Definition Of Depository
According to Depository Act 1996, Depository means an organization where securities of a shareholder are held in the form of electronic accounts.
In other words, a Depository System is a system where transactions in securities can be undertaken without physically delivery of securities or movement of cheque. It is otherwise known as “ Scrip less Trading System” as its elements paperwork and facilitates transparency.
According to Depository Act 1996, each and every depository must be registered as a company under the company’s act and seek registration with SEBI. It facilitates the conversion of physical script into electronic form through the process of dematerialisation and conversion from depository mode to physical mode through the process of dematerialisation of security.
There are two depository in India that are:
- National Securities Depository limited (NSDL)
2. Central Depository Service Limited (CDSL)
What Is National Securities Depository limited (NSDL)
It is considered as the 1st depository company in the country, which was established in Nov, 1996 and registered under the companies act & with SEBI. It is managed by a board of directors and Govt. by its laws.
Functions Of NSDL
- Holding investors securities in electronic form.
- Transferring of securities from one person to another.
- Settlement of securities traded on exchange
- Stock lending and borrowings
- Surrender and withdrawals of securities.
What Is Central Depository Service Limited CDSL?
It is known as the second depository company in the country which is based in Mumbai and started its business on 8th February 1999. It is promoted by Bombay Stock Exchange (BSE) in association with Bank of India, Bank Of Baroda & HDFC Bank.
Functions Of CDSL
- Holding Securities either in certificated or certificated form.
- Transferring securities from one person to another person immediately.
- Providing protections to the investors.
Characteristics Of Depository System
For the sake of clarification some of the most important characteristics of the Depository System are discussed below.
- The holder has a choice either to continue with existing share, certificate or option for depository mode.
- The shares don’t have a distinct number or distinct entity.
- The investors can enjoy the economic benefits from depository.
- It does not require any stamp duty.
- The securities are easily transferable without consuming any time.
The investors have to register with one or more participants who are agents of the depository.
Objective Of Depository Act
- The depository act 1996 aims at:
- To make the securities fungible.
- Making the securities of a public limited company freely transferable.
- Exempting all transfer of share within a depository foom stamp duty.
- Dematerialization of securities in the depository mode.
- Providing a legal basis for establishment of depositories to conduct the tax regarding securities.
Constituents or Player of depository system
There are essentially 4 players of a depository in the market. They are:
The firm which acts as a custodian for securities or where the securities of an investor are holding in electronic is known as depository.
The agent of the depository that provides services to the investors under the depository system is known as depository Participant. It’s main functions are:
- Account opening and its administration.
- Dematerialization and rematerialization.
- Clearing and settlement of traders.
- Daily report generation and downloading.
The person who is the real owner of the securities and has all the rights and liabilities attached with securities held by him is known as a beneficial owner. Its name is recorded with the depository of the company.
The company that issues the securities for trading purposes is known as the Issuer. It has to maintain a registrar for registering the names of depositories as well as beneficial owners of the securities.
Facilities Offered By Depository System
- Settlement of trade electronically.
- Nomination Facility.
- Lending and Borrowing Securities.
- Freezing demand accounts.
Who Can Render Depository Service
- Anybody to eligible to provide depository service must:
- Be formed and registered as a company under the company act.
- Be registered with SEBI as a depository under the SEBI act 1992.
- Have been framed by laws with the previous approval of SEBI.
- Have obtained a certificate of commencement of business from SEBI.
- Have an adequate system and safeguard to prevent manipulation of records.
- Have one or more participants to render Depository Services on its behalf.
Powers Of SEBI under the Depository Act
- Securities exchange board of India enjoy certain power over depository act such powers are:
- To issue a certificate of commencement of business to the depositories.
- To register the depositories and the participants under the SEBI Act.
- To frame regulations in order to carry out the purpose of the depository Act.
- To give directions to any depository participant or issuer in the interest of investors.
- To regulate the player of the depository system and their relationship with investors.
- To suspend or cancel the certificate of registration after giving reasonable opportunities.
- To approve the bye laws of depositories.
Need or Benefit of Depositories
The development of the Indian financial system depends upon a good depository system. It should be considered as good when it is able to provide benefits to:
- The Investors
- The Issuers
- The Intermediaries
- The lending Book
- The Capital Market In General
For the sake of clarification such benefits of depositories are discussed below:
1.Benefits To Investors
The depository system is very much beneficial to the investors such as:
I.Speedy transfer of share
It ensures the sale of securities conveniently within a few minutes. It also helps to carry on trading transactions of securities more efficiently and allotment of bonuses or right shares immediately credited in their account.
ii.Dematerialisation & Re-materialisation
The depository system enables the investors to convert their share certificate into electronic form in the process of decentralisation. It also permits them to convert their electronic holding into a share certificate in the process of Re-materialisation.
iii. Trading Risk Avoid
The depository system helps to avoid large number of risk involved in physical transfer of shares such as:
- Loss of shares in trangit.
- Delay in transfer and registration.
- Mis-match of signatures.
- Bad deliveries etc.
iv. No stamp duty
The depository system does not require any stamp duty on transfer of share as in case of physical transfer. It helps investors to reduce their expenses on stamps. It means he has not paid any amount on stamp duty.
v. Share transfer can not be refuse
The depository system serves as a proof for transferring securities from one person to another. So, no investor can refuse regarding transfer of securities because every transaction is recorded under this system.
vi. Securities are fungible
It means the shares or securities don’t have any distinct number or certificate number under the depository system. Therefore it enables the investors to transfer and exchange their shares or securities most conveniently.
vii. Low brokerage cost
The development of depository systems eliminates middlemen, share, broker or agent etc as transactions are undertaken through electronic media. So it enables the investors to avoid brokerage costs to a large extent.
viii. Delay Reconciliation
The depository participants have to reconcile their discount to the depository at the end of every trading day so there is hardly any chance of occurring mis-match in trading of securities.
2. Benefits to Issuers
The depository system is also beneficial to the issuer company as it maintains details and compete record such benefits are:
- Proper distribution of dividends, interest & bonus to the beneficial owner.
- Reduction in volume of paperwork as far as possible.
- Exercise better control and reduce the possibility of fraud.
- Ensure wider spread of share holdings throughout the world.