working of depositary system

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Working of Depository system

A PROJECT REPORTOn Working of

Depository systemA project Report submitted in partial fulfillment of the requirements

for the award of the degree of

MASTER OF BUSINESS ADMINISTRATION TO

SRI SAI COLLEGE OF ENGINEERING ANDTECHNOLOGY

PUNJAB TECHNICAL UNIVERSITY

JALANDHAR

BY

SUSHIL KUMAR

ROLL NO.80503317057

Under the guidance of

Mr. PUNEET SHARMA (H.O.D)

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TO WHOMSOEVER IT MAY CONCERN

This is to certify that the project report titled “Working of depositort system” carried out

by Mr.sushil kumar, S/o Shri. Rndhir singh (Father’s Name) has been accomplished under my

guidance & supervision as a duly registered MBA student of the Sri sai college of engineering

and technology, Badhani. This project is being submitted by him in the partial fulfillment of the

requirements for the award of the Master of Business Administration from Sri sai college of

engineering and technology.

His project work represents his original work and is worthy of consideration for the award of the

degree of Master of Business Administration.

___________________________________(Name & Signature of the Faculty Advisor)

Title: Working of depository system

Date: ______________________________

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ACKNOWLEDGEMENT

I would like to express my appreciation and gratitude to various people who have shared

their valuable time and made possible this project ,through their direct indirect cooperation .

My honorable Sir Mr. Puneet Sharma (HOD) and Miss Ripsy mahajan (Project in-

charge), for allowing me to work on this project and provide necessary help.

I thank my respected faculties, dear friend & colleagues, who help me in every possible

ways , support me and encouraged me to explore new dimensions.

SUSHIL KUMAR

MBA 4nd Semester

ROLL NO: 80503317057

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INDEX

S.NO.

PARTICULARS PAGE NO.

1. Certificate 05

2. Declaration 06

3. Preface 07

4. Introduction

Depository

Deposiory system

Leagal framework of DS

Functions of DS

Benefits of DS

Safety feature in the DS

Difference b/w Bank and Depository

Some important process in DS

08

09

13

14

19 21 22 35

36

5. National securitirs depository system

About NSDL

Management of NSDL

Fee structure of NSDL

Technology and connectivity in NSDL

Common software use in NSDL

42-50

43

45

47

48

50

6. Central securitirs depository system

About CSDL

Shareholders of CSDL

Board of diectors and management

Fee structure of CSDL

51-55

52

53

54

55

5


7. Research methodology

Objectives of the study

Types of research

Methods of data collection

56-58

57

57

58

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Tools of analysis

Research design

58

58

8. Data analysis and interpretation 59-65

9. Observations 66

10. Suggestions 68

11. Limitations 69

12. Conclusion 70

13. Biblography 71

14. Orignal synopsis 72

15. Questioneerie 74

CERTIFICATE

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Working of Depository systemThis to certify that SUSHIL KUMAR ,M.B.A 4 Semester ,S.S.C.E.T Badhani

(Pathankot) under P.T.U Jalandhar has done project on “Working of depositary system’’ and has

successfully completed his project on my guideline.

It is only for academic purpose and is a bonfires work done by researcher .

Project Guide

Mr. Puneet Sharma

Faculty

S.S.C.E.T

DECLARATION

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Working of Depository systemI am Sushil Kumar do here by declare that the project work entitle on the “Working of

depositary system’’ is the original work done by me.

This project report presented as a partial fulfillment requirement for the degree of Master

of Business administration.

Sushil kumar

MBA 4nd semester

S.S.C.E.T

PREFACE

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Working of Depository systemThe successful completion of this project was a unique experience for me because by

visiting many place and interacting various person, I achieved a better knowledge about this

system. The experience which I gained by doing this project was essential at this turning point of

my carrier this project is being submitted which content detailed analysis of the research under

taken by me.

The research provides an opportunity to the student to devote his/her skills knowledge

and competencies required during the technical session.

The research is on the topic “Working of Depositary system”

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INTRODUCTION

INTODUCTION

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Working of Depository systemOne of the biggest problem faced by the indian capital market has been the manual

and paper based settlement system. Under this system, the clearing and settlement of transaction

take place only with the use of paper work. The system of physical delivery of scrip’s poses

many problems for the purchaser as well as the seller in the form of delayed settlements, long

settlement periods, high level of failed trade, high cost of transaction, bad deliveries etc. In many

cases transfer process takes much longer time then two month as stipulated in section 113 of

companies Act, 1956 or section 22 A of the securities Contracts (Regulations) Act, 1956.

Moreover, a large number of transactions end up as bad deliveries due to faulty compliance of

paper work, mismatch of signatures on transfer deeds with specimen record of the issuer or other

procedural reasons. Besides, theft, forgery, multination of certificates and other irregularities

have also become rampant.

However, as a consequence of implementation of reforms measures, the Indian

capital market has shown rapid growth in the recent past with foreign investors, more stock

exchanges and increased market intermediaries. The old manual system of settlement and

transfer has almost failed to handle the growing volume of paper that has loaded the market.

Thus, to eliminate paperwork, facilitate scrip less trading and electronic book entry of the

transfer of securities, shorten settlement periods, and to improve liquidity in the stock market, it

was found necessary to replace the old system of transfer and settlement with the new and

modern system of depositories. Accordingly the government of India enacted the depositories

Act in 1996 for the orderly growth and development of the Indian capital market.

It is a system whereby the transfer and settlement of scrip’s take place not through

the traditional method of transfer deeds and physical delivery of scrip’s but through the modern

system of effecting transfer of ownership of securities by means of book entry on the ledgers or

the depositary without the physical movement of scrip’s. The new system, thus , eliminates paper

work, facilities automatic and transparent trading in scrip’s, shortens the settlement period and

ultimately contributes to the liquidity of investment in securities. The system is also known as

‘scriples trading system’.

There are essentially four player in the depository system:

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Working of Depository system The Depositary participant

The Beneficial owner/investor

The issuer

The depositary

A depositary is a firm wherein the securities of an investor are held in electonic

form in the same way a bank holds money. It crries out the transactions of securities by means of

book entry, without any physical movement of securities. The depositary based settelment

system is also called ‘book entry transfer settelment’. The depositary acts as a defecto owner of

the securities lodged with it forn the limited purpose of transfer of ownership. It functions as a

custodian of securities of its clients. The name of the depositary appears in the records. With

increase in the number of transactions in the stock market, it had become difficult for the

investors to hold share certificates and debt instruments in bulk. But now, depositary institutions

handle this job. At present there are two depositories in india.

Number of Depositories in India

National securities depositary Ltd. (NSDL)

Central depositary services (india) Ltd. (CDSL)

NSDL was formed and registered under the companies’ act 1956 during December 1995 and

commenced operations during november1996. NSDL was promoted by Industrial Development

Bank of India (IDBI)-the largest development bank in India, Unit trust of India (UTI)-the largest

mutual fund in India and National stock exchange (NSE)-the largest stock exchange in India.

Some of the prominent banks in the country also have a stake in NSDL.

Central Depository services (India) limited which commenced operations during February

1999.CSDL was promoted by stock exchange, Mumbai in association with Bank of Baroda,

Bank of India, State Bank of India and HDFC Bank.

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DEPOSITARY

SYSTEM

WHAT IS DEPOSITORY

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Working of Depository systemElectronic revolution has brought about a number of changes in the functioning of Indian

capital market. The most revolutionary change that was brought in the entire history of the Indian

market is the introduction of depository.

The century old Indian market has been vibrant all along but its paper- based settlement

of trades caused problems like bad delivery, delayed transfers etc., until the enhancement of

depository act in 1996. The depository model in India is a competitive multi depository system in

India the system of dematerialization is followed, wherein the securities will be cancelled as

against the system of immobilization in which the securities are kept in custody.A depository is

an organization where the securities of an investor are held in electronic form and carries out the

securities transaction by book entry.

A depository is a file or set of files in which data is stored for the purpose of safekeeping

or identity authentication. A common example is the set of personal data files at a credit

reporting agency such as Equifax. Another example is the data contained at a state motor vehicle

department. In a biometric security system, a depository contains data about people's physical

characteristics such as iris prints and finger images.

