The financial market exists to facilitate sale and purchase of financial instruments and comprises of two major markets, namely the capital market and the money market. The distinction between capital market and money market is that capital market mainly deals in medium and long-term investments (maturity more than a year) while the money market deals in short-term investments (maturity up to a year). Capital market is the backbone of any country’s economy. It facilitates conversion of savings to investments. Capital market can be classified as primary and secondary market. The primary market is mainly used by issuers for raising fresh capital from the investors by making initial public offers or rights issues or offers for sale of equity or debt. The secondary market provides liquidity to these instruments, through trading and settlement on the stock exchanges.

The erstwhile settlement system on Indian stock exchanges was inefficient and increased risk, due to the time that elapsed between trades and settlement. The transfer was by physical movement of declarations & share certificates. There had to be a physical delivery of securities – a process fraught with delays and resultant risks. 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 which were rampant in the system. Lack of modernization became a hindrance to growth of secondary market and resulted in creation of cumbersome procedures and paper work. In addition, the issuer had the right to refuse the transfer of a security. All this added to costs and delays in settlement thereby restricting liquidity and made investor grievance redressal time consuming.

The Depositories Act, 1996, ushered in an era of efficient capital market infrastructure, improved investor protection, reduced risks and increased transparency of transactions in the securities market. This legislation sought to effectively curb irregularities in the capital market, and protect the interests of the investors, and paved a way for an orderly conduct of the financial markets through free transferability of securities with speed, accuracy, transparency etc

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

The Bank for International Settlements (BIS) describes a depository as "a facility for holding securities which enables securities transactions to be processed by book entry. Physical securities may be immobilized by the depository or securities may be dematerialized (so that they exist only as electronic records)".

The two models of the depository system are:

1. Dematerialization, wherein, by operation, there is no physical scrip in existence as neither the individual who owns the shares nor the depository keeps scrips. The securities issued in physical form are destroyed and exactly equal numbers of securities are created in the depository system, which are credited into the account of the investor. Unlike physical securities, the securities converted into electronic form do not have any distinctive numbers and they are treated as equal and replaceable in all ways; i.e., securities in electronic form are fungible. All subsequent transactions (transfer of ownership) of such securities take place in book-entry form. The depository maintains the electronic ledger of the securities under its control.
    

2. Immobilization, wherein after giving credit of the securities in electronic form, physical certificates are stored or lodged with an organization, which acts as a custodian – a securities depository. Subsequent transactions in such immobilized securities take place through book-entries.

The depositories in India are regulated under the following legal framework:

• The Depositories Act, 1996
  The Depositories Related Laws (Amendment) Act, 1997

• SEBI (Depositories and Participants) Regulations, 1996
   

• Companies Act, 1956
   

• Securities and Exchange Board of India Act, 1992

Apart from the Acts and Regulations,

• Bye Laws of the depository
   

• Operating Instructions of the depositor
  Govern the business and operations of a depository.

The Act came into force on the 20th September, 1995 with "the intention to provide for regulation of depositories in securities and for matters connected therewith or incidental thereto".

The Act extends to the whole of India.

India has adopted dematerialization method

The depository model is based on the deposit of securities by the owner of the securities with a certified depository. Subsequently, an entry is made in the name of the said owner, manifesting his ownership of the securities upon which the person depositing the securities becomes the beneficial owner in respect of the said securities. The service provided in relation to this by the depository is that of recording of allotment of securities or transfer of ownership of securities in the record of the depository.

A depository can be compared to a bank. A Depository is an organisation like a Central Bank, where the securities of a shareholder are held in the electronic form at the request of the shareholder through the medium of a Depository Participant. A depository holds securities (like shares, debentures, bonds, Government Securities, units etc.) of investors in electronic form. Besides holding securities, a depository also provides services related to transactions in securities.

The Depositories Act defines a depository as "a company formed and registered under the Companies Act, 1956 and which
has been granted a certificate of registration under
sub-section (1A) of section 12 of Securities and Exchange Board of India Act, 1992."

