The word depositary is defined as the party of the institution (eg bank or trust company) receiving a deposit.

One with whom anything is lodged in trust as depository is the place where it is put. The obligation upon the depositary is that he keeps the thing with reasonable care and upon re!uest restores it to the depositor." # depository holds securities (like shares debentures bonds $overnment %ecurities units etc.) of investors in electronic form. &esides holding securities a depository also provides services related to transactions in securities. 't acts as a trustee of the owner since the securities are entrusted with him in trust. (e is also the agent of the owner of the securities. #ccording to sub)section (*#) of section *+ of the %ecurities and ,-change &oard of 'ndia #ct *..+/"depository" means a company formed and registered under the 0ompanies #ct *.12 and which has been granted a certificate of registration under sub)section (*#) of section *+ of the %ecurities an ,-change &oard of 'ndia #ct *..+. # 3epository facilitates holding of securities in the electronic form and enables securities transactions to be processed by book entry by a 3epository 4articipant (34) who is an agent of the depository offers depository services to investors. #ccording to %,&' guidelines financial institutions banks custodians stockbrokers etc. are eligible to act as 34s. The investor who is known as beneficial owner (&O) has to open a demat account through any 34 for dematerialisation of his holdings and transferring securities. The depository system envisages a deposit of securities by the various investors with the depository. This would take the form of a transfer by the various investors with the depository. This would take the form of a transfer by the holder of securities in favour of depository. Once the shares are lodged with the depository their transfer would be through book entry transfers in accounts maintained by the depository. Thus the main functions of a depository are to demateriali5e the securities and enable their transaction in book entry form. 'n the absence of depositories which provide for maintenance of ownership records in a book entry form every share transfer is re!uired to be accomplished by physical movement of share certificates to and registration with the company concerned. 6egistration of transfer of securities with depository. *. ,very depository shall on receipt of intimation from a participant register the transfer of security in the name of the transferee. +. 'f a beneficial owner or a transferee of any security seeks to have custody of such security the depository shall inform the issuer accordingly. The process often involves long delays and a significant portion of transactions end up as bad delivery due to faulty completion of paperwork. 'n many cases the process of transfer would take much longer than the two months stipulated in the 0ompanies #ct and a significant proportion of transactions would end up as bad delivery due to faulty compliance of paper work. Theft forgery mutilation of certificates and other irregularities were rampant. 'n addition the issuer has the right to refuse the transfer of a security. #ll this added to costs

and delays in settlement restricted li!uidity and made investor grievance redressal time consuming and at times intractable. Background: The 3epositories #ct initially came into force as an ordinance vi5. The 3epositories Ordinance *..1 promulgated on 7th 8anuary *..2. 't was designed to provide a legal framework for establishment of depositories to record ownership details in book entry form. The #ct also made conse!uential amendments in the 0ompanies #ct *.12/ the %ecurities and ,-change &oard of 'ndia #ct *..+/ the 'ndian %tamp #ct *9../ the 'ncome ta- #ct *.2*/ and the &enami Transactions (4rohibition)#ct *.99. The 3epositories #ct *..2 was enacted with the ob:ective of ensuring free transferability of securities with speed accuracy and security by making securities of public companies freely transferable sub:ect to certain e-ceptions by restricting companys right to use discretion in effecting the transfer securities and dispensing with the transfer deed and other procedural re!uirements under the 0ompanies #ct. The 3epositories #ct *..2 is an #ct to provide for regulation of depositories in securities and for matters connected therewith or incidental thereto. Certificate of Commencement of Business: ;o depository shall act as a depository unless it obtains a certificate of commencement of business from %,&'. The #ct provides for establishment of one or more depositories. ,very depository is re!uired to be registered with the %ecurities and ,-change &oard of 'ndia (%,&') and will have to obtain a 0ertificate for commencement of business on fulfillment of such conditions as may be prescribed. The &oard shall not grant it certificate under sub)section (*) unless it is satisfied that the depository has ade!uate systems and safeguards to prevent manipulation of records and transactions. 'nvestors opting to :oin the system will be re!uired to be registered with one or more participants who will be the agents for the depository. 'nvestors will have the choice of continuing with the e-isting securities certificates or opt for the depository mode. <nder %ection = (*) of the #ct the depository is re!uired to obtain a certificate of commencement of business from the %ecurities and ,-change &oard of 'ndia. #ccording to subsection = the &oard shall not grant a certificate under sub)section (*) unless it is satisfied that the depository has ade!uate systems and safeguards to prevent manipulation of records and transactions. The 3epository #ct provides for the establishment of depositories like the ;ational %ecurities 3epository >imited (;%3>) and the 0entral 3epository %ervices >imited providing depository services in the electronic form for securities traded in e!uity and debt markets. ,very depository must have ade!uate mechanisms for reviewing monitoring and evaluating the depositorys controls systems procedures and safeguards. 't should conduct an annual

