demat in india

8/6/2019 Demat in India

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Pratik Mehta

Tybms -53

Mithibai college

INTRODUCTION

The Indian Capital Market - An Overview

The function of the financial market is to facilitate the transfer of funds from surplus

sectors (lenders) to deficit sectors (borrowers). A financial market consists of investors or

buyers of securities, borrowers or sellers of securities, intermediaries and regulatory

bodies. Financial market does not refer to a physical location. Indian financial system

consists of money market and capital market.

The money market has two components -

1) Organised money market-Organized market is dominated by commercial banks. The

other major participants are Reserve Bank of India, Life Insurance Corporation, General

Insurance Corporation, and Unit Trust of India, Securities Trading Corporation of India

Ltd. and Discount and Finance House of India, other primary dealers, commercial banksand mutual funds.

2) Unorganised money market-Unorganized market despite rapid expansion of the

organized money market through a large network of banking institutions that have

extended their reach even to the rural areas; there is still an active unorganized market. It

consists of indigenous bankers and moneylenders.

The capital market consists of

1) Primary market-The primary market deals with the issue of new instruments by the

corporate sector such as equity shares, preference shares and debt instruments. Central

and State governments, various public sector industrial Units (PSUs), statutory and other

authorities such as state electricity boards and port trusts also issue bonds/debt


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instruments. The primary market in which public issue of securities is made through a

prospectus is a retail market and there is no physical location. There are several major

players in the primary market. These include the merchant bankers, mutual funds,

financial institutions, foreign institutional investors (FIIs) and individual investors.

2) Secondary market-The secondary market or stock exchange is a market for trading and

settlement of securities that have already been issued. The investors holding securities

sell securities through registered brokers/sub-brokers of the stock exchange. Investors

who are desirous of buying securities purchase securities through registered brokers/sub-

brokers of the stock exchange. It may have a physical location like a stock exchange or a

trading floor. In the secondary market, there are the stock brokers (who are members of

the stock exchanges), the mutual funds, financial institutions, foreign institutional

investors (FIIs), and individual investors.

Registrars and Transfer Agents, Custodians and Depositories are capital market

intermediaries that provide important infrastructure services for both primary and

secondary markets.

The reform process was initiated with the establishment of Securities and Exchange

Board of India (SEBI).

Problems due to traditional system of trading

The erstwhile settlement system on Indian stock exchanges was also inefficient and

increased risk, due to the time that elapsed before trades were settled. The transfer was by

physical movement of papers. There had to be a physical delivery of securities -a process

fraught with delays and resultant risks. The second aspect of the settlement related to

transfer of shares in favour of the purchaser by the company. The system of transfer of

ownership was grossly inefficient as every transfer involves physical movement of paper

securities to the issuer for registration, with the change of ownership being evidenced by

an endorsement on the security certificate. In many cases the process of transfer would

take much longer than the two months stipulated in the Companies Act, and a significant

proportion of transactions would end up as bad delivery due to faulty compliance of

paper work. Theft, forgery, mutilation of certificates and other irregularities were


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rampant. In addition, the issuer had the right to refuse the transfer of a security. All this

added to costs and delays in settlement, restricted liquidity and made investor grievance

redress time consuming and, at times, intractable.

To obviate these problems, the Depositories Act, 1996 was passed. It provides for the

establishment of depositories in securities with the objective of ensuring free

transferability of securities with speed, accuracy and security. It does so by

(a) Making securities of public limited companies freely transferable subject to certain

exceptions,

(b) Dematerializing the securities in the depository mode, and

(c) Providing for maintenance of ownership records in a book entry form. In order to

streamline both the stages of settlement process, the Act envisages transfer ownership of

securities electronically by book entry without making the securities move from person to

person. The Act has made the securities of all public limited companies freely

transferable, restricting the company's right to use discretion in effecting the transfer of

securities, and the transfer deed and other procedural requirements under the Companies

Act have been dispensed with. Two depositories, viz., NSDL and CDSL, have come up

to provide instantaneous electronic transfer of securities.

In any stock exchange, trades or transactions have to be settled by either squaring up the

carrying forward positions or settling by payment of net cash or net delivery of securities.

This account settlement period, if it is long, leads to several price distortions and allows

for market manipulation. It increases the chances of speculation resulting in volatility,

which hurts the small investors. With the application of Demat in the securities market -

screen-based trading and trading through the Internet - it has been possible to reduce this

settlement period.

Capital Market Intermediaries

There are several institutions, which facilitate the smooth functioning of the securities

market. They enable the issuers of securities to interact with the investors in the primary

as well as the secondary arena.

Merchant Bankers


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The Merchant Bankers Regulations of Securities and Exchange Board of India (SEBI)

regulate merchant banking activities, especially those covering issue and underwriting of

shares and debentures.

Credit Rating Agencies

The 1990s saw the emergence of a number of rating agencies in the Indian market. These

agencies appraise the performance of issuers of debt instruments like bonds or fixed

deposits. The rating of an instrument depends on parameters like business risk, market

position, operating efficiency, adequacy of cash flows, financial risk, financial flexibility,

and management and industry environment.

R& T Agents - Registrars to Issue

R&T Agents form an important link between the investors and issuers in the securities

market. The R&T Agent is appointed by the Issuer to act on its behalf to service the

investors in respect of all corporate actions like sending out notices and other

communications to the investors as well as dispatch of dividends and other non-cash

benefits.

Stock Brokers

Stockbrokers are the intermediaries who are allowed to trade in securities on the

exchange of which they are members. They buy and sell on their own behalf as well as on

behalf of their clients.

Mutual Funds

Mutual funds are financial intermediaries, which collect the savings of small investors

and invest them in a diversified portfolio of securities to minimize risk and maximize

returns for their participants.

Depositories


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The depositories are important intermediaries in the securities market that is scrip-less or

moving towards such a state. In India, the Depositories Act defines a depository to mean,

"a company formed and registered under the Companies Act, 1956 and which has been

granted a certificate of registration under sub-section (IA) of section 12 of the Securities

and Exchange Board of India Act, 1992." The principal function of a depository is to

dematerialize securities and enable their transactions in book-entry form.

Depository Participants

A Depository Participant (DP) is described as an agent of the depository. They are the

intermediaries between the depository and the investors. The relationship between the

DPs and the depository is governed by an agreement made between the two under the

Depositories Act.

INTRODUCTION TO DEMAT

Indian investor community has undergone sea changes in the past few years. India now

has a very large investor population and ever increasing volumes of trades. However, this

continuous growth in activities has also increased problems associated with stock trading.

Most of these problems arise due to the intrinsic nature of paper based trading and

settlement, like theft or loss of share certificates. This system requires handling of hugevolumes of paper leading to increased costs and inefficiencies. Risk exposure of the

investor also increases due to this trading in paper.

Some of these risks are:

Delay in transfer of shares.

Possibility of forgery on various documents leads to bad deliveries, legal disputes

etc.

Possibility from theft of share certificates.

Prevalence from fake certificates in the market.

Mutilation or loss of share certificates in transit

To obviate these problems, the Depositories Act, 1996 was passed. It provides for the

establishment of depositories in securities with the objective of ensuring free


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transferability of securities with speed, accuracy and security by dematerialization of

shares.

What is Dematerialization?

Dematerialization or "Demat" is a process whereby your securities like shares, debentures

etc, are converted into electronic data and stored in computers by a Depository. Securities

registered in your name are surrendered to Depository Participant (DP) and these are sent

to the respective companies who will cancel them after "Dematerialization" and credit

your depository account with the DP. The securities on Dematerialization appear as

balances in your depository account. These balances are transferable like physical shares.