As per the Act, only a company registered under the Companies Act, 1956 and sponsored by the specified category of institutions can set up a depository in India. {Section 2(1)(e)} The Act mandates that before commencing business a depository shall ensure that SEBI is adequately satisfied that the depository has adequate systems and safeguards to prevent manipulation of records and transactions. Before commencing operations, depositories should obtain a certificate of registration and a certificate of commencement of business from SEBI. {Section 3}

The sponsor of a depository applying for registration with SEBI should belong to one of the following categories, namely:–

1. a public financial institution as defined in section 4A of the Companies Act, 1956 (1 of 1956);
    

2. a bank included for the time being in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934);
    

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

4. a recognised stock exchange within the meaning of clause (j) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956);
    

5. a body corporate engaged in providing financial services where not less than seventy five per cent of the equity capital is held by any of the institutions mentioned in sub-clause (i), (ii), (iii) or (iv) jointly or severally;
    

6. a body corporate constituted or recognised under any law for the time being in force in a foreign country for providing custodial, clearing or settlement services in the securities market and approved by the Central Government; or
    

7. an institution engaged in providing financial services established outside India and approved by the Central Government. {SEBI (D&P) Regulations, 1996}

For considering the grant of certificate of commencement, the Board shall take into account all matters which are relevant to the efficient and orderly functioning of the depository in particular, the following, whether:–

1. the depository has a net worth of not less than rupees one hundred crore;

2. the bye-laws of the depository have been approved by the Board;

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 communications 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 communications 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 facilities and to the electronic data communication network connecting the depository, participants, issuers and issuers’ agents is controlled, monitored and recorded;

7. the depository has a detailed operations manual explaining all aspects of its functioning, including the interface and method of transmission of information between the depository, issuers, issuers’ agents, participants 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; and

10. the grant of certificate of commencement of business is in the interest of investors in the securities market. {SEBI (D&P) Regulations, 1996}

Depository Participants (DPs) are the entities dealing directly with the investors. A depository in India cannot open a demat account of an investor and/or provide services to such a person directly. For opening a demat account or availing the services offered by the depository, a person is required to approach a Depository Participant (DP) who is an agent of the depository. Similar to the brokers or other agents acting on behalf of the investor, a Depository Participant (DP) is the representative (agent) in the depository system.

Depository Participant also should obtain a certificate of registration from SEBI. [Section 2(1)(g)] A DP provides various services of the depository to investors but for the same the DP has to enter into an agreement with the depository to this effect. {Section 4}

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 5}

For the purpose of grant of certificate of registration, the Board shall take into account all matters which are relevant to or relating to the efficient and orderly functioning of a participant and in particular, whether the applicant complies with the following requirements, namely:–

1. the applicant belongs to one of the following categories:–

1. a public financial institution as defined in section 4A of the Companies Act, 1956 (1 of 1956);

2. a bank included for the time being in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934);

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

4. a state financial corporation established under the provisions of section 3 of the State Financial Corporations Act, 1951 (63 of 1951);

5. an institution engaged in providing financial services, promoted by any of the institutions mentioned in sub-clauses (i), (ii), (iii), (iv), jointly or severally;

6. a custodian of securities who has been granted a certificate of registration by the Board under sub-section (1A) of section 12 of the Act;

7. a clearing corporation of a stock exchange;

8. a stock-broker who has been granted a certificate of registration by the Board under sub-section (1) of section 12 of the Act:

   Provided that the stock-broker shall have a minimum net worth of rupees fifty lakhs and the aggregate value of the portfolio of securities of the beneficial owners held in dematerialised form in a depository through him shall not be more than twenty five times the net worth of the stock broker:

   Provided further that if the stock broker seeks to act as a participant in more than one depository, he shall comply with the criteria specified in the first proviso separately for each such depository; or

9. a non-banking finance company, having a net worth of not less than rupees fifty lakhs:

Provided that such company shall act as a participant only on behalf of itself and not on behalf of any other person;

2. the applicant is eligible to be admitted as a participant of the depository through which it has made the application to the Board;

3. the applicant has adequate infrastructure, systems, safeguards and trained staff to carry on activity as a participant; and

4. the grant of certificate of registration is in the interests of investors in the securities market. {SEBI (D&P) Regulations, 1996}

Dematerialisation ("Demat" in short form) signifies conversion of a share certificate from its physical form to electronic form for the same number of holding which is credited to demat account, which is opened with a Depository Participant (DP).