i. ii. iii. iv.

inspection of these procedures and forward a copy of the inspection report to %,&'. The depository is also re!uired 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. 'n the event of loss or destruction sufficient back up of records should be available at a different place. #de!uate measures should be taken including insurance to protect the interests of the beneficial owners against any risks. ,very depository is re!uired to e-tend all such co)operation to the beneficial owners issuers issuers agents custodians of securities other depositories and clearing organisations as is necessary for the effective prompt and accurate clearance and settlement of securities transactions and conduct of business. Parties to a Depository: 'n a depository system the following parties are involved the depository the beneficial owner/ the participant/ the issuer. # depository would render service connected with the recording of allotment of securities or transfer of ownership of securities in its record. The service is availed of by the beneficial owner of the securities which are eligible to be dealt with by the depository system and in respect of which the service is availed of. The beneficial ownership would be pertaining to the securities of an issuer i.e. a person making an issue of securities. %ection *(*) (:) defines registered owner as a depository whose name is entered as such in the name of issuer." The participant means a person through whom the beneficial owner of the securities would avail of the depository service and is the custodial agencies like banks financial institutions as well as large corporate brokerage firms. Agreement between depository and participant: # depository shall enter into an agreement with one or more participants as its agent. #ny person through a participant may enter into an agreement in such form as may be specified by the bye)laws with any depository for availing its services. The relationship and dealings between the depository and the participant will be governed by an agreement and the participant is an agent of the depository vide %ection ? (*) of the #ct. 3epository 4articipants includes brokers banks insurance companies %tock ,-change clearing cells the 6eserve &ank of 'ndia financial institutions institutional managers fund mangers etc. %ection ?* of the 0ompanies #ct lays down two modes of ac!uiring membership of a company and in both an entry of the name of a person as a member in the register of the members of the company is a condition precedent for a person to be regarded a member of the company. (owever to facilitate the beneficial owner of shares on whose behalf the depository holds the shares to be recogni5ed as members %ection ?* in its new subsection =

provides that every person holding e!uity share capital of a company and whose name is entered as a beneficial owner in the records of a depository shall be deemed to be a member of the concerned company. 6egulation +2 of the %,&' (3epositories and 4articipants) 6egulations *..2 states that depositories participants issuers and issuers agent in addition to the rights and obligations laid down in the 3epositories #ct and the bye laws shall have the rights and obligations arising from the agreements entered into by them. In Probir Kumar Misra v. amani amaswamy it was held that after the 3epositories #ct *..2 such depositors who are holding e!uity share capital of the company and whose name is entered as beneficial owner are also deemed to be members of the company thus making them members under the #ct. In t!e case of "ort!ern Pro#ects $td. v. B%ue Coast &ote%s and esorts $td . it was contended that only persons holding e!uity shares can be members of the 0ompany in terms of %ection ?*(=) of the #ct. This was re:ected by 0ourt and it was stated that %ub)section (=) of %ection ?* is therefore only in addition to %ection ?*(*) and %ection ?*(+) and not in derogation or substitution of the first two subsections. The word shareholder and member is used in the same connotation under the #ct and the %ection covers the third category of e!uity shareholders who are neither subscribers as contemplated by %ub)section (*) nor whose names are entered in the register of members as contemplated under %ub)section (+) of %ection ?*. Depositories to indemnify %oss in certain cases. #ny loss caused to the beneficial owner due to the negligence of the depository or the participant the depository shall indemnify such beneficial owner. 'n order to protect the interests of the beneficial owners of the securities handled by the depository section *2 of the #ct seeks to re!uire the depository to indemnify loss suffered by the beneficial owner due to the negligence of the depository or the participant. # sine !ua non for claiming the compensation shall be negligence on the part of the depository or the participant as the case may be. @here loss due to the negligence of the participant is indemnified by the depository the depository shall have the right to recover the same from such participant. #ccording to %ection *9 of the #ct the &oard on being satisfied that it is necessary in the public interest or in the interest of investors so to do may by order in writing A (a) call upon any issuer depository participant or beneficial owner to furnish in writing such information relating to the securities held in a depository as it may re!uire/ or (b) authorise any person to make an en!uiry or inspection in relation to the affairs of the issuer beneficial owner depository or participant who shall submit a report of such en!uiry or inspection to it within such period as may be specified in the order. Burther the &oard may in the interest of investors and to prevent the affairs of depository being conducted in a manner detrimental to