If at a later date, you wish to have these "Demat" securities converted back into paper

certificates, the Depository helps you to do this. For better understanding of the

dematerialization we first understand NATIONAL SECURITIES DEPOSITORY

LIMITED (NSDL).

OVERVIEW OF NSDL

The depository model adopted in India provides for a competitive multi-depository

system. There can be various entities providing depository services. The model adopted

in India provides only for dematerialization of securities. This is a significant step in thedirection of achieving a completely paper-free securities market. Many of the developed

countries have opted either for immobilization (e.g., Hong Kong) or both immobilization

and dematerialization (e.g., Japan) of securities.

Immobilization of securities is done by storing or lodging the physical security

certificates with an organization that acts as a custodian - a securities depository. All

subsequent transactions in such immobilized securities take place through book entries.

The actual owners have the right to withdraw the physical securities from the custodial

agent whenever required by them. In the case of IPO, a jumbo certificate is issued in the

name of the beneficiary owners based on which the depository gives credit to the account

of beneficiary owners.


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Dematerialization as explain before are securities occurs when securities, issued in

physical form, are destroyed and an equivalent number of securities are credited into the

beneficiary owner's account. India has adopted dematerialization route to depository. In a

depository system, the investors stand to gain by way of efficient settlements, lower costs

and lower risks of theft or forgery, etc. But the implementation of the system has to be

secure and well governed. All the players have to be conversant with the rules and

regulations as well as with the technology for processing. The intermediaries in this

system have to play strictly by the rules.

What is a Depository?

Depository functions like a securities bank, where the dematerialized physical securities

are traded and held in custody. This facilitates faster, risk free and low cost settlement.

The principal function of a depository is to dematerialize securities and enable their

transactions in book-entry form. Debiting the transferors depository account and

crediting the transferees depository account transfer the securities. A depository is very

much like a bank in many of its operations.

Legal Framework

The Depositories Act, 1996, Securities, primarily governs the operations of the

depositories and Exchange Board of India (Depositories & Participants) Regulations,

1996, byelaws approved by SEBI, and Business Rules framed in accordance with the

Regulations and byelaws. The Depositories Act passed by Parliament received the

President's assent on August 10, 1996. It was notified in a Gazette on August 12 of the

same year. The Act enables the setting up of multiple depositories in the country. This

was to see that there is competition in the service and there is more than one depository in

operation. At present, two depositories are registered with SEBI - The National Securities

Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL).

Eligibility Criteria for a Depository Any of the following may promote a depository:

1. A public financial Institution as defined in section 4A of the Companies Act, 1956,

2. A bank included in the Second Schedule to the Reserve Bank of India Act, 1934,


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3. A foreign bank operating in India with the approval of the Reserve Bank of India,

4. A recognized stock exchange,

5. An institution engaged in providing financial services where these institutions hold not

less than 75% of the equity jointly or severally

6. A custodian of securities approved by Government of India, and

7. A foreign financial services institution approved by Government of India.

The promoters of a depository are also known as its sponsors. A depository company

must have a minimum net worth of Rs.100 crores. The sponsor(s) of the depository have

to hold at least 51% of the equity capital of the depository company. Participants of that

depository, if any, can hold the balance of the equity capital. However, no single

participant can hold, at any point of time, more than 5% of the equity capital. No foreign

entity, individually or collectively either as a sponsor or as a DP, or as a sponsor and DP

together, can hold more than 20% of the equity capital of the depository.

RegistrationAs per the provisions of the SEBI Act, a depository can deal in securities

only after obtaining a certificate of registration from SEBI.

Commencement of Business A depository that has obtained registration as stated

above, can function only if it obtains a certificate of commencement of business from

SEBI. A depository must apply fo the National Stock Exchange (NSE) - the largest stock

exchange in India, sponsored the setting up of NSDL and subscribed to the initial capital.

NSDL commenced operations on

November 8, 1996.

Ownership

NSDL is a public limited company incorporated under the Companies Act 1956. NSDL

had a paidup equity capital of Rs. 105 crore. The paid up capital has been reduced to Rs.

80 crore since NSDL has bought back its shares of the face value of Rs. 25 crore in the

year 2000. However, its net worth is above the Rs. 100 crore, as required by SEBI

regulations.


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The following organizations are shareholders of NSDL as on March 31, 2002:1

1. Industrial Development Bank of India

2.Unit Trust of India

3. National Stock Exchange

4. State Bank of India

5. Global Trust Bank Limited

6. Citibank NA

7. Standard Chartered Bank

8. HDFC Bank Limited

9. The Hong Kong and Shanghai Banking Corporation Limited

10. Deutsche Bank

11. Dena Bank

12. Canara Bank

Byelaws of NSDL

Byelaws of National Securities Depository Limited have been framed under powers

conferred under section 26 of the Depositories Act 1996 and approved by Securities and

Exchange Board of India.

Functions

NSDL performs the following functions through depository participants (DPs):

o Enables the surrender and withdrawal of securities to and from the depository

(dematerialization and rematerialization).

o Maintains investor holdings in the electronic form.

o Effects settlement of securities traded on the exchanges.

o Carries out settlement of trades not done on the stock exchange (off-market

trades).

o Transfer of securities.

o Pledging/hypothecation of dematerialized securities.

o Electronic credit through public offerings of companies or corporate actions.

o Receipt of non-cash corporate benefits like bonus rights, etc. on Electronic Form.


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o Stock lending and borrowing.

Services Offered by NSDL

NSDL offers a host of services to the investors through its network of DP:

o Maintenance of beneficiary holdings through DP

o Dematerialization

o Off-market Trades

o Settlement in dematerialized securities

o Receipt of allotment in the dematerialized form

o Distribution of corporate benefits

o Rematerialization

o Pledging and hypothecation facilities

o Freezing/locking of investor's account

Fees Structure of NSDL

NSDL charges the DPs and not the investors directly. These charges are fixed. The DP+,

in turn, are free to charge their clients, i.e., the investors for their services. Thus, there is a

two-tier fee structure.

Account Opening

Any investor who wishes to avail depository services must first open an account with a

depository participant of NSDL. The process of opening a demat account is very similar

to a bank account. The investor can open an account with any depository participant of

NSDL. An investor may open an account with several DPs or he may open several

accounts with a single DP. There are several DPs offering various depository-related

services. Each DP is free to fix its own fee structure. Investors have the freedom to

choose a DP based on criteria like convenience, comfort, service levels, safety, reputation

and charges. After exercising this choice, the investor has to enter into an agreement with

the DP. The form and contents of this agreement are specified by the business rules of

NSDL.

Types of Accounts


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Type of depository account depends on the operations to be performed. There are three

types of accounts which can be opened with a depository participant viz. (a) Beneficiary

Account (b) Clearing Member Account and (c) Intermediary Account.

Beneficiary Account

This is an account opened by investors to hold their securities in dematerialized form

with a depository and to carry out the transactions of sale and purchase of such securities

in book entry form through the depository system. A beneficiary account holder is legally

entitled for all rights and liabilities attached to the securities (i.e. equity shares,

debentures, government securities, etc.) held in that account. Therefore, the account is

called "beneficial owner account". A beneficiary account can be in the name of an

individual, corporate, HUF, Minor, Bank, Financial Institution, Trust, etc. or the broker

himself for the purpose of his personal investments in demat form. The account is opened

with a DP.

House account vs. non-house account - An account opened by a DP for the custody of

and transactions in its own investments is referred to as a house account, and all other

beneficiary accounts are referred to as non-house account.

