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Essay on Depositories

Essay Contents:

  1. Essay on the Introduction to Depositories
  2. Essay on Dematerialization and Its Steps
  3. Essay on National Securities Depository Limited (NSDL)
  4. Essay on Central Depository Services India Ltd. (CDSL)
  5. Essay on Depository Participant (DP)
  6. Essay on the Advantages of Depository System

Essay # 1. Introduction to Depositories:


Depository is a person or an institution who keeps the securities on behalf of the investors. In the modern context it is defined as an institution which transfers the ownership of securities in electronic mode on behalf of its members. 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 the SEBI 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 account and crediting the transferee’s account.

There has been substantial growth in the volume of business in stock exchanges during the past decade. The settlement of share transfers and recording them in books took a very long period ranging from 3 to 6 months. (The stipulated time for transfer allowed by Companies Act was 2 months.) The transfer was done through executing a transfer deed and physical movement of papers. There had to be physical delivery of securities. This created unnecessary delays and resultant risk.

The system of transfer of ownership was inefficient as every transfer involved physical movement of paper securities. Many transactions were void because of faulty compliance of paper work. Theft, forgery, mutilation of certificates and other irregularities were also there. This reduced liquidity of securities and the investor had many grievances. Foreign companies and financial institutions were reluctant to enter the Indian capital market because of these problems.

In order to overcome these problems, the establishment of depository system was recommended by a technical group appointed by the Ministry of Finance in 1993. The system was given a legal status by Depository Act in 1996. The Act provided for the establishment of depositories in securities with the objective of ensuring free transferability of securities with speed, accuracy and security. The Act permitted dematerialization of securities in depositories and transfer of securities through electronic book entries without making the securities move from person to person.


The Process:

Only a company registered under the Companies Act and sponsored by the specified category of institutions can set up a depository in India. Before commencing operations, depositories should obtain a Certificate of Registration and Certificate of Commencement of Business from SEBI. The rights and obligations of Depositories, depository participants, issuers and beneficial owners are spelt out clearly in the Depositors Act 1996.

Depositories function for shorter settlement cycles and immediate transfer of title of securities. Central Depository and depository participants are set up for this purpose. Securities shall be dematerialized and investors’ names will be entered in the books of participants. Presently there are two depositories working in the field viz. National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL).

Essay # 2. Dematerialization and Its Steps:


Dematerialization means elimination of paper certificates and maintaining records in the form of electronic entries only. Dematerialization occurs when securities, issued in physical form, are destroyed and an equivalent number of securities are credited into the beneficiary owners’ account.

The dematerialized securities are not identified by distinctive numbers or certificate numbers. It means that all securities in the same class are identical and interchangeable. The depository operates through the computerized book entry for transfer of the securities.

Steps in Dematerialization:

1. The stock exchange will notify the fact of dematerialization of shares through an advertisement. Thereafter the investors may deposit their shares into the Central Depository through an Authorized Depository Agent with whom the investors should open an account with Depository participant.


2. On receipt of the share certificate, the depository or the depository’s agent sends the certificate to the Registrar and Transfer agent for registering Depository Nominee’s name.

3. Within a prescribed period, the Registrar will transfer the scrips, after confirming that the shares are good for disposition, in the name of the Depository Nominee and return it for safe custody with the depository. The depository will credit the account of the investor with the number of shares deposited.

4. Thereafter the shares get graded through a book entry system.

5. In the case of fresh issues, the applicant will have to give depository account particulars in the application form. Successful applicants will have their account credited directly. Those who do not have any account will have to open an account with any of the Authorized Depository to enable the allotment and future trade.


6. The securities held by an investor in the depository are freely transferable from one beneficial owner to another. However, the investors have an option to receive the shares in physical form or dematerialized form. If an investor opts for receiving the securities in dematerialized form, the issuer intimates the depository the details of allotment of security. On receipt of this information, the depository enters the name of the allottee as the beneficial owner of that security in its record.

7. The depository is deemed to be the registered owner for the purpose of effecting transfer of ownership of security on behalf of a beneficial owner. But as a registered owner, it does not have any voting rights or any other rights in respect of those securities.

The beneficial owner is entitled to all rights and benefits as well as subject to all liabilities in respect of his securities held in the depository. A beneficial owner may opt out of a depository in respect of any security by requisite intimation to the depository. A depository shall indemnify a beneficial owner, any loss caused due to negligence of the depository or participant.

Essay # 3. National Securities Depository Limited (NSDL):


National Securities Depository Limited is the first depository to be set-up in India. It was incorporated on December 12, 1995. The Industrial Development Bank of India (IDBI), Unit Trust of India (UTI) – and the National Stock Exchange (NSE), sponsored the setting up of NSDL and subscribed to the initial capital. NSDL commenced operations on November 8, 1996.

NSDL is a public limited company incorporated under the Companies Act 1956. NSDL had a paid-up equity capital of Rs.105 crore. The paid up capital has been reduced to Rs. 80 crore since NSDL has bought back its shares of the face value of Rs. 25 crore in the year 2000.

However, its net worth is above Rs. 100 crore, as required by SEBI regulations. IDBI, UTI, NSE, SBI, Global Trust Bank Ltd., Citibank, Standard Chartered Bank, HDFC Bank, Deutsche Bank, Dena Bank, Canara Bank and the Hong Kong and Shanghai Banking Corporation Ltd. are the shareholders NSDL.

