In this article, Sahali Manna, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses the role of depositories in the Indian Economy

Introduction

In the twenty-first century, many aspects of technology have become a blessing. One such blessing is the ‘depository’ system which is the electronic mode of holding securities. There was a time when Companies used to issue share certificates in physical form.  The investors were supposed to keep the certificate safe and forward it to the buyer once the share is sold. Now, with the introduction of Depositories Act 1996, there is no paperwork involved and in this procedure, all the entries are done electronically. The introduction of depositories system also gave rise to a new type of stock trade called as ‘dematerialization’.

What is Dematerialization?

Dematerialization or Demat is also called as ‘scripless trade’ or ‘scripless transfer’. It is basically the conversion of physical certificates into electronic records. Under dematerialization, physical transfer of shares is avoided and transaction only takes place through an electronic medium. This is the most significant step taken for achieving a paper-free securities market. Share transfer in dematerialized form takes place freely through the electronic book-entry system.

Depositories registered with SEBI

In India, various entities can provide a depository system. A depository must be formed under the Companies Act and must obtain a certificate from the Securities and Exchange Board of India. Two depositories which are already registered under SEBI are:

1. National Securities Depositories Limited (NSDL): NSDL was set up in 1996 by the NSE (National Stock Exchange). IDBI and UTI helped to promote NSDL.
2. Central Depository Service Limited (CDSL): Like NSE promoted NSDL, BSE (Bombay Stock Exchange) promoted CDSL.

NSE introduced the rolling system in India for the first time. This helped the investors get payment within 5 days of the sale. Previously, before this system was introduced the investors used to get their payment on the eighth to the twelfth day from when the trading was done.

And, after promoting CDSL, the annual turnover in BSE also increased and the Badla system also got abolished which increased the scope of depositories in India.

Important Concepts

• Depository participant or a DP is an agent of the depositories which provides depository services to the investors. Any foreign bank, public financial institution, a commercial institution with the approval of the Reserve Bank of India( RBI), state financial corporation, stock brokers, clearing houses, NBFCs that are complying with the rules prescribed with SEBI can be registered as DP.
• Securities eligible for demat shares, stock, debentures, bonds, debenture stock, any other marketable security, any incorporated company, units of the mutual fund, unlisted security, commercial paper are some of the examples.
• BO or Beneficial owner – The benefits from the dematerialized securities are derived by the actual investor of the shares, so they are the beneficial owner (BO) as the depositories hold the security on behalf of the investor and in a fiduciary capacity.

Advantages of the Depository system

The first and the most important advantage of the depository is it eliminates the risk of holding physical securities. Previously, the buyers had to keep checking if the shares had been transferred or not. But since the depository system came about such risks had been reduced to a great extent as everything is now done through electronic mode. Huge paperwork which was related with the same also got reduced and from 1998 demat trading was also made compulsory. This also makes the foreign investor confident to invest in the Indian market as it fewer the chances of any kind of forgery and delay.  

Other advantages of depository system are as follows:

• The transfers take place immediately unlike physical transfer. The beneficial owner also transfers as soon as the shares are transferred from one account to the other.
• It only holds the security listed in particular stock exchange.
• The issue of fake certificates, the problem-related to bad delivery or any kind of issue related to signature are also reduced.
• Now there is no need to fill a transfer form and affix share transfer form in order to transfer share.
• The electronic system is time-saving.
• The fear of losing the certificate or issue of fraud certificates are also eliminated.
• Transfer of benami properties is also restricted.

Steps to dematerialize share certificate

In order to dematerialize the share certificate the investor must:

• Open a Demat account with a DP.
• Then the Demat Request Form (DRF) is to be filled and along with it, the share certificate must be submitted to the DP.
• After this, the DP will send this certificates to the registrar who will issue the equivalent number of securities.
• DP after receiving the share certificate in physical form and the duly filed DRF must give the counter acknowledgement to the BO.
• The DP will capture all the detail from the DRF and certificate and then generate a DRN.
• If the securities are in ‘lock-in’ status then it must specify the ‘Lock –in-Reason’ and ‘Lock-in-Release date’.
• The DP while affixing rubber stamp on the DRF must take care of the material information such as – distinctive number or the folio numbers does not get smudged.
• Next, the  DP will give a “system generated acknowledgement” to the BO.
• After the DRN is generated the CDSL must send the DRF data to the issuer. This process is automatically done by the system.
• The DP must capture all the dispatch detail and must dispatch the physical document within two days from the date of DRN generation.
• The process of dematerialization must be completed within 15 days as specified by the CDSL.