Dematerialisation is a process by which the physical share certificates of an investor are taken back by the company and an equivalent number of securities are credited in electronic form at the request of the investor.

Dematerialised securities allow cost savings (no need to manipulate physical securities) and prevents from loss or theft, amongst other advantages. But, more importantly, this legal and operational technique allows a great degree of efficiency in transferring securities at a low cost, at a high speed, and, if the legal regime is adequate, with the best possible protection to the interests of either issuers, intermediaries and investors.

The process of dematerialisation of securities begins with opening an account with a Depository Participant (it is similar to the opening of a bank account). If the investor already has an existing account, the same will be utilised for credit. Separate accounts for Securities & Commodities has to be maintained

The investor has to fill up and submit a Dematerialisation Request Form (DRF) provided by the DP duly signed by all the holders and surrender the physical shares intended to be dematerialised to the DP. The DP upon receipt of the shares and the DRF will issue an acknowledgement and will send an electronic request to the Company/ Registrars and Transfer Agents of the Company through the Depository for confirmation of demat.

At the time of submitting the shares for dematerialisation, the DP will deface the share certificates with the stamp "SURRENDERED FOR DEMATERIALISATION" and punch two holes on its face. This ensures that the shares are not lost in transit or misused until credit is received by the investor in his demat account.

The DP will simultaneously surrender the DRF and the physical share certificates to the Company/Registrars and Transfer Agents of the Company with a covering letter requesting the Company to confirm demat.

The Registrars and Transfer Agents of the Company, after necessary verification of the documents received from the DP, will cancel the physical shares and confirm demat to the Depository.

The Depository will pass on this confirmation to the DP and the DP after receiving this confirmation will credit the investor account with the number of shares dematerialised. The DP will hold the shares in the dematerialised form thereafter. The investor will be considered the beneficial owner of these dematerialized shares. {Section 6}

Rematerialisation is the exact reverse of dematerialisation. It refers to the process of issuing physical securities in place of the securities held electronically in book-entry form with a depository. Under this process, the depository account of a beneficial owner is debited for the securities sought to be rematerialised and physical certificates for the equivalent number of securities is/are issued.

The beneficial owner desiring to receive physical security certificates in place of the electronic holding should make a request to the Issuer or its R&T Agent through his DP in the prescribed Rematerialisation Request Form (RRF).

On receipt of RRF, the DP checks whether sufficient free balance of the securities sought to be rematerialised is available in the account of the investor. If sufficient balance is available, the DP accepts the RRF and communicates the request to the Depository When the Depository receives the rematerialisation request, it intimates the Issuer or its R&T agent about such requests.

DP is required to forward the RRF to the Issuer or its R&T Agent within seven days of accepting the RRF from the investor. The Issuer or its R&T Agent, after validating the RRF, should confirm to the Depository that the RRF has been accepted. On receipt of such acceptance from the Issuer or its R&T Agent, the DP removes the balances from the respective investor’s account.

On rematerialisation, R&T Agent issues security certificates as per the specifications given by the investor in the RRF. Thereafter, the Issuer or its R&T Agent despatches the security certificates for the rematerialised securities to the investor and his name is entered in the Register of Members of the company. The certificate of securities should be sent to the investors within a period of 30 days from receipt of such RRF by the Issuer or its R&T Agent.

The new certificates may not necessarily bear the same folio or distinctive numbers as those that investor had previously, i.e., prior to his getting them in demat form. When a rematerialisation request is sent, the securities in the investor account will not be available for delivery/transfer immediately. The investor will have to wait for physical certificates to reach him before they can be transferred or sold {Section 14}

With the advent of dematerialisation, stock exchanges across the country have converted their system for trading & settlement in demat form in phased manner. The shares of some specified companies are to be compulsorily traded in demat form.

