Chapter - 9
Depository Systems
Chapter : 1 Introduction to Corporate Finance
Chapter: 2 Source of Corporate Finance
Chapter: 3 Issue of Shares
Chapter: 4 Issue of Debentures
Chapter: 5 Deposits
Chapter: 6 Correspondence with Members
Chapter: 7 Correspondence with Debenture holders
Chapter: 8 Correspondence with Depositors
Chapter : 9 Depository and Interests
Chapter : 10 Dividend and Interest
Chapter: 11 Financial Markets
Chapter: 12 Stock Exchange
__________________________________________________________________________________
Q.1 A) Select the correct answer from the options given below and rewrite the statements.
1. In physical mode, securities are held in ....................................... form.
a) Paper
b) Dematerialization
c) Electronic
Ans: a) Paper
2. Risk of losing certificates exists in ....................................... mode.
a) Physical
b) Dematerialized
c) Digital
Ans: a) Physical
3. In Depository System, securities are held in ......................... form.
a) Scrip based
b) electronic
c) Physical
Ans: b) electronic
4. ................ is the institute which facilitates electronic holding of securities.
a) Depository participant
b) Issuer
c) Depository
Ans: c) Depository
5. There is no payment of ................. when securities are demated.
a) Octroi
b) Wealth Tax
c) Stamp Duty
Ans: c) Stamp Duty
6. Depository Act was passed in .......................................
a) 1919
b) 1996
c) 1999
Ans: b) 1996
7. India has a ....................... depository system.
a) sole
b) multi
c) single
Ans: b) multi
8. ....................... is a constituent of depository system.
a) Government
b) Issuer
c) Trust
Ans: b) Issuer
9. ....................... is the oldest depository in India.
a) Dow Jones
b) NSDL
c) CDSL
10. Demat account is opened by ....................... .
a) Beneficial Owner
b) CDSL
c) SEBI
Ans: a) Beneficial Owner
11. Demated shares are....................... .
a) Non-transferable
b) Fungible
c) Bearer
Ans: b) Fungible
12. ....................... is a unique code given to a security.
a) IBM
b) BBM
C) ISIN
Ans: C) ISIN
13. In India ISIN for corporate securities is allotted by .......................
a) NSDL
b) Central Govt.
c) State Govt.
Ans: a) NSDL
14. ....................... has to apply for ISIN.
a) Company
b) Depository participant
c) Depositors
Ans: a) Company
15. ....................... has to pay charges to maintain Demat Account.
a) Investor
b) Issuer
c) Depository
Ans: a) Investor
16. NSDL is promoted by .......................
a) NSE
b) BSE
c) FTSE
Ans: a) NSE
17. CDSL is promoted by .......................
a) NSE
(b) BSE
c) FTSE
Ans: (b) BSE
B) Match the pairs:
|
Group
‘A |
Group
B |
|
a) Bad Delivery |
1) 1956 |
|
b) Depository
Act |
2) A 12 digit
number/code |
|
c) ISIN |
3) Connects
Government and Bank. |
|
d) Depository
Participant |
4) Second
Depository in India. |
|
e) CDSL |
5) The Issuer
Company |
|
f) Depository |
6) Problem faced
in physical mode. |
|
g) Beneficial
owner |
7) A 10 digit
number/code. |
|
|
8) Connects
Depository and Investor. |
|
|
9) First
Depository in the world. |
|
|
10) Coustodian
of securities in electronic form. |
|
|
11) Problem
faced in electronic mode. |
|
|
12) 1996 |
|
|
13) Government
Organisation. |
|
|
14) The
Investor. |
Ans:
|
Group
‘A |
Group
B |
|
a) Bad Delivery |
6) Problem faced in physical mode. |
|
b) Depository
Act |
12) 1996 |
|
c) ISIN |
2) A 12 digit number/code. |
|
d) Depository
Participant |
8) Connects Depository and Investor. |
|
e) CDSL |
4) Second Depository in India. |
|
f) Depository |
10) Coustodian of securities in electronic form |
|
g) Beneficial
owner |
7) The Investor |
C) Write a word or a term or a phrase which can substitute each of the following statements.