Role of SEBI

Apart from regulating the business in the stock exchanges and any other securities market and protecting the investor’s interest SEBI also regulates the depositories. SEBI (Depositories and participant) Regulations 1996 act is there to regulate the investor accounts in demat form.

In India, the entire depository system is governed by the Securities Exchange Board of India (SEBI). The main aim of SEBI is investor protection. The Depositories Act 1996 ensures free transferability of securities with proper accuracy, speed, and security.

• It makes the securities of public limited company freely transferable
• It dematerializes the securities in depository mode
• It maintains the ownership records in a book-entry form.

Before this act came up there was a settlement risk in the transaction. This was basically for the time taken for such matter. The SEBI Act 1992 provides SEBI with statutory power to protect investor’s interest, promotes the development of the securities market or regulate the securities market. It has full autonomy to conduct inspection and inquiry over any offence or violation of any provision under the act.

Krishanamurthy, R. (1996) in his paper “Depositories for Securities Transaction: An Overview of the Depositories Act and Responsibilities of the Auditing Profession”, has stated that the act being a strict rule-based approach seeks to ensure that investors opting for the Depository Model will at all times be protected from any abuse of the system.

Indian Economy and the Depository system

Investment plays a very important role in shaping an underdeveloped or a developing country. And developing countries find it really hard to get sufficient capital for developments. India needs a high level of saving and investment to leap forward and attain the majority of growth. There is a lot of risk factor related to investment. Hence, market efficiency and investor protection is a need for India to attract investors.  A well-functioning securities market can lead to a stable economic growth. There was always a need for fully developed securities depository system to enhance market efficiency. The settlement system also developed with the Depositories Act 1996. Apart from holding securities, it provides services related to transactions in securities. This system eliminates paperwork and promotes transparent trading. It also contributes to the liquidity of an investment in securities. The stock exchanges too play an important role in the capital market and these are the platforms to trade in securities. Our economy is rapidly growing and modernizing. Over the years the Indian economy has transformed and as a developing economy, it comes in relation to several foreign and domestic factor.  

The capital market must provide some excellent investment opportunities to the investor and must take care of their interest and security. The demat account opening and opening a bank account is almost same.

Concluding Comments

The discussion with regard to depository’s role in Indian economy does not end here. There is lot more about it. SEBI is taking care of investor protection and introduction of the Depositories Act 1996 made the share transfer easy and safe with other advantages added. But the practical issues are not looked upon by the authorities. It may be the case that an investor is now getting paid within five days of transferring his share but it is also true that transfer of funds still takes 2 or 3 days as all the banks are not electronically connected. Another problem is the depository participant debit their clients as they hold their account and as a result of the investor’s faces price hike, Even today general public lacks knowledge about depository system in India. These problems can be overcome if a single depository system is established rather than having multiple depository systems and depository charges must be reduced.

REFERENCES:

1. Mr.B.Hari Babu, Prof.B.K.Surya Prakasha Rao, Dr.B.Srinivasa Rao, ”Role of Depositories in Indian Capital Market – A Comparative Study between NSDL and CDSL”, International Journal of Scientific and Research Publications, Volume 6, Issue 12, December 2016 135.
2. https://www.indianeconomy.net/lms/glossary/depository/
3. https://www.livemint.com/Money/j4wMyH7iKlKynLEipKXMqL/Sahoo-panel-bats-for-liberal-regime-for-Indian-depository-re.html
4. https://accountlearning.com/depository-system-in-india-disadvantages-remedial-measures/
5. Sangeetha D., Investment and its Role in Economic Development, International Journal of Science and Research (IJSR).
6. The Securities and Exchange Board of India: Its establishment and performance. (shodhganga.inflibnet.ac.in/bitstream/10603/8963/14/14_chapter%205.pdf)