Laws Governing Depositories and Depository Participants—FAQs

Dematerialisation is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form.

An investor will have to first open an account with Depository Participant and then request for the dematerialisation of his share certificates through the Depository Participant so that the dematerialised holdings can be credited into that account. This is very similar to opening a Bank Account.

Option to Hold Securities in Dematerialise Form – Dematerialisation of shares is optional and an investor can still hold shares in physical form. However, he has to demat the shares if he wishes to sell the same through the Stock Exchanges.

Similarly, if an investor purchases shares from the Stock Exchange, he will get delivery of the shares in demat form only.

Rematerialisation is the process of converting securities held in electronic form in a demat account back into physical certificate form. For the purpose of rematerialisation, the client has to submit the rematerialisation request to the Depository Participant with whom he has an account.

A client can rematerialise his dematerialised holdings at any point in time.

The securities sent for rematerialisation cannot be traded.

Rematerialisation – Rematerialisation is the process of converting securities held in electronic form in a demat account back in physical certificate form. For the purpose of rematerialisation, the client has to submit the rematerialisation request to the DP with whom he has an account. A client can rematerialise his dematerialised holdings at any point of time.

Process of Rematerialisation of Shares – Rematerialisation is the process of converting securities held in electronic form in a demat account back in physical certificate form. For the purpose of rematerialisation, the client has to submit the rematerialisation request to the DP with whom he has an account. A client can rematerialise his dematerialised holdings at any point of time. The securities sent for rematerialisation cannot be traded.

Normally following procedure is adopted for rematerialisation of shares:

• Client submits the Rematerialisation Request Form (RRF) to DP.
• DP enters the request in its system which blocks the client’s holdings.
• DP intimates to Depository and simultaneously, DP sends the RRF to the Registrar/Issuer.
• Registrar/Issuer prints certificates and dispatch to the client.
• Registrar/Issuer electronically confirms Remat to Depository.
• Client’s account with DP debited.

Tradability – Securities sent for rematerialisation cannot be traded. Therefore, Rohit will not able to trade his securities Post-Remat.

Models of Depository – Following are the two models of depository:

1. Immobilisation – Immobilisation is the process where physical share certificates are kept in vaults with the depository for safe custody. All subsequent transactions in these securities take place in book entry form. The actual owner has the right to withdraw his physical securities as and when desired. The immobilisation of fresh issue may be achieved by issuing a jumbo certificate representing the entire issue in the name of depository, as nominee of the beneficial owners.
2. Dematerialisation – Dematerialisation is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form.

Following are the main points of distinction between dematerialisation and immobilisation:

Demat refers to dematerialisation, which is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form.

The main aim of depositories is to introduce paperless trading and smooth functioning of settlement of security transactions.

Advantages of Depository Scheme – Following are the advantages of the depository scheme:

1. No Stamp Duty – In case of transfer of physical shares, stamp duty is payable on the market value of shares being transferred. However, for transfer of securities in the electronic form no stamp duty is payable.
2. Immediate Transfer and Registration of Securities – Physical transfer of shares was lengthy process as process usually takes around three to four months. Since, depository is a system works in electronic environment, there is immediate transfer of securities.
3. Elimination of Bad Deliveries – In case of transfer of physical shares,
   transfers could be withheld for bad deliveries e.g. signature of transfer is not tallying. In the depository environment, the question of bad delivery does not arise i.e. they cannot be held “under objection”.
4. Elimination of All Risks Associated With Physical Certificates – All risks associated with physical certificates such as delays, loss-in-transit, theft, mutilation etc. eliminated. This problem does not arise in the depository environment.
5. No “Odd Lot” – In traditional system, shares are required to be transferred in lot say 50 or 100. Now, with the introduction of depository scheme, the concept of an “odd lot” in respect of dematerialised shares stands abolished, i.e. in the demat mode, market lot becomes one share.
6. Faster Disbursement of Non-Cash Corporate Benefits – Depository system provides for direct credit of non-cash corporate benefits like bonus, right issue and dividend to an investors account, thereby ensuring faster disbursement and avoiding risk of loss in transit.
7. Reduction in Transactions Cost – In physical transfer of shares transaction cost like brokerage and handling charges was high. Further courier/postal charges for sending share certificates/transfer deeds are also required to be incurred. But in depository scheme brokerage charges are get reduced and other charges like courier/postal charges are required at all.
8. Elimination of Problems Related to Change of Address of Investor, Transmission, etc. – In case of change of address or transmission of demat shares, investors are saved from undergoing the entire change procedure with each company or registrar. Investors have to only inform their DP with all relevant documents and the required changes are effected in the database of all the companies, where the investor is a registered holder of securities.
9. Elimination of Problems Related to Selling Securities on Behalf of a Minor – A natural guardian is not required to take Court approval for selling Demat Securities on behalf of a minor.