1. This mode of holding securities may result in loss and theft of certificates.
Ans: Physical mode,
2. The organization which holds the securities in electronic mode.
Ans: Depository
3. This system eliminates storing of certificates.
Ans: Depository
4. This system allows faster and easier transfer of securities.
Ans: Depository
5. The oldest Depository of India.
Ans: NSDL
6. The country where depository system started for the first time.
Ans: Germany
7. The registered owner of securities.
Ans: BO
8. The Agent of the Depository.
Ans: DP
9. This process converts securities into electronic form from physical form.
Ans: Demat
10. This process converts securities into physical form from electronic form.
Ans: Remat
11. This means securities are without distinctive identity number.
Ans: Fungibility
12. This is the unique code for security given in depository system.
Ans: ISIN
D) State whether the following statements are true or false.
1. Physical mode of holding securities is risky.
Ans: True
2. Allotment of securities take longer time when in physical mode.
Ans: True
3. Transfer of securities is easier in electronic mode.
Ans: True
4. Bad delivery is likely in Depository System.
Ans: False
5. Depository system began in the USA for the first time in the world.
Ans: False
6. India has a multi Depository System.
Ans: True
7. Depository system is very similar to banking system.
Ans: True
8. DP is a constituent of Depository System.
Ans: True
9. DP is an agent of Depository.
Ans: True
10. A Bank can work as a DP.
Ans: True
11. DRF is required for conversion from physical to electronic.
Ans: True
12. ISIN is a unique code given to the specific securities.
Ans: True
E) Find the odd one.
1. Elimination of storage of Certificates, Theft of Certificates, Torn Certificates.
Ans: Elimination of storage of certificate
2. NSDL, CDSL, NBFC
Ans: NBFC
3. Depository, DP, RBI.
Ans: RBI
4. DP, BO, State Government.
Ans: State Govt
5. Issuer, BO, Central Government.
Ans: Central Govt
6. DRF, RRF, PPF
Ans: PPF
F) Complete the sentences.
1. Central location for keeping securities in demated form is ......................... .
Ans: Depository
2. Freezing of debit/credit of securities is possible in ......................... .
Ans: Depository
3. First Depository of the world started in the year ......................... .
Ans: 1947
4. The Indian Depository Act was passed in the year .,............ .
Ans: 1996
5. Link between Depository and Investor is ......................... .
Ans: DP
6. Account of securities of the Investors is maintained by ......................... .
Ans: DP
7. The process which converts physical securities in electronic form is ......................... .
Ans: Demat
8. The process which converts digital securities in physical form is ......................... .
Ans: Remat
9. The Issuer company must register with ......................... .
Ans: Depository
10. The unique code identifying a security is ......................... .
Ans: ISIN
11. The first depository of India is ......................... .
Ans: NSDL
G) Select the correct option from the bracket.
|
Group ‘A’ |
Group ‘B’ |
|
a) Dematerialization |
1)
------------ |
|
b)
----------- |
2) DP |
|
c) First
depository of world |
3) --------- |
|
d) CDSL |
4)
----------- |
(1999, Agent of Depository, Germany, Physical to electronic)
Group ‘A’ | Group ‘B’ |
a) Dematerialization | 1) Physical to electronic |
b) Agent of Depository | 2) DP |
c) First depository of world | 3) Germany |
d) CDSL | 4) 1999 |
|
Group ‘A’ |
Group ‘B’ |
|
a) First
depository of world |
1)
------------ |
|
b)
----------- |
2) Rematerialisation |
|
c) Fungibility |
3) --------- |
|
d) ----------- |
4) ISIN |
(12 digit code, NSDL, Electronic to physical, No distinctive number)
|
Group ‘A’ |
Group ‘B’ |
|
a) First
depository of world |
1)
NSDL |
|
b) Electronic to physical |
2) Rematerialisation |
|
c) Fungibility |
3) No distinctive number |
|
d) 12 digit code |
4) ISIN |
H) Answer in one sentence.
1. What is Depository System ?
Ans: Depository system hold securities in electronics form, where transfer and settelment of securities are done electronically.
2. Give examples of action termed as corporate action.
Ans: payment of dividend, issue of bonus share, offering of right share, easy to redemption of debenture, marger and aquisition, etc. Are the example of action termed as corporate action.