the investors or the securities market it may issue such directions (a) to any depository or participant or any person associated with the securities market/ or (b) to any issuer as may be appropriate in the interest of investors or the securities market. The %,&' came out with the %ecurity and ,-change &oard of 'ndia (3epositories and 4articipants) 6egulations *..2 regulating various facets of law relating to depositories. The rules govern areas such as registration of depository grant of certificate of commencement of business registration of participants and details regarding rights and obligations of depositories participants issuers manner of registrat. 'urrender of certificate of security. #ny person who has entered into an agreement under section 1 shall surrender the certificate of security for which he seeks to avail the services of a depository to the issuer in such manner as may be specified by the regulations. The issuer on receipt of certificate of security under sub) section (*) shall cancel the certificate of security and substitute in its records the name of the depository as a registered owner in respect of that security and inform the depository accordingly. # depository shall on receipt of information under sub)section (+) enter the name of the person referred to in sub)section (*) in its records as the beneficial owner. (ungib%e) @ith respect to goods and %ecurities those of which any unit is by nature or usage of trade the e!uivalent of any other like unitC.@here the sub:ect of obligation is a thing if a given class the thing is said to be fungible/ i.e. the delivery of any ob:ect which answers to the generic description which will satisfy the terms of the obligation." %ection . (*) #ll securities held by a depository shall be dematerialised and shall be in a fungible form. *ptions to receive security certificate or !o%d securities wit! depository: ,very person subscribing to securities offered by an issuer shall have the option either to receive the security certificates or hold securities with a depository. (urnis!ing of information and records by depository and issuer. ,very depository shall furnish to the issuer information about the transfer of securities in the name of beneficial owners at intervals Power of Board to ca%% for information and en+uiry. The &oard on being satisfied that it is necessary in the public interest or in the interest of investors so to do may by order in writing call upon any issuer depository participant or beneficial owner to furnish in writing such information relating to the securities held in a depository as it may re!uire/ or authorise any person to make an en!uiry or inspection in relation to the affairs of the issuer beneficial owner depository or participant who shall submit a report of such en!uiry or inspection to it within such period as may be specified in the order.

