2. Interoduction to Depositry System

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What is a depository?

A "Depository" is a facility for holdingsecurities, which enables securitiestransactions to be processed by bookentry. To achieve this purpose, thedepository may immobilize thesecurities or dematerialise them (sothat they exist only as electronicrecords).India has chosen the

dematerialisation route. In India, adepository is an organisation, whichholds the beneficial owner's securitiesin electronic form, through aregistered Depository Participant(DP). A depository functionssomewhat similar to a commercial

bank. To avail of the services offeredby a depository, the investor has toopen an account with a registered DP

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What is dematerialisation?

"Dematerialisation" is a process bywhich physical certificates areconverted into electronic form.

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Who is a Beneficial Owner (BO)?

"Beneficial Owner" is a person inwhose name a demat account isopened with CDSL for the purpose ofholding securities in the electronicform and whose name is recorded assuch with CDSL.

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Who is a Depository Participant?A "Depository Participant" (DP) is anagent of the depository who isauthorised to offer depositoryservices to investors. Financialinstitutions, banks, custodians andstockbrokers complying with therequirements prescribed by SEBI/Depositories can be registered as DP.Further information on DP, can beaccessed from CDSL's websitewww.cdslindia.com

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Who is an Issuer?

"Issuer" means any entity making anissue of securities.


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What is an ISIN (International

Securities Identification Number)?"ISIN" is the unique identificationnumber given to a security of anissuer at the time of admitting suchsecurity in the depository system.

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Whether different securities issuedby the same Issuer will have sameISIN?

No, different securities issued by thesame issuer will have different ISINs.

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What services are provided by aDP?

Following services can be availed ofthrough a DP :

a) Dematerialisation, i.e. gettingphysical securities converted intoelectronic form.

b) Rematerialisation, i.e. gettingelectronic securities balances held ina BO account converted into physical


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form.c) To maintain record of holdings inthe electronic form.

d) Settlement of trades by delivering /receiving underlying securities from /in BO accounts.

e) Settlement of off-market trades i.e.transactions between BOs enteredoutside the Stock Exchange.

f) Providing electronic credit inrespect of securities allotted byissuers under IPO or otherwise.

g) Receiving on behalf of demataccount holders non-cash corporatebenefits, such as, allotment of bonusand rights shares in electronic formor securities resulting uponconsolidation, stock split or merger /amalgamation of companies.

h) Pledging of dematerialisedsecurities & facilitating loans againstshares.

i) Freezing of the demat account fordebits, credits, or both.

j) Internet facilities "easi" and"easiest", if the DP is registered forthe same with CDSL.


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Demat account

From Wikipedia, the free encyclopedia

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tone used on Wikipedia. Tagged sinceMarch 2010.

The term Demat, in India, refers to a

dematerialised account for individual Indiancitizens to trade in listed stocks ordebentures,required forinvestors by The SecuritiesExchange Board of India (SEBI). In a demataccount, shares and securities are held


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electronically instead of the investor takingphysical possession of certificates. A DematAccount is opened by the investor whileregistering with an investment broker(or subbroker). The Demat account number is quotedfor all transactions to enable electronicsettlements of trades to take place.

Access to the Demat account requiresan internetpassword and a transactionpassword. Transfers or purchasesofsecurities can then be initiated. Purchasesand sales of securities on the Demat accountare automatically made once transactions areconfirmed and completed.

[edit]Advantages of DematA Demat account reduces brokerage charges(which are usually around 2.5%), makespledging/hypothecation of shares easier,enables quick ownership of securities onsettlement resulting in increased liquidity,

avoids confusion in the ownership title ofsecurities, and provides easy receipt of publicissue allotments orIPOs.


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A Demat account also helps avoid problemstypically associated physical share certificates,for example: delivery failures caused bysignature mismatch, postal delay and loss ofcertificate in transit. Further, it eliminates risksassociated with forgery and loss due todamaged stock certificates. Demat accountholders also avoid stamp duty (as against 0.5per cent payable on physical shares) and filling

up of transfer deeds. Demat account holdersusually obtain quicker receipt of benefits likestock splits and bonus

Indian Market Scenario

The Indian capital market has seen an

unprecedented boom in the last 15 years interms of number ofstock exchanges, listedcompanies, trade volumes, marketintermediaries, and investor population.However, this surge in activity created manyinitial problems due to the large volumes of

paperwork. Trading, clearing and settlements atlarge volumes using only paper-basedinstruments were beset with problems that


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threatened the very survival of the Indian capitalmarket.

