DEPOSITORIES ACT, 1996 - CS Executive - CMSL

Depositories Act, 1996
Company Secretary
ICSI
CS Executive

1. DEPOSITORIES ACT, 1996 CS RISHI KAKKAD [phone] c srishikakkad @gmail.com

2. Objectives of Depository A legal basis for establishment of depositories to conduct the task of maintenance of ownership records and effecting changes in ownership records through book entry Dematerialization of securities in the depositories mode as well as giving option to an investor to choose between holding securities in physical mode and holding securities in a dematerialized form in a depository Making the securities fungible Making the shares, debentures and any interest thereon of a public limited company freely transferable Exempting all transfers of shares within a depository from stamp duty.

3. Fungibility Fungibility means interchangeability or exchangeability. All securities held in depository shall be fungible i.e. all certificates of the same security shall become interchangeable in the sense that if investor loses the right to obtain exact certificate which he/she surrenders at the time of entry into the depository. It is like withdrawing money from the bank without bothering about the distinctive numbers of the currencies.

4. Bank Depository Holds Funds in bank account Transfer funds between the accounts Facilitates transfer without having to handle money Accountable for safe keeping of funds Holds securities in account Transfer securities between the account holders Facilitates transfer of ownership without having to handle securities Accountable for safe keeping of securities.

5. Sec 29 Companies Act, 2013 Companies to bring public issue in demat form. Company ----- Custodian ----- Depositories ------ Depository Participant Registered Owner V/s Beneficial Owner

6. Depository A depository is an organization (SEBI registered) Capital Market Intermediary facilitating issuance and trading of securities in electronic form. A depository is an organization like Central bank, where the securities of shareholders are held in electronic- form, on the request of the shareholder. The Investor has to open account with the depository through Depository Participant (DP). There are two depositories in India, i .e. National Securities Depository Limited (NSDL) & Central Depository Services Ltd (CDSL). Depository provides various facilities like Account opening, Dematerialization, Rematerialisation , Settlement of trades, pledging, etc. All the securities held by the depository shall be dematerialized and shall be in fungible form. Registration of the depository is required under SEBI (Depository & Participant Regulations, 1996. Both Depository & Depository Participant are regulated by SEBI.

7. Depository Participant DP is described as AGENT of the depository. They are the intermediaries between depository and investors. Zerodha Upstox ICICI direct HDFC Securities Angel One Broking

8. Benefits of Depository system Elimination of Bad Deliveries Earlier, when Physical share certificates were transferred there were severe problems of bad delivery, e.g , sign not matched, Folio no: improperly return, death of transferor, etc. Due to which transfer used to be delayed more by 2-3months. But, by introduction of Demat deliveries/settlement now occur in T+2 days. Elimination of all risks associated with the physical certificates If Physical share certificates are torn, mutilated, lost then there was problem in transferring shares & application for Duplicate certificate was very cumbersome or time-processing. No such risk associated in demat as transactions are recorded electronically. Immediate transfer & Registration of securities Earlier, physical share transfer used to take 2- 3 months for transferring shares from transferor (seller)to transferee (buyer). But, in demat mode, registration of shares takes placein T+2 days, i.e , the day when the securities are credited in his delivery account. Faster Disbursement of Non-cash benefits like rights, bonus ,etc. Direct transfer of rights, bonus, etc into your Demat A/c electronically, no fear of losing such certificates in transit (e.g. courier). Reduction in Brokerage Because of no back office cost or no separate secretarial department for handling volume of transactions. All records and operations are done electronically which indirectly result into low cost of operations, thus, brokerages are less. Elimination of problem of change of address, transmission, etc Earlier, If you held shares in physical mode, and you have changed your address then you need to apply for Change in Address in all those companies where you were holding shares, But, in demat mode, you need to submit an application for change in address to your DP, your new address will be updated in all the books of the company and there will be no difficulty in receiving annual report, AGM Notice, Dividend warrants, etc. Elimination of problems related to selling securities on behalf of a minor A natural guardian is not required to take court approval for selling Demat securities on behalf of a minor

9. Dematerialization V/s Rematerialization Dematerialization is a process where physical share certificates are converted into electronic form. Physical Certificates are taken back by the company & same number of securities are credited in his account, on his request. An Investor has to open an account with the Depository through Depository-Participant, in order to dematerialized the securities. It is an option for Investor to dematerialized their securities. From 5th December, 2018 there will be no Physical transfer of shares which ultimately means that now you need to demat your security if you wish to transfer/sell to another party). If an Investor wants to sell the shares through Stock-Exchange, he/she will have to demat the shares. Similarly, if one wants to buy the shares through Stock-Exchange, will have to get delivery in Demat shares. When Investor wants to convert their shares from electronic/ demat mode to Physical mode,such process is known as Rematerialization .