Documents for Verification

For the purpose of verification, all investors have to submit the followingdocuments along with the prescribed account opening form.

Proof of identity - A beneficiary account must be opened only after obtaining a

proof of identity of the applicant. An existing must authenticate the applicants

signature and photograph account holder or by the applicant's bank or after due

verification made with the original of the applicant's valid passport, voter ID,

driving license or PAN card with photograph; and further,

Proof of address - The account opening form should be supported with proof of

address such as verified copies of ration card/ passport/ voter ID/ PAN card/

driving license/ bank passbook.

An authorized official of the Participant, under his signature, shall verify the original

documents. In case any account holder fails to produce the original documents for

verification within the period of 30 days, it must be immediately brought to the notice of


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NSDL. Failure to produce the original documents within the prescribed time would invite

appropriate action against such account holders, which could even include freezing of

their accounts.

Beneficiary Account Procedure for Opening an Account

Investors have the choice of selecting a DP based on their convenience, comfort, service

levels, safety, reputation charges, etc. They have the flexibility to have more than one

account with the same DP or any other DP. No minimum balance is required for opening

a depository account. Investors also have the freedom to close an account with one DP

and open another one with any other DP.

The type of the Account opening form to be filled by an investor and the list of

documents required depend on the type of beneficiary account to be opened - whether it

is for NRI or Corporate or Individual. Further, the individual account can be in a single

name or joint names. Clearing Members and brokers have to open a beneficiary account

if they have to deal with their own holdings. There are several client types in the

depository system and different codes are allotted to them. These are listed below.

1. Resident- Ordinary, HUF

2. Financial Institutions(FI)-Government sponsored FI, State financial cooperation, and

others institution

3. FII-Mauritius-based, Others

4. NRI-Repatriable, Non-Repatriable, Depository Receipt

5. Body Corporate- Domestic Company, Overseas Corporate Body-Repatriable,

Government Company, Central Government, State Government, Co-operative Body,

NBFC, Non-NBFC, Broker, Foreign Bodies, Group Companies, Others, OCB-Non-

repatriable, Depository Receipt

6. CM (Clearing Member)

7. Foreign National - Foreign National / Depository Receipt

8. Mutual Fund - Depository Receipt

9. Trust

10. Bank- Foreign Bank, Co-operative bank, Nationalized Bank, Others

11. Intermediary


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The forms prescribed by NSDL require the applicants to give the following details:

Name(s) of account holder(s) - The participant should ensure that the name is identical to

that which appears on the certificate(s) to be dematerialized. In the case of a joint

account, the names of the holders should be in the same order as appearing in the share

certificate to be dematerialized.

Mailing and communication address or addresses - The veracity of the applicant's address

is determined through the documents submitted for verification like ration card, passport,

voter ID, PAN card, driving license, bank passbook, etc.

Details of guardian in case account holder are a minor - Only a guardian can open a

depository account for a minor. The guardian remains the beneficial owner in the records

of the depository for the securities held on behalf of the minor till he becomes a major.

Foreign Address and RBI approval details for NRI, FII or OCB accounts - For

foreignbased clients like NRIs, Flls, OCBs, etc., the DP must obtain original or attested

copies of the power of attorney and the approval letter from RBI permitting them to

invest.

Clearing member details for a clearing account - A broker account as a clearing account

can be opened only after the depository approves it and allots a clearing-member

business-partner identification number (CM-BP-ID). A broker member can have only

one clearing accountper stock exchange of which he is a member.

Details of bank account - Details of bank account of the account holder, including the 9-

digit code number of the bank and branch appearing on the MICR cheques issued by the

bank have to be filled in the application form.


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Details of Income-tax Permanent Account Number (PAN) or GIR No . - In case the

account holder is not an income-tax assessee, or he has not yet been allotted a PAN or

GIR No., the DP must obtain a declaration to this effect from the account holder.

Nomination declaration A beneficial owner can make a nomination of his account in

favour of any person by filing the nomination form with his DP.

Details of introducer - If an existing client has introduced a new client to the DP his

signature are required on the form. In other cases, the DP may ask for details that he

considers appropriate.

Supporting Documents As mentioned earlier, supporting documents, required to be

submitted with the account opening form, include

1. Photograph of account holder(s)/authorized-holders/constituent attorney,

2. Proof of incorporation for companies, e.g., certified copies of the memorandum of

association, trust deed etc.,

3. Certified copy of the document authorizing the specified person(s) to operate the

account,

E.g., a copy of the board resolution etc.,

4. Any other document the DP may consider necessary to establish the genuineness of the

Account holder(s).

There are different forms available for Joint Accounts, HUF, Companies, minors, and

Partnership firms

Clearing Member Account

The entities that are authorized to pay in and receive the pay out from a clearing

corporation/ clearing house against trades done by them or their clients are known as

clearing members. CMs are identified in the system through their CM-BP ID. All pay-in

and payout transactions are carried out through their accounts.


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There are two types of clearing members:

1. All members of a stock exchange popularly known as brokers are clearing members;

2. Custodians who are permitted by the stock exchange to act as a clearing member.

Procedure to Open a Clearing Member Account: The steps undertaken to open the

account are same as those of individuals, difference lies in the type of form and details to

be filled in and documents to be submitted. The only major difference is that the clearing

member has to first register itself with the depository and obtain a business partner

identification number (CM-BP-ID). The clearing account is identified by the combination

of CC-CM-ID given by the clearing corporation, CM-BP-ID given by the depository and

the client-ID given by the DP. Immediately after opening a clearing account, the DP

should inform the depository the details of clearing member's name, CM-BP-ID, client-

ID, and date of opening the account in DPM system.

Details to be filled in the form are:

1. Name of the Clearing Member

2. Company's short name, if any

3. Address of the registered office, telephone number, fax number, e-mail, if any

4. Name and address of the authorized signatories, their designations and telephone

numbers, status code, sub-status code

5. Bank account particulars, bank name and its branch, current account number, RBI

reference number, RBI approval date, and PAN/ GIR number

6. Signatures of Authorized signatory (ies)

A Separate enclosure has to be attached to the account opening form specifying the

following details:

1. Name and address of the clearing member

2. Name and address of the clearing corporation

A Separate enclosure has to be attached to the account opening form specifyin


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the following det

ils:

1. Name and address of the clearing member

2. Name and address of the clearing corporation

3. Clearing Corporation Id (CC-IDa has adopted the demat route in which the book entry

is made electronically against securities that are cancelled. The share certificates are

shredded (i.e., its paper form is destroyed) and a corresponding credit entry of the number

of securities (written on the certificates) is made in the account opened with the

Depository Participant (DP). The securities held in dematerialized form are fungible.

They do not bear any distinguishable features like distinctive number, folio number or

certificate number. Once the shares are dematerialized, they lose their identification

features in terms of share certificate distinctive numbers and folio numbers. Title to the

securities owned is in terms of number of securities and not in terms of distinctive

numbers, certificates numbers etc. Each security is identified in the depository system by

ISIN and short name. For example, a person owning 100 shares in ABC Ltd. in physical

form will record his ownership as below:

Company Name: ABC Ltd.

