Chapter-V

Role of Depositories:
NSDL and CDSL
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CHAPTER-V
Role of Depositories: NSDL and CDSL

Introduction;
Shares and bonds are being issued by companies for quite some time. Twelve
years back, all these were issued in the form of physical certificates that the
investor had to keep safe and then forward to the buyer once sold. This process
was highly time consuming and gave rise to issues like fake securities and bad
deliveries. All these reasons and the improvement in technology gave rise to
depositories and the electronic mode of holding securities.
A depository resembles a bank; however incase of a depository the deposits
are securities, such as shares, debentures, bonds and government securities, in
electronic form. A depository functions as a bank- both are common houses that
hold assets of the participating members and provide services to clients.
In India there is Depository System for securities trading in which book entry
is done electronically and no paper work is involved. The physical form of
securities is extinguished and shares or securities are held in an electronic form.
Before the introduction of the depository system through the Depository Act,
1996, the process of sale, purchase and transfer of securities was a huge problem,
and there was no safety at all.
DEMATERIALISATION OF SECURITIES:

Dematerialization is relatively a new concept introduced in the securities

market. It is basically a process by which the physical certificates of an investor
are taken/surrendered-by/to the company/registrar and actually destroyed and an
equivalent number of securities are credited in the depository account of the
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investor on request of the investor. To overcome the problems associated with

settlement of physical share certificates and to provide electronic depository
facilities for securities traded in the equity and the debt markets, the process of
dematerialization of shares was evolved.
Key Features of the Depository System in India
h Multi-Depository System: The depository model adopted in India provides
for a competitive multi-depository system. There can be various entities
providing depository services. A depository should be a company formed under
4 the Company Act, 1956 and should have been granted a certificate of registration
under the Securities and Exchange Board of India Act, 1992. Presently, there are
two depositories registered with SEBI, namely:
National Securities Depository Limited (NSDL), and
Central Depository Service Limited (CDSL)
2. Depository services through depository participants: The depositories can
provide their services to investors through their agents called depository
participants. These agents are appointed subject to the conditions prescribed
under Securities and Exchange Board of India (Depositories and Participants)
Regulations, 1996 and other applicable conditions.
3o Dematerialization: The model adopted in India provides for dematerialisation
of securities. This is a significant step in the direction of achieving a completely
paper-free securities market. Dematerialization is a process by which physical
certificates of an investor are converted into electronic form and credited to the
account of the depository participant
4. Fungibility: The securities held in dematerialized form do not bear any
notable feature like distinctive number, folio number or certificate number. Once
shares get dematerialized, they lose their identity in terms of share certificate
distinctive numbers and folio numbers. Thus all securities in the same class are
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identical and interchangeable. For example, all equity shares in the class of fully
paid up shares are interchangeable.
5. Registered Owner/ Beneficial Owner; In the depository system, the
ownership of securities dematerialized is bifurcated between Registered Owner
and Beneficial Owner. According to the Depositories Act, ‘Registered Owner’
means a depository whose name is entered as such in the register of the issuer. A
‘Beneficial Owner’ means a 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 remain with the beneficial owner. For the
securities dematerialized, NSDL/CDSL is the Registered Owner in the books of
the issuer; but ownership rights and liabilities rest with Beneficial Owner. All the
rights, duties and liabilities underlying the security are on the beneficial owner of
the security.
6= Free Transferability of shares; Transfer of shares held in dematerialized
form takes place freely through electronic book-entry system.
Advantages of the Depository System;
The advantages of dematerialization of securities are as follows:

» Share certificates, on dematerialization, are cancelled and the same will not
be sent back to the investor. The shares, represented by dematerialized share
certificates are fungible and, therefore, certificate numbers and distinctive
numbers are cancelled and become non-operative.
9 It enables processing of share trading and transfers electronically without
involving share certificates and transfer deeds, thus eliminating the paper
work involved in scrip-based trading and share transfer system.
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• Transfer of dematerialized securities is immediate and unlike in the case of

physical transfer where the change of ownership has to be informed to the
company in order to be registered as such, in case of transfer in
dematerialized form, beneficial ownership will be transferred as soon as the
shares are transferred from one account to another.
» The investor is also relieved of problems like bad delivery, fake certificates,
shares under litigation, signature difference of transferor and the like.
» There is no need to fill a transfer form for transfer of shares and affix share
transfer stamps.
9 There is saving in time and cost on account of elimination of posting of
certificates.
9 The threat of loss of certificates or fraudulent interception of certificates in
transit that causes anxiety to the investors, are eliminated.