However, the investor can still transact in the scrip in physical form up to 500 shares (through odd lot window facilities provided by Stock Exchanges). Dematerialisation of shares is optional and an investor can still hold shares in physical form {Section 8}

Two types of ownership are contemplated under the depository system {Section 10}

1. A registered owner is the depository who holds the securities in his name.

2. A beneficial owner is the person whose name is recorded as such with the depository.

Though the securities are registered in the name of the depository actually holding them the rights, benefits and liabilities in respect of the securities held by the depository vest in the beneficial owner.

One of the basic services provided by depositories is to facilitate transfer of securities from one account to another at the instruction of the account holder. The securities held by an investor in the depository are freely transferable from one beneficial owner to another {Section 7}

A demat account can be debited/credited only on instructions of the investor. The investor therefore needs to give instructions to his DP to effect debit/credit of securities out of his demat account. A beneficiary account can be debited only if the beneficial owner has given ‘Delivery Instruction’ [DI] in the prescribed form.

However, instructions are, generally, required only for debit since an investor can give a one-time standing instruction to the DP, for crediting the account without a credit instruction, at the time of account opening.

No stamp duty for transfer of securities is charged when securities are held in the electronic form. In case of transfer of physical shares, stamp duty of 0.5 per cent is payable on the market value of shares being transferred. {The Depositories Related Laws (Amendment) Act, 1997}

This prime advantage of free transfer is basically enabled due to the concept of ‘fungibility’. In the depository system, the securities dematerialised are not identified by distinctive numbers or certificate numbers as in the physical environment. Thus all securities in the same class are identical and interchangeable. {Section 9}

Dematerialised Securities are identified in the depository system through a unique code known as "International Securities Identification Number" (ISIN). ISIN is a 12-character long identification mark. It has three components – a prefix, a basic number and a check digit. The pre-fix is a twoletter country code as stated under ISO 3166 (IN for India).

The basic number comprises of nine alphanumeric characters (letter and/or digits). The check digit at the end of the ISIN is computed according to the modulus 10 "Double-Add-Double". It establishes that the ISIN is valid.

Every depository shall enter into an agreement with the issuer in respect of securities that are to be declared as eligible to be held in dematerialised form. Where the issuer has appointed a Registrar to the Issue or Share Transfer Agent, the depository shall enter into a tripartite agreement with the issuer and the Registrar to the Issue or Share Transfer Agent, as the case may be. Securities issued by the same company, issued at different times or carrying different rights, terms and conditions are considered different securities for the purpose of allocating ISIN and are allotted distinct ISINs. In India, SEBI has delegated the assigning of ISIN of various securities to NSDL. Allotment of ISIN for G-sec is done by Reserve Bank of India. Different ISINs are allocated to the physical and dematerialised securities of the same issue.

To illustrate, ISIN —IN E 091F 01 01 0 has the following break up:

IN - India

E - Company

First four digits 091F - Company serial number;

01 - equity (it can be mutual fund units, debt or Government securities);

01 - issue number;

Last digit 0 - check digit.

The third digit (E in the above example) may be E, F, A, B, C or 9. Each one carries the following meaning:

E - Company

F - Mutual fund unit

A - Central Government Security

B - State Government Security

C - Commodities

9 - equity shares with rights which are different from equity shares bearing INE number. Whenever dealing with ISIN number, it is important to pay special attention to the third digit.

Transfer of securities from one account to another may be done for any of the following purposes:

1. Transfer due to a transaction done on a person-to-person basis is called ‘off-market’ transaction.

2. Transfer arising out of a transaction done on a stock exchange.

3. Transfer arising on account of inter-depository transfer.

4. Transfer arising out of Pledge/Hypothecation transactions

Incidental Transfer of shares

1. Transmission
    

2. Transposition

Any trade that is cleared and settled without the participation of a clearing corporation is called off market trade; i.e., transfer from one beneficiary account to another due to a trade between them. Off-Market transaction can be used for transfer securities from one investor’s account to another investor’s account. Both accounts are required to be in the same Depository. Both accounts may with same DP or different DPs.