Additional information may be added, including facial characteristics, voice prints, and

hand prints. When a person's identity must be verified, one or more biometric samples is taken in

real time, and this data is compared with the data in the depository. In general information

storage applications, a depository is a physical site where data is kept in the form of hard copies,

magnetic disks, magnetic tapes, compact disks (CDs), and similar media. A good example is the

safe deposit vault in a financial institution. An ideal depository is secure, in the sense that only

authorized persons or institutions can gain access to the data it contains. However, experience

has shown that many depositories, no matter how secure they claim to be, can be compromised

by a determined hacker or thief.

WHAT IS DEPOSTORY SYSTEM

http://searchSecurity.techtarget.com/sDefinition/0,,sid14_gci957086,00.html



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Working of Depository systemThe 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 relates 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 rampant. In addition, the issuer has the right to refuse the transfer of a

security. All this added to costs and delays in settlement, restricted liquidity and made investor

grievance redressal 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) dematerialising 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

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Working of Depository systeminvestors. With the application of IT in the securities market - screen-based trading and trading

through the Internet - it has been possible to reduce this settlement period.

Legal Framework of depositary system

The operations of the depositories are primarily governed by the Depositories Act, 1996,

Securities and Exchange Board of India (Depositories & Participants) Regulations, 1996, Bye-

Laws approved by SEBI, and Business Rules framed in accordance with the Regulations and

Bye-Laws.

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).

Only a company registered under the Companies Act, 1956 and sponsored by the

specified category of institutions can set up a depository in India. Before commencing

operations, depositories should obtain a certificate of registration and a certificate of

commencement of business from SEBI.

The rights and obligations of depositories, depository participants, issuers and beneficial

owners are spelt out clearly in the Depositories Act 1996.

As per the Act :

• Section 4: DP is an agent of the Depository: A DP is an agent of the depository, who provides

various services of the depository to investors. The DP has to enter into an agreement with the

depository to this effect. Any investor who would like to avail the services of a depository has to

enter into an agreement with any DP of his choice. The DP will then make the depository

services available to the investor.

• Section 7: Free Transferability : The securities held by an investor in the depository are freely

transferable from one beneficial owner to another.

• Section 8: Option to hold securities in demat form : In the depository system, every investor

subscribing to securities offered by an issuer has an option to receive the same in physical form

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Working of Depository systemor dematerialised form. If an investor opts for receiving the securities in dematerialised form, the

issuer intimates the depository the details of allotment of security. On receipt of this information,

the depository enters the name of the allottee as the beneficial owner of that security in its record.

• Section 9: Securities held in a depository are fungible : All securities held by the depository are

in dematerialised and fungible form.

• Section 10: Registered Owner and Beneficial Owner : The depository is deemed to be the

registered owner for the purpose of effecting transfer of ownership of security on behalf of a

beneficial owner. But as a registered owner, it does not have any voting rights or any other rights

in respect of those securities. The beneficial owner is entitled to all rights and benefits as well as

subject to all liabilities in respect of his securities held in the depository.

• Section 14: Option to opt out of depository : A beneficial owner may opt out of a depository in

respect of any security by requisite intimation to the depository.

• Section 16: Depository to indemnify losses : A depository shall indemnify a beneficial owner,

any loss caused due to negligence of the depository or its participant.

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;

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

4. A recognised stock exchange;

5. An institution engaged in providing financial services where not less than 75% of the equity is

held jointly or severally by these institutions;

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 crore. 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

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Working of Depository systemeither 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.

Registration – As per the provisions of the SEBI Act, a depository can deal in securities only

after obtaining a certificate of registration from SEBI. The sponsors of the proposed depository

should apply to SEBI for a certificate of registration in the prescribed form. On being satisfied

with the eligibility parameters of a company to act as a depository, SEBI may grant a certificate

of registration subject to certain conditions.

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 for and obtain a certificate of commencement of business from SEBI within one year

from the date of receiving the certificate of registration from SEBI.

SEBI grants a certificate of commencement of business if it is satisfied that the

depository has adequate systems and safeguards to prevent manipulation of records and

transactions. SEBI takes into account all matters relevant to the efficient and orderly functioning

of the depository. It particularly examines whether :

1. The depository has a net worth of not less than Rs. 100 crore;

2. The Bye-Laws of the depository have been approved by SEBI;

3. The automatic data processing systems of the depository have been protected against

unauthorised access, alteration, destruction, disclosure or dissemination of records and data;

4. The network, through which continuous electronic means of communication are established

between the depository, participants, issuers and issuers' agents, is secure against unauthorised

entry or access.

5. The depository has established standard transmission and encryption formats for electronic

communication of data between the depository, participants, issuers and issuers' agents;

6. The physical or electronic access to the premises, facilities, automatic data processing

systems, data storage sites and facilities including back-up sites, and to the electronic data

communication network connecting the DPs, issuers and issuers' agents is controlled, monitored

and recorded;

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Working of Depository system7. The depository has a detailed operational manual explaining all aspects of its functioning,

including the interface and method of transmission of information between the depository,

issuers, issuers' agents, DPs and beneficial owners;

8. The depository has established adequate procedures and facilities to ensure that its records are

protected against loss or destruction and arrangements have been made for maintaining back-up

facilities at a location different from that of the depository;

9. The depository has made adequate arrangements including insurance for indemnifying the

beneficial owners for any loss that may be caused to such beneficial owners by the wrongful act,

negligence or default of the depository or its participants or of any employee of the depository or

participant;

10. The granting of certificate of commencement of business is in the interest of investors in

securities market.

Agreement between Depository and Issuers – If either the issuer (a company which has

issued securities) or the investor opts to hold his securities in a demat form, the issuer enters into

an agreement with the depository to enable the investors to dematerialise their securities.

No such agreement is necessary where :

i. Depository, is the issuer of securities, or;

ii. The State or Central Government is the issuer of government securities.

Where the issuer has appointed a registrar to the issue or share transfer, the depository

enters into a tripartite agreement with the Issuer and Registrar & Transfer (R&T) Agent, as the

case may be, for the securities declared eligible for dematerialisation. At present, NSDL is

discharging the responsibility of R&T Agent for the securities issued by State and Central

Governments.

Rights and Obligations of Depositories – Depositories have the rights and obligations conferred

upon them under the Depositories Act, the regulations made under the Depositories Act, Bye-

Laws approved by SEBI, and the agreements made with the participants, issuers and their R&T

agents.

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Working of Depository systemEvery depository must have adequate mechanisms for reviewing, monitoring and

evaluating the depository's controls, systems, procedures and safeguards. It should conduct an

annual inspection of these procedures and forward a copy of the inspection report to SEBI. The

depository is also required to ensure that the integrity of the automatic data processing systems is

maintained at all times and take all precautions necessary to ensure that the records are not lost,

destroyed or tampered with. In the event of loss or destruction, sufficient back up of records

should be available at a different place. Adequate measures should be taken, including insurance,

to protect the interests of the beneficial owners against any risks.

Every depository is required to extend all such co-operation to the beneficial owners,

issuers, issuers' agents, custodians of securities, other depositories and clearing organisations, as

is necessary for the effective, prompt and accurate clearance and settlement of securities

transactions and conduct of business.

The depository should indemnify beneficial owners of securities for any loss caused to

them due to the negligence of the DP. However, where the loss is caused due to the negligence of

a DP, the depository shall have the right to recover it from such DPs.

Bye-Laws – A depository is required to make Bye-Laws governing its operations. The Bye-

Laws have to be in conformity with the Depositories Act and the regulations made thereunder,

and need to be approved by SEBI before becoming effective.

Depository – Every depository is required to maintain the following records and documents.

These have to be preserved for a minimum period of five years.

1. Records of securities dematerialised and rematerialised.

2. The names of the transferor, transferee, and the dates of transfer of securities.

3. A register and an index of beneficial owners.

4. Details of the holdings of the securities of beneficial owners as at the end of each day.

5. Records of instructions received from, and sent to, participants, issuers, issuers' agents and

beneficial owners.

6. Records of approval, notice, entry and cancellation of pledge or hypothecation.

7. Details of participants.

8. Details of securities declared to be eligible for dematerialisation in the depository.

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Working of Depository system9. Such other records as may be specified by SEBI for carrying on the activities as a depository.