Disadvantages/Problems of the Depository System ;

Some disadvantages were about the depository system were known beforehand.
But since the advantages outweighed the shortcomings of dematerialisation, the
depository system was given the go-ahead.

® Lack of control; Trading in securities may become uncontrolled in case of

dematerialized securities.
9 Need for greater supervision; It is incumbent upon the capital market
regulator to keep a close watch on the trading in dematerialized securities
and see to it that trading does not act as a detriment to investors. The role of
key market players in case of dematerialized securities, such as stock
brokers, needs to be supervised as they have the capability of manipulating
the market.
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<* Complexity of the system; Multiple regulatory frameworks have to be

confirmed to, including the Depositories Act, Regulations and the various
Bye Laws of various depositories. Additionally, agreements are entered at
various levels in the process of dematerialization. These may cause anxiety
to the investor desirous of simplicity in terms of transactions in
dematerialized securities.

Besides the above mentioned disadvantages, some other problems with the
system have been discovered subsequently. With new regulations people are
finding more and more loopholes in the system. Some examples of the
malpractices and fraudulent activities that take place are:

a Current regulations prohibit multiple bids or applications by a single person.

But investors open multiple demat accounts and make multiple applications
to subscribe to IPOs in the hope of getting allotment of shares.
» Some listed companies had obtained duplicate shares after the originals were
pledged with banks and then sold the duplicates in the secondary market to
make a profit
* Promoters of some companies dematerialized shares in excess of the
company’s issued capital.
9 Certain investors pledged shares with banks and got the same shares reissued
as duplicates.
0 There is an undue delay in the settlement of complaints by investors against
depository participants. This is because there is no single body that is in
charge of ensuring full compliance by these companies.
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Table 5.1: Comparison of a Depository with a Bank

Depositories
Hold securities in an account
Transfer securities between
accounts on the instruction of the
account holder
Assist in transfer of ownership
without having to handle securities
Facilitates safekeeping of shares
Banks
Hold funds in an account
Transfers funds between accounts
on the instruction of the account
holder
Assist in transfers without having
to handle money
Facilitates safekeeping of money

Depositories in India
At present there are two depositories in India, National Securities
Depository Limited (NSDL) and Central Depository Services (CDS). NSDL
is the first Indian depository; it was inaugurated in November 1996. NSDL was
set up with an initial capital of US$28mn, promoted by Industrial Development
Bank of India (IDBI), Unit Trust of India (UTI) and National Stock Exchange of
India Ltd. (NSE). Later, State Bank of India (SBI) also became a shareholder.
The other depository is Central Depository Services (CDS). It is still in the
process of linking with the stock exchanges. It has registered around 20 DPs and
has signed up with 40 companies. It had received a certificate of commencement
of business from SEBI on February 8,1999.
These depositories have appointed different Depository Participants (DP) for
them. An investor can open an account with any of the depositories5 DP. But
transfers arising out of trades on the stock exchanges can take place only
amongst account-holders with NSDL’s DPs. This is because only NSDL is
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linked to the stock exchanges (nine of them including the main ones-National
Stock Exchange and Bombay Stock Exchange).
In order to facilitate transfers between investors having accounts in the two
existing depositories in the country the Securities and Exchange Board of India
has asked all stock exchanges to link up with the depositories. SEBI has also
directed the companies’ registrar and transfer agents to effect change of
registered ownership in its books within two hours of receiving a transfer request
from the depositories. Once connected to both the depositories the stock
exchanges have also to ensure that inter-depository transfers take place
smoothly. It also involves the two depositories connecting with each other. The
NSDL and CDS have signed an agreement for inter-depository connectivity.
Depository Participant
NSDL carries out its activities through various functionaries called business
partners who include Depository Participants (DPs), Issuing corporates and their
Registrars and Transfer Agents, Clearing corporations/ Clearing Houses etc.
NSDL is electronically linked to each of these business partners via a satellite
link through Very Small Aperture Terminals (VSATs). The entire integrated
system (including the VSAT linkups and the software at NSDL and each
business partner’s end) has been named as the “NEST” [National Electronic
Settlement & Transfer] system.
The investor interacts with the depository through a depository participant of
NSDL. A DP can be a bank, financial institution, a custodian or a broker. Just as
one opens a bank account in order to avail of the services of a bank, an investor
opens a depository account with a depository participant in order to avail of
depository facilities.
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The recent exparte interim order of Sebi concerning IPOs has raised several
issues and has also pointed a finger against quite a few market intermediaries for
their failure to discharge their role in accordance with the applicable law. Among
the important agencies that figure prominently in the Sebi order are the
depositories.
Investors would recall that not very long ago, securities in the capital market in
India were traded in the physical form. As a result, the market suffered from
various drawbacks including thefts and forgeries of share certificates. Moreover,
dealing in the physical mode had its own limitations which inhibited the growth
of the capital market in India. These shortcomings were acutely felt more so after
the liberalisation of the economy. To address all such issues the Central
Government enacted the Depositories Act, 1996, with retrospective effect from
September 20,1995.
Is it compulsory for every investor to hold securities in the demat form or can
he also hold shares in the physical form? The Depositories Act provides that
every person subscribing to securities offered by an issuer has the option to
receive the security certificates or hold securities with a depository. However,
investors need to note that while securities can be held by way of certificates,
dealing in the market is permitted only if the securities are in the demat mode.
When an investor holds securities in the physical form, the certificates bear serial
numbers, the distinctive numbers, etc. However, when the securities are held in
demat mode, they are akin to money lying in the bank account. Therefore, there
is no question of certificate numbers or distinctive numbers, though the quantity
will remain the same.
As in the case of certificates, holders of securities in demat mode (called
beneficial owners) can create a pledge or hypothecation in respect of the
securities held by them. In such cases, it is necessary for the beneficial owner to
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inform the depository of the pledge or hypothecation created by him. The