Until the late eighties, the common man keptaway from capital market and thus the amountof funds mobilized through the market wasrelatively meager. Indian markets weredrowning in paper shares which were becomingincreasingly tedious to maintain. Problems suchas fake and stolen shares, fake signatures andsignature mismatch, duplication and mutilationof shares, and transfer problems plagued thetraditional paper-based trading and settlementsystem. On top of all these risks, the systemhad cumbersome procedures and excessivepaperwork that deterred both retail andinstitutional investors from entering the capitalmarket. Investors felt under-compensated forthese risks borne by them. Thus, lack ofmodernization in a large, inefficient systembecame a major hindrance to the growth of thecapital market.

Real growth and improvement appeared in theearly nineties in the wake of the economicliberalization initiatives of the IndianGovernment. Economic reforms were


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envisaged in various financial sectors: banking,capital markets, securities, marketregulation, mutual funds, foreign investmentsand Governmental control. Financial institutionsand stock exchanges knew that stockcertificates were the main cause of investordisputes and arbitration cases. The traditionalpaper-based system simply could not keep upwith the rapid pace of economic growth, and a

better alternative was mandated.

The Government of India decided to set up afully automated exchange model that couldoffer screen-based trading and depositories toeliminate various bottlenecks in the capitalmarket, particularly in the clearing andsettlement system in stock exchanges.

Goal Of Demat System

India adopted the Demat System for electronicbookkeeping, wherein shares and securities arerepresented and maintained electronically, thus

eliminating the troubles associated with papershares. After the introduction of the depositorysystem by the Depository Act, 1996, theprocess of sale, purchase and transfer of


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shares became significantly easier and most ofthe risks associated with paper certificates weremitigated.

Demat Benefits

The benefits of Demat are enumerated asfollows:

Easy and convenient way to hold securities

Immediate transfer of securities

No stamp duty on transfer of securities

Safer than paper-shares (earlier risksassociated with physical certificates such asbad delivery, fake securities, delays, thefts etcare mostly eliminated)

Reduced paperwork for transfer of securities Reduced transaction cost

No "odd lot" problem: even one share can besold

Change in address recorded with a DP getsregistered with all companies in which

investor holds securities eliminating the needto correspond with each of them separately

Transmission of securities is doneby DP eliminating the need for notifyingcompanies


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Automatic credit into demat account forshares arising out ofbonus/split/consolidation/merger etc

A single Demat account can hold investmentsin both equity and debt instruments

Traders can work from any where (e.g. evenfrom home)

Benefit to the Company

The depository system helps in reducing thecost of new issues due to lower printing anddistribution costs. It increases the efficiency ofthe registrars and transfer agents and theSecretarial Department of the company. Itprovides better facilities for communication and

timely service to shareholders and investors.Benefit to the Investor

The depository system reduces risks involved inholding physical certificates, e.g., loss, theft,mutilation, forgery, etc. It ensures transfersettlements and reduces delay in registration of

shares. It ensures faster communication toinvestors. It helps avoid bad delivery problemsdue to signature differences, etc.It ensuresfaster payment on sale of shares. No stamp


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duty is paid on transfer of shares. It providesmore acceptability and liquidity of securities.

Benefits to BrokersIt reduces risks of delayed settlement. Itensures greater profit due to increase in volumeof trading. It eliminates chances of forgery bad delivery. It increases overall of tradingandprofitability. It increases confidence in

investors.Depository Participant (DP)

Main article: Depository_participant

A depository (in simple terms) is a institutionholding a pool of pre-verified shares held in

electronic mode that offers efficient settlementof transactions. A Depository Participant (DP) isan intermediary between the investor and thedepository. A DP is typically a financialorganization like a bank, broker, financialinstitution, or custodian acting as an agent of

the Depository to make its services available tothe investors. Each DP is assigned a uniqueidentification number known as DP-ID. As ofMarch, 2006, there were a total of 538 DPsregistered with SEBI.


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[edit]Demat Conversion

Converting physical records of investments into

electronic records is called dematerialisingsecurities. In order to dematerialise physicalsecurities investors must fill in a DRF (DematRequest Form) which is available with the DPand submit the same along with physicalcertificates. Every security has an ISIN

(International Securities Identification Number).A separate DRF must be filled for each ISIN.

