic form at the request of the shares holders through the medium of participation. The main function of DP is dematerialization of shares and their maintenance on behalf of the investors in electronic form. The LSE securities limited is DP of both NSDL and CDSL. It has its branches at Ludhiana, Jalandhar and Amritsar. Establishment at Jalandhar 25 March and Amritsar 25 April 2003. At the present time LSESL DPs has more than 8500 investors.



Advantages of having a Demat account with the LSE securities Ltd.
ü Subsidiary of the Ludhiana Stock Exchange Association Ltd.
ü Focus on Stock Markets.
ü Future dated instruction.
ü Quicker Market Transactions.
ü Pledge facility.
ü Automatic credit.
ü Transaction Statement.
ü Transportation cum Demat facility.
ü Special scheme.
ü Nomination facility

7 New Venture of LSESL:

7.1 The Online Real Time Depository:

According to the news in “Hindustan Times” dated July 11, 2000, the Ludhiana Stock Exchange has decided to start ‘Online real time depository’ service at an estimated investment of Rs. 40 lakh by the end of this month. Mr. Manjit Singh (Executive Director) said the LSE Securities Ltd. hoped to get an estimated 5000 account in just one year of its operation significantly, the new service by the LSE comes close on heels of securities exchange board of India’s direct instruction on compulsory dematerialization of shares. The new project will be of great help for those dealing with LSE as the workload on existing depository participant offices for opening dematerialized accounts. Due to lack of online real time deposit services, the processing of dematerialization of shares takes longer besides causing errors. He added “We shall provide prompt services because one depository participant will be directly linked with NSDL.

7.2 Recent Developments:

ü Screen Based Trading
ü Depository System
ü Corporate Membership of NSE
ü Corporate Membership of BSE
ü Trading of Bigger Stock Exchanges


3.7.3 Trading Mechanisms

The operation of purchase and sell scrips are as follows:-

Walks to any known broker / sub broker


On the LSESL scan the entire counter


It will display five best bidding after for all the scrips listed


Traded on LSESL


Decide to buy or sell


Ask your broker to deal on your behalf


Deals gets confirmed automatically at the best price for you


Make the payment/margin money/share certificate along with
(TD) before pay in date


Collect the same confirmation slip


Visit the same counter in LSESL a on pay out and collect delivery payment
(written 10 days)



8 Two Main Agencies of Depository System:

v NATIONAL SECURITIES DEPOSITORY LIMITED
v CENTRAL DEPOSITORY SERVICES LIMITED


NATIONAL SECURITIES DEPOSITORY LIMITED
Although India had a vibrant capital market, which is more than a century old, the paper-based settlement of trades caused substantial problems like bad delivery and long settlement cycles continued. The enactment of Depositories Act in August 1996 paved the way for establishment of NSDL, the first depository in India. In order to provide a safe and efficient system of trading and settlement, National Securities Depository Ltd. was inaugurated in November 1996.
NSDL was set up with an initial capital of INR one billion (USD 28 million), promoted by Industrial Development Bank of India (IDBI), Unit Trust of India and national Stock Exchange of India Ltd. (NSEIL). Subsequently, State Bank of India, Global Trust Bank Limited, Citibank NA, Standard Charted Bank, HDFC bank Limited, the HongKong and Shanghai banking Corporation Limited, Deutsche Bank, Dena Bank and Canara Bank have became a shareholders of NSDL.

JOINING NSDL
NSDL carries out its activities through service providers like depository participants (DPs), issuing companies and their Registrars and Share Transfer Agent, Clearing corporations/ Clearing Houses of Stock Exchanges. These entities are called business partners in NSDL terminology.
The investor can obtain depository services trough depository participants of NSDL. Just as one opens a bank account in order to avail of the services of a bank, an investor opens a depository account with depository participants in order to avail of depository facilities.




OWNERSHIP
NSDL is public limited company incorporation under the Companies Act 1956. NSDL has paid equity capital of Rs. 105 crores. The paid up capital has been reduced to Rs. 80 Crores.

OPERATIONS
NSDL operates through a network of DPs who interact
with investors. However, as required holding an account with the depository act, NSDL is responsible to every individual investor holding an account with the depository.
An investor who buys securities from exchange connected to NSDL may receive his delivery in the dematerialized form as dematerialized securities can be delivered in physical segment at the option of the seller. Therefore, those investors who buy securities from these exchanges should necessarily open a depository account to take delivery of demat securities.
Also, SEBI has made it compulsory for all categories of investors to settle trades in demat form with respect to a select list of scrips since January 4, 1999. Therefore, investors trading in these scrips will necessarily need a depository account to settle their trades.

MANAGEMENT
NSDL is a public limited company managed by a professional board of director the day today operations are conducted by the managing director. To assist the MD in his function, the eligibility criteria and period of the nomination of the members are governed by the laws of NSDL in this regard.