depository concerned has to make a noting in its records to that effect.
SECURITIES ELIGIBLE FOR DEMATERIALISATION :

The entire depository system in India is governed by the rules made by the
market regulations - SEBI. According to the SEBI (Depositories and
Participants) regulations, 1996, the following securities are eligible for holding
in dematerialized form.
Shares, scripts, stocks, bonds, debenture stocks or other marketable securities
of similar nature or any incorporated company or body corporate including
underlying shares of ADR’s and GDR’s. Units of mutual funds, rights under
collective investment schemes, venture capital funds, commercial paper,
certificate of deposit, securitized debt, money market instrument and unlisted
securities.
A list of securities available for demat in NSDL/CDSL depository is made
known to all DP’s by way of circulars sent through e-mails. The information is
also put up on NSDL/CDSL website and in the monthly information bulletin.
Registration:

As per the provisions of the SEBI Act, a depository can deal in

securities only after obtaining a certificate of registration from SEBI. The
sponsors of the proposed depository should apply to SEBI for a certificate
of registration in the prescribed form.
Commencement of Business:

A Depository that has obtained registration as stated above, can

function only if it obtains a certificate of commencement of business from
SEBI. A Depository must apply for and . obtain a certificate of
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commencement of business from SEBI within one year from the date of
receiving the certificate of registration fromSEBL
Agreement between the Depository and Issuers:
If either the issuer ( a company which has issued securities ) or the
investor opts to hold his securities in a demat form, the issuer enters into
an agreement with the depository to enable the investors to dematerialize
their securities. No such agreement is necessary where the state or Central
Government is the issuer of government securities.
Services of Depository:

A Depository established under the Depositories Act can provide any

service connected with recording of allotment of securities or transfer of
ownership of securities in the record of a depository. Any person willing
to avail the services of the depository can do so by entering into an
agreement with the depository through any of its participants. A depository
can provide depository services only through a DP. A depository cannot
directly open accounts and provide services to clients. Every depository in
its bye-laws must state which securities are eligible for demat holding.
Generally, the following securities are eligible for dematerialization:
(a) Shares, scrips stocks, bonds, debentures, debenture stock or other
marketable securities of a like nature in or of any incorporated
company or other body corporate.
(b)Unit of mutual funds, rights under collective investment schemes and
venture capital funds, commercial paper, certificates of deposit,
securitised debt, money market instruments, government securities and
unlisted securities.
(c) Securities admitted to NSDL depository are notified to all DPs
through circulars sent by email everyday. Investors are informed about
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these securities through NSDL5s website-www.nsdl.co.in - and NEST

update-a monthly newsletter of NSDL.
Functions of Depository;
1) Dematerlization: One of the primary functions of depository is to
eliminate or minimize the movement of physical securities in the
market. This is achieved through dematerilization of securities.
2) Account Transfer: The_depository gives effects to all transfers
resulting from the settlement of trades and other transactions between
various beneficial owners by recording entries in the accounts of such
beneficial owners.
3) Transfer and Registration: A transfer is the legal change of
ownership of a security in the records of the issuer. For effecting a
transfer, certain legal steps have to be taken like endorsement,
execution of a transfer instrument and payment of stamp duty.
4) Corporate Actions: A depository may handle corporate actions in two
ways. In the first case, it merely provides information to the issuer
about the persons entitled to receive corporate benefits. In the other
case, depository itself takes the responsibility of distribution of
corporate benefits.
5) Pledge and Hypothecation: Depositories allow the securities placed .
with them to be used as collateral to secure loans and other credits. In
a manual environment, borrowers are required to deliver pledged
securities in physical form to the lender or its custodian. These
securities are verified for authencity and often need to be transferred
In the name of lender.
6) Linkages with clearing system: Whether it is a separate clearing
corporation attached to a stock exchange or a clearing house
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(department) of a stock exchange, the clearing system performs the

