Depository System in India (Derivatives, Options, Future)

Prepared By: Megha Garg Monal Gupta Anam Ali

Points to be covered in presentation

o Depository System in Indiao Existing Depositories in Indiao Derivativeso Optiono Future

HISTORYThe first depository was set up

way back in 1947 in Germany.In India it is a relatively new

concept introduced in 1996 with the enactment of Depositories Act 1996.

Their operations are carried out in accordance with regulations made by SEBI, bye-laws & rules of Depositories Act & SEBI (Depositories & Participants) Regulations Act, 1996.

MEANINGThe term Depository means a place where a deposit of money, securities, property etc. is deposited for safekeeping under the terms of depository agreement.

A Depository is a firm where in the securities of an investor are held in an electronic form in the same way as a bank holds money.

Contd…

The Depositories Act defines a depository as “a company formed & registered under the Companies Act, 1956 and which has been granted a certificate of registration under sub-section (1A) of section 12 Securities and Exchange Board of India Act, 1992.”

Depository system essentially aims at eliminating the voluminous & cumbersome paper work involved in the scrip-based system and offers scope for ‘paperless’ trading through state-of-the-art technology.

CONSTITUENTS OF DEPOSITORY SYSTEM

There are essentially four players in the depository system:-

The Depository Participants The Beneficial Owner/Investor The Issuer The Depository

ADVANTAGES OF DEPOSITORY SYSTEM

No risk of loss/theft/fraud of shares.

No stamp duty on transfer. Reduced transaction cost. No delay in transfers. Reduced paper work. Fast and speedy transaction.

DISADVANTAGES OF DEPOSITORY SYSTEM

Lack of control. Need for greater supervision. Complexity of the system.

EXISTING DEPOSITORIES IN INDIA

Presently there are two depositories in the country, namely, National Securities Depositories Limited (NSDL) and Central Depositories Services Limited (CDSL).

NSDL It was set up as the first

depository company in the country; it has been sponsored by the UTI, NSE, SBI, HDFC Bank & Citibank.

FUNCTIONS OF NSDL

It enables the surrender and withdrawal of securities to, and from the depository.

Maintains investors’ holding in the electronic form.

Transfer of securities.Receipt of non-cash corporate

benefits like bonus, rights & so on.

Carries out settlement of trades not done on the stock exchange.

CDSL The BSE in association with the BOI, BOB,

SBI & HDFC Bank have promoted CDSL as the secondary depository in India for dealing in securities, in the electronic form, by the name of CDSL

OBJECTIVES OF CDSL• To accelerate the growth of scrip-less

trading.• To create a competitive environment,

which will be responsive to the user’s interests and demands.

• To enhance liquidity.

FEATURES OF CDSL

Centralized database and accounting.

Disasters recovery. CDSL link up NSDL. Services offers CDSL : Dematerialization of existing scripts, dematerialization of new issues, reliable and efficient settlements.

A BANK-DEPOSITORY ANALOGY

Bank Depository 1. Holds funds in an

account on behalf of a customer

1. Holds securities in an account on behalf of an investor.

2. Transfer funds between accounts on the instruction of the account holder.

2. Transfer securities between accounts on the instruction of the account holder.

3. Physical handling of funds is avoided.

3. Physical handling of securities is avoided.

4. Provides safe custody of fund

4. Provides safe custody of securities.

DERIVATIVES Derivatives are financial contract

whose value/price is dependent on the behavior of the price of one or more basic underlying assets.

The underlying securities for derivatives are :-

Commodities (castor seeds, grains, potatoes).

Precious metal (gold, silver). Interest rate. Stock Value Index.

CHARACTERISTICS

It has one or more underlying assets.

The value of derivatives depends upon on their underlying assets price movements.

The contracts are fulfilled or transacted through a recognized exchange.

DERIVATIVES INSTRUMENTS FORWARDS : A forward contract is a customized

contract between two entities, where settlement take place on a specific date in future at today’s pre-agreed price.

FUTURES : A future contract is an agreement between two parties to buy or sell an asset at certain time in future at a certain price.

OPTIONS : An option represents the right but not the obligation to buy or sell a security or other assets during a given time at a specified price. It is of two types-:

Call options & Put options.• SWAPS : these are private agreement between two

parties to exchange cash flow in the future according to the pre arranged formula.

• LEAPS : normally option contracts are for a period of 1 to 12 months. However exchange may introduce options contracts with a maturity period of 2-3 years. These long term contracts are called leaps or Long Term Equity Anticipation Securities.

FUTURE CONTRACTS

A Future Contract is a type of derivative instrument, or financial contract, in which two parties agree to transact a set of financial instruments or physical commodities for future delivery at a particular price

(future contracts are basically agreeing to buy something that a seller has not yet produced for a set price)

SIGNIFICANCE OF FUTURE MARKET

Because the future market is both highly active & central to the global market place. It is a good source for vital market information & sentiment indicators.

A. Discovery of Prices: future market helps in determining the present & future price of commodity by estimating the present & future demand & supply.

B. Reduction of risk : future market is also a place for the people to reduce risk when making purchases because the price of the commodity is pre-set in future contract.

USERS OF FUTURE CONTRACTS