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DEPOSITORIES AT A GLANCE

 

 

INTRODUCTION

 

National Securities Depository Limited (NSDL), the first ever Depository of the country, was established under the Depositories Act, 1996 and it commenced operations with effect from November 1996. Subsequently, the other Depository called Central Depository Services (India) Limited (CDSL) was formed. Holding and handling of securities in electronic form eliminates problems that are normally associated with physical certificates, like mutilation, loss in transit, problems of bad delivery, etc. Further, it facilitates faster settlement cycles. The number of users of NSDL as well as CDSL depository systems is steadily increasing. The objectives of the Depositories are to provide convenient, dependable and secure depository services at an affordable cost to investors. Presently, it is compulsory to settle all trades done on any stock exchange in demat mode only. Dematerialization or demat is the process of converting the securities held in physical form into an electronic record form or to directly allot securities in electronic record form. These electronic records of securities are shown as “electronic balances” in the demat accounts of investors. Any investor can open a demat account through a Depository Participant (DP).

 

DEFINITION OF DEPOSITORY

 

 A depository can be compared to a bank. A depository holds securities like shares, debentures, bonds, Government Securities, mutual fund units etc. of investors in electronic form. Besides holding securities, a depository also provides services related to transactions in securities. A depository interfaces with the investors through its agents called Depository Participants (DPs). If an investor wants to avail of the services offered by the depository, the investor has to open an account with a DP. This is similar to opening an account with any branch of a bank in order to utilize the bank's services.

 

Dematerialization:

 

According to the Depositories Act, 1996, an investor has the option to hold securities either in physical or electronic form. However, SEBI has notified that settlement of trades in listed securities should take place only in the demat mode. Although, trades upto 500 shares can be settled in physical form, physical settlement is virtually not taking place for the apprehension of bad delivery on account of mismatch of signatures, forgery of signatures, fake certificates, etc. In order to dematerialise certificates, an investor will have to first open an account with a DP and then request for the dematerialisation of certificates by filling up a dematerialization request form [DRF], which is available with the DP and submitting the same along with the physical certificates. The investor has to ensure that before the certificates are handed over to the DP for dematerialisation, they are defaced by marking "Surrendered for Dematerialisation" on the face of the certificates. All the scrips included in S&P, CNX, NIFTY and BSE SENSEX have already joined Depository. Investors can get an updated list of these companies from the DP or from the website of NSDL/CDSL. Investors can dematerialise and hold investments like debt instruments, mutual fund units and government securities in a single demat account.

 

Rematerialization:

 

In order to covert securities back to physical form, a request has to be sent to the concerned DP for rematerialisation of the same. 'Rematerialisation' is the term used for converting electronic holdings back into certificates. DP will forward investor’s request to NSDL/CDSL, after verifying the electronic balance at the credit of the DP account holder. NSDL/ CDSL, in turn, will intimate the registrar who will print the certificates and dispatch the same to the investors.

 

BENEFITS

 

The benefits of participation in a depository are:

1

Reduction in paperwork involved in transfer of securities

2

Reduction of transaction cost

3

Nomination facility as in the case of a Bank account

4

Necessary transmission of securities is done by DP itself thereby eliminating correspondence with companies

5

Convenient method for consolidation of folios/accounts

6

facility to hold investments in equity, debt instruments and Government securities in a single account

7

Automatic credit into demat account of shares, arising out of split/ consolidation/ merger etc.

8

Elimination of all risks associated with physical certificates like risk of loss, mutilation or theft of certificates

9

In the depository environment, securities cannot be returned        “under objection” for any reason and hence the question of bad delivery does not arise nor does the investor face any uncertainty on the genuineness of securities purchased by him.

10

After the payout, once securities are credited to the investor’s demat             account, the investor becomes the owner of the securities, as there is no need to seek registration from the company or its registrar.

11

All stock exchanges currently follow the T+2 rolling settlement cycle i.e. settlement of trades is done on the 2nd working day from the trade day. This has become possible because of demat, which enables faster transfer of securities and enhances liquidity.

12

Direct credit of securities issued as bonus or on allotment of             IPO/rights, split and merger ensures faster receipt of securities and eliminate the risk of loss of certificates in transit.

13

No stamp duty is payable by the investors for transfer of any           kind of securities in demat form. 

14

For all investments held in the beneficiary owner’s account,           instead of informing each company separately about the change in address, bank account details, nomination, one single instruction to the DP take care of all such changes.