A Depository Participant is an agent of the depository through which it interfaces with the investor and provides depository services.

According to SEBI guidelines, Financial Institutions like banks, custodians, stock brokers etc. can become participants in the depository.

Depository Participant is one with whom a client needs to open an account to deal in electronic form. While the Depository can be compared to a Bank, Depository Participant is like a branch of a bank with which one can have an account. Therefore, Depository Participants are authorised to maintain accounts of dematerialised shares. They help in instantaneous electronic transfer of shares held in Demat form through electronic book entry system.

Characteristics of a Depository Participant

• Acts as an agent of Depository.
• Customer interface of Depository.
• Functions like Securities Bank.
• Account opening facilities.
• Facilitates dematerialisation.
• Instant transfer on payout.
• Credits to investor in IPO, Rights, Bonus.
• Settles trades in electronic segment.

The depository system functions very much like the banking system. Following points are given in support of this statement.

• A bank holds funds in accounts whereas a depository holds securities in accounts for its clients.
• A bank transfers funds between accounts whereas a depository transfers securities between accounts.
• Both the bank and the depository are accountable for the safe keeping of funds and securities respectively.

A depository is a system which holds shares in the form of electronic account. A Depository performs the functions of holding safe-keeping, transferring and allowing withdrawal of securities like bank performs functions of holding, safe-keeping, transferring and withdrawal of money. When you deposit money your money, your account is credited. When you withdraw cash, your account is debited. The currency notes paid to you will be different from the once you deposited. Thus, serial number of currency notes deposited and withdrawn will never be the same-same will be the situation in depository scheme. The depository participant with whom you have opened demat account gives you periodic statement of your account just like bank give you statement/passbook regarding your deposit and withdrawal of funds from the accounts.

A depository interfaces with the investors through its agents called Depository Participants (DPs). If an investor wants to avail the services offered by the depository, the investor has to open an account with a DP. Just as a brokers act an agent of the investor at the Stock Exchange, a Depository Participant (DP) is the representative (agent) of the investor in the depository system providing the link between the Company and investor through the Depository. The Depository Participant maintains securities’ account balances and intimates the status of holding to the account holder from time to time.

Characteristics of a Depository Participant

• Transmission requests/nomination
• Acts as an agent of Depository
• Customer interface of Depository
• Functions like Securities Bank
• Account opening
• Facilitates dematerialisation
• Instant transfer on pay-out
• Credits to investor in IPO, rights, bonus etc.
• Settles trades in electronic segment
• Pledge/enforcement of pledge etc.

A DP is one with whom an investor needs to open an account to deal in shares in electronic form. While the Depository can be compared to a Bank, DP is like a branch of that bank with which an account can be opened.

Both depository and custodian services are responsible for safe keeping of securities but they are different in the sense that the Depository can legally transfer beneficial ownership, while a custodian cannot. The main objective of a Depository is to minimise the paper work involved with the ownership, trading and transfer of securities.