3. When was Depository Act passed in India ?
Ans: In india, Depository Act passed at 1996.
4. What is a DP ?
Ans: Financial intermediate which provides depository service i.e. financial services relating to holding, maintaining and dealing securities into an electronic form is called as Depository Participants.
5. What is Dematerialization ?
Ans: The process of conversion of physical certificate as share certificate and other securities into an electronic mode is called as Dematerialization.
6. What is Rematerialization ?
Ans: The process of conversion of electronics holding of securities into physical certificate is called Rematerialization.
7. What is ISIN ?
Ans: ISIN is stand for International Securities Number and It is 12 digit code that having uniquely identifies specific securities issue.
8. Name the depositories in India ?
Ans: There are two depositories system in India:
a) The National Securities Depository Limited (NSDL)
b) The Central Depository Services Limited (CDSL)
I) Correct the underlined word/s and rewrite the following sentences.
1. Electronic mode of holding securities is risky.
Ans: Physical
2. Allotment and Transfer of securities is time consuming in electronic mode.
Ans: Physical mode
3. Banking system leads to a scrip less capital market.
Ans: Depository
4. Storage of Certificates is not required in Physical mode of holding
Ans: Depository/Electronic
5. India has a single Depository system.
Ans: Multi
6. Depository Participant in India has to register under the partnership act.
Ans: SEBI Act
7. Demat accounts are opened and maintained by the Depository.
Ans: DP
8. Securities are fungible in Physical mode.
Ans: Electronic
9. ISIN is a code given to a company.
Ans: Securities
10. ISIN of Indian Government securities is issued by NSDL.
Ans: RBI
J. Arrange in proper order.
1. a) Gets Statement of Accounts
b) Open Demat Account
c) Submit DRF
Ans: b) Open Demat Account, c) Submit DRF, a) Gets Statement of Accounts
2. a) Investor (BO) submits application for securities to issuer company.
b) Depository intimates the DP about crediting BO's Account.
c) Issuer company gives details of allotment to Depository.
Ans: . a) Investor (BO) submits application for securities to issuer company, c) Issuer company gives details of allotment to Depository, b) Depository intimates the DP about crediting BO’s Account.
Q.2 Explain the following terms/concepts.
1. Depository system
Ans: Under Depository System, securities are held in electronic form. The transfer and settlement of securities are done electronically.
The Depository System maintains accounts of the shareholder, enables transfer, collects dividends, bonus shares, etc. on behalf of the shareholder.
This system is also called as scripless trading system.
2. Dematerialization
Ans: Process of converting Physical certificates of securities into electronic form.
The paper form of securities is converted in to digitally/ electronically held securities.
It uses 'DRF' : Viz. 'Dematerialization Request Form' from Investor to the DP
3. Rematerialization
Ans: It is the process of conversion of electronic form of securities into physical
form.
The electronic records are converted into physical/paper form securities.
It uses 'RRF' : viz Rematerialization Request Form’ from Investor to the DP.
4. Fungibility
Ans: In financial terms, fungibility means the state of being interchangeable. Some financial assets are fungible while some are not fungible. e.g.
a) land is not fungible as every unit of land has its unique quality which adds to or reduces its value.
b) Currency note is fungible as there is no difference between two currency notes of the same value.
5. ISIN
Ans: ISIN is stand for International Securities Number and It is 12 digit code that having uniquely identifies specific securities issue.
2) ISINs in any country are allotted by that country’s NNA (National Numbering Agency.
3) ISIN is a standard numbering system which is accepted globally.
4) The International Organization of Standardization (ISO) currently defines ISIN’s structure.
Q.3 Study the following case/situation and express your opinion.
1. Mr. Z holds 100 shares of Peculiar Co. Ltd. in Physical mode and wishes to convert the same in electronic mode :
a) Mr. Z holds a Saving Bank Account with CFDH Bank Ltd. Can he deposit his shares in this account for demat ?
Ans: No, Mr, Z cannot deposit his shares in his bank account for Demat.
b) What type of account is needed for the same ?
Ans: No, Mr. Z cannot deposit his shares in his bank account for Demat.
c) Is it the RBI which will be the custodian of shares of Mr. Z after demating ?
Ans: No, RBI cannot act as the custodian of shares of Mr. Z. The bank can act as a custodian.
