INTERNAL AUDIT OF DEPOSITORY PARTICIPANT

Shares have become a very important aspect of financial market. Due to various demerits of physical holding of shares, the problems, such as duplicate or fake share certificate or share warrant arises which is very difficult to detect. To overcome this demerits The Securities and Exchange Board of India (SEBI) made a rule which was meant to modify the form of holding shares. (contd.) As per this rule, the shares held by individual shareholders must be in a paperless form, or in other words in an electronic form i.e. in Demat form. Thus, SEBI had made it compulsory to purchase/sell shares through DEMAT A/c only. DEMAT DEMAT stands for Dematerialisation. DEMAT symbolizes shares in an electronic form A shareholder may convert his physical holdings of shares into dematerialized form Then, after dematerialization of shares they can be transacted through DEMAT A/c DEMAT A/c can be opened through any DEPOSITORY PARTICIPANT WHAT IS A DEPOSITORY PARTICIPANT ? 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, 1996. 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. DEPOSITORIES The Depositories Act 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 dematerialise securities and enable their transactions in book-entry form. At present, two depositories are registered with SEBI The National Securities Depository Limited (NSDL) and

Central Depository Services (India) Limited (CDSL).

The operations of the depositories are primarily governed by Legal Framework The Depositories Act, 1996, Securities and Exchange Board of India (Depositories & Participants) Regulations, 1996, Bye - Laws approved by SEBI, and Business Rules framed in accordance with the Regulations and ByeLaws. Only a company registered under the Companies Act, 1956 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 a certificate of commencement of business from SEBI. ANALOG MADE FOR EASY UNDERSTANDING In a bank the medium of exchange is money, whereas a depository deals in securities. In a bank, money is given for safe-keeping. In a depository, securities are kept safely. Banks hold and transfer funds; depositories perform the same function with securities. Banks can transfer funds from one account to another without handling cash; a depository can do the same with physical securities. Just as in a bank an account is opened to avail of the banking services, an account has to be opened with a DP for holding scrip's in the depository segment. DEPOSITORY PARTICIPANT

Who can become a Depository Participant ?

SEBI allows two type of person to be a Depository Participant (D.P.) Banks Brokers Comparatively, banks are in a better position to become a D.P., since they have better trading relations and experience. Bank can register itself both with NSDL & CDSL.

Procedures for opening an account with D.P.

In order to avail Demat facilities one has to open a Demat account with a D.P. The process of opening an account is as follows : Central Depository issues a common account opening form which is to be filled by the applicant. Photocopy of Proof of residence, PAN, photograph, introduction etc. with sign should be attached / enclosed with a/c opening form. Account holder has to enter into standardised agreement with D.P. duly signed on a stamp paper of rupees hundred. Such application are then sent to the Central Depository (C.D.). C.D. generates the account number and intimates it to the D.P., D.P. in turn inform the customer

Objectives of Internal Audit

To assure the management that the operations of the Participant are in compliance with the requirements of The Depositories Act, 1996, SEBI (Depositories & Participants) Regulations, 1996, NSDL Bye Laws and Business Rules and its agreement with the client and NSDL. To assure management that the DPM system is managed and maintained in a manner that there is no threat to business continuity, integrity of data processing system is maintained at all times and methods are put in place to ensure that records are not lost, destroyed or tampered with or in the event of loss or destruction of data, sufficient backup of records is available at all times.

Objectives of Internal Audit

To assure management that the capacity of computer system, staff strength and internal procedures are commensurate with the business. To assure management and NSDL that the business operations of the Participant are conducted in a manner that all the foreseeable risks are addressed to with appropriate internal control mechanism.

 To assure management that the operations are conducted in a manner that there is no loss of revenue and receivables are received promptly.

AUDIT ESSENTIAL CLAUSES

ACCOUNT OPENING MODIFICATION DEMATERIALISATION REMATERIALISATION PLEDGE / HYPOTHECATION TRANSMISSION RECORDS/DOCUMENTS TO BE MAINTAINED BY DP ACCOUNT OPENING Agreement to be executed before opening account CMs of BSE DP CM agreement. CMs of other exchange DP BO agreement. Proof of identity & Proof of address As according to SEBI circular 24th Aug. 2004 Documents to be verified with original stamp Proof to be verified by DP officer.

Proof of permanent & correspondence address Permanent address should be field mandatory Proof of correspondence address mandatory if not same as permanent address Third party correspondence address. Common documents collected from different types of BOs by a DP : Proof of address All holders & all types of BOs PAN card All holders & all type of BO accounts To be verified with website of I.T. Dept. Verified with original stamp MOA & AOA & Certificate of incorporation Corporate, Banks and CMs Proof of Bank details HUF, NRI, Trust, Corporate, CMs Power of Attorney (POA)

Board Resolution Banks, Corporate, CMs. List of authorised signatories Banks, Registered Trust, Corporate, CMs Required documents for Individual investor Declaration by karta in case of HUF Proof of Indian address in case of NRI Birth certificate of minor Trust deed in case of Registered Trust

Scanning of signatories Signature of all BO(s). Signature of power of attorney holders Authorised signatories & POA holders Procedures for MODIFICATION of Demat a/c

Procedure for change of address (individual) Request in writing for change of address signed by all the account holders. Proof of identity Proof of new address Latest transaction statement of Demat account received from the participant HUF stamp require if the Demat account is HUF Original document should be submitted for verification with Photo Copies.