No. of Shares: 100

Distinctive Nos.: 932654701 to 932654800

Certificate No.: ABC001263

Folio No.: A658542

In NSDL depository system, the record of ownership will be shown as:

INE001A01013 ABC by demat 100

International Securities Identification Number (ISIN)

Each of the securities dematerialized in the NSDL depository bears a distinctive ISIN

an identification number. International Securities Identification Number (ISIN) is a

unique identification number for each security issued in any of the International

Standards Organisation (ISO) member countries in accordance with the ISIN Standard

(ISO 6166). ISO 6166 was developed for use for international (cross-border) as well as


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domestic trades. ISIN is a 12-character long identification mark. It has three components

- a prefix, a basic number and a check digit. The prefix is a two-letter country code as

stated under ISO 3166 (IN for India).

The dictionary meaning of the word is "movable things that are standardised so that one

unit is essentially the same as another which may be estimated and replaced by weight,

number and measure".

The basic number comprises nine alphanumeric characters (letter and/or digits). The

check digit at the end of the ISIN is computed according to the modulus 10 "Double-

Add- Double". It establishes that the ISIN is valid. Securities issued by the same

company, issued at different times or carrying different rights, terms and conditions are

considered different securities for the purpose of allocating ISIN and are allotted distinct

ISINs. In India, SEBI assigns ISIN to various publicly traded securities. Different ISINs

are allocated to the physical and dematerialized securities of the same issue. To illustrate,

ISIN INE 475c 01 012 has the following break up:

IN - India

E - Company

Last digit - check digit

First four digits 475c - Company serial number;

01 - equity (it can be mutual fund units, debt or Government securities);

01 - issue number;

2 - check digit.

The third digit (E in the above example) may be E, F, A, B or 9. Each one carries the

following meaning:

E - Company

F - Mutual fund unit

A - Central Government Security

B - State Government Security

9 - equity shares with rights, which are different from equity shares bearing INE number.

Whenever dealing with ISIN number, it is important to pay special attention to the third

digit.

Securities that can be dematerialized


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The entire depository system in India is governed by the rules made by the market

regulator - SEBI. According to the SEBI (Depositories and Participants) Regulations,

1996, the following securities are eligible for holding in dematerialized form.

1. Shares, scrips, stocks, bonds debentures, debenture stock or other marketable securities

of similar nature of any incorporated company or body corporate including underlying

shares of ADRs and GDRs.

2. Units of mutual funds, rights under collective investment schemes and venture capital

funds, commercial paper, certificate of deposit, securities debt, money market

instruments and unlisted securities.

A list of securities available for demat in NSDL depository is made known to all DPs by

way of circulars sent through email. The information is also put up on NSDL's Website

and in the monthly information bulletin NEST Update.

Physical form of securities can be converted into book entry form in NSDL depository

system only if the company which has issued the securities, has entered into an

agreement with NSDL to offer demat facility.

The Demat Process (see fig. 6)

A holder of depository eligible securities may get his physical holding converted into

electronic form by making a request through the DP with whom he has his beneficiary

account.


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Prerequisites for Dematerialization Request

1. The registered holder of the securities should make the request.

2. Securities to be dematerialized must be recognized by NSDL as eligible. In other

words, only those securities that ISIN has been activated by NSDL, can be

dematerialized.

3. The company/issuer should have established connectivity with NSDL. Only after such

connectivity is established that the securities of that company/issuer are recognized to be

"available for dematerialization".

4. The holder of securities should have a beneficiary account in the same name as it

appears on the security certificates to be dematerialized.

5. The request should be made in the prescribed dematerialization request form.


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Transposition cum Demat

NSDL has amended its Bye Laws and Business Rules to enable investors to transpose

names of the joint holders along with the process of dematerialization through their DPs.

Prior to this amendment, investors having shares in joint names (Mr. A & Mr. B), but in

different sequence (Mr. B & Mr. A) were either required to open multiple accounts for

each sequence (Mr. A & Mr. B and Mr. B & Mr. A) or to effect the transposition directly

with the Issuer/R&T Agent and then dematerialize their securities through their DPs.

In case of transposition-cum-dematerialization, the Client can get the securities

dematerialized in the same account if the names appearing on the certificates match with

the names in which the account has been opened but are in a different order, by

submitting the security certificates along with the Transposition Form and the

Dematerialization Request Form (DRF) to the DP.

Procedure for Dematerialization


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1. DPs provide dematerialization request forms (DRF) to their clients.

2. The client completes the DRF in all respects and submits to the DP along with the

security certificates to be dematerialized.

3. The DP checks the DRF for validity, completeness and correctness. The following

points should be checked particularly:

The security certificates to be dematerialized are attached to DRF.

The attached security certificates are marked (defaced) with the words

'Surrendered for Dematerialization'. This is a precautionary measure to prevent

misuse of share certificates by anyone.

Figure 18

The certificates are mutilated by punching two holes. However, the certificates

should not be mutilated or defaced in a manner affecting any material

information.

The name of the client on DRF and the certificates is exactly the same as in the

clients accounts in DPM. However, minor variations in the name may be

permitted if it can be reasonably established that both names are of the same

person. The permitted variations refer to initials not being spelt out fully or put

prior to after the surname. In such cases, if the signature on the DRF matches the

specimen signature available with the DP, the securities can be considered for

demat.


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Details like security type, face value, paid-up value, pari passu status, certificate

numbers, distinctive numbers, number of certificates, total quantity of securities

and lock-in status are filled-in correctly.

Separate DRFs have to be submitted for:

Free and locked-in securities;

Securities locked-in for different reasons;

Each ISIN;

Securities of different paid-up value; and

For each client account.

DRF is signed by

The sole holder in case of single holding;

All joint holders in case of joint holding;

Separate DRFs have to be submitted for:



Each ISIN;

Securities of

different paid-up value; and

For each client account.

DRF is signed by

The sole

older in case of single holding;

All joint holders in case of joint holding;

Authorized signatories in the case of corporat

accoulist for investors

While filling up the dematerialization request form, investors need to check:


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1. The DRF has to be obtained only from the DP with whom they have opened an

account.

2. The DRF has to be filled in duplicate/triplicate as required by the DP.

3. All the information asked in the form is mandatory and has to be filled.

4. Separate forms should be filled for separate ISIN numbers of the company.

5. Separate forms should be filled for lock-in and free securities.

6. All the holders should sign the DRF form. Signatures should match with those of the

specimens on the account opening form. However if the signature with the company/

R&T Agent is different from the signature with the DP, the client may affix both

signatures.

7. The order of the holders should be same as that in the account opening form.

8. While submitting the shares they should be defaced by mentioning on it "surrendered

for dematerialization".

9. After submitting the certificates, an acknowledgement slip duly signed by the DP

should be collected.

10. Demat request form for dematerializing government securities is different and is

called "

DRF - GS".

Before accepting the form and share certificates for dematerialization the DP should

check:

1. Client has submitted the securities for dematerialisation along with the

Dematerialisation Request form (DRF).

2. No dematerialisation request, other than one from a registered holder of securities, has

been entertained.

3. The certificates submitted by the client for dematerialisation belong to the eligible list

of securities admitted by the Depository.

4. Verify that the DRF submitted by the client has been filled completely and duly

signed. The DP has to issue to the client an acknowledgement slip duly signed and

stamped.


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5. Verify the signature of the client on the form and compare it with the specimen

available in its records. If the signatures are different, the DP has to ensure proper

identification of the client.

6. NSDL issues circulars on caution to be exercised in respect of shares belonging to

some companies. Such circulars should be referred to before accepting a demat request.

7. If the form is in order, the request details are entered in its DPM and the DPM

generates a Dematerialisation Request Number (DRN).

8. The DRN so generated are entered in the space provided for the purpose in the DRF.

The details given in the DRF should match with the details of reports generated by DPM

and verified by a person other than the person who had entered the data.