2. Mr. R holds 100 shares of Peculiar Co. Ltd. in Demat mode :
a) He wants to transfer one share each to his wife, daughter and son. Can he do so ?
Ans: Mr. R can transfer one share each to his wife, daughter, and son. For that, they must have a Demat Account.
b) Does he need to submit DRF or DIS if he wants to transfer his shares ?
Ans: If Mr. R wants to transfer his shares, he has to submit DRF or DIS to Depository Participants.
c) Can he nominate his wife in his demat account ?
Ans: Yes, Mr. R can nominate his wife in his Demat account. Every Individual Investor can avail nomination facility.
3. Mrs. Z wishes to open a Demat account in her name :
a) Can she open the account going to Mumbai office of NSDL ?
Ans: No, Mrs. Z cannot open the account going to the Mumbai office of NSDL. Because NSDL is depository. She can open an account with DP.
b) Is she required to pay for opening of account and its maintenance ?
Ans: Yes, Mrs. Z is required to pay for opening of account and its maintenance.
c) Does she have to send the shares to respective company for demating ?
Ans: No, Mrs. Z. is not required to send the shares to the respective company for demating.
4. Mr. L wants to demat his 25 shares of Peculiar Co. Ltd. bearing certificate No. 100 and distinctive No. 76-100.
a) Which form is he required to fill as a written request to the DP ?
Ans: Mr. L has to fill and submit the DRF form and certificates to the DP.
b) Does he have to fill instrument of transfer if he wishes to transfer the same after demat ?
Ans: Mr. L is not required to fill instrument of transfer if he wishes to transfer the same after Demat.
c) Does he have to quote certificate no. and distinctive no. if he wishes to transfer his shares after it is in demat form ?
Ans: The securities in Demat form are fungible. They do not have any certificate no. and distinctive no. Therefore Mr. L is not required to quote certificate no. and distinctive no. if he wishes to transfer his shares after it is in Demat form.
5. Mr. S holds 50 shares of Peculiar Co. Ltd. in demat form. The company has declared a dividend of ` 5/- per share and Bonus of 1:1 to its shareholders.
a) How will Mr. S get his dividend ?
Ans: The account of Mr.S is automatically credited for dividends by the company through corporate actions.
b) Will he get Bonus share in Physical or demat ?
Ans: Mr. S will get bonus shares in Demat mode. His account is automatically credited by the company through corporate actions.
c) Who is entitled to dividend and Bonus : Mr. S or the depository ? (NSDL in this case)
Ans: Mr. S is the beneficial owner and therefore he is entitled to get dividend and bonus shares.
Q.4 Distinguish between the following.
1. Dematerlization and Rematerlization
Ans:
|
Point |
Dematerlization |
Rematerlization |
|
1. Meaning |
Process of
converting Physical certificates of securities into electronic form. |
It is the
process of conversion of electronic form of securities into physical form. |
|
2. Conversion |
Here, the paper
form of securities is converted in to digitally/ electronically held
securities. |
Here, the
electronic records are converted into physical/paper form securities. |
|
3. Use of Form |
It uses 'DRF' :
Viz. 'Dematerialization Request Form' from Investor to the DP |
It uses 'RRF' :
viz Rematerialization Request Form’ from Investor to the DP. |
|
4. Sequence |
This is an
initial process. It is a primary and Principal function of the depository |
This is a
reverse process. It is a secondary and supporting function of depository.
Already demated securities are remated. |
|
5. Identification
of Securities |
Demated
securities have no distinctive numbers. They are fungible |
Remated
securities will have certificate and distinctive numbers as issued by
company. |
|
6. Securities
Maintenance Authority |
Depository is
the custodian of securities and records. |
The issuing
company is the record keeping authority. Securities are maintained by the
investor. |
|
7. . Difficulty
of Process |
Demat is an easy
process. Also its not a time consuming process |
Remat is not
only a time consuming but also a complex process |
Q.5 Answer the brief.
1. Explain disadvantages of physical mode of holding securities.
Ans: Physical mode of holding securities : It means securities are held in the form of paper certificates.
It has following disadvantages :
1) Risk : Certificates of papers can be lost, damaged, torn, stolen, misplaced during transit, etc.