The complete process of dematerialisation isoutlined below:

Investor surrenders certificates fordematerialisation to the DP.

DP intimates the Depository of the requestthrough the system.

DP submits the certificates to the registrar ofthe Issuer Company.

Registrar confirms the dematerialisation

request from Depository. After dematerialising the certificates,

Registrar updates accounts and informsdepository of the completion ofdematerialisation.


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Depository updates its accounts and informsthe DP.

DP updates the Demat account of theinvestor.

[edit]Demat Options

There are many hundreds ofDepositoryParticipants (DPs) offering the Demat accountfacility in India as of Sept, 2011. A comparison

of the fees charged by different DPs is detailedbelow.

There are a few distinct advantages of having abank as a DP. Having a Demat account with abank DP, usually provides quick processing,accessibility, convenience, and online

transaction capability to the investor. Generally,banks credit the Demat account with shares incase of purchase, or credit a savings accountswith the proceeds of a sale on the third day.

Banks are also advantageous because of thenumber of branches they have. Some banks

give the option of opening a demat account inany branch, while others restrict themselves toa select set of branches. Some private banksalso provide online access to the demat


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account. So an investor can conveniently checkdetails of his/her holdings, transactions andstatus of requests through his/her bank's net-banking facility. A broker who acts as a DP maynot be able to provide these services.

[edit]Fees Involved

There are four major charges usually levied ona demat account: Account opening fee, annual

maintenance fee, custodian fee and transactionfee. Charges for all fees vary from DP to DP.

[edit]Account-opening fee

Depending on the DP, there may or may not bean opening account fee. Private banks, suchas HDFC Bank andAXIS Bank, do not have

one. However, players such as ICICIBank,Globe Capital, Karvy Consultants, Bajajcapital limited and State Bank of India doimpose an opening fee. Most players levy thiswhen upon re-opening a demat account.However, theStock Holding Corporation offers a

lifetime account opening fee, which allows theinvestor to hold on to his/her demat account fora long period. This fee is refundable.

[edit]Annual maintenance fee


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This is also known as folio maintenancecharges, and is generally levied in advance.

[edit]Custodian feeThis fee is charged yearly and depends on thenumber of securities (i.e. ISINs) held in theaccount. It generally ranges between Rs 0.5 toRs 1 per ISIN per month. DPs will not chargecustody fee for an ISIN on which the companies

have paid one-time custody charges to thedepository.

[edit]Transaction fee

The transaction fee is charged forcrediting/debiting securities to and from theaccount on a monthly basis. While some DPs,

such as SBI, charge a flat fee per transaction,HDFC Bank and ICICI Bank peg the fee to thetransaction value, subject to a minimumamount. The fee also differs based on the kindof transaction (buying or selling). Some DPscharge only for debiting the securities while

others charge for both. Some DPs also chargethe investor even if the instruction to buy/sellfails or is rejected. In addition, service tax isalso charged by the DPs.


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In addition to the other fees, the DP alsocharges a fee for converting the shares fromthe physical to the electronic form or vice-versa.This fee varies for both demat (physical-to-electronic) and remat (electronic-to-physical)requests. For demat, some DPs charge a flatfee per request in addition to the variable feeper certificate, while others charge only thevariable fee.

For instance, Stock Holding Corporationcharges Rs 25 as the request fee and Rs 3 percertificate as the variable fee. However, SBIcharges only the variable fee, which is Rs 3 percertificate. Remat requests also have chargesakin to that of demat. However, variablecharges for remat are generally higher thandemat.

Some of the additional features (usually offeredby banks) are as follows. Some DPs offer afrequent trader account, where they charge

frequent traders at lower rates than thestandard charges. Demat account holders aregenerally required to pay the DP an advancefee for each account which will be adjustedagainst the various service charges. The


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account holder needs to raise the balance whenit falls below a certain amount prescribed by theDP. However, if you also hold a savingsaccount with the DP you can provide a debitauthorisation to the DP for paying this charge.Finally, once you choose your DP, it will beprudent to keep all your accounts with that DP,so that tracking your capital gains liability iseasier. This is because, for calculating capital

gains tax, the period of holding will bedetermined by the DP and different DPs followdifferent methods. For instance, ICICI Bankuses the first in first out(FIFO) method tocompute the period of holding. The proof of thecost of acquisition will be the contract note. The

computation of capital gains is done account-wise.