9. The DRF is forwarded to the issuer or its R&T Agent only after ascertaining that the

number of certificates annexed with the DRF tallies with the number of certificates

mentioned on the DRF, within 7 days of its receipt.

10. The details of the certificates submitted for dematerialization with the details filled up

are in consonance with the DRF.

11. The client has marked the certificates submitted for dematerialization with the words

"surrendered for Dematerialization".

12. The safety and security of the certificates submitted for dematerialization till the

certificates were forwarded to the Issuer or its R&T Agent has to be ensured.

13. Punch two holes on the company name on the security certificates before forwarding

them to the issuer or its R&T Agent.

14. Ensure that the client has filled in a separate DRF for securities having distinct ISINs.

15. Ensure that the client for has filled in a separate DRF for locked in and free securities

having the same ISIN.

16. Ensure that the client has submitted a separate DRF for each of his/their accounts

maintained with the DP.

17. DRF and certificates have to be sent to the correct address of the company where they

are accepted. NSDL issues circulars giving information about the addresses where

physical documents will be accepted.

Figure 19


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Precautions to be taken while processing DRF

Rejection of DRF

A demat request can be rejected in the case of the following objections. The table below

gives the reasons for rejection and the action that DPs need to take in case of each

objection.

The DP has to inform his client about the rejection if and when the R&T Agent has

rejected theDRF. In such cases the R&T Agent sends the certificates directly to the client.

Subsequent Disputes

Any dispute regarding the title of securities (in physical form) after they have been

dematerialized and credited to a client's account, has to be settled amongst the DPs,

clients and issuer or its R&T Agent. The procedure for dispute settlement is laid down in

SEBI Guidelines for Good and Bad Delivery of documents, as is done in the case of

physical securities.

SEBI Guidelines on Transfer-cum-Demat Scheme

SEBI has taken various policy initiatives to popularize the demat concept. In order to

help investors to dematerialize physical shares received but not yet registered in their

name, SEBI has introduced a scheme called Transfer-cum-Demat. As per the Guidelines,


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all companies that are included in the SEBI compulsory list have to offer Transfer-cum-

Demat facility. Investors who have bought shares of these companies from the market

can send their shares to the company for simultaneous action of transfer-cum-demat.

With effect from February 12, 2003 this facility is applicable for shares upto 500 (in

number) only.

The relevant details of the Guidelines are enumerated below.

1. The issuer or its Registrar and Transfer (R&T) Agent, on completion of the process of

registration of shares submitted for transfer, has to intimate the investor providing an

option to dematerialize such shares. The investor intending to exercise the option of

dematerializing shares has to send the dematerialization request within 30 days of the

date of the option letter, failing which the issuer or its R&T Agent can dispatch, the

certificates. Requests received subsequent to dispatch of the certificates are rejected.

2. Investors exercising the option of dematerializing the shares have to submit the

following documents to the DP:

Dematerialization Request Form (DRF)

Original option letter received from the issuer or its R&T Agent.

3. DP shall affix its seal and signature on the original option letter.

4. The DP has to execute the request for dematerialization in the Depository DP Module

(DPM).

5. The DP has to dispatch of DRF along with the original option letter to the Issuer or its

R&T Agent and keep a copy of it for records.

6. The Issuer or its R&T Agent has to process the dematerialization request for its

validity and verify the signatures on the DRF with those on the transfer deed.

7. If the request is in order, the Issuer or its R&T Agent defaces the certificates with the

word "Dematerialized" and confirms the dematerialization request.

8. The Issuer or its R&T Agent has to maintain a record of the securities certificates that

have been dematerialized.

9. If the request is rejected, the Issuer or its R&T Agent has to dispatch the certificates to

the investor.

10. NSDL is required to obtain from the company a certificate from a Chartered

Accountant or a Company Secretary that the company has complied with the Guidelines.


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Rematerialization

Rematerialization is the exact reverse of dematerialization. It refers to the process of

issuing physical securities in place of the securities held electronically in book-entry form

with a depository. Under this process, the depository account of a beneficial owner is

debited for the securities sought to be rematerialized and physical certificates for the

equivalent number of securities is/are issued.

A beneficial owner holding securities with a depository has a right to get his electronic

holding converted into physical holding at any time. The beneficial owner desiring to

receive physical security certificates in place of the electronic holding should make a

request to the issuer or its R&T Agent through his DP in the prescribed rematerialization

request form (RRF).

On receipt of RRF, the DP checks whether sufficient free balance of the securities that to

be rematerialized is available in the account of the client. If sufficient balance is

available, the DP accepts the RRF and communicates the request to NSDL through the

DPM system. When NSDL receives the rematerialization request, it intimates the issuer

or its R&T agent about such requests. NSDL sends this intimation to R&T agents on a

daily basis on the DPMSHR system. DP should forward the RRF to the issuer or its R&T

Agent within seven days of accepting the RRF from the client. The issuer or its R&T

Agent, after validating the RRF, should confirm to NSDL that the RRF has been

accepted. On receipt of such acceptance from the issuer or its R&T Agent, NSDL

removes the balances from the respective client's account.

On rematerialization, R&T Agent issues security certificates as per the specifications

given by the client in the RRF. Thereafter, the issuer or its R&T Agent dispatches the

security certificates for the rematerialized securities to the client and his name is entered

in the Register of Members of the company. The certificate of securities should be sent to

the clients within a period of 30 days from receipt of such RRF by the issuer or its R&T

Agent. The new certificates may not necessarily bear the same folio or distinctive

numbers as those that investor had previously, i.e., prior to his getting them in demat

form. When a re-materialisation request is sent, the securities in the client account will

not be available for delivery/transfer immediately. The client will have to wait for


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physical certificates to reach him before they can be sold. Thus the client would

encounter temporary illiquidity on the shares requested for in re-materialised form.

Prerequisite to a Rematerialization Request

1. The beneficial owners of the securities should make the request.

2. There should be sufficient free balance of securities available in the beneficiary

account to honor the rematerialization request.

Rematerialization Process

1. The DP should provide rematerialization request forms (RRF) to clients.

2. The client should complete RRF in all respects and submit it to the DP.

3. The DP should check RRF for validity, completeness and correctness. In particular, the

following points should be checked.

There is sufficient free balance available in the client's account to honor the

rematerialization request.

The name of client on RRF is exactly the same as that in the client account.

In case of joint holding, the order of names appearing in RRF is the same as in the

client's account.

Details like security type, face value, issuer's name and lock-in status are filled-in

correctly.

The client has indicated his option to receive physical certificates either in jumbo lot for

the entire quantity requested or in market lot.

Separate RRF are submitted for



Each ISIN

Securities of different paid-up value; and

Each client account. RRF is signed by

The sole holder in case of single holding;

All joint holders in case of joint holding,

Authorized signatories in the case of corporate accounts,


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Constituted attorney in the case of NRI accounts;

4. If RRF is not found in order, the DP should return the RRF to the client for

rectification.

5. If RRF is found in order the DP should accept RRF and issue an acknowledgement to

the client.

6. DP should enter the rematerialization request in DPM. DPM will generate a remat

request number (RRN), which should be mentioned on RRF.

7. An authorized person, other than one who entered the RRF details in DPM, should

verify the details of RRN and release a request to the depository.

8. The DP should complete the authorization of RRF and forward it to the issuer or its

R&T Agent for rematerialization. The DP should forward RRF to the issuer or its R&T

Agent within seven days of accepting it from the client.