Following combinations of off-market transactions are possible:

• Beneficiary Owner Account to Beneficiary Owner account

• Beneficiary Owner Account to Clearing Member Account for pay-in

• Clearing Member Account to Beneficiary Owner Account for pay-out

When securities are purchased or sold, the same need to be transferred into the buyer’s account or transferred out of the seller’s account. Since settlement of trades in all listed securities is to be compulsorily done in the dematerialised form, the transaction has to be routed through the depository system. This activity of the Clearing House / Clearing Corporation of the stock exchange of delivering funds and securities to the respective sellers/buyers is known as "Settlement of market trades". The date on which settlement takes place is known as "Settlement date".

Market trades can be settled only through a clearing member. Every clearing member intending to participate in the depository segment of the market will open a special Clearing account with a Participant. If the clearing member is itself a Participant, the account can be opened in its own Participant set-up. When investors sell securities, the securities are moved from the investors’ accounts to the Pool account of the clearing member, and at the time of pay-in, the securities are moved to the clearing corporation based on the net obligation of the clearing member.

The process of delivery of securities by the seller Clearing Member to the Clearing House/Clearing Corporation for settlement is known as ‘Pay-in of securities’ and the process of delivery of securities by the Clearing House/Clearing Corporation to the buyer Clearing Member is known as ‘Pay-out of securities’. Pay-in and Payout of securities takes place at predetermined timings decided by the stock exchanges.

Settlement of on market trades is currently done on a T+2 basis; i.e., settlement takes place on 2nd working day after the trade has been executed by the Clearing Member. (In case of commodity futures having delivery the settlement is done on E+2 basis; i.e., settlement takes place on 2nd working day after the expiry of the futures contract on the commodity exchanges.)

Transfer of securities to / from an account held in one depository to / from an account held in another depository is known as "Inter depository transfers". Beneficiary Owner / Clearing Member wishing to deliver / receive securities to / from a demat account with the other depository will give instruction to the DP by submitting duly filled in instruction slip. On receipt of the instruction slip, the DP will verify the same and enter the instructions in the CDSL system. The instruction entered by the DP will be executed on the "execution date" as specified by the Beneficiary Owner in the instruction slip.

Inter depository transaction can be used for transferring securities from:

1. Beneficiary Owner account on one depository to Beneficiary Owner account on other depository

2. Beneficiary Owner account on one depository to Clearing Member account on other depository.

3. Clearing Member account on one depository to Beneficiary Owner account on other depository

4. Clearing Member account on one depository to Clearing Member account on other depository

A Clearing Member may for the purpose of moving securities within its Pool Account submit an inter-settlement instruction form to the Participant.

The Clearing Member may give instructions to its Participant to debit its Pool account and credit the Pool account of another Clearing Member. The Clearing Member may give receipt instructions to its Participant for crediting its Pool account from Pool account of another Clearing Member.

The word "transmission" means devolution of title to shares, for example, devolution by death, succession, inheritance, bankruptcy, marriage, etc. The person on whom the shares devolve has to prove his entitlement by submitting appropriate documents and seek transmission.

If the securities are not in dematerialised form before the event for transmission occurs then it the option of the person inheriting the securities to either have the transmission affirmed in physical form of securities or have the transmission confirmed along with dematerialisation. In case of death of one or more joint holders, the surviving joint holder(s) can get the name(s) of the deceased deleted from the security certificate(s) and get them dematerialised by submission of the following documents:–

1. Dematerialisation Request Form

2. Notarized copy of the death certificate of the deceased holder/s.

3. Transmission request form - TRF

DP should set up a demat request in the account of the surviving holder(s) and submit all the documents to the Issuer/RTA with the system generated letter. DP should write in the ‘form BO ID’ column as ‘Transmission-cum-Demat’.

Transposition is applicable in situations where the demat account has been opened in the name of A, B, C and some of the certificates are in any other order of holder names such as A, C, B or B, C, A or C, B, A etc.; i.e., holders names are same but order in which they appear is different. Such certificates can be dematerialised in the account of A, B, C by filling up a Transposition Request Form (TRPF), attaching the same with the DRF and submitting to the DP.