functions of ascertaining the pay-in (sell) or pay-out (buy) of brokers
who have traded on the stock exchange.
National Securities Depository Limited (NSDL)
Although India had a vibrant capital market which is more than a century old, the
paper-based settlement of trades caused substantial problems like bad delivery and
delayed transfer of title till recently. The enactment of Depositories Act in August
1996 paved the way for establishment of NSDL, the first depository in India. This
depository promoted by institutions of national stature responsible for economic
development of the country has since established a national infrastructure of
international standards that handles most of the securities held and settled in
dematerialised form in the Indian capital market
Using innovative and flexible technology systems, NSDL works to support the
investors and brokers in the capital market of the country. NSDL aims at ensuring
the safety and soundness of Indian marketplaces by developing settlement
solutions that increase efficiency, minimise risk and reduce costs. At NSDL, we
play a quiet but central role in developing products and services that will continue
to nurture the growing needs of the financial services industry.
Promoters / Shareholders:
NSDL is promoted by Industrial Development Bank of India Limited (IDBI)
- the largest development bank of India, Unit Trust of India (UTI) - the largest
mutual fond in India and National Stock Exchange of India Limited (NSE) - the
largest stock exchange in India. Some of the prominent banks in the country have
taken a stake in NSDL.
Promoters
Industrial Development Bank of India Limited (Now, IDBI Bank Limited)
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Unit Trust of India (Now, Administrators of the Specified Undertaking of the

Unit Trust of India)
National Stock Exchange of India Limited
Other Shareholders
State Bank of India
HDFC Bank Limited
Deutsche Bank A.G.
Axis Bank Limited
Citibank N. A.
Standard Chartered Bank
The Hongkong and Shanghai Banking Corporation Limited
Oriental Bank of Commerce
Union Bank of India
Dena Bank
CanaraBank
Management of NSDLs NSDL is a public limited company managed by a
professional Board of Directors. The day-to-day operations are conducted by the
Managing Director. To assist the MD in his functions, the Board appoints an
Executive Committee (EC) of not more than 15 members. The eligibility criteria
and period of nomination, etc. are governed by the bye-laws of NSDL.
Bye-laws of NSDL t Bye-laws of National Securities Depository Limited have
been framed under powers conferred under section 26 of the Depositories Act 1996
and approved by Securities and Exchange Board of India. The bye-laws contain
fourteen chapters and pertain to the areas listed below.
1. Short title and commencement
2. Definitions
3. Board of Directors
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4. Executive Committee
5. Business Rules
6„ Participants
7. Safeguards to protect interest of clients and participants
8. Securities
9. Accounts / transactions by book entry
10.Reconciliation, accounts and audit
ILDisciplinary action
12. Appeals
13. Conciliation
14. Arbitration
Functions >
NSDL performs the following functions through depository participants (DPs):
• Enables the surrender and withdrawal of securities to and from the
depository (dematerialization and re-materialization).
® Maintains investor holdings in the electronic form.
• Effects settlement of securities traded on the exchanges.
• Carries out settlement of trades not done on the stock exchange (off-market
trades).
• Transfer of securities.
® Pledging / hypothecation of dematerialized securities.
® Electronic credit in public offerings of companies or corporate actions.
® Receipt of non-cash corporate benefits like bonus rights, etc. in Electronic
Form.
® Stock lending and borrowing.
Services Offered by NSDL :
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NSDL offers a host of services to the investors through its network of DPs:
® Maintenance of beneficiary holdings through DPs.
® Dematerialization
• Off-market Trades.
• Settlement in dematerialized securities.
• Receipt of allotment in the dematerialized form.
® Distribution of corporate benefits.
® Re-materialization.
® Pledging and hypothecation facilities.
® Freezing / locking of investor’s account
® Stock lending and borrowing facilities.
Fees Structure of NSDL:
NSDL charges the DPs and not the investors directly. These charges are fixed. The
DPs, in turn, are free to charge their clients, i.e., the investors for their services.
Thus, there is a two- tier fee structure.
Inspection, Accounting and Internal Audit:
NSDL obtains audited financial reports from all its DPs once every year. NSDL
also carries out periodic visits to the offices of its constituents - R & T agents, DPs
and clearing corporations - -to review the operating procedures, systems
maintenance and compliance with the bye-laws, business rules and SEBI
Regulations.
Additionally, DPs are required to submit to NSDL internal audit reports every
quarter. Internal audit has to be conducted by a chartered accountant or a company
secretary in practice. The Board of Directors appoints a Disciplinary Action
Committee (DAC) to deal with any matter relating to DPs clients, issuers and R &
T agents. The DAC is empowered to suspend or expel a DP, declare a security as
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ineligible on the NSDL, freeze a DP account and conduct inspection or call for
records and issue notices.