9. The issuer or its R&T Agent should verify the RRF for validity, completeness and

correctness. It should also match the details with the intimation received from the

depository against the same RRN.

10. In case the issuer or its R&T Agent finds RRF in order, it should confirm the remat

request the issuer or its R&T Agent should then proceed to issue the physical security

certificates and dispatch them to the beneficial owner.

11. The DP, on receiving confirmation of debit entry in DPM, should inform the clientaccordingly.

The entire process takes a maximum of 30 days. No trading is possible on the securities

sent for remat.

CHAPTER 11

Trading and Settlement

One of the basic services provided by NSDL is to facilitate transfer of securities from one

account to another at the instruction of the account holder. In NSDL depository system

both transferor and transferee have to give instructions to its depository participants

[DPs] for delivering [transferring out] and receiving of securities. However, transferee

can give 'Standing Instructions' [SI] to its DP for receiving in securities. If SI is not given,

transferee has to give separate instructions each time securities have to be received.


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Transfer of securities from one account to another may be done for any of the following

purposes:

a. Transfer due to a transaction done on a person-to-person basis is called 'off-market'

transaction.

b. Transfer arising out of a transaction done on a stock exchange.

c. Transfer arising out of transmission and account closure.

A beneficiary account can be debited only if the beneficial owner has given 'delivery

instruction' [DI] in the prescribed form. Separate forms have to be used for transferring

securities within NSDL and between depositories.

1. Seller gives delivery instructions to his DP to move securities from his account to the

buyer's account.

2. Buyer automatically receives the credit of the securities into his account on the basis of

standing instruction for credits.

3. Buyer receives credit of securities into his account only if he gives receipt instructions,

if standing instructions have not been given.

4. DP needs to be extra careful in verifying the signature of the client if unusual

quantities of securities are being debited to the account.

5. Funds move from buyer to seller outside the NSDL system.

The DI for an off-market trade or for a market trade has to be clearly indicated in the

form by marking appropriately. The form should be complete in all respects. All the

holder(s) of the account have to sign the form. If the debit has to be effected on a

particular date in future, account holder may mention such date in the space provided for

'execution date' in the form. This chapter deals with settlement of off-market trade and

market transfer for instructions received in the prescribed form as given above. Transfers

arising out of transmission and account closure are discussed under the chapter on

transmission and account opening respectively.

Settlement of off-market transactions:

Any trade that is cleared and settled without the participation of a clearing corporation is

called off-market trade. Transfer from one beneficiary account to another due to a trade


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between them is called off-market transaction. Large deals between institution, trades

among private parties, transfer of securities between a client and a sub-broker, large

trades in debt instruments are normally settled through off-market route.

The transferor will submit a DI with 'off-market trade' ticked off to initiate an off-market

debit. The account holder is required to specify the date on which instruction should be

executed by mentioning the execution date on the instruction. The debit may be effected

on the 'instruction date' if 'execution date' is not mentioned. Thus when execution date is

not mentioned separately, instruction date is considered as execution date. If the

execution date is mentioned, the debit will be affected on that date. DP will enter the

instruction in the DPM when the instruction form is complete in all respects and is found

in order. DPM will generate an 'instruction number' for each instruction entered. DP will

write the instruction number on the instruction slip for future reference.

The instruction will be triggered on the execution date. If there is adequate balance in the

account, such quantity will be debited on the execution date. If adequate balances do not

exist in the account, then instruction will wait for adequate balances till the end of the

execution day. The account will be debited immediately on receipt of adequate balances

in the account. If adequate balances are not received till the end of the day of the

execution date, the instruction will fail. Transferee will receive securities into the account

automatically if SI were given to the DP at the time of account opening. If SI is not given,

transferee has to submit duly filled in 'receipt instruction' [RI] form for every expected

receipt. Exchange of money for the off-market transactions are handled outside the

depository system

Settlement of market-transaction :

Figure 24

A market trade is one that is settled through participation of a Clearing Corporation. In

the depository environment, the securities move through account transfer. Once the

broker on the stock exchange executes the trade, the seller gives a delivery instruction to

his DP to transfer securities to his broker's account.

The broker has to then complete the pay-in before the deadline prescribed by the stock

exchange. The broker removes securities from his account to CC/CH of the stock

exchange concerned, before the deadline given by the stock exchange.


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The CC/CH gives pay-out and securities are transferred to the buying broker's account.

The broker then gives delivery instructions to his DP to transfer securities to the buyer's

account.

The movement of funds takes place outside the NSDL system.

1. Seller gives delivery instructions to his DP to move securities from his account to his

Brokers account

2. Securities are transferred from broker's account to CC on the basis of a delivery out

Instruction.

3. On payout, securities are moved from CC to buying broker's account.

4. Buying broker gives instructions and securities move to the buyer's account.

Transfer of securities towards settlement of transactions done on a stock exchange is

called settlement of market transaction. This type of settlement is done by transferring

securities from a beneficiary account to a clearing member account. Brokers of stock

exchanges that offer settlement through depository are required to open a 'clearing

member account'. In addition to the brokers, custodians registered with SEBI and

approved by stock exchanges can open a clearing member account. These accounts are

popularly known as 'Broker settlement account'. A client who has sold shares will deliver

securities into the settlement account of the broker through whom securities were sold.

The following are important descriptions of a transaction done on a stock exchange. All

these descriptions have to be written in the 'DI' slip.

Market type

Stock exchanges offer different market segments in which trades can be done. The type

of settlement or type of trade does the segmentation. Each of the segments is denoted as

'market type' in NSDL depository system. The stock exchange, which offers these market

types, generally, recognizes these settlements with a two-character code. The DI slip

should contain the market type for which securities are being transferred to the clearing

member. The contract note/trade confirmation slip given by the broker/sub-broker will

indicate the market type.

Settlement number


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A settlement number identifies trading periods of each of the above market segments.

Every settlement number has a trade-beginning day, trade-ending day, settlement pay-in

day, settlement pay-out day. Stock exchanges divide a period of one year [generally

calendar year] into several settlement periods and allocate settlement number for each

settlement-period. All these days collectively are called 'settlement calendar'. DPM

system will give complete details of settlement calendar for each stock exchange. The DI

slip should contain the settlement number for which the securities are being transferred to

the clearing member.

Clearing member

Every broker in a stock exchange offering settlement in dematerialised securities will

have to open a distinct account called 'clearing member account'. It is identified with a

number called 'CM-BP-Id'. If a broker deals in more than one stock exchange, he will be

allotted one CM-BP- Id per stock exchange. The DI slip should contain the CM-BP-id

relevant to the stock exchange in which the trade was done.

Delivery deadline

Stock exchanges set a deadline time by which clearing member are expected to deliver

securities. Clearing member can deliver securities within the deadline time only if they

have received securities from their clients. In order to ensure that clients give securities in

time to the clearing member, SEBI has prescribed deadline time by which clients have to

give securities to clearing members. SEBI has advised DPs to instruct their clients to

submit the settlement instructions at least 24 hours, i.e. one working day prior to the pay-

in date. The client must submit the delivery instruction slip to its Depository Participant

before the DPs acceptance deadline.

Steps in pay-in and pay-out

The process of a broker [CM] submitting securities being towards the securities sold by

him on behalf of his client, to CC/CH of a stock exchange is called 'pay-in'. All CM's are

expected to complete the pay-in before the deadline time prescribed by the stock

exchange. In a depository environment, the following steps have to be completed to

execute the 'pay-in' successfully: -

The clients of the brokers who have sold securities will move the securities to the

broker-settlement account before the deadline time [NSDL deadline time].


