A Review on Depository Services in India

 


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“A Review on Depository Services in India”

Abstract
Dematerialization or demat is a process to convert the securities held in physical form into an electronic form or to directly allot securities in electronic record form. These electronic records of securities are shown as “electronic balances” in the demat account through a depository participant (DP). DP provides a link between the account holder (beneficiary owner or BO) and the company on one hand and National Securities Depository Limited (NSDL) and the BO on the other hand.

1. Process of Dematerialisation
The investor (demat ac holder) should approach the DP for conversion of physical shares into electronic form, for which the demat ac holder should submit the physical shares to the DP. The investor before submitting the shares should sign across the physical shares “submit for Dematerialisation “, then the DP checks the signature and names of the shares holders and after he/she will send a request to the registrar of the companies whose shares are to be dematerialized through National Securities Depository Limited (NSDL). To verify the genuineness of the shares and names of the shares holders, usually takes about 1 week, after that the DP will approach the registrar with a request to convert the shares into electronic form, the registrar will take the physical shares and will issue electronic shares. The registrar will inform NSDL that the shares are converted into electronic form, after that the registrar will inform the DP that the shares are credited into the investor’s demat a/c. The entire process will take about 20-30 days depending on the company and the number of shares to be converted
2. Objective of promotion of NSDL
National Securities Depository Limited (NSDL) was established by passing the securities act of 1996. NSDL was promoted by the industrial giant called Industrial Development Bank of India (IDBI) and mutual fund giant Unit Trust of India (UTI) and the National Stock Exchange (NSE). The shareholders of the NSDL comprise of the following

  • State Bank of India
  • Global Trust Bank
  • HDFC Bank
  • Canara Bank
  • Dena Bank
  • Deutchese Bank
    NSDL was promoted with the objective of providing credible, dependable, convenient and secure service along with objective of promoting dematerailisation of shares and involving as many co’s as possible and to make the trading on all stock exchange through demat form. The following stock exchange are connected to the NSDL for trading in demat form only
    1. National Stock Exchange
    2. Bombay Stock Exchange
    3. Bangalore Stock Exchange
    4. Lucknow Stock Exchange
    5. Ahmedabad Stock Exchange
    6. Kolkata Stock Exchange
    7. Delhi Stock Exchange
    8. Madras Stock Exchange
    9. Indore Stock Exchange
    10. OTCIE
    3. Depository

    A Depository can be compared to a bank for shares. Just as a bank holds cash in your account and provides all services related to transaction of cash, the Depository holds securities in electronic form and provides all services related to transaction of Shares / debt instruments. A depository interacts with Clients through a Depository Participant (DP) with whom the client has to maintain a Demat Account. Thus an investor who wishes to avail of all Depository Services has to open a Demat Account with a DP. The first depository to commence operation is National Securities Depository limited (NSDL). A depository to commence business must register with Security and Exchange Board of India (SEBI). Once SEBI gives the certificate of commencement of business it can start its operations. NSDL commenced its operation on November 8, 1996.

    4. Depository Participant
    Depository Participant is the link between investors and the NSDL, he play a major role in the depository system. Every investor who wants to hold shares in Demat form must open account with a DP of his/her choice. The DP provides all the services relating to transmission of shares and for this service DP levy some charges which is to be paid by the account holder, and charges for annual maintenance which is to be paid by account holder, in turn the DP provide clients with passbook and delivery instruction slips to operate from his Demat ac .
    4.1 Brief of Various Depository Participants
    Stock Holding Corporation of India (SHCIL) is the 1st DP to be registered with the NSDL and it is the largest DP with over 6 lac investor accounts. SHCIL is known for its aggressive marketing and it offers its facility for investors (individual, corparates as well as clearing ac for broker) of all types. SHCIL was promoted by the major financial & investment institutions and insurance companies viz…IDBI, ICICI, IFCI, IIBI, LIC, GIC and its subsidiaries for providing custodian & related services. SHCIL has a cluster of inter-linked online branches, with over 130 offices & more than (400 franchisees). With its vast cover, SHCIL has the custody of over 130,000cr of clients’ assets. SHCIL Provides the following services:
    1. Demat services (individual, brokers & corporate) 2. Loan against shares 3. Fund invest advisory services for mutual funds