Pena%ty for de%ay in demateria%isation or issue of certificate of securities. 'f any issuer or its agent or any person who is registered as an intermediary under the provisions of section *+ of the %ecurities and ,-change &oard of 'ndia #ct *..+ (*1 of *..+) fails to dematerialise or issue the certificate of securities on opting out of a depository by the investors within the time specified under this #ct or regulations or bye)laws made thereunder or abets in delaying the process of dematerialisation or issue the certificate of securities on opting out of a depository of securities such issuer or its agent or intermediary shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees whichever is less. Pena%ty for fai%ure to reconci%e records. 'f a depository or participant or any issuer or its agent or any person who is registered as an intermediary under the provisions of section *+ of the %ecurities and ,-change &oard of 'ndia #ct *..+ (*1 of *..+) fails to reconcile the records of dematerialised securities with all the securities issued by the issuer as specified in the regulations such depository or participant or issuer or its agent or intermediary shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees whichever is less. Benefits of Depository: The depository system gives a less risky settlement with implementation of collateral bases payment systems and greater profits from increased trading volume which are made possible by ;03% systems with reduced operational costs per transaction and reduced risk. There is an improved cash flow from not having funds tied up for long periods. Burther forgery and counterfeit have been eliminated with attendant reduction in settlement risk from bad deliveries. The system has led to an opportunity for development of retail brokerage business and for development of more sophisticated custodial services which can be offered to the smaller investor. There are now standardised communications between ;03% registrars and other intermediaries. #lso there is an ability to arrange pledges without movement of physical scrip and further increase overall level of trading activity li!uidity and profits. #lthough 'ndia had a vibrant capital market which is more than a century old the paper) based settlement of trades caused substantial problems like bad delivery and delayed transfer of title till recently. The enactment of 3epositories #ct in #ugust *..2 paved the way for establishment of ;%3> the first depository in 'ndia. This depository promoted by institutions of national stature responsible for economic development of the country has since established a national infrastructure of international standard that handles most of the trading and settlement in dematerialised form in 'ndian capital market. The procedure relating to depositories is mainly governed by the regulations and bye laws that are framed by the %,&' and the depositories under the power provided by the 3epositories #ct. There are immense benefits to the public by reduction of risks associated with loss mutilation theft and forgery of physical scrip. Burther there is an elimination of financial loss

owing to loss of physical scrip and greater li!uidity from speedier settlements and reduction in delays in registration. There will be greater opportunities for investment offered by new instrument and services that can be provided only when ;03% is implemented and faster receipt of benefits and rights resulting from corporate actions. There is also an improved protection of shareholders rights resulting from more time communications from the issuer and reduced transaction costs through greater efficiency. The system provides <p)to)date knowledge of shareholders names and addresses. #nd there will be savings in costs of new issues from reduction in printing and distribution costs. 't may also lead to increased efficiency of registrar and transfer agent functions and better facilities for communication with shareholders conveying benefits of corporate actions and information notices. Burthermore there will be an improved ability to attract international investors without having to incur the e-penditure of issuance in overseas markets. 'mmobilisation of securities is done by storing or lodging the physical security certificates with an organisation that acts as a custodian A a securities depository. #ll subse!uent transactions in such immobilised securities take place through book entries. The actual owners have the right to withdraw the physical securities from the custodial agent whenever re!uired by them. 6ule +9) The following securities shall be eligible for being held in demateriali5ed form in a depositoryD) 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 securiti5ed debt money market instruments Conc%usionD The 3epository #ct which provides for the establishment of depositories like ;%3> and 03%> to curb the irregularities in the capital market and protect the interests of the investors and paved a way for an orderly conduct of the financial markets through the free transferability of securities with speed accuracy and transparency. "ationa% 'ecurities Depository $imited (;%3>) in an 'ndian central securities depository based in Eumbai.F=G 't was established in *..1 as the first electronic securities depository in 'ndia with national coverage based on a suggestion by a national institution responsible for the economic development of 'ndia .F?G 't has established a national infrastructure using international standards that handles most of the securities held and settled in dematerialised form in the 'ndian capital market.F History[edit] #lthough 'ndia had a vibrant capital market which is more than a century old the paper) based settlement of trades caused substantial problems such as bad delivery and delayed transfer of title. The enactment of 3epositories #ct in #ugust *..2 paved the way for establishment of "ationa% 'ecurities Depository $imited (;%3>) the first depository in