15

The statement of account periodically sent by the DP provides the investor the consolidated position of all his investments in the demat account. This makes it convenient for an investor to           monitor his portfolio.

 

 

SERVICES

 

The following services can be availed of through a DP registered with NSDL/ CDSL:

 

1

Dematerialisation i.e., converting physical certificates to  electronic             form

2

Rematerialisation i.e., conversion of securities in demat form         into physical certificates

3

Facilitating repurchase / redemption of units of mutual funds

4

Electronic settlement of trades in stock exchanges connected        to NSDL /CDSL

5

Pledging/hypothecation of dematerialised securities against loan;

6

Electronic credit in respect of securities allotted by issuers under IPO or otherwise.

7

Receipt of non-cash corporate benefits, such as, allotment of          bonus and rights shares in electronic form or securities resulting upon consolidation, stock split or merger / amalgamation of companies.

8

Nomination facility for demat accounts

9

Services related to change of address, change in bank account details, change in nominee of the account holders.

10

Effecting transmission of securities

11

Instructions to your DP over Internet through SPEED-e facility if the DP is registered with NSDL.  Internet facilities “easi” and “easiest”, if the DP is registered for the same with CDSL.

12

Other facilities viz. holding debt instruments in the same account, availing stock lending/borrowing facility, etc.

13

Settlement of off-market trades i.e. transactions between BOs entered outside the Stock Exchange.

14

Pledging of dematerialised securities & facilitating loans against shares.

15

Freezing of the demat account for debits, credits, or both.

        

 

ACCOUNT OPENING

 

NSDL/CDSL provides its services to investors through its agents called Depository Participants (DPs). These agents are appointed by NSDL/ CDSL with the approval of SEBI. According to SEBI regulations, amongst others, three categories of entities i.e. Banks, Financial Institutions and Members of Stock Exchanges (brokers) registered with SEBI can become DPs. All the DPs are appointed subject to fulfillment of uniform requirements of SEBI (Depositories and Participants) Regulations, 1996 and requirements of the Depository. However, the type of services offered, the service standards may differ among various DPs. For example, a DP branch having direct connectivity with the main office having depository set-up may be in a position to execute instructions faster.

 

A shareholder/investor intending to open a DP account shall have to sign an agreement with the DP registered with NSDL or CDSL, as the case may be, in prescribed standard agreement, which details their rights and duties. He will be required to submit the following with the prescribed account opening form. In case he wants to open account jointly with other person(s), following should be submitted for all the account holders. (I) Proof of Identity (POI) (copy of any one proof): • Passport • Voter ID Card• Driving license • PAN card with photograph• Identity card/document with applicant's Photo, issued by a) Central/State Government and its Departments, b) Statutory/Regulatory Authorities, c) Public Sector Undertakings, d) Scheduled Commercial Banks, e) Public Financial Institutions, f) Colleges affiliated to Universities (this can be treated as valid only till the time the applicant is a student), g) Professional Bodies such as ICAI, ICWAI, ICSI, Bar Council etc., to their Members; and h) Credit cards/Debit cards issued by Banks. (II) Proof of Address (POA) (copy of any one proof): • Ration card • Passport • Voter ID Card • Driving license • Bank passbook • Verified copies of Electricity bills (not more than two months old)/ Residence Telephone bills (not more than two months old)/ Leave and License agreement / Agreement for sale. (III) Passport-size photograph. (IV) Copy of PAN Card.

 

NOMINATION

 

Nomination can be made only by individuals holding beneficiary accounts either singly or jointly. Non-individuals including society, trust, body corporate, partnership firm, karta of Hindu Undivided Family, holder of power of attorney cannot nominate.

 

Nomination is permitted for accounts with joint holders. But, in case of death of any of the joint holder(s), the securities will be transmitted to the surviving holder(s). Only in the event of death of all the joint holders, the securities will be transmitted to the nominee. NRI can nominate directly. But, the power of attorney holder cannot nominate on behalf of NRI. NRI can be a nominee subject to the exchange control regulations in force from time to time. A minor cannot nominate either directly or through its guardian. But a minor can be a nominee. At present only one nomination can be made for one depository account. Nomination can be made account wise and not security wise.

 

 

TRANSMISSION

 

Transmission is the process by which securities of a deceased account holder are transferred to the account of the surviving joint holder(s)/ legal heirs / nominee of the deceased account holder. Process of transmission in case of dematerialized holdings is more convenient as the transmission formalities for all securities held in a demat account can be completed by submitting documents to the DP whereas in case of physical securities the surviving joint holder(s)/ legal heirs/ nominee has to correspond independently with each company in which shares are held.