Securities held in a depository account can be pledged or hypothecated against a loan, credit, or such other facility availed by the beneficial owner of such securities. The nature of control on the securities offered as collateral determines whether the transaction is a pledge or hypothecation. A pledge/hypothecation transaction needs identification, which may be an agreement number. The borrower is called a pledgor and the lender is called a pledgee. There can be any number of pledge/hypothecation transactions between the same set of pledgees and pledgors. There are 4 processes

The pledgor initiates the creation of pledge/hypothecation through its DP. Once a pledge/hypothecation request has been created, the details of the pledge/hypothecation are electronically communicated to DP of pledgee for confirmation. Securities are then debited from the free or locked-in balances and credited as pledged balances of the pledgor. The pledgee instructs his DP to confirm the creation of the pledge. In case of rejection by the pledgee, the securities are debited from the pledged balances of the pledgor and credited to his free/locked-in balances.

For cancellation of pledge request, pledgor will initiate the same through a reverse transaction to the DP requesting for cancellation of the original pledge order. Pledge cancellation request will only be accepted till the time the original pledge order is not accepted / rejected by the pledgee. If the pledge has been accepted by the pledgee the system will automatically reject the cancellation request.

The pledge/hypothecation so created can either be closed on repayment of loan or invoked if there is a default.

The pledgor can request for closure of pledge/hypothecation after the performance of the underlying agreement. After the pledgor has fulfilled the obligation under the agreement, the pledgor initiates the closure of pledge/hypothecation through his DP and the pledgee instructs his DP to confirm the closure of the pledge/hypothecation. In some cases the pledgee, suo-motu submits an instruction in the prescribed form to its DP to initiate unilateral closure of pledge /hypothecation. On confirmation of closure, the securities are debited from the pledged balances of the pledgor and credited to his free/locked-in balances.

If the pledgor defaults in discharging his obligation under the agreement, the pledgee may invoke the pledge/ hypothecation. If the lender (pledgee) has unilateral right (without reference to borrower) to appropriate the securities to his account if the borrower (pledgor) defaults or otherwise, the transaction is called a pledge. If the lender needs concurrence of the borrower (pledgor) for appropriating securities to his account, the transaction is called hypothecation. If the pledgor fails to discharge his obligations under the agreement of pledge or for any other reason, the pledgee may invoke the pledge. He can then claim the beneficial ownership of the concerned securities after taking the necessary steps in terms of the pledge agreement. On receipt of invocation request by the depository, the securities are transferred from the ‘pledged balance’ of the pledgor’s beneficial owner account to the ‘free balance’ of pledgee’s beneficial owner account. {Section 12}

Demat accounts opened with depositories are referred as ‘Beneficial Owner Accounts’ or ‘BO account’. A demat account may be opened and maintained in the name(s) of one person (sole holder) or more than one persons (joint holders). All the joint-holders have to sign the application form and the agreement.

The Beneficiary Owner ID is unique within the DP and will serve as a reference number for the investor’s account in all future dealings of the investor with the DP or with the depository. There are two depositories in India viz. NSDL & CDSL. Beneficiary Owner ID (a sixteen digit identification / account number) issued is different for & dependent on the depository with which the account is opened.

In case of CDSL it is a continuous combination of the CDSL Code, DP Type, DP Code, Branch Code, Serial No, and the Check Digit.

In case of NSDL the account number has two parts; i.e., 8-digit DP-ID (identification number of Depository Participant) and 8-digit investor account number.

There are absolutely no restrictions on the number of DP’s an investor can open accounts with. However, the investors should remember that they would need to open accounts in the same sequence of names in which the shares are held by them. For example, if they hold some shares jointly in the names A, B, C and some shares also in the names A, C, B, they would need to open 2 DP accounts.

A BO account closure can be initiated by:

• BO In order to close an account the investor has to submit an account closure request form to the participant. The investor intending to close its account may opt for rematerialisation of its holdings or transfer of holdings to an account with another participant.

• DP The participant may initiate closure of a investor account if the investor has defaulted in its obligations towards the participant. The participant has to serve sufficient notice to the investor before it takes such a step.