(i) Public financial institutions, scheduled commercial banks, foreign banks operating in India with the approval of the RBI, state financial corporations, custodians, stock-brokers, clearing corporations/clearing houses, NBFCs and registrar to an issue or share transfer agent complying with the requirements prescribed by SEBI can be registered as Depository Participant.

Thus, if foreign bank is operating in India with the approval of the RBI, it can be registered as Depository Participant.

(ii) The investor already having a demat account has a choice to open another demat account with any Depository Participant.

Thus, Manoj Soni, who has demat account with scheduled commercial bank can open another demat with another Depository Participant.

(iii) Non-cash benefits viz. Bonus, Rights Issue, etc. are electronically credited to the beneficial owner’s account through Depository.

Thus, Manmohan Reddy would get the right issue shares through electronic credit to his account through Depository.

(iv) All types of equity/debt instruments viz. equity shares, preference Shares, partly paid shares, bonds, debentures, commercial papers, certificates of deposit, government securities (G-SEC) etc. irrespective of whether these instruments are listed/unlisted/privately placed can be dematerialised with depository, if they have been admitted with the depository.

Thus, debentures and commercial papers are available for Demat at the Depository.

Eligibility Condition for Depository Services – Any company or other institution to be eligible to provide depository services must fulfil following conditions:

(a) It must be formed and registered as a company under the Companies Act, 2013.

(b) It must be registered with SEBI as a depository under the SEBI Act, 1992.

(c) It has framed bye-laws with the previous approval of SEBI.

(d) It has one or more participants to render depository services on its behalf.

(e) It has adequate systems and safeguards to prevent manipulation of records and transactions to the satisfaction of SEBI.

(f) It complies with the Depositories Act, 1996 and the SEBI (Depositories & Participants) Regulations, 2018.

(g) It meets eligibility criteria in terms of constitution, network etc.

(i) According to the Depositories Act, 1996, an investor has the option to hold ­securities either in physical or electronic form. Part of holding can be in physical form and part in demat form. However, SEBI has notified that settlement of market trades in listed securities should take place only in the demat mode.

Regulation 40 of the SEBI (LODR) Regulations, 2015 provides that except in case of transmission or transposition of securities, requests for effecting transfer of securities shall not be processed unless the securities are held in the dematerialised form with a depository.

Thus, Mr X cannot transfer his shares in physical mode. He can do so only through depository mode by opening demat account.

(ii) Only those securities, which are admitted into the depository system are available for dematerialisation to the holders of such securities or can be allotted in electronic record form by the issuer. Securities include shares, debentures, bonds, Commercial Paper (CP), Certificate of Deposits (CD).

Thus, Commercial Paper & Certificate of Deposits are available for dematerialisation at depository.

Securities in depositories to be in fungible form [Section 9] – All securities held by a depository shall be dematerialised and shall be in a fungible form i.e. all certificates of the same security shall become interchangeable in the sense that investor loses the right to obtain the exact certificate he surrenders at the time of entry into depository.

It is like withdrawing money from the bank without bothering about the distinctive numbers of the currencies.

• It is not necessary that an investor should hold shares in dematerialised form. He can opt out of depository scheme at any time subject compliance of provisions of Section 14 of the Depositories Act, 1996.
• If a beneficial owner seeks to opt out of a depository in respect of any security he shall inform the depository accordingly.
• The depository shall on receipt of intimation make appropriate entries in its records and shall inform the issuer.
• Every issuer shall, within 30 days of the receipt of intimation from the depository and on fulfilment of conditions and on payment of fees, issue the certificate of securities to the beneficial owner or the transferee.

Power to Grant Immunity [Section 24B] – The Central Government may grant immunity to a person who has violated the provisions of the SEBI Act, 1992.

Conditions for Granting Immunity:

(a) SEBI makes recommendation to the Central Government.

(b) Concerned person has made full and true disclosure in respect of alleged violation.

(c) Proceedings for the prosecution for any such offence not have been instituted before granting immunity.