Services of Depository – A depository established under the Depositories Act can provide any

service connected with recording of allotment of securities or transfer of ownership of securities

in the record of a depository. Any person willing to avail the services of the depository can do so

by entering into an agreement with the depository through any of its participants. A depository

can provide depository services only through a DP. A depository cannot directly open accounts

and provide services to clients. Every depository in its Bye-Laws must state which securities are

eligible for demat holding. Generally, the following securities are eligible for dematerialisation:

(a) Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a

like nature in or of any incorporated company or other body corporate.

(b) Units of mutual funds, rights under collective investment schemes and venture capital funds,

commercial paper, certificates of deposit, securitised debt, money market instruments,

government securities, national saving certificates, kisan vikas patra and unlisted securities.

(c) Securities admitted to NSDL depository are notified to all DPs through circulars sent by

email. Investors are informed about these securities through NSDL's Website - www.nsdl.co.in

and NEST Update - a monthly newsletter of NSDL.

Functions of Depository

Dematerialisation: One of the primary functions of depository is to eliminate or minimise

the movement of physical securities in the market. This is achieved through dematerialisation of

securities. Dematerialisation is the process of converting securities held in physical form into

holdings in book entry form.

Account Transfer: The depository gives effects to all transfers resulting from the

settlement of trades and other transactions between various beneficial owners by recording

entries in the accounts of such beneficial owners.

Transfer and Registration: A transfer is the legal change of ownership of a security in the

records of the issuer. For effecting a transfer, certain legal steps have to be taken like

endorsement, execution of a transfer instrument and payment of stamp duty. The depository

accelerates the transfer process by registering the ownership of shares in the name of the

http://www.nsdl.co.in/

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Working of Depository systemdepository. Under a depository system, transfer of security occurs merely by passing book

entries in the records of the depositories, on the instructions of the beneficial owners.

Corporate Actions: A depository may handle corporate actions in two ways. In the first

case, it merely provides information to the issuer about the persons entitled to receive corporate

benefits. In the other case, depository itself takes the responsibility of distribution of corporate

benefits.

Pledge and Hypothecation: The securities held with NSDL may be used as collateral to

secure loans and other credits by the clients. In a manual environment, borrowers are required to

deliver pledged securities in physical form to the lender or its custodian. These securities are

verified for authenticity and often need to be transferred in the name of lender. This has a time

and money cost by way of transfer fees or stamp duty. If the borrower wants to substitute the

pledged securities, these steps have to be repeated. Use of depository services for pledging/

hypothecating the securities makes the process very simple and cost effective. The securities

pledged/hypothecated are transferred to a segregated or collateral account through book entries

in the records of the depository.

Linkages with Clearing System: Whether it is a separate clearing corporation attached to

a stock exchange or a clearing house (department) of a stock exchange, the clearing system

performs the functions of ascertaining the pay-in (sell) or pay-out (buy) of brokers who have

traded on the stock exchange. Actual delivery of securities to the clearing system from the selling

brokers and delivery of securities from the clearing system to the buying broker is done by the

depository. To achieve this, depositories and the clearing system should be electronically linked.

Having understood the depository system, let us now look at the organisation and functions of

National Securities Depository Limited (NSDL).

BENEFITS OF DEPOSITORY SYSYEM

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Working of Depository system No risks associated with physical certificates such as loss of share certificate, Fake

securities, Etc.

No bad delivery.

Faster settlement cycles.

Low transaction cost for purchase and sale of securities compared to physical mode.

Increase liquidity of securities

Reduction of paper work

Allotment of IPO, Bonus, Rights shares etc. in electronic form

Wavier of stamp duty on transfer of securities

Intimation like change of address, bank mandate, nomination, request of transmission,

required to be given only to Depository Participant (DP) Irrespective of the number of

companies in which shares held.

Facilities offered by depository system

Dematerialisation

Rematerialisation

Electronic settlement of trades in stock exchanges connected to depositories.

Pledging/hypothecation of dematerialized securities.

Electronic credit of securities allotted in public, rights, bonus issue.

Nomination facility.

Freezing of De-mat accounts, so that the debits from the dematerialization are not

permitted.

Services related to change of address, nomination, mandate, transmission, etc.

Other services viz.holding debt instruments in the same demat account.

Availing stock lending/borrowing facility, etc.

Safety features in the depository system

To ensure safety to the investors the following measures exist-

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Working of Depository system Strict norms for becoming depository participant- Net worth criteria, SEBI approval etc.

is mandatory.

DP cannot effect ant debit or credit in the demat account of the investor without the valid

authorization of the investor.

Regulation reconciliation between DP and the depositories.

Periodic inspection by Depositories of the office of the DP and Registrar.

All investors have a right to receive their statements of accounts periodically from the

DP.

In the depository system, 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.

Compulsory internal audit of operations of DP by practicing company secretary of the

chartered accountant every quarter.

Various procedures for backup and safe keeping of data at all the levels.

SEBI has made compulsory trading of shares of all the companies listed in Stock Exchange

in demat form w.e.f 2 January 2002. Hence, if the investor wants to trade in respect of the

companies, which have established connectivity with NSDL & CDSL, he may have to open a

beneficiary account.

Beneficiary account

A beneficiary account is an account opened by the investor or a broker with a DP of his choice,

to hold shares in dematerialized form and undertake scrip less trading.

Investor contacting the depository

The investor must open a demat account with a Depository Participant. Opening a demat account

with a DP is similar to opening an account with bank. The selection of DP is to be done by the

investor based on fee payable, proximity, service levels, etc.

Documents required for opening demat account

For demat account opening the following documents are required to be given-

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Working of Depository system Demat account opening form duly filled.

Address proof.

Photograph

Identity proof

Other formalities in Demat account opening

Once a demat account is opened, the investor must sign an agreement with the DP. The

investor will be allotted an account no. known as client identity. The client identity number along

with the DP identity number forms a unique combination. Both these numbers should be quoted

in all the future dealing with Depositories /DP /RTA /Company. However in case of CDSL there

is no DP identity and the 16-digit Client identity itself is a unique number. The investor must

collect forms like dematerialization request form (DRF), Delivery instruction slips etc.

Certain points to be considered while opening Demat account

Demat account cannot be opened in the name of the partnership firms, as a partnership

firm is not a legal entity. However, a demat account can be opened in the name of the partners.

Demat account cannot be opened in the name of the HUF. It has to be opened in the name of the

Karta of the HUF.

In the case of a minor, the depository account should be opened in the name of the minor

and the guardian’s name should be mentioned. The guardian will sign as signatory on behalf of

the minor.

Investor can open any number of DP accounts with any number of DP’s. However, investor

has to incur cost for each of such account.Investor must open different Demat accounts for shares

held in different combination of names. Alternatively investor can submit the certificate for

Demat along with transposition form.

Minimum balance of securitiesn required to be maintained in Demat account

There is no minimum balance required to be maintained in a Demat account and an

investor can even maintain nil balance.

Other steps the investor should take

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Working of Depository systemThe investor should inform his DP of any change in his address, bank account,

nomination, etc. immediately upon change thereof.

Charges for Demat account opening and other depository trading

The depository does not charge any fee directly from the investors. The depository

charges only the DP’s. However, the DP is free to charge its clients for the services offered. The

charges of DP’s also vary.

Stock exchanges connected to the Depositories for Demat trading

At present the following 10 stock exchanges are connected to the Depositories-

National Stock Exchange

The Stock Exchange Mumbai

Calcutta Stock Exchange

Delhi Stock Exchange

Ludhiana Stock Exchange

Bang lore Stock Exchange

Over the counter stock exchange of India

Madras Stock Exchange

Inter connected Stock Exchange

Ahmedabad Stock Exchange.

Market trade and off market trade

Trade done and settled through a stock exchange and clearing corporation is market trade.

Trade done privately without the involvement of the Stock Broker of Stock Exchange is off

market trade.

27

Working of Depository systemBuying and selling of shares by the investor

The investor can buy and sell shares only through a stockbroker and not through a DP.

DP helps in delivering the shares against a sale transaction or receiving the shares for a purchase

transaction.