• Depository

The depository can, on its own close the participant’s / Beneficiary Owners own account on the basis of the orders received from the Central or State Government or the Securities and Exchange Board of India or any court or tribunal or any other statutory authority.

Investors holding securities in dematerialised form have the option of nominating persons who would be entitled to receive securities outstanding in their names in the event of their death. Shareholders have the option of holding securities in joint names without nomination or in single name with nomination. Nomination is requested at the time of opening the depository account itself. There is a separate prescribed form for nomination under depository segment. Investors can appoint a nominee at the time of opening a depository account itself. Nominees can be changed at will by resubmitting the nomination details in the prescribed form. Nomination can be made only by individuals holding beneficiary owner accounts on their own behalf singly or jointly.

Facility for freezing / locking of investor accounts, which enables the investor to make his account non-operational, is also available as a measure of security. The investor is required to fill up the freeze request form and submit the same to his DP. A investor may request that his account be frozen by deactivating it. The account is frozen for any transaction thereafter, until it is reactivated on a request from the investor. An account may be frozen for debits or for both debits and credits depending on the choice of the account holder.

The Investor may request to freeze:

1. its account maintained with a participant; or

2. a particular ISIN in its account; or

3. specific number of securities held under an ISIN in its account,

by giving an instruction to the Participant or to the Depository, in the form and manner

The Depository Participant can freeze the account and/or the ISIN and/or specific number of securities of a Investor, on the basis of instructions received from the Investor or pursuant to the orders received by the participant or the Depository from the Central or State Government, the Securities and Exchange Board of India or any order passed by a court, tribunal, or any other statutory authority in this regard.

The Depository can, on its own freeze the participant’s / Beneficiary Owners own account and/or the ISIN and/or specific number of securities to the extent of the securities held in the Participant’s / Beneficiary Owner’s name, or advise the Participant to do so, under the following circumstances:–

1. on the basis of the orders received from the Central or State Government or the Securities and Exchange Board of India or any court or tribunal or any other statutory authority in this regard; or
    

2. the participant has become insolvent, bankrupt or in case the participant is a body corporate, it being wound up.

When any corporate event such as rights or bonus or dividend is announced for a particular security, a specified date known as record date/book closure date is intimated. The depositories will give the list of demat account holders and the number of shares held by them in electronic form on the record date to the Registrars and Transfer Agents of the Company {Section 11 & 13}

The Registrars and Transfer agents or the company will then calculate the corporate benefits due to all the shareholders. On the basis of positions so intimated, The disbursement of cash benefits such as dividend / interest will be done by the company whereas the distribution of securities /entitlements will be done by the depositories based on the information provided by the Registrars and Transfer Agents of the company. The disbursement of cash benefits such as dividend / interest will be done by the company whereas the distribution of securities / entitlements will be done by the Depositories based on the information provided by the Registrars and Transfer Agents of the company; i.e., the same are credited in favour of the demat account holders directly in the depository account held by them. The corporate entitlements such as bonus will be made in the same form as of the original holdings.

The bye-laws of the depository also require prior approval from SEBI. Section 25 of the Depositories Act, 1996 empowers SEBI to frame regulations inter alia with regard to the following aspects:

• The form in which record is to be maintained

• Certificate of commencement of business shall be issued

• The manner in which the certificate of security shall be surrendered

• The manner of creating pledge and hypothecation of securities

• The conditions and the fees payable with respect to the issue of the certificate of securities

• The rights and obligations of depositories, participants, issuers

• The eligibility criteria for admission of securities in the depository section 26 of the Depositories Act, 1996 requires the depository to frame Bye-laws, among others, on the following aspects:

• The eligibility criteria for admission and removal of securities in the depository

• The conditions subject to which the securities will be dealt with or withdrawn from a Depository

• The eligibility criteria for admission, suspension and expulsion of any person as a participant

• The manner and procedure for dematerialisation of securities

• Inter se rights and obligations among the depository, issuer, company and beneficial owners

• Manner of furnishing information to SEBI

• The procedure for resolving disputes involving depository, issuer, company, or beneficial owner

• Internal control standards including procedure for auditing reviewing and monitoring, etc.