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CM will move securities from his account to CC/CH of the stock exchange

concerned, before the deadline time given by the stock exchange. If the CM is

unable to give delivery within the time, the shortage is purchased by the CC/CH

in an open auction and the difference in price will be collected from the CM.

The process of a CC/CH transferring the securities to the broker's settlement-account for

the quantity of securities purchased by them on behalf of their clients is known as 'pay-

out'. Payout time is also pre-determined by the settlement calendar. The following steps

are taken to distribute securities received in pay-out to buying clients:-

The CC/CH credits the buying CM account immediately on pay-out.

The CM/broker will transfer securities from his CM Settlement account to the accounts

of the buyer.

In a clearing member account, the securities are always kept in a bucket of specific

market type and settlement number. The clearing member may have to move securities

from one bucket with a different market type-settlement number combination to another

bucket from where pay-in is to be affected. To effect this movement a clearing member

can give an instruction to move securities from one settlement to another settlement,

which is called 'inter-settlement transfer'.Tracking of securities received for pay-in

A CM is required to track the securities, which it has received for pay-in. A CM can

obtain such information from the following sources:

1. Its clients : CM may contact selling clients to inquire whether they have delivered

securities

2. Its DP: CM may contact its DP to find out the deliveries received into its CM

settlement account

3. Internet - using SPEED service of NSDL

NSDL offers a secured Internet based service for clearing members [such as brokers] of

stock exchanges linked to NSDL. This service named SPEED [Securities Position Easy


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Electronic Dissemination] enables the clearing members to view details of their clearing

member settlement accounts directly on the Internet. Data available include:-

- Balance lying in CM settlement account

- Transactions for securities delivered by the client [for pay-in]

- Transactions for securities delivered by the CM to CC [pay-in]

- Transactions for securities delivered by CC to CM [pay-out]

- Transactions for securities delivered by CM to clients [after pay-out]

Details of all settlements for which pay-in had taken place in last 10 days and for which

pay-in is scheduled in next 10 days is available. Data is updated 5 times in a day. All the

above data can be downloaded and input in CM's back office for further use. This facility

will be of immense help to the CM as the dolid. The participant shall execute the

instructions of the CM to debit/credit the settlement account of the CM.

Inter-depository transfer :-

Transfer of securities from an account in one depository to an account in another

depository is termed as an inter-depository transfer. This facility is quite similar to

account transfers within NSDL.

As per SEBI (Depositories and Participants) Regulations, 1996, both the depository

must be inter-connected to enable inter-depository transfers.

It can be done only for securities that are available for dematerialisation on both the

depositories.

The account in NSDL can be either a clearing account or a beneficiary account.

For debiting the clearing account or the beneficiary account with NSDL, the form for

"Inter-depository delivery instruction" is required to be submitted by the clearing

member/ beneficial owner to its DP.

For crediting the clearing account or the beneficiary account, the standing instruction

given for automatically crediting the account is applicable. In case the standing

instructions are not given, then the form for "Inter-Depository Receipt Instruction" is

required to be submitted by the clearing member/beneficial owner to its DP.


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Inter Depository Transfer instructions for the day are exchanged online between the two

depositories.

The deadline time for DPs to verify & release Inter Depository Transfer delivery/

receipt instructions is 6 p.m. on weekdays and 2.30 p.m. on Saturdays.

Figure 32

Check List for Settlement

Verify signature.

Ensure strict adherence to submission of instructions within pre-defined

settlement deadlines

Advise and ensure that clients sign instruction by all the joint holders. Only in

case of

CM a/c the facility of anyone or jointly is permitted.

Verify all fields in instruction form.

Accept delivery instructions before 24 hours of pay-in deadline.Check RBI

approval in case of NRI transactions.

In case of natural guardian, no court approval is needed for movement of

securities

From the account held in name of the minor.

SPEED-e

NSDL has set-up an Internet based service called SPEED-e. Demat account holders

(including brokers) can submit delivery instructions to their Depository Participants

(DPs) electronically, thus eliminating the need to submit instructions in paper form. The

facility features high level of security (128 bit SSL) for server authentication and data

encryption. The instructions submitted by the account holders are digitally signed.

SPEED-e allows both interactive and batch file based operation with digital signature.

Thus data entered by the account holder is received into the depository participantssystem and executed. As the client under clients verifiable authority reconfirms the

instruction, depository participant acts on it directly without any modifications in the

instructions.

Benefits


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The direct and indirect benefits of the Demat system are described in detail below. In the

depository system, the ownership and transfer of securities takes place by means of

electronic book entries. At the outset, this system rids the capital market of the dangers

related to handling of paper.

Elimination of bad deliveries - In the depository environment, once the holdings

of an investor are dematerialized, the question of bad delivery does not arise, i.e.,

their transfer cannot be rejected due to defect in the quality of the security. All

possible reasons for objecting transfer of title due to deficiencies associated with

transfer deed and share certificates are completely eliminated since both transfer

deed and share certificates are eliminated in depository system.

Elimination of all risks associated with physical certificates - Dealing in physical

securities has associated security risks of theft of stocks, mutilation or loss of

certificates during movements to and from the registrars. These expose the

investor to the cost of obtaining duplicate certificates, advertisements, etc. Such

problems do not arise in the depository environment.

No stamp duty - There is no stamp duty for transfer of equity instruments andunits of mutual funds in the depository system. In the case of physical shares,

stamp duty of 0.5% is payable on transfer of shares.

Immediate transfer and registration of securities - In the depository environment,

once the securities are credited to the investors account on pay out, he becomes

the legal owner of the securities. There is no further need to send it to the

company's registrar for transfer of ownership or registration which is necessary in

the case of physical securities. This process normally takes longer than the

statutory prescribed period of two months thus exposing the investor to

opportunity cost of delay in transfer and to risk of loss in transit. To overcome

this, the normally accepted practice is to hold the securities in street names, i.e.,

not to register the change of ownership. However, if the investors miss a book


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closure, the securities are not good for delivery and the investor would also stand

to loose his corporate entitlements.

Faster settlement cycle - With the introduction of electronic form of settlement,

Indian Capital markets have moved from 15 day long settlement cycle to T+2

settlement cycle where the settlement takes place on 2nd day from the day of

trading. This enables faster turnover of stock and enhances liquidity with the

investor.

Buyer is secured - In the physical environment, seller was secured since the sale

proceeds were always fully realizable but the buyer was not since it was not

certain whether shares purchased will get transferred or not. The market principle

is that buyer is king was not did not apply to the capital market. This situation has

now been corrected.

Faster disbursement of non-cash corporate benefits - NSDL provides for direct

credit of non-cash corporate entitlements like rights, bonus, etc., to an investor's

account, thereby ensuring faster disbursement and avoiding the risk of certificates

getting lost in transit.

Reduction in rate of interest on loans - Some banks provide this benefit against

pledge of dematerialized securities. Dematerialized securities eliminate

hassles/risks like getting securities registered in their name at the time of book

closure if the pledgee defaults in repayment. Also eliminated is the risk of stocks

coming under objections when they are sent to the company's registrar for

registration if the pledge has to be invoked.

Increases in maximum limit of advances This increase from Rs. 10 lakh to Rs.

20 lakh per borrower. There is also a reduction in minimum margin from 50% to

25% by banks for advances against dematerialized securities as per the Monetary

and Credit Policy of Reserve Bank of India for the first half of 1998-99.


