Module: 2 - Capital Markets of India - Depositories & Demat Format or Virtual Holding of Securities
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Depositories have brought forth far reaching change in the trading of securities by dispensing with the need for physical exchange of securities traded and creating the concept of virtual holding of securities in electronic form. This part explains what are depositories and how they function.

A depository is an organization, which holds the shares in the form, of electronic accounts in the same way a bank holds the money. Buying and selling electronic shares in the market is just like selling physical shares, only it's much more simple and safe. Under the Depository System, transfer of ownership of securities is done by book entry similar to a bank deposit account. Under the system, the Depository Company ensures delivery of shares against payment. The company also undertakes to distribute dividends, Bonus shares, etc. to its account holders and monitor all the accounts.

A depository interfaces with its investors through its agents called depository participants (DPs). If an investor wants to utilize the services offered by a depository, the investor has to open an account with a DP. This is similar to opening an account with any branch of a bank in order to utilize the bank's services.

In India the Depositories Act, 1996 defines and regulates the powers and functions of Depositors under the jurisdiction of SEBI, the Regulator. As per the Act a "depository" means a company formed and registered under the Companies Act, 1956 and which has been granted a certificate of registration under sub-section (1A) of section 12 of the Securities and Exchange Board of India Act, 1992. The minimum net worth stipulated by SEBI for a depository is Rs. 100 crore. At present two Depositories viz. National Securities Depository Limited (NSDL) and Central Depository Services (I) Limited (CDSL) are registered with SEBI.

A Depository Participant (DP) is an agent of the depository through which it interfaces with the investor. A DP can offer depository services only after it gets proper registration from SEBI. A Depository can be compared with a bank, like wise a DP may be compared with a branch of a Bank. As present approximately 401 DPs are registered with SEBI. A list of DP's and their addresses are displayed at the website of SEBI.

Dematerialization is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form and credited in the investor's account.

The Indian capital market has witnessed unprecedented growth in use of information technology in the past few years, which has made it possible to carry out modernization in trading and settlement systems. Automation of the trading mechanism has given us a trading system comparable with the best in the world. Establishment of a settlement guarantees mechanism removed the counter party risk in stock exchanges. Though the advent of automated trading brought with it several associated benefits such as transparency in trading and equal opportunity for market players all over the country; the problems related to the settlement of trades such as high instances of bad deliveries and long settlement cycles have continued. As an answer to these myriad settlement problems, The Government passed The Depositories Act, 1996 with retrospective effect from 20th day of September 1995. The National Securities Depository Limited (NSDL) was inaugurated in Nov 1996 as the first depository in the country. The latest major development, which helped hasten the awakening of the capital market, was that from Jan 4th, 1999, all category of investor can deliver only in dematerialized form with respect to a select list of securities

Benefits are enumerated below: -

• A safe, convenient way to hold securities;

• Immediate transfer of securities;

• No stamp duty on transfer of securities;

• Elimination of risks associated with physical certificates such as bad delivery , fake securities, Delays, thefts etc.;

• Reduction in paperwork involved in transfer of securities;

• Reduction in transaction cost;

• · No odd lot problem, even one share can be sold;

• Nomination facility;

• Change in address recorded with DP gets registered with all companies in which investor holds securities electronically eliminating the need to correspond with each of them separately;

• Transmission of securities is done by DP eliminating correspondence with companies;

• Automatic credit into demat account of shares, arising out-of bonus/split/consolidation/merger etc.

• Public offering can be got directly in the electronic form. In the public issue application form there is a provision to indicate the manner in which an investor wants the securities allotted. He has to mention the BO ID and the name and ID of the DP on the application form. Any allotment made will be credited into the BO account.

• To receive cash corporate benefit such as dividend / interest etc. - The concerned company would obtain the details of beneficiary holders and their holdings as on the date of the book closure / record date from Depositories. The payment to the investors will be made by the company through the ECS (Electronic Clearing Service) facility, wherever available. Thus the dividend / interest will be credited to investor's bank account directly. Where ECS facility is not available dividend / interest will be given by issuing warrants on which the investor's bank account details are printed. The bank account details will be those, which the investor would have mentioned in his account opening form or changed thereafter.

• To receive non-cash corporate benefit such as bonus etc. - The concerned company would obtain the details of beneficiary holders and their holdings as on the date of the book closure / record date from depositories. Beneficiary's entitlement will be credited by the company directly in ones depository account.

• In case of discrepancies in corporate benefits - In case of discrepancies in corporate benefits, one can approach his/her DP or the company / its R&T Agents.

Buying/selling in the stock market either by way of regular investment or in terms of trading on revolving basis needs sound legal, financial and operational knowledge on the part of the Investor. It is also a fact that the net saver in the Indian community is the average middle-income household. The small man is the real provider of the capital needs of the country. How to mobilize this savings to channel in corporate investments? This is possible due to the creditable role of SEBI, by which "Investors are enabled to make informed choices and decisions and achieve fair deals in their financial dealings". But SEBI does not play a direct role and its presence is not seen by the ordinary investor, while buying or selling stock. SEBI has introduced a number of intermediaries equipped with specialised skills and expertise to be available to the common investor, to carry out and assist the Investor and the Corporates with a package of investment services. It is the role of SEBI to approve, register all these intermediaries and to regulate their functioning to provide a risk-free environment in the Stock Market.

SEBI's functions include inter-alia

• Registering and regulating the working different intermediaries and such other intermediaries who may be associated with securities markets in any manner.

• Registering and regulating the working of the depositories, participants, custodians of securities, foreign institutional investors, credit rating agencies and such other intermediaries as the Board may, by notification, specify in this behalf.

• registering and regulating the working of venture capital funds and collective investment schemes including mutual funds;

Some of SEBI registered Intermediaries, whose functions and responsibilities are supervised and regulated by SEBI are:

• stock brokers,

• sub-brokers,

• share transfer agents,

• bankers to an issue,

• trustees of trust deeds,

• registrars to an issue,

• merchant bankers,

• underwriters,

• portfolio managers,

• investment advisers

Every investor may have to deal with some of the intermediaries. The role of SEBI is to regulate and standardise the role of different intermediaries, by defining eligibility criteria for the registration of intermediaries and regulating operating systems and functional procedures. SEBI being a quasi-judicial body is endowed with penal powers to deal with violations of the code by anyone of the Intermediaries registered with and functioning under its jurisdiction.