What is a depository system?
Discuss the process of dematerialization and the process of creating pledge of
securities held in depository.
Ans :
A
"Depository" is a facility for holding securities, which enables
securities transactions to be processed by book entry. To achieve this purpose,
the depository may immobilize the securities or dematerialise them (so that
they exist only as electronic records).India has chosen the dematerialisation
route. In India, a depository is an organisation, which holds the beneficial
owner's securities in electronic form, through a registered Depository
Participant (DP). A depository functions somewhat similar to a commercial bank.
To avail of the services offered by a depository, the investor has to open an
account with a registered DP
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Concept of depositary
system essentially aims at eliminating the
voluminous and cumbersome paper work involved in the scrip-based system and
offers scope for ‘paperless’ trading through state-of-the-art technology. It
enables conversion of physical securities in electronic form through a
process of ‘dematerialization’ (also known as ‘demat’) of share certificates
and facilitates share transactions and transfers electronically without
involving any share certificate or transfer deed. It thus alleviates the
hardship currently faced by the investors and it offers options for
converting the shares from electronic to physical or paper from through a
process of ‘rematerialization’ (also known as ‘remat’).
Depositary System is, indeed,
time-tested and long prevalent in many advanced countries and has been
playing a significant role in stock markets around the world.
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In India, the first depositary has been
set-up by National Securities Depositary Limited (NSDL), which is jointly
promoted by IDBI, UTI and the NSE (National Stock Exchange) in accordance with
the Rules and Regulations framed by SEBI.
Constituents
·
Depository (NSDL)
·
Depository Participants (DPs)
·
Companies Registrars
·
Investors
We would like to describe the concept
step-by-step:
Few
years’ back, it was a concept of scrip-based system it was indeed a quite
complex and time consuming and was riddled with a variety of problems like bad
deliveries for several reasons, e.g.:
·
Litigations and disputes in respect of shares
purchased,
·
Tearing and mutilation of certificates,
·
Fake certificates
·
Loss of certificate in transit,
·
Delay in postal transit,
·
Time taken in processing
·
Mistakes in completing the details in transfer
deeds,
·
Stamp Duty/ postal charges, etc.
DEMATERIALISATION
It
is a process of conversion of physical share – certificate into
electronic – form . So, when a shareholder uses the dematerialization facility,
company take back the shares, through depository – system and equal number of
shares are credited in his account in e-form.
DEMAT is a process by which your
share certificates are taken back by HLL through your DP, verified and if found
in order, demat is confirmed by HLL and then an equivalent number of shares are
credited by the DP to your account as electronic holding. The entire process of
dematerialization has to be completed within a period of 15 days.
The depository system is very much like our banking
system as,
·
NSDL holds securities in accounts
·
Safe keepings of securities
·
Transfers without handling securities
·
Transfers securities between accounts
Rematerialization
It is a process of conversion of
electronic shares into physical shares. When a beneficial – owner opt out of a
depository, he will inform about it, to the company, through depository. The
company will issue fresh share – certificate to the beneficial – owner, within
30 days from the date of request.
In
this, e- records are converted into physical – shares certificate.
Firstly
shares are dematerialize then it is rematerialize, so it is secondary and
supporting function of depository.
In
this process it requires “Rematerialisation Request form” (RRF)
Rematerialization is a process of
converting your electronic holdings back into share
certificates
in paper form. The process of rematerialization is also carried out through
your DP and the process has to be completed within a period of 30
days.
Switching over depository system from scrip-based
system
The switching procedure is described here
systematically:
STEP 1: -
·
Approach a DP of your choice and open an account
just like we open an account with a bank.
·
With the opening of account, you get
identification number called ‘Client ID’ that serve as a reference point for
all your transactions with the DP.
·
Fill up a form called Dematerialization Request
Form (DRF) to be provided by the DP and hand over your share certificates duly
called by writing “ surrendered for dematerialization” to them for demat. The
DP will accept certificates registered only in your name. A specimen of DRF as
prescribed by NSDL is given in annexure ‘C’.
STEP 2: -
·
Upon receipt of DRF along with the original
share certificates, the DP sends an electronic request to HLL through NSDL for
confirmation of demat and simultaneously surrenders your DRF and share
certificates accompanied by a standard letter to HLL for demat confirmation.
STEP 3: -
·
HLL is already equipped with the requisite
hardware/software facility and is linked to NSDL network through a V-SAT
connection. Your DP’s request for demat is thus electronically received by HLL
through NSDL without any delay.
STEP 4: -
·
As soon as HLL receives the DRF and your share
certificates, necessary verification is done and demat is confirmed to
NSDL.
STEP 5: -
·
NSDL further confirms demat to your DP.
STEP 6: -
·
DP credits your account with the number of
shares so dematerialized and thereafter you hold the securities in electronic
form.
·
Your DP also gives you a statement of holdings
and updates your account after each transaction just like your bank
account.
FREEZING OF YOPUR ACCUONT WITH THE DP
If at any time, as a security measure, you wish that no
transaction should be affected in your account, you may accordingly advise your
DP who shall then ensure that your account is totally frozen until further instructions
from you.
CORPORATE BENEFITS
When HLL announces dividend, NSDL will provide the
details of all persons having electronic holding of HLL shares with reference
to the record date/book closure and HLL will disburse the dividend to such
holders by sending dividend warrants directly to them as per the practice
presently followed in scrip-based system. In case of rights/bonus issues, the
distribution of share entitlement will be done in electronic from by NSDL based
on the information provided by HLL.
For any discrepancy with regard to corporate benefits,
you can always approach your HLL/DP for any assistance of clarification.
BENEFITS OF THE DEPOSITORY SYSTEM:
·
As would be evident from the above, electronic
transaction of securities eliminates the problems and delays arising out of
scrip-based system.
·
Bad deliveries are almost eliminated.
·
There is no hassle, filling in transfer deeds
and lodging/dispatching the transfer documents with the company, thus avoiding
a lot of paper work.
·
You no longer have to wait for the shares to be
transferred in your name and suffer delays because of processing time.
·
It thoroughly eliminates risks associated with
loss/fraudulent interception of share certificates in postal transit.
·
There is no scope for any risk of loss, theft of
fraud with regard to share certificates.
·
When you buy shares in depository mode, you
become the owner of those shares in electronic from within a day of the
completion of settlement. Similarly, when you sell shares in electronic from,
you receive the payment much faster.
·
Investment is highly liquid at all times, as
there is shorter waiting period.
·
The marketable lot for transaction in depository
mode has been fixed as one share. Therefore, the problem of odd lots is
eliminated.
·
Once you open an account with the DP for HLL
shares, you can utilize the same for transacting securities of other companies,
which are part of the depositary system.
·
You save on stamp duty @ 0.5% of the market
value of shares and although you incur some cost towards DP’s service charges,
it could still lead to some savings. This however needs to be evaluated by the
individual investor.
·
The Syndicate, thus, request you to evaluate
seriously this option of investment. We would be please to provide our
assistance.
Rights and
Obligations of Depositories and its constituents :
1.
Every depository has to enter into an
agreement with the issuer in respect of securities to become eligible to held the securities in
demat form.
2.
2.
Every depository is to maintain the following records and documents :
(a) Records of securities dematerialised and
rematerialised
(b) Names of the transferor, transferee, and the
dates of transfer of securities
(c) A register and an index of beneficial
owners
(d) Details of holding of the securities of the
beneficial owners as at the end of every day.
(e) Records of instruction received from and
sent to participants, issuers’ agents and beneficial owners,
3.
Details and the maintenance of records and
documents should be intimated to Board.
All the records and documents should be preserved
for minimum 5 years.
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