Corporate benefits

Corporate benefit is a corporate event. It can be cash corporate benefit like dividend,

interest, etc.or non-cash corporate benefits like rights, bonus etc.

When any corporate event such as right or bonus or dividend is announced for a

particular security, depository will give the details of all clients having electronic holdings in that

security as of the record date to the RTA/Company will then calculate the corporate benefits due

to all the shareholders. The disbursements of cash benefits such as dividend/interests will be

done by the RTA/Company directly to the shareholders. Non-cash benefits will be distributed

through depository by crediting the entitled quantity of shares into shareholders demat account.

Direct credit of shares in electronic form:

In the public/Right issue application form of depository eligible companies, there will be

a provision for the investor to indicate the manner in which he wants the securities allotted to

him. Even in the case of bonus issue the investor is given an option for getting the shares allotted

in physical or electric form. The investor must mention his client ID. Number and DP ID No.

Advantage of getting allotment in electronic form:

SEBI has announced that the shares of all the companies going in for public issue will

have to be compulsorily settled in demat form by all investors. It is, therefore,

advantageous for an investor to prefer the allotment in demat form, so that the shares

have higher liquidity.

28

Working of Depository system In case of Discrepancies in corporate benefits the investor can approach his DP who in

turn will contact the RTA/Company for clarifications regarding allotment of securities.

Clearing members, Clearing corporations and other intermediaries cannot have voting

rights in respects of the shares held in pool account. Further the clearing member or

cleaning corporation is also responsible for distribution of bonus, right and other

corporate benefits lying in his account to the investor.

Menaing of Transfer, Transmission and Transposition

Transfer

Depository is electronically linked to depository participants, issuer company or Registrar &

transfer agent and the clearing corporation/ clearing house of the stock exchange. This is done in

order to facilitate settlement of trades and to perform a daily, reconciliation of all the account

balances held with depository. Thus, an integrated system is set up for maintenance of investor

accounts.

Transmission

In the case of transmission, the claimant will have to fill a transmission request form,

supported by documents like death certificates, etc. The DP, after ensuring that the application is

genuine, will transfer securities to the demat account of the claimant. For this purpose claimant

must have a depository account. The major advantage in transmission of dematerialized holdings

is the transmission formalities for all securities held with the DP can be completed in one go,

unlike in the case of share certificate, where the claimant will have to interact with each

RTA/Company.

Transposition

In case of transportation-cum-dematerialization, the investor can get the securities

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

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

submitting the security certificate along with the transportation form and the

Dematerialisation request form”(DRF) to the DP.

29


Pledging

Pledging of dematerialized securities:

Pledging dematerialized securities is easier and more advantageous as compared to

pledging physical securities. The procedure as follows

Both borrower (pledger) as well as the lender (pledgee) must have depository account.

The pledger must initiate the pledge by submitting to his DP the details of the securities

to be pledged in a standard format.

The pledge should confirm the request through his DP.

Once this is done the securities are pledged. All financial transactions between the pledger and

the pledgee are handled outside the depository system.

Procedure for the closure of pledge

After the borrower has repaid the loan, the borrower can request for a closure of pledge by

instructing his DP in a prescribed format. The lender on receiving the repayment will instruct his

DP confirmed the closure of the pledge.

Change of securities offered in a pledgeIf the pledger (lender) agrees, the investor may change the securities offered in a pledge.

Nomination

Shares held in physical as well as electronic form can be nominated. Nomination can be

made only by individuals holding beneficiary accounts on their own behalf either singly or

30

Working of Depository systemjointly. On individuals, society, trust, body corporate ,partnership firm, Karta or Hindu undivided

Family, holder of power of attorney cannot nominate.

Nomination is permitted for accounts with joint holder, but in case of death of any of the

joint holder, the securities will be transmitted to the surviving holder(s) only in the event of death

of all the joint holders, the securities will be transmitted to the nominee.

Only an individual can be a nominee. A nominee shall not be a society, trust, body

corporate, partnership firm, karta of Hindu undivided Family or a power of attorney holder.

A minor cannot nominate either directly or through its guardian.

A minor can be a nominee. In such a case, the guardian will sign on behalf of the

nominee and in addition to the name and photograph of the nominee, the name, address and the

photograph of the guardian must be given.Separate nomination cannot be made for each security.

Nomination can be made Demat account wise and not security wise.

The investor must fill in and submit to his DP the nomination form. The account holder,

Nominee and two witnesses must sign this form and the name; address and photograph of the

nominee must be submitted.

The nomination can be changed anytime by the account holder by filling up the revised

nomination form and submitting it to the DP. The account holder, Nominee and two witnesses

must sign this form and the name; address and photograph of the nominee must be submitted. In

case of joint holders, all joint holders must sign.

Demat of debt instrument

Debt instrument can also be held in demat form. Instruments like bond, debentures,

commercial papers, certificates of deposit, etc. irrespective whether these instruments are

listed/unlisted/privately placed or even issued to a single holder can be dematerialized.

Commercial paper can also be kept in demat form. As per RBI Monetary and credit policy –

banks, Financial Institutions, primary Dealers and satellite dealers are directed to convert their

outstanding investment in commercial papers in script form, into Demat form. The above entities

have also been directed to make fresh investment in commercial paper only in demat form.

Bonds and debentures can also kept in demat form. In its midterm review of the monetary

and credit policy RBI has mentioned that banks and financial institutions shall make investment

in debentures and bonds only in demat form. Any new instrument can be issued directly in

31

Working of Depository systemdematerialized form without recourse to printing of either letter of allotment or certificates.

Securities will be directly credit into the demat accounts of the investor by the depositories on

receipt of allotment details from RTA/Company.

The investor need not open separate demat account for demat of debt instrument.

The procedure of dematerialization of debt instrument is same as that carried out for

equity shares. In order to dematerialized his/her certificates; an investor will have to first open a

demat account with a DP and the a request for the dematerialization of certificates by filling up a

dematerialization request form (DRF), which is available with DP and submitting the same along

with the physical certificates. The investor has to ensure that before the certificates are handed

over to the DP for demat, he marks “Surrendered for Dematerialization” on the face of the

certificates.

Account opening

Demat/Remat

Account Maintenance

Custody

Transaction, etc.

Knowing of securities balance in demat account

The investor is provided with a transaction statement by his DP at regular intervals. Based on

that the investor will know his security balances.

Receiving Transaction statement by investor

The DP will send a transaction statement once in a quarter if there is no transaction during the

quarter. If there are any transactions DP will send the statements within fifteen days of the

transaction.

Freezing of demat account

32

Working of Depository systemThe depository system provides the facility to freeze the demat account for any debits or for both

debits and credits. In an account, which is “free zed of debits”, no debits will be permitted from

the account, till the time it is defreeze. This is in additional security feature of the investors.

Standing instruction to DP

The investor can give one time standing instruction to his DP to receive all the credits coming to

his depository account automatically. However, the investor cannot give standing instruction for

any debits in his account.

Access of investor accounts by all DP’s

A DP cannot access the investors account of any other DP.The DP can access only those

investors accounts serviced by them.

Furnishing of bank account particulars in DP

Details of bank account of the client, including the 9-digit code number of the bank and branch

appearing on the MICR cheque issued by the bank have to be given to the DP at the time of

account opening. Companies use this information for printing them on dividend/interest warrants

etc., to prevent its misuse. In case the client wishes to change this bank account details, he can do

so by submitting the change in writing to the DP.

Procedure of closure of demat account

An investor can close a demat account by giving an application in prescribed form. In

case there is any balance in the demat account sought to be closed, the following steps are

necessary-

33

Working of Depository system1. Rematerialisation of all securities standing to the credit of the demat account at the time

of making the application for the closure.

2. Transferring the balance to the credit of another demat account , with the same

participant or with a different participant.

Dematerialization

Dematerialization is the process of conversion of shares or other securities held in physical form

into electronic form.

Whom to approach

The investor must approach hid DP for Dematerialization

The shares that an investor can dematerialize

The investor can demat the shares of any company that has established connectivity with NSDL

or CDSL

Steps involved in dematerialization

1. Investor must submit request form and share certificate to DP.

2. DP will check whether security is available for Demat. Investor must deface the share

certificate by stamping “surrendered for dematerialization” and DP will punch two holes on

the name of the company and will draw two parallel lines across the face of the certificate.