    4. Stock invest (buysell shares through internet) 4.1.1 HDFC BANK
    HDFC Bank commences its depository services in 1997. HDFC was promoted by Housing Development Finance Corporation. It is one of largest DP with both NSDL &CDSL. HDFC has over 50 branches and more than 100 service centers spread all over the country with more than 4 lakh ac. HDFC offers its service to investor, corporate and well as clearing member ac. HDFC is backed by state of art technology network, it has vast gamut of schemes catering to need of the investors, brokers, corporate etc .
    Service provide include:

  • Demat ac (individual broker)
  • Loan against shares
  • Advisory services to client
  • Internet service

    4.1.2 IDBI
    Industrial Development Bank of India is a major player in the depository system with a proven record in its cherished history; it is one the first player to offer Depository services to its ever-growing clients. With a vast network of state of art branches it offers Depository services to more than 3 lakh clients spread over the entire country
    The services provided include:

  • Demat ac (individual brokers)
  • Advisory service
  • Loan against shares and
  • Internet facilities to its clients. 4.1.3 Karvy
    One of the leading regional players with a strong presence in Hyderabad, karvy is always in the forefront in providing Depository services to its clients which are more than 3 lakh. Karvy not only provide Depository services but is also a dominant player in the registrar of companies. Majority of companies listed in Hyderabad stock exchange having karvy as their registrar it ahs vast network of branches to provide service to its growing clients.
    The services provided include:
  • Demat ac (individual & clearing member)
  • Loan against shares
  • Internet facilities (where by client can give online instruction)

    5. Operational Process From The Side Of Investor & Speculator
    Procedure: Trading in dematerialized securities is done through your broker just like physical trading.

    5.1 Sell Dematerialized Securities:
    You give instruction to your DP for debit of your depository account and credit of your broker’s clearing member account at least 24 hours i. e. , one working day prior to the pay in date or before the deadline prescribed by your DP, so that your broker‘s clearing ac is credited at the time arranged with him. This instruction should be given using “delivery instruction slip “allotted to you by your DP. On the pay in day, your broker gives instruction to his DP for delivery to Clearing Corporation clearing house of the stock exchange. The broker receives payment from the clearing corporationhouse. You receive payment from the broker for the sale in the same manner you receive for a sale in the physical form

    5.2 Buy Dematerialized Securities
    You purchase securities in any of the stock exchange connected to NSDL through a broker of your choice and make payment to your broker. make sure you tell your broker that you want only demat shares, broker arrange payment to clearing corporationhouse of the stock exchange , broker receives credit in his clearing ac with his DP an the pay out day. The broker immediately transfers these securities to your depository account. Broker gives instruction to his DP to debit his clearing ac and credit your depository account Securities & Exchange Board of India (SEBI) through a circular dated march 3rd2003 has reduced the rolling settlement period from T+3 to T+2 days, beside that it has made mandatory that all trading taking place in all stock exchange must be done only in demat form, rolling settlement refers where each trading not only consist of trading but also settlement day, with the advent of T+2 day rolling settlement, it becomes imperative that all trades must be settled within 2 days, this can be possible only when settlement and transfer can take very fast , this is possible in demat form only. Beside that no Investor can sell physical shares more than 500 in quantity without dematerialization of shares.

    5.3 Procedure of T+2 Rolling Settlement
    T: trading day, where buying and selling takes place
    T+1 day: by 11.30 am the investors and speculators have to give confirmation by Giving Instruction to the DP
    T+2 day: the DP has to download the instruction file from the NSDL and execute the same by 2.30 p. m.
    6. Present Status Of Dematerialization:
    6.1 Investors:
    At present there are 37,68,012 Investors accounts from within the country and abroad 3567 clearing member (share brokers) account have been opened to facilitate trading And settlement of Demat shares in the stock exchanges connected to NSDL. Table 1 shows the growth in Investors account over a period of three years. Month –year client Ac
    (Lakhs)
    June 01 34.93
    June 02 37.41
    June 03 37.68
    Source: www.nsdl. co.in

    6.2 Settlement:

    At present, a total quantity of 162 cr shares having a value of Rs 13,013 were settled in Demat form in the stock exchanges connected to NSDL.

