Fundamentals of Depositories

THE DEPOSITORIES

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A depository is a central central location for keeping securities In other words it is a facility for for holding securities either in certificated certificated or uncertificated uncertificated form In today's electronic world it is transfer of ownership in electronic mode In other words it is a place where securities are stored, recorded on behalf of investors A depository works as a nominee, custodian on behalf  of investors. This is leading le ading to a system system of immobilization and dematerialization of share certificates

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Group of 30 private sector recommended the formation of central depository in order to provide speed and accuracy to stock exchange In Indian stock exchange there was no transparency, transparency, bad bad deliveries, delay in transfer, transfer, forgery The depository system aims at replacing the manual system of transfer by simple book entries system

Objectives of a Depository •

Reduce the time for transfer of securities

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Avoid the risk of settlement settlement

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Enhance liquidity and efficiency

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Reduce cost of transaction for the investor

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Create a system for central handling of  securities Promotes country’s competitiveness by complying with international standards standards

Activities of Depository • • • • • • • • • • • •

Accepting deposit of securities for custody Making computerized book entry Providing for withdrawal of securities Distribution of dividend and interest Redemption of securities on maturity BENIFITES TO INVESTORS:Eliminates paper work The risk of bad deliveries, de liveries, fraud, will not exist It shortens settlement time and investor can increase its volume Investor Investor can change chan ge portfolio more frequency Distribution of dividends,interest,etc becomes easier The cost of transfer is less a share transfers are exempted from stamp duty

Benefits to companies •

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The company will be able to know the particulars of  beneficial periodically Investors complaints will be less It will be possible to send annual reports without delay BENEFITS TO CAPITAL CAPITAL MARKET MA RKET The capital market will be more transparent as trading, clearing and settlement are done through computers The market becomes automated due to use of computers and telecommunication Confidence of investors improves Foreign investor will start participating It increases the volume of trade by number and value

Steps Involved In Depository Depository Process •

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Immobilization Immobilization of shares which means converting converting physical certificates into electronic data Share certificates-depository-book entry ------statement of account On receiving share certificates the depository sends them to registrar and transfer agent for registering With in prescribed prescribe d time registrar transfers transfers the scrips in the name of depository In case of fresh issue the applicant must give depository account particulars

Registration •

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Registration of Depository with sebi is must THE application for registration must be submitted in prescribed form along with fee of 50000. The sponsor of a depository can be 1 Public financial institution 2 Banks 3 Foregin banks operating in India 4 Recognised stock exchange 5 Institutions engaged in financial services. SEBI prohibits depository to carry on any activity other than that of depository At 51%of equity capital should be held by a depository and holding of NRI should be maximum of 49% A depository is required to pay an annual fee or RS10000 With 1year of registration depository should apply for commencement of business

Certificate of commencement of business •

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With 1year of registration with sebi depository is required to apply for commencement commencement of business. While granting certificate SEBI considers ;The net worth of the depository is not less than 100crores 100crores The bye laws of depository are approved by sebi The automated data is protected protected against unauthorized use, alteration or destruction The depository has a detailed operation manual explaining explaining ifs functioning It has made adequate a dequate arrangements arrangements including insurance and to indemnify the owner incase of any loss caused due to negligence of depository or DP or its employee The grant of certificate must be in the interest of investor The SEBI should make physical physical verification of the infrastructure infrastructure facilities of  the depository

SEBI (Depository And Participants) Act;1996 • • • • • •

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Features of the Act;Issue of securities through electronic electronic media The act provides for the creation of depository Institution registered registered under the companies act Having minimum net worth of 100crores 100crores DEPOSITORY PARTIPANTS-As per act a depository will deal with the issuer through a DP.It is the link between the investors and depository or he is the agent of the depository As per SEBI commercial banks, financial Institutions stock exchange exchange can act as DP A choice is to given to the investor investor as to physical securities and having a depository based ownership. The investor can switch from depository mode to non-depository mode and vice versa The act does not provide for a stamp duty. duty. At the time of issue of  securities the issuing company will pay the stamp duty on the total

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Ownership records maintained by depository or DP will be accepted as legal evidence DEPOSITORY CONSTITUENTS 1.Depository 2.DP 3.Benificial owner 4.Issuer Depository is a custodian of securities and helps in transfer of shares and have no right over securities. He should have an adequate mechanism for reviewing,monitoring,and evaluating records DEPOSITORY DEPOSI TORY PATICIPANT It is the link between b etween depository and the owner of securities. The depository and DP are to be registered with SEDI Provide statement statement of accounts, reconcile reconcile his records with depository on daily basis and submit periodic returns THE BENEFICIAL OWNER;-He is the real owner of the securities and has all the rights and liabilities associated with it. Issuer is the company which issues securities. He gives choice to investors regarding holding the securities in physical form or demat form The investor is free to exercise this option either at the time of applying or later on An investor will have to open an account with the depository and is issued a client number

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Drawbacks •

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1 Multiple depositories----A depository depository is a service institution so investor wants better service at reduced cost. The cost of capital i.e. 100 crores will be born by the investor. A single depository system should be present as it reduces cost and inter depository movement of messages 2.Inter depository competition will hamper the interest of  the investors 3The retail investor wants to hold the securities in scrip form because of old habit, lack of awareness or tax evasion. As long as demat is made compulsory the investors will hold shares in scrip form

Remedial Measures •

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SEBI has undertaken undertaken a public awareness program me To increase the volume sebi has made dematting compulsory for institutional investor SEBI has allowed delivery of demat securities secu rities in physical form as well .An investor purchasing shares in physical physical segment may get delivery in demat shares