3. DP enters the Demat request in their system to be sent to the depository. DP

dispatches the physical certificates along with the DRF to the RTA/ Company.

4. Depository records the details of the system and forwards the request to Registrar and

transfer agent or issuer i.e. the company whose shares are sought to be dematerialized.

5. RTA Company on receiving the physical documents verifies request and check them.

Once the RTA/Company finds that shares are in order, dematerialization of the concerned

securities is electronically confirmed to the depository

34

Working of Depository system6. Depository credits the dematerialized securities to the beneficiary account of the

investor and intimates the DP electronically. The DP issues a statement of

transaction to the client.

Signing of the demat request form in case of joint holders

All joint holders should sign the DRF.

Company identification number for demat purposes

Once the company is admitted in the depository system, the depository allots an ISIN. This

number is unique for each security of the company that is admitted in the depository.

Mentioning of the ISIN in the DRF

The ISIN should be mentioned in the DRF.This to certain extent ensures that the security

mentioned in the DRF is the one which the investor intends to dematerialize.

Distinguishing between partly paid-up share and fully paid up shares in the depository

Parties paid up shares and fully paid up shares are identified by separate ISIN’s (International

security identification number). These are also traded separately at the stock exchanges. The

company issues call notices to the beneficial holders of partly paid up securities in the electronic

form. The details of such beneficial holders will be provided to the RTA/company will

automatically convert the partly paid up shares to fully paid shares.

Rematerialisation

Rematerialisation is conversion of electronic holdings into physical certificate form.

Steps involved for Rematerialisation

35

Working of Depository systemThe investor must fill up a remat form (RRF) and give it to the DP. The DP will forward the

request depository after verifying that the shareholder has necessary balances. Depository in turn

will intimate the RTA/Company will print the certificate and dispatch the same to the investor.

Electronic settlement of the Trades

Procedure for selling dematerialization securities in the stock exchanges is similar to the

procedure for selling physical securities Instead of delivering physical securities to the broker,

the investor must instruct his/her DP to debit his/her demat account with the number of securities

sold by him/her and credit broker’s clearing account.

Procedure for selling securities is given below:

Investor sells securities in any of the stock exchange linked to depository through a

broker.

Investor gives instruction to DP to debit his account and credit the brokers (clearing

account pool) account.

Before the pay-in-day. Investor’s broker transfers the securities to clearing

corporation.

The broker receives payment from the stock exchange (Clearing Corporation).

The investor receives payment from the broker for the sale in the same manner

payment is received for a sale in the physical mode.

Procedure for purchase of dematerialized shares

The procedure or buying dematerialized securities in stock exchanges is similar to

the procedure for buying physical securities. Investor may give a one time standing

36

Working of Depository systeminstruction to receive credits into his /her account or may give separate instruction each time

in he prescribed format.

The transaction relating to purchase of securities are summarized below.

Investor purchases securities in any of the stock exchanges connected to depository

through a broker.

Broker receives payment from investor’s.

Broker arranges payment to clearing corporation.

Broker receives credit of securities in clearing account on the payout day.

Broker gives instruction to DP to debit clearing account and credit client’s account.

Investor receives shares in his account.

The investor should ensure that the broker transfer the securities purchased to his

account, before the book closure. If the securities remain in the clearing account of the

broker, the company may give corporate benefits to the broker. Therefore, the investor has to

collect benefits from the broker.

DIFFERENCE BETWEEN BANK AND DEPOSITORY

BANK DEPOSITORY

Allocates account number. Allocates client ID number.

37


Holds funds in accounts

Minimum balance required.

Functions through branches.

Issues account statement & pass

book.

Charges commission/ service

charges.

Provides interest to the account

holders.

Holds securities in accounts.

Normally no minimum balance

required.

Functions through depository

participants.

Issues account statement i.e.

statement of holding and statement

of transactions.

Depository Participant charges:

o Account opening and

closing fee

o Demat and Remat fee

o Transaction fee (buy, sell,

off market)

o Custody charges

In future, through stock lending, it

will be possible to earn income on

Depository Account.

Some important Processes in depositary system

Dematerialization Rematerialization Initial public offers Trading & settlements.

38


On Market transactions Off market transactions Inter Depository transactions

Dematerialization Process

Physical Securities → Electronic Form.

Pre-requisites:

• Demat Account with any DP of the Depository.• ISIN for the securities available with the Depository.• Investor should be registered holder for the securities in the books of the company.

Rematerialization

Rematerialization or remat is a compiler optimization which saves time by recomputing a value

instead of loading it from memory. It is typically tightly integrated with register allocation,

where it is used as an alternative to spilling registers to memory. It was conceived by Preston

http://en.wikipedia.org/w/index.php?title=Preston_Briggs&action=edit&redlink=1

http://en.wikipedia.org/wiki/Register_allocation

http://en.wikipedia.org/wiki/Compiler_optimization

39

Working of Depository systemBriggs, Keith D. Cooper, and Linda Torczon in 1992.Rematerialization works by keeping track

of the expression used to compute each variable, using the concept of available expressions.

Sometimes the variables used to compute a value are modified, and so can no longer be used to

rematerialize that value. The expression is then said to no longer be available. Other criteria must

also be fulfilled, for example a maximum complexity on the expression used to rematerialize the

value; it would do no good to rematerialize a value using a complex computation that takes more

time than a load. Usally the expression must also have no effects.

Rematerialization process

Electronic Form → Physical Securities

Initial public offers

An initial public stock offering (IPO) referred to simply as an "offering" or "flotation," is

when a company (called the issuer) issues common stock or shares to the public for the first time.

http://en.wikipedia.org/wiki/Share_(finance)

http://en.wikipedia.org/wiki/Common_stock

http://en.wikipedia.org/wiki/Available_expression

http://en.wikipedia.org/w/index.php?title=Linda_Torczon&action=edit&redlink=1

http://en.wikipedia.org/w/index.php?title=Keith_D._Cooper&action=edit&redlink=1

http://en.wikipedia.org/w/index.php?title=Preston_Briggs&action=edit&redlink=1

40

Working of Depository systemThey are often issued by smaller, younger companies seeking capital to expand, but can also be

done by large privately-owned companies looking to become publicly traded.

In an IPO the issuer may obtain the assistance of an underwriting firm, which helps it

determine what type of security to issue (common or preferred), best offering price and time to

bring it to market.

An IPO can be a risky investment. For the individual investor, it is tough to predict what the

stock or shares will do on its initial day of trading and in the near future since there is often little

historical data with which to analyze the company. Also, most IPOs are of companies going

through a transitory growth period, and they are therefore subject to additional uncertainty

regarding their future value.

The first sale of stock by a private company to the public. IPOs are often issued by

smaller, younger companies seeking the capital to expand, but can also be done by large

privately owned companies looking to become publicly traded. In an IPO, the issuer obtains the

assistance of an underwriting firm, which helps it determine what type of security to issue

(common or preferred), the best offering price and the time to bring it to market.Also referred to

as a "public offering".

IPOs can be a risky investment. For the individual investor, it is tough to predict what the

stock will do on its initial day of trading and in the near future because there is often little

historical data with which to analyze the company. Also, most IPOs are of companies going

through a transitory growth period, which are subject to additional uncertainty regarding their

future values.

Initial public offers process

http://en.wikipedia.org/wiki/Investment

http://en.wikipedia.org/wiki/Preferred_stock

http://en.wikipedia.org/wiki/Security_(finance)

http://en.wikipedia.org/wiki/Underwriting

http://en.wikipedia.org/wiki/Public_company

http://en.wikipedia.org/wiki/Privately_held_company

http://en.wikipedia.org/wiki/Financial_capital

41


Trading & settlements

Transfer of securities in/ out of the Demat A/c can arise in the following instances:

For execution of Off Market Transactions.

42


For settling On Market Transactions.

For Inter depository transactions.

Off Market TransactionsTransaction done on person to person basis without going through stock exchange mechanism.Pre-requisites:

Transfer of securities from one BO A/c to another BO A/c.

Both A/c’s are with same Depository though with differentDPs.