10. Investor Depository Participant Depository Company

11. How to get Demat account opened A/c opening Form + Fees + Adhar Card + Residence Proof + KYC Form + PAN Card UCC

12. Depository is Transformer BSE (1875) = CDSL NSE (1992) = NSDL

13. Questions There is a duopoly of depository system India Comment. Depository System is primary and secondary market intermediary. Depository participant is an interface between depository and beneficial owner. RK ------- DP -------------- Depository -------- Tata Motors Investor Trader Beneficial Owner

14. Depository Participant is a SEBI registered intermediary, an agent of Depositories, through whom a beneficial owner can get his demat account be opened with depository. Characteristics of depository participant:

15. Immobilization When Physical share certificates are kept in vaults with the depository for safe custody, all subsequent transactions in these securities takes place in book entry form. The actual owner has the right to withdraw his physical securities as and when desired. The Immobilization of Fresh Issue (IPO) may be achieved by issuing a Jumbo Certificate representing the entire issue in the name of Depository, as nominee of the beneficial owners. Company coming up with public issue, company issues physical certificates in favour of Depository and hand it over to the custodian to facilitate further process in electronic form. The Share Certificate issued by the company in the name of the Depository is called Jumbo Certificate. After receiving the certificate the custodian intimates the depository to issue shares in demat form. Physical shares issued by company are freezed in favour of depositories is called immobilization.

16. Delivery Instruction Slip A slip issued by seller of securities authorizing Depository Participant to get securities delivered for the execution of trade. No settlement can be made by Depository unless the DIS in respect of such securities has been submitted in Depository system. NSCCL ICCL DIS is similar to cheque book No blank signed DIS to be kept with DP or any other person An investor is advised to insist issuance of DIS

17. Pledge or Hypothecation or Mortgage of Securities

18. Audit under SEBI (Depositories and Participants) Regulations a. It is the duty of every issuer to submit an audit report on a quarterly basis on a Recognized Stock Exchange (RSE) audited by PCA or PCS, w.r.t; i . the details of changes in share capital during the quarter ii. the in-principle approval obtained by the issuer from all the stock exchanges where it is listed in respect of such further issued capital. iii. reconciliation of the total issued capital iv. listed capital and capital held by depositories in dematerialized form b. Any difference in the records maintained by the issuer shall be reported to the depositories and stock exchanges. c. The audit report is required to give the updated status of the “Register of Members( RoM )”of the issuer and confirm that securities have been dematerialized as per requests within 21 days from the date of receipt of requests by the issuer.

19. Internal Audit The two Depository service providers in India, viz., National Securities Depository Ltd. (NSDL) and Central Depository Services (India) Limited (CDSL) have allowed Company Secretaries in Whole-time Practice (PCS) to undertake internal audit of the operations of Depository Participants (DPs). NSDL Circular: Every Depository Participant shall ensure that an internal audit in respect of the operations of the Depository is conducted at intervals of not more than three months by a qualified Chartered Accountant or a Company Secretary holding a certificate of Practice and a copy of the internal audit report shall be furnished to the Depository. CDSL Circular: Every Depository Participant shall ensure that an internal audit shall be conducted in respect of the participant’s operations relating to CDSL by a qualified Chartered Accountant in accordance with the provisions of the Chartered Accountants Act, 1949 or by a Company Secretary in practice in accordance with the provisions of the Company Secretaries Act, 1980, at such intervals as may be specified by CDSL from time to time. A copy of Internal Audit report shall be furnished to CDSL.

20. Checklist for conducting Internal Audit a. Account opening b. Dematerialisation of Securities c. Rematerialisation of Securities d. Market Trades e. Off Market Trades f. Records to be Maintained by DPs g. Freezing of Account h. Closure of Account

21. Concurrent Audit The process of demat account opening, control and verification of Delivery Instruction Slips (DIS) is subject to Concurrent Audit. Depository Participants have been advised to appoint a firm of qualified Chartered Accountant(s) or Company Secretary( ies ) holding a certificate of practice for conducting the concurrent audit. However, the participants in case they so desire, may entrust the concurrent audit to their Internal Auditors. In respect of account opening, the auditor should verify all the documents including KYC documents furnished by the Clients and verified by the officials of the Participants. Issuance of DIS: The procedure followed by the Participants with respect to: (a) Issuance of DIS booklets including loose slips. (b) Existence of controls on DIS issued to Clients including pre-stamping of Client ID and unique preprinted serial numbers. (c) Record maintenance for issuance of DIS booklets (including loose slips) in the back office. Verification of DIS: The procedure followed by the Participants with respect to: (a) Date and time stamping (including late stamping) on instruction slips. (b) Blocking of used/reported lost/stolen instruction slips in back office system/ manual record. (c) Blocking of slips in the back office system/manual record which are executed in DPM directly. (d) Two step verification for a transaction for more than Rs. 5 lakh, especially in case of off-market transactions. (e) Instructions received from dormant accounts.

22. Time Limit for reporting Concurrent Audit Report:- The Concurrent Auditor should conduct the audit in respect of all accounts opened, DIS issued and controls on DIS as mentioned above, during the day, by the next working day. In case the audit could not be completed within the next working day due to large volume, the auditor should ensure that the audit is completed within a week’s time. Qualifications in Concurrent Audit Report:- Any deviation and/or non-compliance observed in the aforesaid areas should be mentioned in the audit report of the Concurrent Auditor. The Management of the Participant should comment on the observations made by the Concurrent Auditor. Submission of Concurrent Audit Report:- The Concurrent Audit Report should be submitted to NSDL, on a quarterly basis, in a hard copy form. If the Auditor for Internal and Concurrent Audit is the same, consolidated report may be submitted.