Depositories act, 1996 were introduced to overcome the challenges. Before knowing the depositories act act, 1996. We need to understand the growth of capital market, India seems the rapid growth in it, in the 21st century. In this existing system there was paper based work and issues like delays in transfers, settlements periods that were long, bad deliveries e.t.c. these characteristics seems to sign of a market that is in under developing and also, it is not international market standards.
Depository system is an organisation, it holds securities like bonds, debentures, mutual funds, shares, governmental securities e.t.c. of investors in electronic form. And with request of investors through a registered depository participant. It provides services related to transactions in securities. Depository acts as defecto owner of securities lodged with it and it also functions as custodian securities of clients.
There are 4 players in depository system
Depository, participant, issuer and beneficial owner.
Depository further divided into two they are
- NSDL [national securities depository limited] and
- CDSL [central depository services limited]
NSDL [NATIONAL SECURITIES DEPOSITORY LIMITED]
National securities depository limited, it begins the operations during November in the year 1996 was elevated by IDBI [industrial development bank of India], UTI [Unit trust of India] and NSE [national stock exchange].
CDSL [CENTRAL DEPOSITORY SERVICES LIMITED]
Central depository services limited, it begins the operations during February in the year 1999. It was elevated by Mumbai stock exchange in association with bank of India, HDFC, State bank of India and bank of baroda.
Participant acts as bridge between depository and beneficial owner and it is an agent to depository. Participant maintains all ownership records of every beneficial owner in the book entry. Both participant and depository have to be registered in SEBI [securities and exchange board of India. SEBI safeguards the companies to control [or] prohibit the manipulation of records and transactions.
Beneficial owner is the real owner of securities. Which the securities entered with depository in the form of book entry. So, beneficial owner has all rights and liabilities that are associated with securities.
Issuer is a company that issues the security. It maintains register to registering the names of the registered owners of depositories, securities. These issuers [companies] send a list to share holders of the company. Who opt the system of depository, to the depositories.
FACILITIES OFFERED BY DEPOSITORY SYSTEM
- Electronic settlement of trade
- Nomination facility
- Re materialisation
- Freezing of demat accounts
- Electronic credit of securities allotted in public rights and bonus issue
- Stock lending / borrowing facilities, e.t.c
- Pledging or hypothecation of dematerialised securities.
Types of depository institutions
Savings, credit unions, commercial banks.
Functions of depository system
Allows the provision of loans of mortgages to interested parties
Depository holds the securities of customers and give them back when they need. The customer receive interest on deposits, when depository earns more interest than the customer receiving interest by lending it to other people [or] doing business in the form of mortgages [or] loans.
Services as a link between public companies and share holders
Depository functions maintain correction between public companies that issue financial securities, and share holders. Securities are issued by agents associated with depositories. Who are known as depository participants. Agents responsibility to transfer securities from depositories to share holders. It can be brokerage, bank [or] an institution.
Reduced paper work and accelerates the process of transferring securities
When trade takes place, depository transfers the ownership of securities from account of one share holder to other. It helps in reducing the paper work and accelerates the process of transferring the securities.
Eliminates risk relating to owing physical financial securities
Depository allows traders and shareholders to hold securities in dematerialized form. So, by this, the risk related to holding of physical financial securities was abolished. So, in trade they don’t need to worry about transactions of securities. Whether they transferred successfully without loss [or] theft, depository system reduces the risk of allowing securities to be held and transferred in electronic form.
Features of depository system
Depository services through depository participants
Depositories provide their services to share holders through their agents called as depository participants. These depository participants are appointed subject to the conditions prescribed under securities and SEBI [securities exchange board of India] depositories and participants regulations, 1996.
This model is adopted in India provides for dematerialization of securities. This is the step to achieve completely paper free securities market. Dematerialization is a process by which physical certificates of share holder are converted into electronic form and credited to the account of depository participant.
In depository system, ownership of securities dematerialized is dissected between registered owner and beneficial owner. According to depositories act 1996, beneficial owner means a person whose name is recorded with depository. Registered owner means a depository whose name is entered in register of issuer. Though the securities registered in the name of depository actually holding them, the rights, obligations, liabilities and benefits are remains with the beneficial owner.
Multi depository system
Depository system [or] model that is adopted in India, it provides a competitive multi depository system. There are various entities that are providing depository services. Depository is a company formed under company act 1956. And have been granted a certificate of registration under SEBI [securities exchange board of India act, 1992] present two depositories registered with SEBI they are [ 1] NSDL [national securities depository limited]  CDSL [central depository services limited]
Free transferability of shares
Transfer takes place easily through electronic system and disposing the procedural formalities related to paper work.
Physical certificates have some issues like theft, loss, transit, bad deliveries, e.t.c. as compared to electronic system. This is the system i.e easier [or] free than the physical certificates.
No stamp duty
For the transfer of physical shares, 0.5 percent of stamp duty is payable on market, but in electronic system there is no such duty. So this the benefit in depository system.
Securities held in dematerialized form, they don’t bear any notable feature like folio number [or] certificate number, distinctive number. Once the shares are dematerialized then they lose their identity in terms to share certificate distinctive numbers and certificate numbers. All securities in some class are interchangeable and identical. For example, all equal slaves in a some class of fully paid shares are identical.
SEBI [Securities exchange board of India] regulates the legal framework for depository system then the act regulated by depositories act, 1996. Byelaws of depository, business rules of depositories and SEBI [depository and participants regulations ] 1996.
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