Table S.2 Progress of NSDL in India

August 2009 Demat Accounts cross one crore
August 2008 Launch of Central Recordkeeping Agency (for New Pension
System)
May 2008 NSDL and Japan Securities Depository Center sign Information
Sharing and Collaboration Pact
April 2008 NSDL and National Depository Center (Russia) sign
Information Sharing and Collaboration Pact
February 2008 NSDL and Euroclear (Belgium) sign Information Sharing and
Collaboration Pact
September 2007 Value of securities held in dematerialised form at NSDL crosses
US$ 1 trillion
September 2007 Launch of SMS alert facility for investors
June 2007 NSDL and DTCC (US Depository) sign Information Sharing
and Collaboration Pact
January 2007 NSDL and TDCC (Taiwan Depository) sign Information
Sharing and Collaboration Pact
November 2006 NSDL completes a decade of depository operations
January 2006 Launch of National Skills Registry by NDML
July 2005 Launch of Tax Information Network - PAN Ledger
January 2005 Launch of online upload of Central Excise challan data
October 2004 Intraday production shifting to Disaster Recovery Site
June 2004 Incorporation of NSDL Database Management Limited (NDML)
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- wholly owned subsidiary company of NSDL

June 2004 Launch of Online Tax Accounting System (OLTAS)
June 2004 Launch of PAN card services
January 2004 Launch of Tax Information Network (TIN)
January 2004 Launch of IDeAS
November 2003 Introduction of demat of Warehouse Receipts
November 2003 Launch of Market Participants and Investors Database (MAPIN)
October 2003 Demat Accounts cross 6 million
April 2003 Introduction of T+2 Rolling Settlement
December 2002 Demat Accounts cross 5 million
November 2002 Launch of STEADY - An STP initiative by NSDL
April 2002 Introduction of T+3 Rolling Settlement
September 2001 NSDL launches SPEED-e
July 2001 Introduction of T+5 Rolling Settlement and Uniform Settlement
Cycle
June 2000 98% settlement in demat form
June 2000 Commencement of Demat of Debt Instruments
May 2000 Demat accounts with NSDL cross 2.5 mn
February 2000 NSDL launches internet based service - SPEED - for CMs
May 1999 NSDL launches NCFM - Depository Operations Module
January 1999 Commencement of compulsory trading for retail investors
December 1998 Introduction of Demat of Government Securities
December 1998 Establishment of NSDL branches at Chennai, Delhi & Kolkata
November 1998 Demat accounts with NSDL cross 100,000
April 1998 Demat delivery in physical segment at NSE and BSE
March 1998 Value of securities held in dematerialised form at NSDL crosses
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US$ 5 bn.
January 1998 Compulsory demat trading for Institutional investors
December 1997 Commencement of Demat trading at BSE
June 1997 Value of securities held in dematerialised form at NSDL crosses
US$ 1 bn.
December 1996 Commencement of Demat trading at NSE
November 1996 NSDL Inauguration
August 1996 Enactment of Depositories Act
December 1995 NSDL Incorporation
September 1995 Promulgation of Depositories Ordinance

Source: NSDL website

From inception NSDL travelled a long way. In the depository system, securities
are held in depository accounts, which is more or less similar to holding funds in
bank accounts. Transfer of ownership of securities is done through simple account
transfers. This method does away with all the risks and hassles normally associated
with paperwork. Consequently, the cost of transacting in a depository environment
is considerably lower as compared to transacting in certificates.