(d) The Central Government may impose condition subject to which immunity shall be granted.

Withdrawal of Immunity – An immunity granted to a person may be withdrawn by the Central Government if it is satisfied that:

(i) Such person had not complied with the condition on which the immunity was granted; or

(ii) Such person had given false evidence.

Consequence of Withdrawal of Immunity – After withdrawal of immunity, the concerned person may be tried for the offence of which he appears to have been guilty and shall also become liable to the imposition of any penalty.

Depository – Depository means a company formed and registered under the Companies Act, 2013 and which has been granted a certificate of registration under section 12(1A) of the SEBI Act, 1992.

A depository is an organisation which holds securities like shares, debentures, bonds, government securities, mutual fund units etc. of investors in electronic form at the request of the investors through a registered depository participant. It also provides services related to transactions in securities.

Registered Owner & Beneficiary Owner – All the public limited companies are required by the Companies Act, 2013 to maintain an index of members, wherein they are required to keep a record or the owners of the company. With the concept of dematerialisation of securities and transfer of shares through book entry system coming up, registered owners are NSDL & CDSL only.

So, in the index of members of any company, there are only two registered owners, i.e. the two depositories. The depositories keep a track of all the clients through the depository participants.

Therefore, the registered owners are the depositories whereas the beneficiary owners are the people who are holding the securities at any given point of time.

Whenever a company declares a bonus issue, the securities are transferred in the name of the two depositories and they further transfer it to the clients through their participants. Therefore, the depositories are known as the registered owners and the investors are known as the beneficiary owners as they get the benefits of all the corporate actions.

Rights of Depositories and Beneficial Owner [Section 10]

• A depository shall be deemed to be the registered owner for the purposes of effecting transfer of ownership of security on behalf of a beneficial owner.
• The depository as a registered owner shall not have any voting rights or any other rights in respect of securities held by it.
• The beneficial owner shall be entitled to all the rights and benefits and be subjected to all the liabilities in respect of his securities held by a depository.

Register of Beneficial Owner [Section 11] – Every depository shall maintain a register and an index of beneficial owners in the manner provided in the Companies Act, 2013.

(1) Every issuer shall submit audit report on a quarterly basis, to the concerned stock exchanges audited by a qualified Chartered Accountant or Practicing Company Secretary.

(2) The audit is conducted for the following purposes:

(a) To reconcile total issued capital, listed capital and capital held by depositories in dematerialised form.

(b) To give the details of changes in share capital during the quarter.

(c) To give the details of in-principle approval obtained by the issuer from all the stock exchanges where it is listed in respect of further issued capital.

(3) Audit report shall give following details:

(a) Updated status of the register of members of the issuer.

(b) Confirmation that securities have been dematerialised as per requests within 21 days from the date of receipt of requests by the issuer.

(c) Reasons for delay where the dematerialisation has not been effected within the said stipulated period.

(4) The issuer shall immediately bring to the notice of the depositories and the stock exchanges any difference observed in its issued, listed, and the capital held by depositories in dematerialised form.

Concurrent Audit Meaning – Concurrent audit is a systematic and timely examination of transactions on a regular basis to ensure accuracy, authenticity, compliance with procedures and guidelines.

The word ‘concurrent’ itself defines its meaning, concurrent means happening at the time. Concurrent Audit means doing the examination of the transactions at the time of happening or parallel with the transaction.

The emphasis under concurrent audit is not on test checking but on substantial checking of transactions.

Concurrent Audit of Depository Participants – Practicing Company Secretary is authorised to carry out concurrent audit of Depository Participants which covers audit of the process of demat account opening, control and verification of Delivery Instruction Slips (DIS).

Important Points Relating to Concurrent Audit:

• NSDL vide its Circular has provided for concurrent audit of the Depository Participants.
• The Circular provides that, the process of demat account opening, control and verification of Delivery Instruction Slips (DIS) is subject to Concurrent Audit.