    Table 2 shows the settlement figures over the past three years

    Month year Settlement qty settlement value (cr) June 01 66 7,665
    June 02 141 13,238
    June 03 162 13,013
    Source: www.nsdl. co.in

    6.3 Companies:
    There are about 4,854 companies that are available for Demat. Table 3 indicates the Increase in the numbers of companies joined NSDL over a period of three years. Table 3. The Increase in the numbers of companies Joined NSDL over a period of three years. Month-year no of co’s
    joined
    June 01 2981
    June 02 4324
    June 03 4854
    Source: www.nsdl. co.in

    6.4 Debentures / Bonds:

    At present 517 issuers have issued 9989 debenturesbonds in Demat form .3340 Instruments have been redeemed and 6649 instruments are available for Dematerialisation. Table 3A shows the growth over a period of last three months.

    Table 3A. The growth over a period of last three months Month-Year

    No of (cr) Issuers No of Instrument

    Demat value (cr)

    April 03 499 6425 192670
    May 03 509 6434 197609
    June 03 517 6649 203773
    Source: www.nsdl. co.in

    6.5 Commercial Paper:

    At present there are 322 issuers who have issued 3840 commercial paper in Demat form .3881 Instruments have been redeemed and 459 commercial paper are available for Dematerialisation. Table 3B shows the growth over a period of last three months. Table 3B. The growth over a period of last three months Month-year No of issuers No of active instruments April 03 318 386
    May 03 320 429
    June 03 322 459
    Source: www.nsdl. co.in

    7 Dematerialisation:

    At present 6887 cr securities having value of Rs 5,81,436 cr were Dematerialised. Table 4 shows the Dematerialisation figures over the last three years

    Month-year Demat qty(cr) Demat value(cr)
    June 01 3862 350497
    June 02 5677 446776
    June 03 6887 581436
    Source: www.nsdl. co.in

    8 Depository Participant:

    At present 213 Depository Participant are offering Depository services . DP services are provided from 1719 locations across the length and breadth of the country. Table 5 shows the steady increase in the number of DP’s. Month-year No of DP’s
    June 01 196
    June 02 212
    June 03 213
    Source: www.nsdl. co.in

    9 THE DIFFERENT TYPES OF DEMAT AC PROVIDED BY

    DEPOSITORY PARTICIPANT

    9.1 Beneficiary A/C:

    Every investor is provided with an unique a/c which is called. the beneficiary a/c, it is an unique a/c with 8 digit number which identifies the BO across the depository system. The depository participant gives the BO a/c holder the following document

  • Delivery instruction slip
  • Inter-depository transfer slip
  • Inter settlement instruction slip
    The inter depository receipt is used to transfer the shares from the investor BO a/c to the broker clearing a/c. The investor has to issue this slip to the depository participant 24 hours earlier than pay in time to effect the transfer. The inter depository transfer slip is used to transfer shares from one depository to another. The inter settlement slip is used to transfer shares from one settlement to another settlement. 9.2 Clearing Account: Each clearing member of the stock exchange connected to NSDL is required to open one clearing account with a depository participant of his choice, if a clearing member is a member of more than one stock exchange, then one clearing account per stock exchange must be opened.

    9.3 Procedure For Opening A Demat Account From Investor And Speculator Point Of View

    9.3.1 Investor, both individuals and non-individuals, have a choice to open a demat account with any NSDL DP of their choice. Individual investor can be Indian residents or NRIs. Non-individuals BOs include corporates, FIIs, Mutual funds, Trusts etc also under the scheme of two way fungibility of ADR/GDR, non-residents can open a demat account with an NSDL DP 9.3.2 A BO should consider fee structure, location convenience and the track record before selecting the DP for opening his/her demat account 9.3.3 More than one demat account can be opened in identical names with the same depository and/or with both the depositories 9.3.4 A demat account can be maintained even with nil balance, as there is no minimum requirement of holding any minimum – security balance in a demat account 9.3.5 If securities are already held in joint names, the demat account should be opened in the order of names in which the securities are held . if the securities are held by an individual jointly with different persons, separate demat account will have to opened for each of such combinations, however, if the same person hold securities in different order of their names, one single demat account in names of all these persons (not exceeding 3 persons) would be sufficient, provided the facility of transportation-cum-demat is used . At the time of opening a demat account or anytime thereafter, individual having a demat account in a single or joint names can make, a nomination, in the unfortunate event of demise of one of the joint holders, the securities can transmitted in the names of the survivor holders, but in the event of demise of the sole holder or all the joint holders, the securities cam be transmitted in the name of the nominee. a resident Indian can nominate an NRI or another NRI and similarly an NRI can nominate a resident Indian or another NRI . non individual like corporate’s cannot make nomination 10 Documents required to be submitted at the time of opening NSDL Demat Account

