Notes on Depository Organisations

This article throws light upon the top two depository organisations. The organisations are: 1. National Securities Depository Ltd. (NSDL) 2. Central Depository Services (India) Limited.

Organisation # 1. National Securities Depository Ltd. (NSDL):

NSDL was the first depository organisation promoted by IDBI, UTI and National Stock Exchange (NSE). NSDL was set up to provide electronic depository facilities for securities being traded in capital market.

The depository’s ordinance was promulgated by the Government of India in September, 1995.The Securities and Exchange Board of India (SEBI) issued the guidelines for depositories in May, 1996. The Bill was passed by the parliament in July 1996, whereas NSDL was registered by SEBI on June 7, 1996.

NSDL has minimum net-worth of Rs 100 crores. NSDL deals with shares in dematerialized form through depository participants who are agents of investor banks, stock brokers and financial institutions. NSDL Depository Participant can be a public financial institution, bank, custodian, registered stock broker or a non- banking financial company subject to the approval from the depository company and the SEBI.

As per RBI guidelines, institutional investors/banks having a minimum portfolio of securities of Rs. 10 crore have to settle all transactions through depository. NBFCs and brokers are required to have a minimum net-worth of Rs. 60 lakhs. Depository Participant (DP) has to pay an admission fee of Rs. 25,000 to NSDL and deposit Rs. 10 lakh as a security with NSDL.

Functioning of NSDL:

NSDL carries out its activities through service providers like Depository Participants (DPs), Issuing Companies and their Registrars and Share Transfer Agents, Clearing Corporations/Clearing House of Stock Exchanges. The investors can obtain depository services by opening a demat account with a depository participant of NSDL.

Issuer Company can make dematerialization services available to its shareholders by entering into an agreement with NSDL and by establishing an electronic link with NSDL.

A clearing member has to open a clearing account in the depository system for receiving the securities from its clients for delivery to the Clearing House/Clearing Corporations as pay-in and to distribute the pay­out to its clients received from the Clearing Corporation/House.

The Clearing Corporations/Houses of stock exchanges are linked electronically to the depository in order to electronically receive securities delivered by clearing members towards pay-in and to give out securities to clearing members towards pay-out.

Above mentioned service providers are also called Business Partners in NSDL terminology. NSDL is electronically linked to each of these business partners via a satellite link through Very Small Aperture Terminals (VSATS) or through Leased Land lines. The entire integrated system is called the “NEST” [National Electronic Settlement & Transfer].

The Certification Program of NSDL:

In order to ensure rendering of quality depository services by the Depository participants, NSDL has launched Certification Programme on depository. This programme helps the participants to understand and adopt the procedures to be followed in conducting various transactions in the NSDL depository system.

NSDL has made it mandatory for all branches of DPs to have at least one person qualified in the Certification Programme.

Safety Measures:

In order to ensure safety of the investor holdings, various checks and measures have been taken by NSDL.

These include:

(i) A DP has to get itself registered with SEBI in order to be operational.

(ii) DPs are allowed to effect any debit and credit to an account only when a valid instruction is received from the client.

(iii) NSDL carries out periodic inspection into records and the activities of both DP and R & T agents.

(iv) Everyday, there is system driven mandatory reconciliation between participant and NSDL.

(v) All investors have a right to receive their statement of accounts periodically from the DP.

(vi) NSDL forwards statement of account to the investors every month at random as a counter check.

(vii) All grievances of the investors are to be resolved by the concerned business partner. In case, he fails to do so, investor has the right to approach NSDL’s investor relationship cell.

(viii) NSDL has taken up a comprehensive insurance policy to protect the interest of the investors in case of failure of the DP to resolve a genuine loss.

(ix) An investor can transfer his holdings to an account held with another DP, in case, the DP in which he is holding an account goes bankrupt.

Special Services:

In addition to the main services of electronic custody and trade settlement services, NSDL provides special services like pledge, hypothecation of securities, automatic delivery of securities to Clearing Corporations, distribution of cash and non-cash corporate benefits, stock lending, distribution of securities to allottees in case of public issues, internet based services for clearing members, ‘SPEED’ and Internet based services for demat account holders ‘SPEED-e’ (pronounced as speedy). SPEEDe is a common infrastructure of NSDL and any DP of NSDL can subscribe to it. SPEED-e enables demat account-holders (including clearing members) to submit delivery instructions directly on the internet through Speed-e Website.

Organisation # 2. Central Depository Services (India) Limited:

Central Depository Services (India) Ltd. commenced its operations during February, 1999. It was promoted by Mumbai Stock Exchange in association 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.

CDSL was set up with the objective of providing convenient, dependable and secure depository services at affordable cost to all market participants. All leading stock exchanges like the National Stock Exchange, Calcutta stock exchange, Delhi stock exchange, Ahmadabad Stock Exchange etc. have established connectivity with CDSL.

As at the end of March 2002, over 4300 issuers have admitted their securities (equities, bonds, and debentures commercial papers), units of mutual funds, certificate of deposits etc., into the CDSL system. Thus an investor can hold almost all his securities in one account with CDSL.

Features of CDSL:

(i) Wide Coverage:

CDSL has over 165 DPs spread around 100 cities/towns across the country. Thus it is convenient for an investor to select a DP as per his requirement.

(ii) On-line DP Services:

DP can provide on-line depository services because CDSL’s system is based on centralised database architecture.

(iii) Reasonable Fee:

CDSL has kept the tariff rates at the lowest in order to provide affordable depository services to investors. It does not charge any fees from its depository participants in respect of custody or ISIN (International Securities Identification Number).

(iv) Internet Access:

Demat account holders can have an access to their accounts on internet because DPs are registered with CDSL for internet access.

(v) Contingency Arrangements:

CDSL has made provisions for contingency terminals which help a DP to update transactions in case there is any problem with the system.

(vi) Helpline:

Any DP or an investor can obtain clarifications and guidance from CDSL’s prompt and courteous helpline facility.

(vii) Stores Records:

CDSL stores records describing the ownership of securities. This service makes it possible for securities settlement in India to be conducted electronically, instead of requiring the presentation of physical scrip such as share certificates.

(ix) Electronic Settlement:

CDSL facilitates electronic settlement of securities. The company connects and performs tens of thousands of transactions every day, linking hundreds of companies to India’s stock exchanges.