INSPECTION, ACCOUNTING AND INTERNAL AUDIT
NSDL obtains audited financial reports from all its DPs once every year. NSDL also carries out periodic visits at the office of its constituents/R & T agents, DPs & Clearing Corporation/ to review the operating procedures system maintained & compliance with the by laws, business rules & SEBI Regulations. Additionally DPs are required to submit NSDL internal audit report every quarter. The Board appoints a Disciplinary Action Committee (DAC) to deal with any matter relating to DPs clients, issuers and R & T agents.


BASIC SERVICES / FUNCTIONS OF NSDL

DEMATERIALISATION:
One of the primary functions of depository is to eliminate/ minimize the movement of physical securities in the market. Dematerialization is the process by which a client can get physical certificates converted into electronic balances maintained in its account with DP. Securities held in dematerialization form are fungible, i.e. they do not bear any distinguishing features.

TRADING & SETTLEMENT:
One the primary basic service provided by NSDL is to facilitate the transfer of securities from one account to another on the instructions of the account holder, in NSDL both transferor & transferee have to give instructions to their DPs for delivering & receiving of securities. However, transferors can give standing instructions to its DP for receiving in securities.

OFF MARKET TRADE:
In off market, seller gives his delivery instructions to his DP to move securities from his account to his buyer’s account. A buyer automatically receives the credit of the securities to his account.

NSDL



DP 1 DP2



SELLER BUYER








PLEDGE & HYPOTHICATION:
Depository Act permits the creation of Pledge & Hypothecation of securities against loan. Credit/ such other facility available by the beneficial owner of securities.


For this purpose, both the agreement, i.e. the pledgor & pledgee must have a beneficial account with NSDL.


NSDL



PLEDGEES DP PLEDGORS DP



(CONFIRMATION) AGREEMENT (REQUEST)
PLEDGEE PLEDGOR


LOAN


PROCESS:
v Agreement is signed between the pledgor & pledgee outside the NSDL system.
v Pledgor gives pledgee pledge creation request to DP who enters in systems.
v The request reaches the pledge’s DP through the NSDL system. His DP intimates pledgee.
v Pledgee gives a pledge creation confirmation to his DP who enters in the system.
v Securities are transferred from “Free balance” head to “Pledge balance head”.
v Pledgee gives loan to pledgor outside the NSDL system.



LINKAGES WITH CLEARING SYSTEM:
The clearing system performs the function of ascertaining the payin (SELL) or payout (BUY) of brokers who have traded on stock exchange. Actual delivery of securities to the clearing system from the selling brokers & delivery of securities from the clearing system to the buying broker is done by the depository.


ACCOUNT OPENING:
Just as in bank, opening an account is the first step that an investors intends to hold scrips in DEMAT forming the depository system the investor can open an account with any DP of NSDL. The investor opens an account with several DPs or he may open several accounts with the single DP. The investor has to enter into an agreement with DP.

SPECIAL SERVICES:
NSDL has taken the initiative for providing the facility of enabling brokers to deliver contract notes to custodian/fund managers electronically through its STEADY facility. STEADY (Securities Trading – Information Easy Access and Delivery) was launched by NSDL on November 30th, 2002. STEADY is a means of transmitting digitally signed trade information with encryption across market participants electronically and efficiently, through Internet.

MILESSTONES OF NSDL
September, 1995
Drafting of Depositories Ordinance
December, 1995
NSDL Incorporation
May, 1996
SEBI Regulations
August, 1996
Enactment of the Depositories Act
November, 1996
Inauguration of NSDL; Commencement of Dematerialization
December, 1996
Commencement of trading in Dematerialized shares on NSE
June, 1997
Total value of Demat securities at NSDL crosses US $ 1 bn.
December, 1997
Commencement of trading in Dematerialized shares on BSE
January. 1998
Compulsory Demat Trading for institutional investors commences
March, 1998
Total value of Demat securities at NSDL crosses US $ 5 bn.
April, 1998
Demat shares treated as good delivery in physical segments of NSE and BSE
June, 1998
Commencement of trading in dematerialized shares on CSE
September, 1998
Commencement of trading in dematerialized shares on DSE
November, 1998
Investor counts cross 1,00,000
December, 1998
Commencement of dematerialization of Government Securities
January, 1999
Compulsory demat trading for retail investors commences
May, 1999
NSDL launches the NSDL – Depository Operations Module
October, 1999
Investor accounts cross one million mark
February, 2000
NSDL launches internet based service – SPEED for clearing members
May, 2000
Investor accounts cross 2.5 million
June, 2000
Commencement of dematerialization of debt instruments
June, 2000
98% Settlement in demat form
July, 2001
Introduction of T + 5 Rolling Settlement & Uniform Settlement Cycle
April, 2002
Introduction of T + 3 Rolling Settlement
November, 2002
Launch of STEADY – an STP initiative by NSDL
December, 2002
Investor accounts cross 5 million
April, 2003
Introduction of T + 2 Rolling Settlement




CENTRAL DEPOSITORY SERVICES LIMITED (CDSL)
CENTRAL DEPOSITORY SERVICES LIMITED (CDSL) is set up to meet the objectives of the Act & to fulfill the user’s need. The CDSL was granted its “ Certificate of Commencement” on Feb 8, 1999 from SEBI. The balances in the investors account recorded and maintained with CDSL can be obtained through the DP. The DP is required to provide the investor, at regular intervals, a statement of account, which gives the details of the securities holdings and transactions. The depository system has effectively eliminated paper-based certificates, which were prone to be fake, forged, counterfeit resulting in bad deliveries.
CDSL offers an effective and instantaneous transfer of securities. CDSL was promoted by The Stock Exchange, Mumbai (BSE) jointly with leading banks such as State Bank of India, Bank of India, Bank of Baroda, HDFC Bank, Standard Chartered Bank, Union Bank of India and centurion Bank.