Neither buyer’s A/c nor seller’s A/c is with clearing house/clearing corporation.Off market transaction process

On Market Transaction

Trades done by investors through stock exchange mechanism and settled using same stock exchange mechanism.

seller as well as buyer account is with CH/CC

43


Inter Depository Transactions.

SEBI (Depository and participants) Regulations, 1996 requires depositories to be inter connected.

Securities available for dematerialization on both depositories.

Debit/ credit instructions have to given on inter-depository delivery or receipts forms to the DP’s of seller and the buyer.

These instructions are exchanged online for each day between the depositories.

44


National Securities Depository Limited

In a span of about nine years, investors have switched over to electronic [demat]

settlement and National Securities Depository Limited (NSDL) stands at the centre of this

change. In order to provide quality service to the users of depository, NSDL launched a

45

Working of Depository systemcertification programme in depository operations in May 1999. This certification is conducted

using NCFM infrastructure created by NSE and is called "NSDL - Depository Operations

Module". The programme is aimed at certifying whether an individual has adequate knowledge

of depository operations, to be able to service investors. Depository Participants are required to

appoint at least one person who has qualified in the certification programme at each of their

service centres. This handbook is meant to help the candidates in their preparation for the

certification programme.

This handbook has been divided into four volumes for readers' convenience. The first

volumegives an overview of the Indian capital market and NSDL depository system. The second

volume deals with admission procedure for different business partners of NSDL, their

obligations, practices, systems and procedures to be followed by them and benefits and safety of

depository system. The third volume helps in acquiring a working level understanding of certain

basic services offered by NSDL like account opening, dematerialisation, and transfer of

securities and related operations. The last volume deals with special services offered by NSDL

like Pledge, Stock Lending and Borrowings, Corporate Actions, National Savings Certificates /

Kisan Vikas Patra (NSC/KVP) in demat form, Warehouse Receipts, Market Participants and

Investor Database (MAPIN) and Tax Information Network (TIN).

The procedures explained in the handbook are based on the Depositories Act, Securities

and Exchange Board of India (Depositories & Participants) Regulations and Byelaws & Business

Rules of NSDL. The book contains illustrations, flow charts and checklists for better

understanding of various concepts and procedures. A sample test paper is given at the end of the

fourth volume to help the candidates appearing for NCFM test form an assessment of their

preparedness. A thorough understanding of this handbook will form a good base for qualifying

the certification test.

Readers may like to visit NSDL website www.nsdl.co.in for updates and to know the new

procedures introduced or changes brought about in the existing procedures. A feedback form is

given at the end of the fourth volume. Readers may give their feedback, which will be of great

help in enhancing the value of this Handbook in its subsequent editions.

46

Working of Depository systemNational Securities Depository Limited

National Securities Depository Limited is the first depository to be set-up in India. It was

incorporated on December 12, 1995. The Industrial Development Bank of India (IDBI) - the

largest development bank in India, Unit Trust of India (UTI) - the largest Indian mutual fund and

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.

The following organisations are shareholders of NSDL as on March 31, 2005.

1. Industrial Development Bank of India

2. Administrator of the Specified Undertaking of the Unit Trust of India - DRF

3. National Stock Exchange

4. State Bank of India

5. Oriental Bank of Commerce

6. Citibank N.A.

7. Standard Chartered Bank

8. HDFC Bank Limited

9. The Hongkong and Shanghai Banking Corporation Limited

10. Deutsche Bank A.G.

11. Dena Bank

12. Canara Bank

Management of NSDL

NSDL is a public limited company managed by a professional Board of Directors. The day-today

operations are conducted by the Chairman & Managing Director (CMD). To assist the CMD in

his functions, the Board appoints an Executive Committee (EC) of not more than 15 members.

The eligibility criteria and period of nomination, etc. are governed by the Bye-Laws of NSDL in

47

Working of Depository systemthis regard.

Bye-Laws of NSDL

Bye-Laws 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. The Bye-Laws contain fourteen chapters and pertain to the areas listed

below :

1. Short title and commencement

2. Definitions

3. Board of Directors

4. Executive Committee

5. Business Rules

6. Participants

7. Safeguards to protect interest of clients and participants.

8. Securities

9. Accounts/transactions by book entry

10. Reconciliation, accounts and audit

11. Disciplinary action

12. Appeals

13. Conciliation

14. Arbitration

Amendments to NSDL Bye-Laws require the approval of the Board of Directors of NSDL and

SEBI.

Business Rules of NSDL

Amendments to NSDL Business Rules require the approval of NSDL Executive Committee and

filing of the same with SEBI at least a day before the effective date for the amendments.

Functions.

NSDL performs the following functions through depository participants :

48

Working of Depository system_ Enables the surrender and withdrawal of securities to and from the depository

(dematerialisation and rematerialisation).

_ Maintains investor holdings in the electronic form.

_ Effects settlement of securities traded on the exchanges.

_ Carries out settlement of trades not done on the stock exchange (off-market trades).

_ Transfer of securities.

_ Pledging/hypothecation of dematerialised securities.

_ Electronic credit in public offerings of companies or corporate actions.

_ Receipt of non-cash corporate benefits like bonus rights, etc. in electronic form.

_ Stock Lending and Borrowing.

Services Offered by NSDL

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

_ Maintenance of beneficiary holdings through DPs

_ Dematerialisation

_ Off-market Trades

_ Settlement in dematerialised securities

_ Receipt of allotment in the dematerialised form

_ Distribution of corporate benefits

_ Rematerialisation

_ Pledging and hypothecation facilities

_ Freezing/locking of investor's account

_ Stock lending and borrowing facilities

Fee Structure of NSDL

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

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

twotier fee structure.

Inspection, Accounting and Internal Audit

49

Working of Depository systemNSDL obtains audited financial reports from all its DPs once every year. NSDL also

carries out periodic visits to the offices of its constituents - R&T agents, DPs and clearing

corporations – to review the operating procedures, systems maintenance and compliance with the

Bye-Laws, Business Rules and SEBI Regulations.

Additionally, DPs are required to submit to NSDL, internal audit reports every quarter.

Internal audit has to be conducted by a chartered accountant or a company secretary in practice.

The Board of Directors appoints a Disciplinary Action Committee (DAC) to deal with any matter

relating to DPs clients, Issuers and R&T agents. The DAC is empowered to suspend or expel a

DP, declare a security as ineligible on the NSDL system, freeze a DP account and conduct

inspection or call for records and issue notices.

If a DP is aggrieved by the action of the DAC, it has the right to appeal to the EC against

the action of the DAC. This has to be done within 30 days of the action by DAC. The EC has to

hear the appeal within two months from the date of filing the appeal. The EC has the power to

stay the operation of the orders passed by the DAC. The information on all such actions has to be

furnished to SEBI.

Settlement of Disputes

All disputes, differences and claims arising out of any dealings on the NSDL, irrespective

of whether NSDL is a party to it or not, have to be settled under the Arbitration and Conciliation

Act 1996.

Technology and Connectivity in NSDL

System View of NSDL Depository System

50


Account holders (investors) open account with the DPs. The account details, entered in a

computer system maintained by Depository Participants called DPM, are electronically conveyed

to the central system of NSDL called DM. Companies who have agreed to offer demat facility to

their shareholders use a computer system called DPM (SHR) to connect to the NSDL central

51

Working of Depository systemsystem. DPM (SHR) may be installed by the company itself or through its R&T Agent. This

system is used to electronically receive demat requests, confirm such requests or to receive

beneficial owner data (Benpos) from the depository. Stock exchanges receive pay-in (receiving

securities against sales made by brokers) or to payout (giving securities to brokers against their

purchases) using a computer system connected to NSDL called DPM (CC).

All the computer systems installed by DPs (DPM-DP), companies (DPM-SHRs), and

stock exchanges (DPM-CC) are connected to NSDL central system (DM) through V-SAT (very

small aperture terminal) or leased lines. These are collectively called Business Partner Systems.

Any transaction conducted by any computer system in the NSDL depository system which is

targetted to reach any other computer system first gets recorded in DM and then will reach the

target. No two business partners' systems can communicate to each other without passing

through the DM.

Maintenance of Accounts at the Central System

The NSDL central system known as DM maintains accounts of all account holders in the

depository system. All the transactions entered at any point in the computer system connected to

it are first effected in the central system and subsequently at these computers. Thus, the central

system of NSDL has the records of all details of every transaction conducted in the depository

system.