 

In case of the death of the sole holder, for the purpose of transmission of securities, the nominee has to submit a duly filled-in transmission form, notarized copy of death certificate and an affidavit in the prescribed format to the DP. After verifying these documents and if found in order, the DP will transmit the securities to the account of the nominee.

 

In case nomination is not made by the sole account holder, the securities would be transmitted to the account of legal heir(s), as may be determined by an order of the competent court. However in cases where the value of securities to be transmitted is less than Rs.1,00,000/- the DP may process the request based on submission of necessary letter of indemnity, surety, affidavits and NOC documents.

 

CORPORATE BENEFITS

 

The payment to the investors will be made by the company through the ECS (Electronic Clearing Service) facility or by issuing warrants on which investor’s bank account details are printed. The concerned company obtains the details of beneficiary holders and their holdings from the Depository. BO’s entitlement will be credited by the company directly in his depository account.

 

An allotment advice will be sent by the Issuer/ its R&T agent for bonus/ rights entitlement. The Transaction Statement given by the DP, will also show the bonus/ rights credit into the account. The quantity shown in the advice and transaction statement should match.

 

CHARGES

 

Depositories charge the DPs and not the investors. The DP, in turn, charges its clients for the services offered. The charges that the DP will be levying forms a part of the DP-Client agreement. DP may revise charges by giving 30 days notice in advance. DPs charge the investors based on their own pricing structure. DPs have the freedom to devise their own price structure without any restrictions from the Depository in this regard. This helps in development of competition amongst the DPs and increases the efficiency of services provided by them to their accountholders.

 

INTERNET FACILITIES: NSDL

SPEED-e AND IDeAS

 

NSDL has recently launched a facility for delivering instructions to your DP over Internet, called SPEED-e. The facility can be used by all registered users. Investors can submit delivery instructions electronically, on the SPEED-e website https://www.speed-e.nsdl.com, after obtaining authorization from the DP to operate the account through the SPEED-e facility. Investors can monitor the status of their delivery instructions to ensure that the instructions have been executed. The benefit offered by SPEED-e to a demat account holder /Clearing Member is the convenience of conducting demat account transactions using an Internet connection from anywhere at anytime eliminating paperwork.

 

IDeAS is a facility available on SPEED-e website for clients to view latest balances and transactions that have taken place in their demat accounts during the last 30 days. Clients can download month-wise statement of transaction for the previous months (maximum 12 months) bearing NSDL's Digital signature which can be verified by using a signature verification utility. Brokers can view and download the latest balances and transactions that have taken place in their pool accounts in respect of settlements for the current pay-in date, previous four and next four pay-in dates.

 

INTERNET FACILITIES: CDSL

easi and easiest

 

Electronic Access to Securities Information (easi) is CDSL’s internet facility, which enables Beneficial Owners / Clearing Members having demat account with CDSL system for viewing their holdings, viewing the status of their instructions, obtaining transaction details for preceding 7 days, viewing the value of their holdings based on the previous day’s closing price on BSE and obtaining print of statement of account through the internet. easi is accessible anywhere anytime through CDSL’s website www.cdslindia.com. Any BO who has an account with a DP of CDSL and whose DP has registered under easi can avail of the easi facility. All that is required is a personal computer with internet access.

 

ELECTRONIC ACCESS TO SECURITIES INFORMATION & EXECUTION OF SECURED TRANSACTIONS (easiest)

 

easiest is an internet facility which permits Beneficial Owners/ Clearing Members to submit debit/credit transaction instructions to effect off-market, on-market, inter-depository and early pay-in transactions. Moreover, all the facilities and benefits of easi are automatically available to a subscriber of easiest. A BO/CM should register online with the CDSL’s website to get login password for easiest as it gives him anytime-anywhere convenience for submission of his debit/credit instructions and access to his demat account for details of holdings and transactions. Thus, a BO does not require to approach his DP each time a transaction instruction is to be submitted.

 

PLEDGE OF DEMAT SECURITIES

 

A BO can, not only pledge his demat securities, but, may also be able to obtain higher loan amounts, with reduced margins & lower rate of interest.  Moreover, procedure for pledging securities in demat form is very convenient, both, for the pledgor and the pledgee. In case of default by the pledgor, the pledgee, after giving notice to the pledgor as per the terms of the agreement, may instruct his DP to invoke the pledge by submitting the “Invocation Request Form” (IRF). On execution of this instruction, the securities are transferred into the pledgee’s account. This does not require any confirmation from the pledgor. It may be noted that the pledgor continues to remain the beneficial owner of the pledged securities and will, therefore, be receiving the corporate benefits during the period of pledge.