[edit]Opening a Demat Account

First, an investor has to approach a DP and fillup an account opening form. The account

opening form must be supported by copies ofany one of the approved documents to serve asproof of identity (POI) and proof of address(POA) as specified by SEBI. An investor must


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have his/herPAN card in original at the time ofopening of account (mandate effective fromApril 1, 2006).

All applicants should carry original documentsfor verification by an authorized official of thedepository participant, under his signature.Further, the investor has to sign an agreementwith DP in a depository prescribed standardformat, which details rights and duties ofinvestor and DP. DP should provide theinvestor with a copy of the agreement andschedule of charges for their future reference.The DP will open the account in the system andgive an account number, which is also calledBOID (Beneficiary Owner Identificationnumber). The DP may revise the charges bygiving 30 days notice in advance. SEBI hasrationalised the cost structure fordematerialisation by removing account openingcharges, transaction charges for credit ofsecurities, and custody charges vide circulardated January 28, 2005. Further, SEBI has videcircular dated November 9, 2005 advised thatwith effect from January 9, 2006, no chargesshall be levied by a depository on DP and


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consequently, by a DP on a Beneficiary Owner(BO) when a BO transfers all the securitieslying in his account to another branch of thesame DP or to another DP of the samedepository or another depository, provided theBO Account(s) at transferee DP and attransferor DP are one and the same, i.e.identical in all respects. (Ravi kumar Gupta,2011 in Angel Broking works.) In case the BO

Account at transferor DP is a joint account, theBO Account at transferee DP should also be ajoint account in the same sequence ofownership.

[edit]Disadvantages of Demat

Trading in securities may becomeuncontrolled in case of dematerializedsecurities.

It is incumbent upon the capital marketregulator to keep a close watch on the trading

in dematerialized securities and see to it thattrading does not act as a detriment toinvestors.


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For dematerialized securities, the role of keymarket players such as stock-brokers needsto be supervised as they have the capabilityof manipulating the market.

Multiple regulatory frameworks have to beconformed to, including the Depositories Act,Regulations and the various By-Laws ofvarious depositories.

Agreements are entered at various levels inthe process of dematerialization. These maycause anxiety to the investor desirous ofsimplicity.

[edit]Transfer of Shares between DPs

To transfer shares, an investor has to fill one oftwo kinds of Depository Instruction Slip (DIS).The first check made is whether both Demataccounts are at the same Depository. There aretwo depositories: (CDSL (Central DepositorySecurities Limited) and NSDL (National

Securities Depository Limited)). If both Demataccount are not at the same depository, then anINTER Depository Slip (Inter DIS) has to befilled and submitted. Otherwise, and INTRA


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Depository Slip (Intra DIS) has to be filled andsubmitted.

For example: If we have one Demat account with CDSL

and other Demat account with NSDL, then weneed an Inter-DIS. (In case the investorneeds an Intra-DIS, the investor should checkwith the broker, since brokers usually issue

an Intra-DIS) Now that the correct DIS has been

determined, information pertaining to thetransfer transaction has to be , filled: scripname, INE number, quantity in words andfigures

Finally, the investor should submit that DIS tothe broker with signatures.

The transfer broker shall accept that DIS induplicate and acknowledge receipt of DIS onduplicate copy.

The investor should submit the DIS whenmarket is on. Accordingly, date of submission ofDIS and date of execution of DIS can be sameor a difference of one day is also acceptable.


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The investor also has to pay the broker somecharges for the transfer.

[edit]Security RecommendationsDIS is almost like a cheque book, so it can bemisused if issued blank. So an investor shouldexercise sufficient caution while issuing a DISslip. For example: an investor should depositonly a completely filled-in slip to the broker.

Unfilled rows should be cancelled out so thatthey cannot be tampered with.

[edit] No. of Depository in the country

Currently there are two depositories operationalin the country.

1. National Securities Depository Ltd. -NSDL - Having 95 Cr. Demat A/c as on 31-03-2010 - 300 DPs in India

2. Central Depository Services Ltd. - CDSL- Having 65 laks Demat A/c as on 31-03-2010 - 500 DPs in India


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CHAPTER 2

INTERODUCTION OF

DEPOSITRY ORGANISATION

Documents

2. Interoduction to Depositry System