Procedure for change of address (Corporate) Request in writing on company Letterhead & Company stamp for changing address signed by the authorised signatories in the Depository account Proof of new address Require ID documents of authorised signatories Latest transaction statement of Demat account received from the participant Original document should be submitted for verification with Photo Copies.

Procedure for changing Bank Details

Request in writing for changing of Bank details signed by all account holders 9 digit MICR code Saving banks full address Bank Account No., Bank Account type, Bank name Company stamp require if the Demat Account is corporate HUF stamp require on request letter if the Demat account type is HUF Cancellation cheque copy which include saving bank no. Procedure for changing signature in normal and corporate Demat a/c Request in writing for change of signature duly signed by all account holders specifying the reason of change New signature should be attested by clients banker with complete with complete details Valid proof of identity Client should visit participants office personally In the presence of officials of Participant, Client should affix his/her new signature

Procedure for Updating Nominee Require Nominee format (Annexure JA) duly filled & signed by all a/c holders Signature of two witnesses with Full Name, Address & Date Photograph of the Nominee In case the nominee is minor guardian signature & photograph is to be filled Nominee forms to be accepted only for individual accounts only. Minor & HUF cannot nominate

This procedures must be ensured by the internal Auditor to be followed while modification of Demat a/c DEMATERIALISATION Dematerialisation of securities occurs when securities issued in physical form are destroyed and an equivalent number of securities are credited into the beneficiary owner's account. The internal Auditor must ensure the following while auditing : No Dematerialisation request had been entertained by the participant other than from a registered holder of securities

 Beneficial owner(s) had submitted to the Depository Participant, the securities for dematerialisation along with the Dematerialisation request form The Dematerialisation request form submitted by the Beneficial owner(s) had been completely filled & dully signed The Depository Participant had dully verified the signature of the beneficial owner(s), as on the form, with the specimen available in its records The details of the certificates for dematerialisation was in consonance with details filled up in the corresponding Dematerialisation Request Form (DRF) That the DP had forwarded DRF to the Central Depository (CD) electronically within seven days The Depository sends all such forms (DRF) along with the share certificates to the Register & Transfer Agent (RTA) The RTA verifies the validity of security certificates and if they are found to be genuine, the RTA intimates the CD to credit the Demat a/c of the beneficiary owner(s). On receiving such permission the CD credits the Demat a/c of the beneficiary owner(s) Precautions to be taken while processing DRF Ensure account to have the same sequence of names of holders and name structure as printed on the physical certificate. Ensure ISIN is activated Separate DRF for : partly & fully paid-up shares locked and free holdings holdings locked in for different reasons locked in holdings having different release date different ISINs of the company ISIN to be entered by DP. All joint holders to sign DRF. Check DRF form with details on certificate. REMATERIALISATION A Demat A/c holder may convert his securities in the physical form by following the necessary procedure Intimate the DP Fill up the Rematerialisation Requisition Form (RRF) RRF will be sent to the CD by DP

 CD will send the RRF to the RTA RTA will verify if the applicant really holds the shares which he wants in physical form RTA will send the share certificate directly to individual / applicants The Internal Auditor has to ensure that the following points were followed while Rematerialisation of securities : The beneficial owner(s) submitted a request to DP for the Rematerialisation of holding in his / her / their account On receipt of the RRF , the DP had verified that the form was dully filled in & had issued to the beneficial owner an acknowledgement slip duly signed & stamped The Depository Participant had duly verified the signature of the beneficial owner(s) as on the form with the specimen available in its record. In case of mismatch, DP had not accept / processed rematerialisation request While entering the details if it was found that the beneficial owner(s) account did not have enough balance, the DP had not entered the request The DP had filled the authorisation portion of the request form & had dispatched it to the Issuer / Registrar & Transfer Agent within seven days of accepting such request from Beneficial owner(s) PLEDGE / HYPOTHECATION The pledgor initiates the creation of ledge / hypothecation through its DP and the pledgee instructs its DP to confirm the creation of the pledge. The pledge/hypothecation so created can either be closed on repayment of loan or invoked if there is a default. After the pledgor has repaid the loan to the pledgee, the pledgor initiates the closure of pledge/hypothecation through its DP and the pledgee instructs its DP to confirm the closure of the pledge/hypothecation. If the pledgor defaults in discharging his obligation under the agreement, the pledgee may invoke the pledge/ hypothecation.

TRANSMISSION The Companies Act, 1956, distinguishes transmission of shares from transfer of shares. While transfer of shares relates to a voluntary act of the shareholder,transmission is brought about by operation of law. The word "transmission" means devolution of title to shares, for example, devolution by death, succession, inheritance, bankruptcy, marriage, etc. The person on whom the shares devolve has to prove his entitlement by submitting appropriate documents and seek transmission. RECORDS/DOCUMENTS TO BE MAINTAINED BY DP Every depository is required to maintain the following records and documents. These have to be preserved for a minimum period of five years. Records of securities dematerialised and rematerialised. The names of the transferor, transferee, and the dates of transfer of securities. A register and an index of beneficial owners. Details of the holdings of the securities of beneficial owners as at the end of each day. Records of instructions received from, and sent to, participants, issuers, issuers agents and beneficial owners. Records of approval, notice, entry and cancellation of pledge or hypothecation. Details of participants. Details of securities declared to be eligible for dematerialisation in the depository. Such other records as may be specified by SEBI for carrying on the activities as a depository.