Every participant is required to maintain the following records and documents:–

1. Records of all the transactions entered into with a depository and with a beneficial owner;

2. Details of securities dematerialised, rematerialised on behalf of beneficial owners with whom it has entered into an agreement;

3. Records of instructions received from beneficial owners and statements of account provided to beneficial owners; and

4. Records of approval, notice, entry and cancellation of pledge or hypothecation, as the case may be.

Every depository has to maintain the following records and documents:–

1. Records of securities dematerialised and dematerialised;

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

3. A register and an index of beneficial owners;

4. Records of instructions received from and sent to participants, issuers, issuers’ agents and beneficial owners;

5. Records of approval, notice, entry and cancellation of pledge or hypothecation, as the case may be;

6. Details of participants;

7. Details of securities declared to be eligible for dematerialisation in the depository; and

8. Such other records as may be specified by the Board for carrying on the activities as a depository {Sebi (D & P) Regulations, 1996}.

Such records & documents are required to be preserved for a minimum period of five years.

The Board is given the powers to appoint one or more persons as inspecting officer & undertake inspection of the books of account, records, documents and infrastructure, systems and procedures, or to investigate the affairs of a depository, a participant, a beneficial owner, an issuer or its agent for any of the following purposes :-

1. To ensure that the books of account are being maintained by the depository, participant, issuer or its agent in the specified manner;

2. To look into the complaints received from the depositories, participants, issuers, issuers’ agents, beneficial owners or any other person;

3. To ascertain whether the provisions of applicable laws are being complied with by the depository, participant, beneficial owner, issuer or its agent;

4. To ascertain whether the systems, procedures and safeguards being followed by a depository, participant, beneficial owner, issuer or its agent are adequate;

5. To ensure that the affairs of a depository, participant, beneficial owner, issuer or its agent, are being conducted in a manner which are in the interest of the investors or the securities market.

The Board has to give not less than 10 days notice to the depository, participant, beneficial owner, issuer or its agent, as the case may be.

The Board may suspend the certificate of registration granted to a depository or a participant, if such depository or participant:-

1. Contravenes any of the provisions of the Act, the Depositories Ordinance, the bye-laws, agreements and these regulations;

2. Fails to furnish any information relating to its activity as a depository or participant as required under these regulations;

3. Does not furnish the information called for by the Board or furnishes information which is false or misleading in any material particular;

4. Does not co-operate in any inspection or investigation or enquiry conducted by the Board;

5. Fails to comply with any direction of the Board; or

6. Fails to pay the annual fee.

The Board may cancel the certificate of registration granted to a depository or participant if such depository or participant

1. is guilty of fraud, or has been convicted of an offence involving moral turpitude; or
    

2. has been guilty of repeated defaults of the nature specified above.

CDSL has introduced Electronic Access to Securities Information (easi) facility. easi enables Beneficial Owners/Clearing Members having demat account with CDSL system to view their holdings and obtain transactions status through the internet. easi is accessible from anywhere, anytime through CDSL website- www.cdslindia.com

NSDL launched SPEED-e (pronounced as speedy) in September, 2001. Any participant of NSDL can subscribe to SPEED-e, the common infrastructure of NSDL. SPEED-e enables demat account holders (including Clearing Members) to submit delivery instructions directly on the Internet through SPEED-e website https://speed-e.nsdl.com. SPEED-e is available only to those participants who have subscribed to it and the users sign an agreement with the participant. A demat account holder will have the option of accessing SPEED-e either as a Password User or as a Smart Card User. A Clearing Member must be a Smart Card User to be able to access SPEED-e. Password Users can debit their demat accounts only in favour of specified Pre-Notified Clearing Member accounts (up to three), while Smart Card Users can submit instructions in favour of any number of accounts.

IDeAS (Internet-based Demat Account Statement) is the facility for viewing balances and transactions in the demat account updated on an online basis with a delay of maximum 30 minutes. This facility is available to the Users of SPEED-e, Clearing Members who have subscribed to IDeAS and to those investors whose participants are registered for IDeAS. A demat account holder or a Clearing Member will have the option to access IDeAS either as a Password or a Smart Card User.