2) Efforts in Duplicating : Obtaining duplicate certificates (if original certificate is lost) involves time, efforts and money.
3) Delay in allotment of securities : Allotment of new securities takes longer time.
4) Delay in Transfer and Transmission of securities : More time is involved in transfer and transmission of securities as it involves actual handling of physical certificates.
5) Risk of Bad Delivery : Delivering certificates which are torn, forged, etc. creates problems in buying and selling of securities.
2. Explain any four advantages of Depository system to Investor.
Ans: ADVANTAGES OF DEPOSITORY SYSTEM
A) To Investors :
1) Elimination of Risk : All risks associated with physical certificates like delays, lost, theft, mutilation, bad deliveries, etc. are totally eliminated.
2) Safety : It is the most safe and secure way of holding securities. The entire system functions under the Depository Act and is monitored by SEBI.
e.g. The Investor can keep his account in a ‘Freeze / Lock' mode to avoid / prevent unexpected debit or credit or both by giving instructions to the DP.
3) Easy Transfer of shares :
(a) Efforts in filling transfer forms and lodging the documents is eliminated.
(b) Also the stamp duty levied on transfer of physical shares is not applicable.
(c) Processing time in transfer of securities is reduced and neither the securities nor the cash is tied / held up for unnecessarily long time.
4) Updates and Intimation : The investor is provided with the status of the holdings and transactions by DP and occasionally by the Depository too.
5) Security against Loan : Dematerialised securities are preferred by banks and financial institutions as security against loan.
6) No concept of ‘Lots’ : The system of odd and even lot stands abolished. The market lot is one share for dematerialised securities.
7) Nomination Facility : Individual Investors can avail of nomination facility. This simplifies the process in the event of the death of the investor.
8) Automatic Credit : The account of investor is automatically credited/debited in case of a change initiated by the company which impacts the securities. This is called ‘Corporate Action’.
Few examples which can be termed as Corporate Action are : Payment of Dividend, Issue of Bonus Shares, Offering of Rights Shares, Early Redemption of Debentures, Mergers and Acquisitions, etc.
3. Explain four advantages of Depository system to the Company.
Ans: To Companies :
1) Up-to-date Information : The up-to-date information about investors is provided by the depository.
2) Reduction in costs and efforts : Costs, efforts and time involved in printing and distribution of certificates in cases of new issues, bonus, transfers, etc. is saved.
3) Better Investor - Company Relationships : The complaints arising out of loss of certificates, signature differences, long lapses of time in executing requests, etc. is substantially reduced. It leads to better communication with investors and increased goodwill for the company.
4) International Investment : Under Depository System, better and quicker services can be provided and this attracts investments from abroad.
4. Explain Depository as constituent of Depository System.
Ans: The Depository :
1) It is an organization like the Central Bank where securities are held in electronic form at the investor’s request.
2) It also provides different services related to different transactions in such securities.
3) It is responsible for safe-keeping of the investor's securities.
4) There is no direct access to investor with the Depository.
5) It works as a link between the company and investors.
5. Explain DP as the constituent of Depository system.
Ans: Depository Participant (DP) :
1. It is the agent of Depository
2. DP is registered under the SEBI Act. It enjoys rights and obligations as specified under SEBI (Depository and Participants) Regulations of 1996.
3. It is an intermediary appointed by Depository.
4. DP acts as a link between Depository and the investor.
5. It directly deals with customers. It sends statement of accounts periodically.
6. It functions like a securities bank.
7. It facilitates Demateralisation.
8. It credits securities in the event of Rights Issue, Bonus Issue, etc.
9. It handles instant transfers of pay-outs like dividend, interest, etc.
10. It settles trade electronically.
11. Following can work as DPs :
a) Financial Institutions b) Banks c) Approved Foreign Banks
d) Custodians : Responsible for overseeing operations of assets/fund. e) Stock Brokers
f) Clearing Corporation g) NBFC (Non Banking Financial Company)
h) Registrar to an Issue or Share Transfer Agents
12. The DP maintains account of securities of each investor.
13. The DP has a unique number for identification.
Q.6 Justify the following statements.