Settlement of Disputes: All disputes, differences and claims arising out of any
dealings on the NSDL, irrespective of whether NSDL is a party to it or not, have to
be settled under the Arbitration and Conciliation act 1996.
Maintenance of Accounts at the Central System: The NSDL central system
known as DM maintains accounts of all account holders in the depository system.
All the transactions entered at any point in the computer system connected to it are
first effected in the central system and subsequently at these Computers. Thus, the
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central system of NSDL has the records of all details of every transaction
conducted in the depository system.
Distributed Database; Each of the computer systems connected to NSDL system
has its own database relating to its clients. This helps in giving prompt and
accurate service to the clients. However each of the databases is reconciled with
the data at the central system everyday in order to ensure that the data in the
distributed database tallies with the central database.
Common Software; NSDL develops software required by depository participants,
Companies, R&T Agents and clearing corporations for conducting depository
operations. Thus, the computer systems used by all the entities will have common
software given by NSDL. However, depending on the business potential, branch
networks and any other specific features, DPs may develop software of their own
for coordination, communication and control and provide service to their clients.
Such exclusive software is called “back office software “„DPM system given
NSDL gives “export and import” facility to take out the transaction details to be
used by back office software and to feed in transaction details generated from the
back office software.
Account Gpemng; Any investor who wishes to avail depository services must first
open an account with a depository participant of NSDL. The process of opening a
demat account is very similar to a bank account. The investor can open an account
an account with any depository participant of NSDL. An investor may open an
account with several DPs or he may open several accounts with a single DP. There
are several DPs offering various depository-related services. Each DP is free to fix
its own fee structure. Investors have the freedom to choose a DP based on criteria
like convenience, comfort, service levels, safety reputation and charges. After
exercising this choice, the investor has to enter into an agreement with the DP. The
form and contents of this agreement are specified by the business rules of NSDL.
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In this chapter we deal with the procedure for account opening under the NSDL
system.
Types of Accounts: Type of depository account depends on the operations
to be performed. There are three types of demat accounts which can be
opened with a depository participant viz. (a) Beneficiary Account (b)
Clearing Account and (c) Intermediary Account.

Types of Accounts

Beneficiary Owner
Account Clearing Member Account Intermediary Account

House Non - House

A DP may be required to open three categories of accounts for clients - Beneficiary

Account, Clearing Member Account and Intermediary Account.
A Beneficiary Account is an ownership account. The holders / s of securities in this type
of account own those securities.
The Clearing Member Account and Intermediary Account are transitory accounts. The
securities in these accounts are held for commercial purpose only.
A Clearing Member Account is opened by a broker or a Clearing Member for the
purpose of settlement of trades.
An Intermediary Account can opened by a SEBI registered intermediary for the purpose
of stock lending and borrowing.

Beneficiary Account: This is an account opened by investors to hold their

securities in dematerialized form with a depository and to carry out the
transactions of sale and purchase of such securities in book- entry form
through the depository system. A beneficiary account holde r is legally
entitled for all rights and liabilities attached to the securities (i.e. equity
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shares, debentures, government securities, etc.) held in that account. Therefore,

the account is called “beneficial owner account “. A beneficiary account can
be in the name of an individual, corporate, HUF, Minor, Bank, Financial
Institution, Trust, etc. or the broker himself for the purpose of his personal
investments in demat form. The account is opened with a DP.
Documents for Verification: For the purpose of verification, all investors
have to submit the following documents along with the prescribed account
opening form.
Proof of Identity A beneficiary account must be opened only after
obtaining a proof of identity of the applicant.
Proof of address The account opening form should be supported with
proof of address such as verified copies of ration card / passport / voter ID /
PAN card/ driving license/bank passbook.
In case any account holder fails to produce the original documents for
verification within the aforesaid period of 30 days, it must be immediately
brought to the notice of NSDL. Failure to produce the original documents
within the prescribed time would invite appropriate action against such
account holders, which could even include freezing of their accounts.
Common Information: The process of opening an account with a depository,
nature of such an account, and various factors to be considered for opening
a depository account are explained below. Some details are common to all
types of accounts. These are :
1. Name of the holder
2. Date of birth (for individual accounts )
3. Occupation
4. Address & phone / fax number
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5. Bank details like name of bank, type of account (current / savings).