Distributed Database

Each of the computer systems connected to NSDL system has its own database relating to

its clients. This helps in giving prompt and accurate service to the clients. However each of the

databases is reconciled with the data at the central system everyday in order to ensure that the

data in the distributed database tallies with the central database.

Common Software

NSDL develops software required by depository participants, companies, R&T Agents

and clearing corporations for conducting depository operations. Thus, the computer systems used

by all the entities will have common software given by NSDL. However, depending on the

52

Working of Depository systembusiness potential, branch networks and any other specific features, DPs may develop software

of their own for co-ordination, communication and control and provide service to their clients.

Such exclusive software is called "back office software". DPM system given by NSDL gives

"export and import" facility to take out the transaction details to be used by back office software

and to feed in transaction details generated from the back office software.

Connectivity

The computer system used by DPs, companies, R&T Agents and stock exchanges may be

connected to NSDL central system through V-SAT network or leased line network. NSDL uses

NSE's V-SAT network for the connectivity purposes. Thus, V-SATs used by NSE brokers can

connect to NSDL if the software supplied by NSDL is used. V-SAT uses satellites for

communication purposes. Some business partners may connect using leased lines provided by

MTNL/ BSNL. V-SAT or leased line connections are called primary connectivity. If primary

connectivity fails for any reason, BPs must have the ability to connect through other means. Such

other means are PSTN lines, ISDN lines, POP lines(normal telephone lines) through which they

can dial in to the NSDL system and conduct their transactions.

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Central Depository Services (India)

Limited

Central Depositary Securities Limited

A Depository facilitates holding of securities in the electronic form and enables securities

transactions to be processed by book entry by a Depository Participant (DP), who as an agent of

54

Working of Depository systemthe depository, offers depository services to investors. According to SEBI guidelines, financial

institutions, banks, custodians, stockbrokers, etc. are eligible to act as DPs. The investor who is

known as beneficial owner (BO) has to open a demat account through any DP for

dematerialisation of his holdings and transferring securities.

The balances in the investors account recorded and maintained with CDSL can be

obtained through the DP. The DP is required to provide the investor, at regular intervals, a

statement of account which gives the details of the securities holdings and transactions. The

depository system has effectively eliminated paper-based certificates which were prone to be

fake, forged, counterfeit resulting in bad deliveries. CDSL offers an efficient and instantaneous

transfer of securities.

CDSL was promoted by Bombay Stock Exchange Limited (BSE) jointly with leading

banks such as State Bank of India, Bank of India, Bank of Baroda, HDFC Bank, Standard

Chartered Bank, Union Bank of India and Centurion Bank.

CDSL was set up with the objective of providing convenient, dependable and secure depository

services at affordable cost to all market participants. Some of the important milestones of CDSL

system are:

CDSL received the certificate of commencement of business from SEBI in February, 1999

1) Honourable Union Finance Minister, Shri Yashwant Sinha flagged off the operations of

CDSL on july 15,1999.

2) Settlement of trades in the demat mode through BOI Shareholding Limited, the clearing

house of BSE, started in july 1999.

3) All leading stock exchanges like the National Stock Exchange, Calcutta Stock Exchange,

Delhi stock Exchange, The Stock Exchange, Ahmedabad, etc have established

connectivity with CDSL.

4) As at the end of Dec 2007, over 5000 issuers have admitted their securities (equities,

bonds, debentures, commercial papers), units of mutual funds, certificate of deposits etc.

into the CDSL system.

Shareholders of CDSL

55

Working of Depository systemCDSL was promoted by Bombay Stock Exchange Limited (BSE) in association with

Bank of India, Bank of Baroda, State Bank of India and HDFC Bank. BSE has been involved

with this venture right from the inception and has contributed overwhelmingly to the fruition of

the project. The initial capital of the company is Rs.104.50 crores. The list of shareholders with

effect from 11th December, 2008 is as under.

Sr.No.

Name of shareholders Value of holding (in

Rupees Lacs)

% terms to total equity

1 Bombay Stock Exchange Limited 3,825.46

2 Bank of India 1,000.00

3 Bank of Baroda 1,000.00

4 State Bank of India 1,000.00

5 HDFC Bank Limited 1,500.00

6 Standard Chartered Bank 750.00

7 Canara Bank 674.46

8 Union Bank of India 200.00

9 Bank of Maharashtra 200.00

10 The Jammu and Kashmir Bank Limited 200.00

11 The Calcutta Stock Exchange Association Limited

100.00

12 Others 0.08

TOTAL 10,450.00

A professional Board of Directors with vast and varied experience in capital markets and banking is at the helm of affairs at CDSL.

Board of Directors

Mr. S S Thakur Chairman

Mr. V V Raut Managing Director and Chief Executive Officer

56


Mr. P S Reddy Executive Director

Mr. M. R. Mayya Independent Director

Mr. Madhu Kannan Sponsor Director – Bombay Stock Exchange Limited

Mr. L. P. Aggarwal Sponsor Director – Bombay Stock Exchange Limited

Mr. Prakash R. Kacholia Sponsor Director – Bombay Stock Exchange Limited

Mr. Anjan Barua Sponsor Director - State Bank of India

Mr. A. D. M. Chavali Sponsor Director - Bank of Baroda

Mr. A. R. Kuppuswamy Sponsor Director - Bank of India

Management Team

Mr. V V Raut Managing Director and Chief Executive Officer

Mr. P S Reddy Executive Director

Mr. Pramod Deshpande Chief Technology Officer

Mr. Cyrus Khambata Sr.Vice President.Business Development(Currently on deputation to CDSL Ventures Ltd. as CEO with effect from 7-12-2006)

Mr. Jitendra Chad Vice President.Information Technology

Ms. Nayana Ovalekar Vice President.Audit, Inspection & Compliance

Mr. Bharat Sheth Vice President.Accounts & Administration

Mr. Sunil Alvares Vice President.Business Development

Mr. Ramkumar K. Vice President.Operations

Mr. Jignesh Gandhi Vice President.New Projects

Mr. Satish Budhakar Vice President.Legal & Company Secretary

FEE STRUCTURE OF CDSL

CDSL fees structure to its depository participants is as follows:

SR.NO. Details of Charges CDSL1 Account Opening Charges NIL

2 Account Maintenance Charges NIL for individuals

57

Working of Depository systemRs.500/- p.a. to Corporates

3 Transaction Charges Market & Off-Market

Rs.6/- **

4 Transaction Charges Clearing Member Accounts

Flat charge of Rs.500/- per month on CM accounts for pay-in and pay-outs received from CH

5 Custody Charges NIL

6 Demat Charges NIL

7 Remat Charges Rs.10/- per 100 securities or part quantity orRs. 10/- per cert. whichever is higher.

8 Pledge/Hypothecation Charges Pledge acceptance - Rs.12/- per request.Unpledge acceptance - Rs.12/- per request.

Pledge Invocation Acceptance -Nil

9 Internet Facility 'easi' Rs.20,000/- one time for registration

10 Internet Facility 'easiest' Rs.30,000/- one time for registration Rs.1,150/-p.a.for renewal of digital signature

Monthly charges for DPs or its branches w.e.f. 1st May, 2006For Main DPs: Rs.3,000/- per month or the amount of the actual bill for a given month whichever is higher.

For DP-Branches: Rs.2,000/- per month or the amount of the actual bill for a given month whichever is higher.

Fees for Clearing Members CDSL collects only Rs. 500/ - per month from its DPs for a CM except for CM Investors Securities Account.

The following tariff structure will be effective from Wednesday, April 01, 2009.

Monthly Transaction bill amount(@Rs.6/-per transaction)

(in Rs.)

Rate perDebit Transaction

(in Rs.)

More than Rs.15 lakhs 4.75

More than Rs.4 lakhs and upto Rs.15 lakhs 5.00

More than Rs.1 lakh and upto Rs.4 lakhs 5.50

Upto Rs.1 lakh 6.00

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RESEARCH

METHODOLOGY

RESEARCH METHODOLOGY

Research Methodology refers to search of knowledge .one can also define reseach

methodology as a scientific and systematic search for required information on aspecific topic.