 

TRANSPOSITION-CUM-DEMAT

 

Change in the order of names in which certificates are issued is termed as transposition. Sometimes, a titleholder of securities holds them jointly with one/two/three persons in different order of names. Since dematerialisation can take place through a demat account only in the identical order of names, such investor would have to open multiple demat accounts as per the order of names. To avoid such a situation, the investor could consider using the transposition-cum-demat facility offered by CDSL.

 

Transposition-cum-demat facility enables an investor to transpose names of the joint holders in desired order along with the process of dematerialisation of certificates. Transposition-cum-dematerialisation facilitates dematerialisation of certificates held in different order of names through one demat account, provided the securities to be transposed are held in the same joint names, but, in a different order. Illustratively if A owns a security, which he holds in the joint names of ABC, ACB, etc. he can first transpose them in the name of, say, ABC in which order demat account might have been opened. No new name can be added through transposition process. Similarly, existing names cannot be deleted.

 

SETTLEMENT OF SECURITIES IN DEMAT FORM

The procedure for selling dematerialised securities through any stock exchange is similar to the procedure for selling physical shares. However, the procedure for delivery of securities is much simpler when compared to the delivery of securities in physical segment. In case of sale of demat security, immediately on receipt of intimation of execution of trade from broker, the seller should issue debit instructions to the DP with whom he maintains his demat account, for delivery of security either directly to the Clearing Corporation/Clearing House or to the broker’s clearing account, as advised by his broker.

 

A purchaser of securities can give one-time standing instruction to his DP for receiving securities in his account. This standing instruction can be given at the time of opening of account or later. Alternatively, a BO may choose to issue separate receipt instruction to his DP every time he makes any purchase of securities.

 

SECURITIES LENDING AND BORROWING

 

SEBI has introduced Securities Lending and Borrowing scheme. As per this scheme, those persons having securities can lend their securities for consideration and those requiring securities (for meeting market obligations, as collateral etc.) can borrow the same. Under the scheme, the securities are lent through intermediaries who are approved by SEBI. The approved intermediary would borrow the securities for further lending to borrowers. Lenders of the securities and borrowers of the securities enter into separate agreements with the approved intermediary for lending and borrowing the securities. Lending and borrowing is effected through the depository system. Intermediary has to repay the securities together with any benefits received during the period of the loan. The benefits will be given to the Intermediary/borrower. However, when the securities are being returned/recalled, Intermediary/ borrower will return the securities together with benefits received.

 

SAFETY FEATURES

 

Investors should not submit delivery instruction slips (DIS) to their DP without mentioning the execution date. They are advised to specify the date on which instruction should be executed by mentioning the execution date on the DIS. The execution date can be the same date on which the instruction is submitted or any future date, on which the investors want their account to be debited.

 

DP will issue a Transaction Statement periodically, which will detail the investor’s current balances and the various transactions executed through the depository account. DP may, on request of the investors, also provide Transaction Statement at intervals shorter than the stipulated ones, probably at a cost.

 

FREEZING OF DP ACCOUNT

 

A depository account holder (beneficiary account) may freeze securities lying in the account for as long as the account holder wants it. By freezing the account, account holder can prevent unexpected debits or credits or both, creeping into its account. The following types of freeze facility available in the NSDL system may be availed of by submitting freeze instruction to the DP in the prescribed form.

 

Freeze for debits only - A demat account holder may freeze the account only for debits by submitting a freeze instruction to its DP. However, during the period of freeze, the account holder will continue to receive credits like Bonus or credits arising out of any other corporate action.

 

Freeze for debits as well as credits - An account holder may freeze the account for debits as well as credits. No debits and credits can be made in the account, unless the account holder issues unfreeze instruction. This facility is beneficial to clients who do not use their account for long periods. By freezing their account for debits and credits, they can avoid undue credits to their accounts in addition to preventing debits.

 

Freeze a particular ISIN in the account - An account holder may freeze a particular ISIN (security of a specific company) from being debited from the account, without freezing the whole account. If this type of freeze facility is used, all other securities in the account can be debited or credited but the securities under the specific ISIN will be frozen for debit. The client will be able to use other securities lying in its demat account and also receive credits in the ISIN which has been frozen for debit.

 

Freeze a specific number of securities held under an ISIN in an account - An account holder may freeze a specific quantity of a specific security in an account.

 

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