    10.1 INDIVIDUAL INVESTOR: 10.1.1 An application in the prescribed form duly completed
    10.1.2 Certified copy of an election-id card/passportration card/pan card or driving
    10.1.3 license
    10.1.4 A certified copy of birth certificate and guardian’s names in case of a minor.
    10.1.5 A passport size photograph of each of the applicants with his/their signatures
    10.1.6 put across the photographs
    10.1.7 In case of any attestation by a magistrate/notary public/special executive magistrate/the name, address and the telephone number of the a magistrate/notary public/special executive magistrate
    10.1.8 A copy of the power of attorney, if required
    10.1.9 Agreement in the prescribed form duly executed
    10.2 Procedure for opening a clearing member account for the share broker
    Members of the stock exchange are an important link between investors and the clearinghouse in the depositories system.
    Therefore, to settle trades in dematerialised securities, a stock exchange member must open a clearing member account with any DP
    This account is meant only to transfer shares to and received shares from the clearing house and hence, the member broker does not have any ownership (beneficiary) rights over the shares held in such an account Procedure: 10.2.1 Approach any DP
    10.2.2 Fill up an account opening form (form taken form DP)
    10.2.3 Submit the account opening form along with the following:
    10.2.4 A copy of letter give by the stock exchange for allotment of its clearing

    member ID-CM ID
    10.2.5 A copy of SEBI registration certificate as a stock broker
    10.2.6 Sign an agreement with the DP
    10.2.7 DP will forward a copy of this application to NSDL
    10.2.8 NSDL will allot a CM BP-ID (clearing member business partner ID). This number is of eight characters and appears like IN500025, uniquely identifies the clearing member across the depository system. The clearing member should provide this number (cm bp id) to its clients. Printing it in the contract note
    10.3 STRUCTURE OF CLEARING ACCOUNT:
    The clearing account is identified on the depository system by its CM BP-ID. The internal structure of the clearing account consists of three parts to facilitate easy book keeping. 10.4 Arrangement of clearing account
    10.5 Pool account
    10.6 Delivery account
    10.7 Receipt account

    10.8 Clearing house (CC) clearing corporation (CH)

    10.9 Pool account
    10.10 Pool Account: It has two roles to play in clearing of securities, viz. , before pay-in, the selling client of the clearing member transfers securities from his Client Account to the Clearing Account. After receiving payout, the clearing member transfers securities from his Clearing Account to account of the buying client. a) Delivery Account: The securities before pay-in, the securities move from the Pool Account to the Delivery Account. This movement will be automatic if clearing member has given such an undertaking to its clearing house/clearing corporation. It will be affected on the basis of instructions received from the clearing house/clearing corporation. If the clearing house/clearing corporation b) Has not taken such an undertaking, the clearing member to its DP must submit a delivery instruction form. At the time of pay-in, NSDL flushes out the securities in the Delivery Account and transfers the same to the clearing house/clearing corporation. c) Receipt Account: On payout day, the clearing house/clearing corporation transfers securities to the Pool Account (to the extent of net receipt) through the d) Receipt Account; this account can be used to trace details of settlement-wise receipt of the clearing members. 10.11 Market Type & Settlement Number
    A clearing account can be broken into compartments and sub-compartments. Each compartment can be called as market type and each sub-compartment can be called as settlement number. Hence, if securities are moved to, or moved from any clearing account, apart from the CM-BP-ID, the combination of market type and settlement member must be provided. . A diagrammatic illustration of the internal structure of a clearing account is depicted below

    10.12 Settlement Calendar Settlement calendar is decided by the stock exchange. It contains details for each market type and settlement number. The details for each settlement consist of date of trading, pay-in date, pay-in time, payout date, settlement number etc. Clearing member can obtain the settlement calendar from its own stock exchange. This is also available in the depository software of the DP. You give instruction to your DP for debit of your depository account and credit of your broker’s clearing member account at least 24 hours i. e. , one working day. 11 Conclusion
    Thus there has been a revolutionary change in the shres format and stock trading yielding benefits of transparency, quick trasfers, and other comforts. ##################################

    ** The author is Asst. Professor, Deccan School of Management, Osmania University, Hyderabad-500001 can be contacted at tdbabu17@rediffmail.com Can be contacted for content writing-summer projects-winter projects at MBA, MHM, and others levels tdbabu17@rediffmail.com

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