Meaning of the term “Depository “
Depository means a place to deposit something for safekeeping as bank in which funds or securities are deposited by other under the terms of depository agreements. The Depositories Act, 1996 defines a depository 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. The principal function of a depository is to dematerialize securities and enable their transactions in book-entry form. The securities are transferred by debiting the transferor’s depository account and crediting the transferee’s depository account. The SEBI Regulations, 1996, SEBI has notified regulations on 16th May 1996, which specify the norms for the functioning and Operations of depository system is 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;
An institution engaged in providing financial services where not less than 75% of the equity is held jointly or severally by these institutions;
A custodian of securities approved by Government of India,
Registration:
As per the provisions of the SEBI Act, a depository can deal in securities only after obtaining a certificate of registration from SEBI. The sponsors of the proposed depository should apply to SEBI for a certificate of registration in the prescribed form. Commencement of Business:
A Depository that has obtained registration as stated above, can function only if it obtains a certificate of commencement of business from SEBI. A Depository must apply for and obtain a certificate of commencement of business from SEBI within one 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 opts to hold his securities in a demat form, the issuer enters into an agreement with the depository to enable the investors to dematerialize their securities. No such agreement is necessary where the state or Central Government is the issuer of government securities.
A Depository participant (DP) is described as an agent of the depository. They are the intermediaries between the depository and the investors. The relationship between the DPs and the depository is governed by an agreement made between the two under the Depositories Act. In a strictly legal sense, a DP is an entity who is registered as such with SEBI under the provisions of the SEBI Act. As per the provisions of this Act, a DP can offer depository related services only after obtaining a certificate of registration from SEBI.
Depository Participants:
The regulations have selected various categories of market participants who are eligible to become depository participants who have a well established customer interface network.
These categories are:-
a) Public Financial Institutions.
b) Scheduled Banks.
c) RBI approved Foreign Banks Operating in
d) State Financial Corporations.
e) Certified Custodians of Securities.
f) Clearing corporations of Stock Exchanges.
g) Registered Stock Brokers.
h) Non-Banking Financial Companies.
Services provided by a DP :
Following services can be availed of through a DP: ü Dematerialization, i.e., getting physical securities converted into electronic form.
ü Rematerialization, i.e., getting electronic securities balances held in a BO account converted into physical form.
ü To maintain record of holdings in the electronic form.
ü Settlement of trade by delivering / receiving underlying securities from / BO accounts.
ü Settlement of off-market trades i.e., transactions between BOs entered outside the stock exchange.
ü Providing electronic credit in respect of securities allotted by issuers under IPO or otherwise.
ü 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.
ü Pledging of dematerialized securities & facilitating security lending and browsing, if the DP is registered as an “Approved Intermediary” for the purpose.
Services of Depository:
A Depository established under the Depositories Act can provide any service connected with recording of allotment of securities or transfer of ownership of securities in the record of a depository. Any person willing to avail the services of the depository can do so by entering into an agreement with the depository through any of its participants. A depository can provide depository services only through a DP. A depository cannot directly open accounts and provide services to clients. Every depository in its bye-laws must state which securities are eligible for demat 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.
Functions 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.
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
The system consists of four constituents. They are I) The Depository ii) the depository participants, iii) the beneficial owner and iv) the issuer.
The Depository :- The depository is entrusted with securities for effecting the transfer of ownership of the securities. He is the custodian of his clients “ securities “. The depository has no right over the security except with the transfer of it.
The Depository participants :- The depository participants is the link between the depositories and the owner of securities. He is deemed an agent of the depository. The depository, therefore is responsible for the acts of omission and commission on the part of the DP. The depository, therefore is responsible for the acts of omission and commission 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 lodges his securities with the depository in the form of book entries. He has all rights and liabilities associated with the securities.
The issuer :- It is the company, which issues the security.
The issuer avails choice to the investors for holding securities either in physical form or through the depository, which makes the investor to choose and communicate back to the issuing company at the time of initial offer itself. Then the issuer intimates the depository details about the allotment of securities. The depository in turn records the names of allottes of the securities in their records as the beneficial owners. The name of the depository is entered by the issuer as the registered holder of the security. The investor is free to alter his choice either at the time of applying for securities or at any time thereafter. An investor who wishes to avail himself of the services will have to open an account with depository through a DP. The investor has to enter into an agreement with the DP after which he is issued a client number.
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