'ndia. 't went on to established infrastructure based on international standards that handles most of the securities held and settled in de)materialised form in the 'ndian capital markets. ;%3> has stated it aims are to ensuring the safety and soundness of 'ndian marketplaces by developing settlement solutions that increase efficiency minimise risk and reduce costs. ;%3> plays a !uiet but central role in developing products and services that will continue to nurture the growing needs of the financial services industry. 'n the depository system securities are held in depository accounts which are similar to holding funds in bank accounts. Transfer of ownership of securities is done through simple account transfers. This method does away with all the risks and hassles normally associated with paperwork. 0onse!uently the cost of transacting in a depository environment is considerably lower as compared to transacting in certificates. 'n #ugust +HH. number of 3emat accounts held with ;%3> crossed one crore ;ational %ecurities 3epository >imited (;%3>) does the above tasks for the trades done on ;%,. 't is a :oint venture ofD I '3&' ('ndustrial 3evelopment &ank of 'ndia >imited)/ I ;%, (;ational %tock ,-change)/ and I <T' (<nit Trust of 'ndia). ;%3> is the first depository to be set up in 'ndia. 't was registered by %,&' on 8une 7 *..2. The second depository 0entral 3epository %ervices >imited (03%>) has been promoted by &ombay %tock ,-change and &ank of 'ndia. 't was formed in Bebruary *.... &oth depositories have a network of 3epository participants (34s) which are further electronically connected to their clients. %o 34s act as a link between the depositories and the clients. The 3epository system to some e-tent works like the banking system. There is a central bank and the rules and regulations related to the working of all the commercial foreign co)operative and other types of banks are framed by the central bank. 'n order to do the daily transactions the investors open an account with the associate banks and not with the central one. >ike an investor can have a bank account with more than one bank similarly one can have more than one 3emat #ccount. @e can further bring out the similarities as well as the differences between the two in understanding the depository system.

%ecurities that can be dematerialised The entire depository system in 'ndia is governed by the rules made by the market regulatory %,&'. #ccording to the %,&' (3epositories and 4articipants) 6egulations *..2 the following securities are eligible for holding in demateriali5ed form. *. %hares scrips stocks bonds debentures debenture stock or other marketable securities of similar nature of any incorporated company or other body corporate including underlying shares of #36s and $36s. +. <nits of mutual funds rights under collective investment schemes and venture capital funds commercial paper certificate of deposit securiti5ed debt money market instruments government securities national saving certificates kisan vikas patra and unlisted securities.

4rocess of 3ematerialisation The following steps may be followed for getting physical securities converted into 3emat form. The following diagram will make the understanding of the steps even better. %tepD * 0lientJ'nvestor submits the 36B (3emat 6e!uest Borm) and physical certificates (to be dematted) to the 34. 34 checks whether the securities are available for demat. 0lient defaces the certificate by stamping %urrendered for 3ematerialisation". 34 punches two holes on the name of the company and draws two parallel lines across the face of the certificate. This ensures that your shares are not lost in transit or misused till credit is received by you in your demat account. The 34 upon receipt of the shares and the 36B will issue the client an acknowledgement and will send an electronic re!uest to the 0ompany. %tepD + 34 enters the demat re!uest in his system to be sent to ;%3>. %tepD = 34 dispatches the physical certificates along with the 36B to the 6KT agent. Attention Investors! PAN Card is now mandatory for Demat Account With effect form April 1, 2 !, "#$I has made PAN Card compulsory for all

cate%ories of investors for openin% a Demat Account& #'istin% Demat Account holders would not (e a(le to operate the accounts if they do not produce the PAN card or do not resolve discrepancies, if any, in the PAN details (y Dec )1,

!& "uch account would (e *"uspended from De(it+ until PAN details are

verified and updated (y the depository participants ,DP-& In case of Demat accounts held .ointly, all account holder need to provide their PAN cards& /ri%inal PAN Cards need to (e produce to (e DP for verifyin% the photocopy& 0 Issued (y N"D1 in the interest of Demat account holders&C$"# 2 Introduction to 3inancial 4ar5ets 0 II %tepD ? ;%3> records the details of the electronic re!uest in the system and forwards the re!uest to the 6KT #gent. %tepD 1 6KT #gent on receiving the physical documents and the electronic re!uest verify and check them. Once the 6KT #gent is satisfied demateriali5ation of the concerned securities is electronically confirmed to ;%3>. %tepD 7 ;%3> credits the dematerialised securities to the beneficiary account of the investor and intimates the 34 electronically. %tepD 9 The 34 issues a statement of transaction to the client.