OBECTIVES
Ø To accelerate the scrip less trading.
Ø To make major thrust in the individual investors participation in the depository system.
Ø To provide a flexible accounting structure to support the settlement requirements of the market.
Ø To create a competitive environment which will be responsive to users interest and concerns.

MANAGEMENT:
A professional board of Directors with vast and varied experience in capital markets and banking is at the helm of affairs at CDSL.
Ø Chairman.
Ø General Manager, Bank of India.
Ø Deputy general Manager, (Treasury branch), Bank of Baroda.
Ø Chief General Manager, State Bank of India.
Ø Chief Operating Officer- The Stock Exchange, Mumbai.
Ø Director, ISD, The Stock Exchange, Mumbai.
Ø Independent Director.
Ø Director, Emkay Shares & Stock Brokers Private Limited.
Ø Executive Director.


DATABASE ARCHITECTURE:
CDSL’s system is based on centralized database architecture with on-line connectivity with DPs. It provides following benefits to the users.

· Because of this centralized architecture, the cost for setting up a DP outfit under CDSL system is significantly lower.
· Similarly, the recurring costs to be incurred by a CDSL-DP in terms of maintaining back-ups and the related data Storage are minimal. This enables a CDSL-DP to offer depository services to investors at an attractive price and at the same time achieve break-even faster at much lower volumes.
· The centralized architecture also allows CDSL-DP to make available to investors a to-the-minute status of their account and transactions.

BASIC SERVICES GIVEN BY CDSL

ACCOUNT OPENING
It is one of the important services provided by CDSL. The main objective of account opening is to allow investors to perform the following activities:
a) Dematerialise existing securities currently held by them & reflect securities ownership held by electronic book entries in the CDSL.
b) By & sell dematerialized securities, which are admitted in CDSL or any other Depository.

ACCOUNT ADMINISTRATION
This facility allows DPs to make addition * other modification & to enquire into details BOs (Beneficial Owners).

DEMATERIALISATION OF EXISTING SCRIPS
It enables Bos to convert their scrips existing in physical in physical form to electronic balance in accounts maintained by CDSL through DPs.




TRANSFER OF EXISTING SCRIPS
It is a process by which the securities brought in physical form are transferred in name of the transferee * subsequently converted into electronic balance. These balances are maintained in account held by the beneficial owners with a depository participant of CDSL.

SETTLEMENTS:
The investors can trade in securities on stock exchange through a clearing member. A beneficial owner who holds an account in CDSL will be able to do settlement obligation from his account through his DP. The DP is required to process the instruction from the BO with in the period as specified by CDSL.

TRANSMISSION:
This facility provided by CDSL allows the transfer of securities in case of death of an account holders & inheritance by a successor as stewed by the deceased BO.

PLEDGING & HYPOTHECATION:
The pledging function in CDSL will help in meeting the following objectives: -
Ø Allow a BO to use his dematerialized securities for apledge transaction with a pledge.
Ø Allow pledge invocation by the pledge.

REMATERIALISATION:
REMAT is a process by which the securities held in the electronic form are converted into paper mode securities by the beneficial owner.

ACCOUNT CLOSURE:
The beneficial owner himself or his depository participant may initiate the request for account closure.






SPECIAL SERVICES:

EASY & EASIEST SERVICES:
CDSL’s much awaited internet facility “electronic access to securities information & execution of secure transactions” – (Easiest) is being launched on March 9, 2004. The easiest facility was inaugurated by Shri. G.N. Bajpai, Chairman, SEBI. Easiest is a internet facility which permits Brokers (CMs)/ Beneficial Owners (BOs) to submit debit/credit transaction instruction to effect off-market, on-market, interdepository & early pay in transactions.
The “Easiest” facility will provide anytime any kind of freedom to investors to issue delivery instructions.


MILESTONES OF CDSL
· CDSL received the certificate of commencement of business from SEBI in February, 1999.

· Honorable Union Finance Minister, Shri. Yashwant Sinha flagged off the operations of CDSL on July 15,1999.

· Settlement of trades in the demat mode through BOI Shareholding Limited, the clearinghouse of BSE, started in July 1999.

· All leading stock exchanges like the National stock Exchange, Calcutta Stock Exchange, Delhi stock exchange, the Stock Exchange Ahmedabad, etc have established connectivity with CDSL.

· As at the end of July 2003, over 4600 issuers have admitted their securities (equities, bonds, debentures, commercial papers), units of mutual funds, certificate of deposits etc. into the CDSL system.