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Reduction in brokerage - Since introduction of electronic settlement of securities

there has been a significant fall in the brokerage charged for brokers for effecting

and settling trades of investors at the stock exchanges. This benefit is given to

investors as dealing in dematerialized securities reduces their back office cost of

handling paper. It also eliminates the risk of being the introducing broker.

Reduction in handling of huge volumes of paper - In the physical environment,

every entity involved in purchase or sale of securities was to handle papers and

pass on papers to the next entity. Number of papers to handle increased with the

volume of transactions. However, in the depository environment, except the

delivery instruction to be given by the client/broker, there is no other paper

movement. NSDL has permitted use of floppies to give debit instructions and

large volumes of transactions.

NSDL has recently introduced a common Internet based platform, SPEED-e, for

Clients of all DPs so that Clients can issue instructions to their DPs through

Internet. Using SPEED-e the client need not write delivery instructions or visit its

DP for issuing instructions. Clients can monitor the status of instructions given bythem on SPEED-e on Internet.

Periodic status reports - DPs need to provide periodic reports to investors on their

holdings and transactions. This leads to better management controls on the part of

the servicing agency and better information for the investors.

Dematerialized securities can be delivered in the physical segment Securities

forming a part of the SEBI specified compulsory list (wherein delivery in demat

form is mandatory for all categories of investors) can be delivered in physical

form in the stock exchanges connected to NSDL. This requirement is applicable

to physical deliveries wherein the number of shares is less than 500.


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Elimination of problems related to change of address of investors, 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 about the change along with all

relevant documents. The required changes are effected in the database of all the

companies where the investor is a registered holder of securities. The investor will

receive all cash corporate benefit like dividends, interest warrants, redemption

money, etc. at the new address with immediate effect.

Elimination of problems related to nomination - An account holder can get

securities in all companies transmitted/transferred to his account by completing

formalities with a single entity i.e. DP. He need not deal with all companies

individually.

Elimination of problems related to selling securities on behalf of a minor NSDL

system provides facility for opening demat accounts in the name of minor and

holding their securities in their own name. Since, under the Contract Act , the

minor is not eligible to enter into contracts at their own , the account in the name

of minor is required to be operated by their guardian. The guardian may be thenatural guardian, guardian appointed by will or the guardian appointed by an

order of the court. The minor's guardian will be eligible to open, operate and close

the account on behalf of the minor. The guardian(s) would be signing the

instruction slips to be given to the depository participant, on behalf of the minor.

A minor however cannot be a joint account holder. Non cash corporate benefits

arising out of bonus/rights allotment of shares are credited to the account of the

minor. The concerned issuer of securities in the name of the minor will issue cash

corporate benefits.

Convenient consolidation of accounts - If investors, all accounts, opened multiple

accounts can be consolidated into one account by giving instructions to DP. In


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case of physical certificates, consolidation of folios required correspondence with

all the companies individually.

Convenient portfolio monitoring - Client can monitor portfolio by checking a

single statement of holding/transaction.

Newer services - Opportunities like pledge/hypothecation and stock lending are

given specifically by the depository system.

Increased volumes - Due to ease in transaction and reduced costs, many players

have entered/ increased their transactions. This helps in improving liquidity.

Safety

NSDL has implemented various checks and measures in the Demat system to ensure

safety of the investors' holdings. These include:

A DP can begin operations only after registration by SEBI. The registration

process is based on the recommendation from NSDL after undertaking their

independent assessment and evaluation. SEBI regulations have prescribed

fulfillment of several criteria for becoming a DP.

Depository Participants are allowed to affect any debit and credit to an account

only on the basis of valid instructions from the client.

There are periodic inspections into the activities of both DP and R&T agent by

NSDL. This also includes records based on which the debit/credit are affected.

The data interchange between NSDL and its business partners is protected by

standard protection measures such as encryption. This is a SEBI requirement.

There are no direct communication links between two business partners and all

communications between two business partners are routed through NSDL.


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All investors have a right to receive their transaction statement periodically from

the DP.

Every month NSDL forwards statement of account to a random sample of

investors as a counter check.

In the depository, the depository holds the investor accounts on trust. Therefore, if

the DP goes bankrupt the creditors of the DP will have no access to the holdings

in the name of the clients of the DP. These investors can then either rematerialize

their holdings or transfer to a different account held with another DP.

NSDL has a complete record of the client's transactions in addition to the records

of the DP.

Certification in Depository Operations - NSDL has introduced a Certification

Programmed in Depository Operations. This has been made compulsory for all

DPs. They have to appoint at least one person qualified in this certification

programmed in their branches. This way, NSDL ensures that each branch of a DP,

which services investors, has at least one person who has thorough knowledge

about depository system.

Investor grievances - All grievances of the investors are to be resolved by the

concerned business partner within 30 days. If they fail to do so, the investor has

the right to approach NSDL at the investor grievance cell of NSDL, which would

work towards resolution of the grievance.

Insurance Cover - NSDL has taken a comprehensive insurance policy to protect

the interest of the investors in cases of failure of the DP to resolve a genuine loss.


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Computer and communication infrastructure - NSDL and its business partners use

hardware, software and communication systems, which conform to industry

standards. Further, the systems are accepted by NSDL only after a rigorous testing

procedure. NSDL's central system comprises an IBM mainframe system with a

back-up facility and a remote disaster back-up site. Details with regard to back-up

system are as under:

Machine level back up: The IBM mainframe situated at 'Trade World' (NSDL's

office in Mumbai) in which the data is processed has adequate redundancy built

into its configuration. There is a standby central processing unit (CPU) to which

processing can be switched over if the main system CPU fails. The disk has RAID

implementation, which ensures that a single-point failure will not lead to loss of

data. The system has spare disk configuration where data is automatically copied

from the main disk when the first failure is encountered (due to RAID

implementation first failure does not result in loss of data). All network

components like router, communication controllers, etc., have on-line redundancy

and thus a failure does not result in loss of transaction.

Disaster back up site: In addition, a disaster back up site, equipped with acomputer identical to the mainframe computer & computing resources, has been

set up at a remote location away from Mumbai. NSDL operates generally from its

Mumbai office but often operations are conducted from the disaster back up site

to ensure that the disaster site is always in working condition.

Back up in case of power failure: Continuity in power supply to the main systems

is assured by providing for; dual uninterrupted power supply (UPS) for IBM-

Mainframe and related components wherein the two UPSs are connected in

tandem. In case of failure of primary UPS, the secondary UPS takes over

instantaneously and thus, there is no interruption in operation.


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Periodic Review: The NSDL hardware, software and communication systems are

continuously reviewed in order to make them more secure. These reviews are a

part of an ongoing exercise wherein security considerations are given as much

importance as operational efficiency. These safety measures taken by NSDL have

to be complemented by a similar set of measures at the end of each member of the

depository system like the DPs, Issuers and R&T Agents. The measures that they

need to take have been described below:

Computer and communication infrastructure NSDL and its business partners use

hardware, software and communication systems, which conform to industry

standards. Further, the systems are accepted by NSDL only after a rigorous testing

procedure. NSDL's central system comprises an IBM mainframe system with a

back-up facility and a remote disaster back-up site.

Machine level back up: The IBM mainframe in which the data is processed has

adequate redundancy built into its configuration. There is a standby central

processing unit (CPU) to which processing can be switched over to in case of

main system CPU failure. The disk has RAID implementation, which ensures that

a single point failure will not lead to loss in data. System has spare diskconfiguration where data is automatically copied from the main disk upon

encountering the first failure (due to RAID implementation first failure does not

result in loss of data). All network components like router, communication

controllers etc., have on-line redundancy and thus a failure does not result in loss

of transaction.


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