1. Electronic holding of securities is safer than physical holding.
Ans: a) Under a depository system securities are held in electronic form.
b) All risks associated with physical certificates like delays, lost, theft, mutilation, bad deliveries, etc. are totally eliminated.
c) It is the safest and most secure way of holding securities.
d) It offers scope for paperless trading by using state-of-art technology.
e) It leads to the elimination of storage and handling of certificates.
f) Therefore, Electronic holding of securities is safer than physical holding.
2. Depository provides easy and quicker transfer of shares.
Ans: a) Under a depository system securities are held in electronic form.
b) The transfer and settlement of securities done electronically.
c) Efforts in filling transfer forms and lodging the documents is eliminated.
d) Also the stamp duty levied on the transfer of physical shares is not applicable.
e) Processing time in the transfer of securities is reduced and neither the securities nor the cash is tied/held up for unnecessarily a long time.
f) Hence, Depository provides easy and quicker transfer of shares.
3. Depository system results in reduced time, cost and efforts.
Ans: a) Under a depository system securities are held in electronic form.
b) The transfer and settlement of securities done electronically.
c) Processing time in the transfer of securities is reduced and neither the securities nor the cash is tied/held up for unnecessarily a long time.
d) Costs, efforts, and time involved in printing and distribution of certificates in cases of new issues, bonus, transfers, etc. is saved.
e) Efforts in filling transfer forms and lodging the documents is eliminated.
f) Also the stamp duty levied on the transfer of physical shares is not applicable.
g) Hence, the Depository system results in reduced time, cost and effort.
4. Depository system is very similar to the Banking system.
Ans: a) Banking system keeps the money safe. Similarly, the Depository system keeps the securities safe.
b) In bank funds are held in accounts having unique numbers. Similarly, Securities are held in accounts having unique IDs.
c) Like banks, There is no physical handling of securities during allotments, transfers, etc.
d) In the banking system The transfer of funds between accounts is done. Similarly, in the Depository system, The transfer of securities between accounts is done.
e) Hence, the Depository system is very similar to the Banking system.
5. DP is an important constituent of Depository system.
Ans:
It is the agent of the Depositor. It is an intermediary appointed by Depository.
DP is registered under the SEBI Act. It enjoys rights and obligations as specified under SEBI (Depositor and Participants) Regulations of 1996.
DP acts as a link between Depositor and the investor.
It directly deals with customers. It sends statements of accounts periodically.
It functions like a securities bank. The DP maintains account of securities of each investor.
It facilitates Dematerialisation.
It credits securities in the event of Rights Issue, Bonus Issue, etc.
It handles instant transfers of pa-outs like dividend, interest, etc.
It settles trade electronically.
Hence, DP is an important constituent of Depository system.
6. Depository system allows both : Physical to electronic and electronic to physical conversion.
Ans: a) Depository is an organization like the Central Bank where securities are held in electronic form at the investor’s request.
b) Depository system convert physical certificates into electronic and electronic into physical.
c) Dematerialization is a process whereby a client can get physical certificates converted into electronic mode.
d) Rematerialization is the process whereby a client can get his electronic holdings of securities converted into physical certificates.
e) All risks associated with physical certificates like delays, loss, theft, mutilation, bad deliveries, etc. are totally eliminated.
f) Hence, the Depository system allows both: Physical to electronic and electronic to physical conversion.
7. ISIN is necessary component of Demat.
Ans: 1) It is a code that uniquely identifies a specific securities issue.
2) ISINs in any country are allotted by that country’s NNA (National Numbering Agency)
3) ISIN is a standard numbering system that is accepted globally.
4) In India, issuing ISIN to securities is assigned by SEBI to NSDL (for demated shares) SEBI works as NNA in India.
5) For Government securities, allotment of ISIN is done by the RBI.
6) ISIN consists of a 12 (Twelve) digit alpha-numeric code which is divided in 3 (Three) parts.
7) The company has to apply for ISIN for its securities with documents like prospectus.
8) Hence, ISIN is a necessary component of Demat.
Q.7 Answer the following questions.
1. What is Depository System and explain its advantages.
Ans: Under Depository System, securities are held in electronic form. The transfer and settlement of securities are done electronically. The Depository System maintains accounts of the shareholder, enables transfer, collects dividends, bonus shares, etc. on behalf of the shareholder. This system is also called as scripless trading system.