Account number, branch address, MICR, etc.
6. PAN number, if applicable
7. Details of nomination
8. Specimen signatures
Clearing Member Account; The entities that are authorized to pay in and
receive the pay out from a clearing corporation / clearing house against trades
done by them or their clients are known as clearing members. CMs are
identified in the system through their CM-BP ID. All pay-out transactions are
carried out through their accounts. There are two types of clearing members:
1. All members of a stock exchange popularly known as brokers, are
clearing members.
2. Custodians who are permitted by the stock exchange to act as a clearing
member.
Intermediary Account; As per SEBI Regulations on Stock lending and
borrowing, only an approved intermediary can lend and borrow stocks from
clients. This intermediary borrows from lenders and lends to borrowers.
Intermediaries registered with SEBI as approved intermediary may open an
intermediary account with a DP of its choice, for executing stock lending
and borrowing transactions made through them. An intermediary account may
be opened only after obtaining registration from SEBI under an approved
Stock Lending Scheme, and getting the approval of the depository for
opening the account.
Closure of Account; Closure on client’s request - A DP can close a
depository account on receipt of an application in the prescribed format. The
application should be made by the account holder or by all the joint-holders.
An account can be closed only when there is no balance in the account. In
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case there is any balance in the account sought to be closed, the following
steps are necessary.
(a) Re-materialization of all securities standing to the credit of the account
at the time of making the application for closure; or
(b) Transferring the balance to the credit of another account opened by the
same account holder (s) either with the same participant or with a
different participant.
TRADING AND SETTLEMENT;
Any trade that is cleared and settled without the participation of a clearing
corporation is called off-market trade. Transfer from one beneficiary account
to another due to a trade between them is called off-market transaction.
Large deals between institution, trades among private parties, transfer of
securities between a client and sub-broker, large trades in debt instruments
are normally settled through off-market route.
Off - Market Trade
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h Seller gives delivery instructions to his DP to move securities from

his account to the buyer’s account
2. Buyer automatically receives the credit of the securities into his
account on the basis of standing instruction for credits.
3. Buyer receives credit of securities Into his account only if he gives
receipt instructions, if standing instructions have not been given.
4. DP needs to be extra careful in verifying the signature of the client if
unusual quantities of securities are being debited to the account.
5. Funds move from buyer to seller outside the NSDL system.
Settlement of Market-Transactions
A market trade is one that is settled through participation of a Clearing
Corporation. In the depository environment, the securities move through account
transfer. Once the trade is executed by the broker on the stock exchange, the
seller gives a delivery instructions to his DP to transfer securities to his
broker’s account.
Market Settlement - Demat Shares
The broker has then complete the pay-in before the deadline prescribed by
the stock exchange. The broker removes securities form his account to CC /
CH of the stock exchange concerned, before the deadline given by the stock
exchange.
The CC / CH gives pay - out and securities are transferred to the buying
broker’s account. The broker then gives delivery instructions to his DP to
transfer securities to the buyer’s account. The movement of funds takes
place outside the NSDL system.
1. Seller gives delivery instructions to his DP to move securities
from his account to his broker’s account.
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2. Securities are transferred from broker’s account to CC on the

basis of a delivery out instruction.
3. On pay-out, securities are moved from CC to buying broker’s
account.
4. Buying broker gives instructions and securities move to the
buyer’s account.
CENTRAL DEPOSITORY SERVICES (INDIA) LTD. (CDSL)
Benefits of opening an account with CDSL system
1) The unique centralized database of CDSL enables DPs to debit / credit
securities instantaneously to the Beneficial Owner’s account thereby
avoiding any transit position.
2) CDSL’s unique client ID number ensures debit / credit of securities only to
the intended account, as the system does not accept a transaction, where
account number is keyed in incorrectly.
3) CDSL offers a facility to the clearing House / Clearing Corporation under
which securities sold purchased by any BO on BSE can be directly delivered
from / received in the BO account without routing them through the broker’s
pool account.
4) CDSL does not collect any custody fees from its DPs. Thus BOs can except
a lower charge in respect of securities held in CDSL accounts. The
transaction cost of settlement of securities through CDSL is lower in most
cases.
ACCOUNT TYPES WITHIN CDSL
The account structure in CDSL is designed to meet the following objectives.
S To maintain proper records.
S To Segregate accounts of Beneficial Owners from each other and form
the depository participants.
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^ To enable RTA / Issuers to access an index of all accounts, this

represents the balances of all holdings in a particular ISIN (International

Security Identification Number).
^ To enable Depository Participants to enquire about only those Beneficial
Owner accounts that do they service. The Beneficial Owner master file
account details and the current and historic details of transactions and
balances will be available to DPs.
S To provide a flexible accounting structure to support the settlement
requirements of the market.
^ To account for dematerialized securities at BO level.