NSDL performs the following functions through its various participants:


(i) It enables surrender and withdrawal of securities to and from the depository

(ii) It maintaining investors holdings in the electronic form,

(iii) It effects settlement of securities traded on exchanges

(iv) It carries out settlements of trader that have not been done on the stock exchanges

Essay # 4. Central Depository Services India Ltd. (CDSL):

CDSL is the second depository setup in India with the primary objective of providing convenient, dependable and safe depository services to all market participants. It was promoted in 1999 by BSE jointly with leading banks such as SBI, Bank of India, Bank of Baroda, HDFC Bank, Standard Chartered Bank, Union Bank of India and Centurion Bank. The leading stock exchanges in India have established connectivity with the CDSL.


The CDSL provides various levels of services to investors in shares and securities like:

(i) On line Services

(ii) On line Information to user

(iii) Insurance cover etc.

Essay # 5. Depository Participant (DP):

A DP is an agent of the depository, who provides various services of the depository to investors. The DP has to enter into an agreement with the depository to this effect. Any investor who would like to avail the services of a Depository has to enter into an agreement with any DP of his choice.


The DP will then make the depository services available to the investor. Stock Exchanges, Bankers, Mutual Funds, Custodians, Stock brokers, Issuers, Registrars etc. can become a depository participant. An investor opens a depository account with a DP for holding scrips in the depository segment.

Eligibility Criteria to be a Depository:

A depository may be promoted by any of the following institutions:

1. A public financial institution.

2. A bank included in the Second Schedule of the Reserve Bank of India Act, 1934.

3. A foreign bank operating in India with the approval of the Reserve Bank of India.


4. A recognized stock exchange.

5. An institution engaged in providing financial services where not less than 75% of the equity is held jointly or severally by these institutions.

6. A custodian of securities approved by Government of India.

7. A foreign financial services institution approved by Government of India.

The promoters of a depository are known as sits sponsors. A depository company must have a minimum net worth of Rs. 100 crore. The sponsor(s) of the depository have to hold at least 51% of the equity capital of the depository company.

Participants of that depository if any can hold the balance of the equity capital. However, no single participant can hold, at any point of time, more than 5% of the equity capital. No foreign entity, individually or collectively either as a sponsor or as a DP, or as a sponsor and DP together, can hold more than 20% of the equity capital of the depository.



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. On being satisfied with the eligibility parameters of a company to act as a depository, SEBI may grant a certificate of registration subject to certain conditions.

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.

Where the issuer has appointed a registrar to the issue or share transfer, the depository enters into a tripartite agreement with the issuer and Registrar & Transfer -(R & T) agent, as the case may be, for the securities declared eligible for dematerialization. At present, NSDL is discharging the responsibility of R&T Agent for the securities issued by State and Central Governments.

Rights and Obligations of Depositories:


Depositories have the rights and obligations conferred upon them under the Depositories Act, 1996 the regulations made under the Depositories Act, bye-laws approved by SEBI, and the agreements made with the participants, issuers and their R&T agents.

Every depository must have adequate mechanism for reviewing, monitoring and evaluating the depository’s controls, systems, procedures and safeguards. It should conduct an annual inspection of these procedures and forward a copy of the inspection report to SEBI.

The depository is also required to ensure that the integrity of the automatic data processing systems is maintained at all times and take all precautions necessary to ensure that the records are not lost, destroyed or tampered with. In the event of loss or destruction, sufficient back up of records should be available at a different place. Adequate measures should be taken, including insurance, to protect the interests of the beneficial owners against any risks.

Every depository is required to extend all such co-operation to the beneficial owners, issuers, issuer’s agents, custodians of securities, other depositories and clearing organizations, as is necessary for the effective, prompt and accurate clearance and settlement of securities transactions and conduct of business.

The depository should indemnify beneficial owners of securities for any loss caused to them due to the negligence of the DR However, where the loss is caused due to the negligence of a DR the depository shall have the right to recover it from such DPs.

Services of Depository:

A depository 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) Units of mutual funds, rights under collective investment schemes and venture capital funds, commercial paper, certificates of deposit, securitized debt, money market instruments, government securities and utilized securities.

Functions of Depository:

1. Dematerialization:

One of the primary functions of depository is to eliminate or minimize the movement of physical securities in the market. This is achieved through dematerialization of securities. Dematerialization is the process of converting securities held in physical form into holdings in book entry form.

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 affecting a transfer, certain legal steps have to be taken like endorsement, execution of a transfer instrument and payment of stamp duty. The depository accelerates the transfer process by registering the ownership of entire issue in the name of the depository. Under a depository system, transfer of security occurs merely by passing book entries in the records of the depositories’ on the instructions of the beneficial owners.

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 authenticity and often need to be transferred in the name of lender. This has a time and money cost by way of transfer fees or stamp duty. If the borrower wants to substitute the pledged securities, these steps have to be repeated. Use of depository services for pledging / hypothecating the securities makes the process very simple and cost effective. The securities pledged/ hypothecated are transferred to a segregated or collateral account through book entries in the records of the depository.

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. Actual delivery of securities to the clearing system from the selling brokers and delivery of securities from the clearing system to the buying broker is done by the depository. To achieve this, depositories and the clearing system should be electronically linked.

Essay # 6. Advantages of Depository System:

Following are the advantages of depository system:

1. It avoids much of the paper work related with share transfer.

2. It promotes risk free trading environment.

3. Risk of bad delivery, loss of securities, forged share certificates etc. could be avoided.

4. Settlement time is reduced.

5. Distribution of dividends, interests, etc. are made easy as owners are easily identifiable.

6. Cost of transfer is less as transfers are exempt from stamp duty.

7. The capital market will be more transparent.

8. The market will be highly automated and efficient.

9. Foreign investors are attracted to the capital market.