DEPOSITORIES ACT 1996 NOTES

QUESTION: Explain the meaning and significance of term ‘depositories’. What type of securities the depositories provide?

ANSWER: DEPOSITORY: Depository in a firm wherein the securities of an investor are held in electronic form in the same way a bank holds money. It carries out the transactions of securities by means of book entry, without any physical movement of the securities. The depository based settlement system is also called ‘book entry transfer settlement’

Depository acts as a defact owner of the securities logged with it for the limited purpose of transfer of ownership. It functions as the custodian of securities of its clients.

At present there are two depositories in India:

1. NSDL
2. CDSL

SIGNIFICANCE OF DEPOSITORIES:  Depositories are significant for investors, issuers as well as for intermediaries.

SIGNIFICANCE TO INVESTORS:

1. QUICK TRANSFER OF FUNDS AND SECURITIES: Once the securities are credited to the investors account for payout, he becomes the legal owner of the business. There is no need to send it to the registrar for registration. This facilitates quick transfer of funds and securities in comparison to the purchase and sale of securities in physical form which may takes 3-4 months.
2. ELIMINATION OF ALL THE RISKS WITH THE PHYSICAL CERTIFICATES: In investor is always exposed to the risks of loss by theft of stocks, multilation of certificates, loss in transit or loss of certificates during movement through or from the registrars etc. while dealing in physical form of securities, an investor has to incur costs for obtaining duplicate certificates and ads etc. Such problems are not faced under depositories system.
3. NO STAMP DUTY: No stamp duty is payable by the investors for getting the equity shares and units of mutual funds transferred under the depository. In case of physical shares, stamp duty of 0.5% is payable on transfer of shares.
4. MINIMISED CHANCES OF FRAUD, THEFT AND COUNTERRFEITING OF SECURITIES: Holding of securities in electronic form minimizes the chances of theft. Depository participants can effect the debit or credit to demat only after the receiving of valid requisition slip from the client. Thus the risks of fraud, theft and also counterfeiting of securities is minimized.
5. PROVIDES INSURANCE COVER: NSDL has taken up a comprehensive insurance policy to protect the interest of the investors in case the depository participant fails to resolve a genuine loss.
6. STATEMENT OF ACCOUNTS: Investors receive statements of accounts periodically from the depository participant. Every month, NSDL sent statement of accounts to investors selected at random, as a counter check.
7. DIRECT DISBURSEMENT OF NON-CASH BENEFITS: An investor entitled to receive right shares and bonus shares, is directly credited with such number of shares in his demat account. Similarly, any dividend or interest receivable is directly deposited by depositories in the demat account of the shareholders.
8. FASTER SETTLEMENT CYCLE: A settlement cycle of T+5 is followed for demat shares i.e. settlement of trading whether for purchase or sale is done on the 5^th working day from the trade day. This not only provides liquidity to the investor but also leads to increased stock turnover.
9. REDUCTION IN BROKERAGE: Investors dealing in dematerialized securities are relieved from the botheration of handling huge volumes of paper. Moreover, it reduces the back office cost of the brokers who in turn may provide a reduction in the brokerage of 0.25% to 0.5%.

SIGNIFICANCE OF DEPOSITORIES TO ISSUERS:

1. The costs of registration and transfer of shares get reduced which were earlier incurred by the issuer company.
2. There is saving in costs involved at the time of public issues.
3. It is easy to attract the foreign investors without incurring any cost of issuance in overseas market.
4. Reduction in the cost of registry and transfer, which are presently undertaken by the issuer.

SIGNIFICANCE TO INTERMEDIARIES:

1. Faster settlement
2. Less risk of bad delivery.
3. Reduced chances of forgery, counterfeit certificates, loss in transit, theft etc.

SECURITIES THE DEPOSITORIES PROVIDE:

1. SHARES: Shares are the part of the share capital of the company. Depositories deals in the purchase and sale of shares of the company on behalf of the company on behalf of the participant or beneficial owners. The shares dealt may be equity shares or preference shares.
2. DEBENTURES: Debentures are the acknowledgement of the debt. It is a document under the company’s seal which provides for the payment of a principal sum and interest thereon at regular intervals, which is usually secured by a fixed or floating charge on the company’s property. Depositories provide the trading in debentures through demat account.
3. GOVERNMENT SECURITIES: These are the securities issued by the central or state government. These represents the market borrowings of the centre or the state. Broadly, government securities can be classified as:
4. Dated government securities
5. State development loans
6. Treasury bills.
7. BONDS: Bonds refers to the high security debt instrument that enables an entity to raise funds and fulfill the capital requirements. It is a category of debt that the borrowers avail from individual investors for a specified tenure.
8. MUTUAL FUNDS: Depositories deals in mutual funds and these securities refers to an investment vehicle for investors who pool their savings for investing in diversified portfolio of securities with an aim to yield attractive returns.