The word research methodology comes from the word “advance learner ‘s dictionary

meaning of research as a careful investigation or inquiry especially through research for new

facts in my branch of knowledge for example some author have define research methodology as

systemstized effort to gain new knowledge.

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OBJECTIVES OF THE STUDY

To understand the basic term and process in depositary system.

Get specific knowledge about NSDL and CSDL and its investor pattners.

Provide aducate and desirable information for the readers.

To find out that factors or speculations those are responsible for creating a negative

image of DS in the mind of investor.

Getiting the information about the awareness of depository system.

Find out the satisfactory level of the investors regarding this system.

TYPES OF RESEARCH

ANALYTICAL RESEARCH: It has to used facts or information already available and analyze

these to make a critical evaluation of material.

SAMPLE SIZE: Considering the constraints it was decided to conduct the study based on

sample size of 50 people in specific age groups.

METHODS OF DATA COLLECTION

In the project work Primary data secondary data (both) sources of data has been used: .

PRIMARY SOURCE: I have gathered information about our project from the interaction with

the customers of our company i.e. Reliance Money. The sampling method used was basically

convenience sampling and most of the calls made were cold calls made on the generated

database of recipients of other companies.

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SECONDARY DATA: The secondary data, I have collected from the various websites of

reliance money, various journals, magazines etc.

TOOL OF ANALYSIS

In the project work quantitative technique & percentage method has been used.

RESEARCH DESIGN

For the proper analysis of data simple quantitative technique such as percentage were

used. It help in marketing more accurate generalization From the data available .The data which

was collected from a sample of population was assumed to be representing entire population was

interested .

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DATA ANALYSIS AND

INTERPRETATION

Ques. 1) Are you know about Depository system?

A) Yes 47B) No 03

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Ques. 2) Have you sufficient knowledge and awareness about NSDL or CSDL?A) YesB) NoC) To Some extend

A) Yes 12

B) NO 15

C) To some extent 23

94%

6%

Respondents

Yes

No

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24%

30%

46%

Respondents

Yes

No

To some extend

Ques. 3) Are you satisfy with fee structure of depository system?A) YesB) NoC) To Some extent

A) Yes 17

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B) No 27

C) To some extends 06

Yes No To some extend0

5

10

15

20

25

30

17

27

6

Respondents

Ques. 4) By which depository company you make trading?A) SharekhanB) IndiabullsC) RelianceD) ICICI direct.comE) Other

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A) Sharekhan 07

B) Indiabulls 11

C) Reliance 14

D) ICICI direct.com 08

E) Other 10

Sharekhan Indiabulls Reliance ICICI direct.com Other0

2

4

6

8

10

12

14

7

11

14

8

10

Respondents

Ques. 5) If your selected trading company increase there annual charges will you go with it?

A) Yes B) NoC) If charges are reasonable

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A) Yes 02

B) No 29

C) If charges are

reasonable

19

Yes4%

No58%

If charges are resonable38%

Respondents

Ques.6) According to you which one is the most important factor for a trading

company to enhance the loyalty and customers ?

A) Provide maximum profit

B) Provide tips time to time

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C) No hidden charges

D) Other factors

A) Provide maximum profit 17

B) Provide tips time to time 08

C) No hidden charges 18

D) Other factors 07

34%

16%

36%

14%

RespondentsProvide max profit Provide tips No hidden charges Other factors

OBSERVATION

To study the above Doughnut, Graph and pie charts I observe that the

most of the people of pathankot have knowledge about depository system but

they have not a proper and basic knowledge about this vast concept only limited

information is there.

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Working of Depository systemAccording to data analysis result represent below.

After analysis of first one question it clear that only 03 (6%) respondents are not

introduce with term depository system but majority is goes with yes option 47

(94%) .

Data of second question is shows that only 12 respondents have a sufficient

knowledge about CSDL and NSDL it means most of respondent have a no or only

little bit knowledge about these two terms data says that 15 respondents go with

no and 23 go with to some extent.

With observation of third question we find out that the most of the public of

pathankot are not satisfy with present fee structure of depository system.Data

represents that 27 respondents are not satisfy whereas 17 are satisfy and 06 are

satisfy only some extents.

The observation of this question explain that the sharekhan trading company is

not popular in pathankot area because only o7 respondents are make trading with

it, After that ICICI direct.com comes and get 08 votes, reliance get maximum

votes 14 and 10 respondents making trading with other companies. In this

question its clear that Reliance is popular trading company in pathankot area.

Fifth one question is basically include in this questioner for knowing the loyalty

of public, regarding its trading company. According to data 29 respondents are

not switchover to other company while its present trading company increase its

annual fee. It means peoples are satisfy with its trading company and loyal about

it.

Last question of my questioner is very essential for find the factor which are

directly influence the amount and loyalty of the customer. Data shows that most

of peoples (18) realized that hidden charges are very default factor in decreasing

the number of customers and its loyalty. Whereas 17 respondents are says that

Maximum profits are the main factor, 08 go with time to time tips and only 07

respondents select other factors option.

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SUGGESTION

RECOMMENDATIONS & SUGGESTIONS

Regular statements of holdings should be made available at regular intervals.

The statement of holdings should be provided with the sale and purchase of the

shares.

Awareness of functioning of this system should be spread to the public through

advertisement.

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Working of Depository system Clear picture of the deductions made by depository participant or the charges

levied on the customers should be provided in black and white.

Proper feedback should be taken into consideration. For e.g. calls should be made

when the account is opened.

Bank should expand its network by opening its more branches and franchise and

there should be easy accessibility of services rendered by a this system.

The processing of the demat account opening should be made fast.

Aggressive efforts should be made by sales team to tap the potential customers

and to increase the customer base.

The bank should launch more welfare schemes from time to time.

The e-broking service should be introduced.

Customers should be made aware about the services like phone banking, net

banking, bill pay, dematerialization etc. an instruction manual telling about how

to use their services can also be given to the customer to make these advanced

services more popular.

LIMITATION

Whole area is not covered in this project so only 50 respondents are representative for

complete area its not ideal data.

The study is limited to the different schemes available under the Demat account selected.

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The lack of information sources for the analysis part is also a limitation of this study.

Less awreness about this system in public is very critical block in this study.

In this sytem vast financial terms are comes in this system but peoples are not introduce

with it so peoples are only limited knoweldge about this system and not get sufficent

profit from this system.

CONCLUSION

To conclude, it can be said that the research findings clearly reveal the goodwill and

reputation of depository system among the customers. But there is a need to strengthen this

72

Working of Depository systemdepository system by spreading awareness about the services offered by NSDL, CSDL and its

trading companies through advertisement and by expanding the more branches of this system all

over the country and also by tapping the potential customers through innovative means.

BIBLIOGRAPHY

Websites

www.reliamcemoney.com

www.icicidirect.com

www.sharekhan.com

www.indiabulls.com

www.moneycontrol.com

http://www.moneycontrol.com/

http://www.indiabulls.com/

http://www.sharekhan.com/

http://www.icicidirect.com/

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www.rediff.com

Referred books

1. Financial institutions and markets-L.M.Bhale

2. Investment management-V.K.Bhalla

3. Research methodology-Mohit gupta,Navdeep Aggarwal

4. Financial services- Shashi k. gupta, Nisha aggarwal

ORIGNAL SYNOPSIS

http://www.rediff.com/

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75


76


QUESTIONEERIE

Ques. 1) Do you know about Depository system?A) YesB) No

Ques. 2) Have you sufficient knowledge and awareness about NSDL or CSDL?A) YesB) NoC) To Some extent

Ques. 3) Are you satisfied with fee structure of depository system?D) YesE) NoF) To Some extent

Ques. 4) By which depository company do you make trading?F) SharekhanG) IndiabullH) RelianceI) ICICI direct.comJ) Other

Ques. 5) If your selected trading company increases their annual charges will you go with it?

D) Yes E) NoF) If charges are reasonable

Ques.6) According to you which one is the most important factor for a trading

company to enhance the loyalty and customers?

A) Provide maximum profit

B) Provide tips time to time

C) No hidden charges

D) Other factors

working of depositary system

Documents

depository system introduction

depository system certificate

depository system date

depository system index

settlement system

project work

depositort system

project guide