BENEFITS / ADVANTAGES OF DEPOSITORY SYSTEM
A) To Investors :
1) Elimination of Risk : All risks associated with physical certificates like delays, lost, theft, mutilation, bad deliveries, etc. are totally eliminated.
2) Safety : It is the most safe and secure way of holding securities. The entire system functions under the Depository Act and is monitored by SEBI. e.g. The Investor can keep his account in a ‘Freeze / Lock' mode to avoid / prevent unexpected debit or credit or both by giving instructions to the DP.
3) Easy Transfer of shares : (a) Efforts in filling transfer forms and lodging the documents is eliminated. (b) Also the stamp duty levied on transfer of physical shares is not applicable. (c) Processing time in transfer of securities is reduced and neither the securities nor the cash is tied / held up for unnecessarily long time.
4) Updates and Intimation : The investor is provided with the status of the holdings and transactions by DP and occasionally by the Depository too.
5) Security against Loan : Dematerialised securities are preferred by banks and financial institutions as security against loan.
6) No concept of ‘Lots’ : The system of odd and even lot stands abolished. The market lot is one share for dematerialised securities.
7) Nomination Facility : Individual Investors can avail of nomination facility. This simplifies the process in the event of the death of the investor.
8) Automatic Credit : The account of investor is automatically credited/debited in case of a change initiated by the company which impacts the securities. This is called ‘Corporate Action’.
Few examples which can be termed as Corporate Action are : Payment of Dividend, Issue of Bonus Shares, Offering of Rights Shares, Early Redemption of Debentures, Mergers and Acquisitions, etc.
B) To Companies :
1) Up-to-date Information : The up-to-date information about investors is provided by the depository.
2) Reduction in costs and efforts : Costs, efforts and time involved in printing and distribution of certificates in cases of new issues, bonus, transfers, etc. is saved.
3) Better Investor - Company Relationships : The complaints arising out of loss of certificates, signature differences, long lapses of time in executing requests, etc. is substantially reduced. It leads to better communication with investors and increased goodwill for the company.
4) International Investment : Under Depository System, better and quicker services can be provided and this attracts investments from abroad.
2. Explain the constituents of Depository system.
Ans: CONSTITUENTS OF DEPOSITORY SYSTEM All operations under the Depository System is performed by Depository with the help of its constituents as explained below :
(1) The Depository :
1) It is an organization like the Central Bank where securities are held in electronic form at the investor’s request.
2) It also provides different services related to different transactions in such securities.
3) It is responsible for safe-keeping of the investor's securities.
4) There is no direct access to investor with the Depository.
5) It works as a link between the company and investors.
(2) Depository Participant (DP) :
1. It is the agent of Depository
2. DP is registered under the SEBI Act. It enjoys rights and obligations as specified under SEBI (Depository and Participants) Regulations of 1996.
3. It is an intermediary appointed by Depository.
4. DP acts as a link between Depository and the investor.
5. It directly deals with customers. It sends statement of accounts periodically.
6. It functions like a securities bank.
7. It facilitates Demateralisation.
8. It credits securities in the event of Rights Issue, Bonus Issue, etc.
9. It handles instant transfers of pay-outs like dividend, interest, etc.
10. It settles trade electronically.
11. Following can work as DPs :
a) Financial Institutions
b) Banks
c) Approved Foreign Banks
d) Custodians : Responsible for overseeing operations of assets/fund.
e) Stock Brokers
f) Clearing Corporation
g) NBFC (Non Banking Financial Company)
h) Registrar to an Issue or Share Transfer Agents
12. The DP maintains account of securities of each investor.
13. The DP has a unique number for identification.
(3) The Beneficial Owner (BO) :
1. The BO is the investor of securities who has availed the services of Depository Participant.
2. BO is entitled to all rights, benefits and is subject to all liabilities with respect to securities held by Depository.
3. The BO can also be called as client of Depository and DP.
4. BO/Client is required to open a Demat account with the DP for electronic holding of securities. BO has to pay charges to the DP for availing the services of DP.
5. BO is given a unique account number in which securities are held.
(4) The Issuer Company :
1. It means the company which has issued the securities which are dematerialized.
2. It must register with the Depository.
0 Comments