FEATURES
1) All beneficial Owner accounts are operated at Depository
Participant level, however data is maintained at CDSL Level.
2) BOs do not have direct access to CDSL system, except through
66 Smartcards44 for enquiry purpose, as and when provided.
PROCEDURE FOR OPENING DEMAT ACCOUNT
The process of opening a demat account through a DP of CDSL is very easy
and simple. It is similar to the opening of a bank account.
L Investor as choose a DP from the list of CDSL DPs published in CDSL
Infoline or accessible through the CDSL website www.cdslindia.com
2. The investor should submit an application form to the DP.
3. Before demat account is opened, the investor will have to execute an
agreement on a stamp paper to be provided by the DP, which defines the
rights and obligations of both, the investors and the DP.
4. On opening an account, a unique BO ID (Beneficial Owner Identification)
Number is allotted, which should be quoted in all future transactions.
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5. Under the Depository system, there is no restriction on opening more than

one BO account in the same or identical names with the same or other DPs
subject to the condition that all requirements are compiled with.
6. There is also no compulsion on any investor to open this demat account with
the same DP as that of his broker, Investor can open account with the DP of
his choice and carry on his trading activity through a broker of his choice.
Where any DP offers special charge with the brokers DP may have some
advantages.
However a BO belonging to any one of the categories specified under the
CDSL Bye laws need not enter into an agreement with the DP, if the DP has
entered into an agreement with the BO pursuant to securities & Exchange Board of
India (Custodian of securities) Regulations 1996. The BO Categories are as under:
> Public Financial Institutions as defined in section 4A of the Companies
Act, 1956.
> A Bank included for the time being in the second schedule to the
Reserve Bank of India Act, 1951.
> Foreign Bank operating in India with the approval of RBI.
> State Financial Corporation established under the provisions of section
3 of the State Financials Corporations Act, 1951.
> An Institution engaged in providing financial services, promoted by any
of the Institutions mentioned herein above, jointly and severally.
> A Custodian of securities who has been granted a certificates of
Registration by the Board under sub-section (1A) of section 12 of the
SEBI Act, 1992.
> Foreign Institutional Investor as defined under section 2(f) of the SEBI
(Foreign Institutional Investors) Regulations, 1995.
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> A Mutual Funds as defined under Section 2(q) of the SEBI (Mutual
Funds) Regulations, 1992 and Registered with SEBI under regulation 9
thereof.
DEMATERIALISATION OF SECURITIES :
Objectives >
To enable Beneficial Owners to convert their scripts existing in physical
form to electronic balances in accounts maintained by CDSL, through DPs.
Features >
Dematerialization is a process by which the scrips existing in paper form are
converted into electronic balances maintained in securities accounts held by the
BO with a DP of CDSL.
However, to Dematerialize the share certificates an investor has to
> Fill up a Dematerialization request form, which is available with
the DP.
> Submit share certificates along with the forms (Write “Surrendered
for Demat” on the face of the certificate before submitting it for
demat).
> Receive credit for the dematerialized shares within 15 days.
Only those securities held in the form of certificates registered in one’s name
individually or jointly can be dematerialized. Moreover, the securities must belong
to the list of securities admitted for dematerialization at CDSL. Securities held in
street name (Market deliveries) cannot be dematerialized.
If one wants to dematerialize the securities of a company that is not admitted
with CDSL, then the investor should request the company to have that security
admitted with CDSL and once that has been done, he can get it dematerialized.
SEBI has laid down a separate procedure for simultaneous transfer and
!

demat of share’s in one’s favour. The transfer cum demat facility is available only
 156

in respect of securities of those issuer companies, who have entered into special
arrangement with the depositories. After the company / RTA has transferred the
shares in the name of the Transferee, it will send option letter to the transferee to
ascertain whether he wishes to have them dematerialized. Incase the transferee opts
to receive them in demat mode; he will submit the option letter along with the DRF
to the DP. DP will forward the DRF and the option letter to the company / RTA,
whereupon company / RTA will demat them and the BO account will be credited.
In demat form the market lot is one share and therefore, there is no question
of odd lot. Dematerialized shares do not have any distintives or certificate
numbers. In demat all shares are fully fungible, which means that any 100 shares
of a company are similar to any other 100 shares of that company.
While CDSL does not levy any charges for dematerialization of securities,
DPs collect dematerialization charge together with postage / courier charges.
REFERENCE TO LAW:
Depositories Act, 1996
> Section 6 - Surrender of Certificate of Security.
SEBI (Depositories and Participants) Regulations, 1996.
> SEBI Regulations 27 - Depository to declare specific securities
eligible.
> SEBI Regulations 28 - Securities eligible for dematerialization.
> SEBI Regulations 29 - Agreement between depository and Issuers.
> SEBI Regulation 38 - Records to be maintained.
> SEBI Regulation 53 - Agreement by Issuer.
> SEBI Regulation 54 - Manner of surrender of Certificate of security.
PROCEDURE FOR DEMATERIALIZATION
1. To Materialize any physical security, one will have to open a demat account
with a DP of one’s Choice.
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2. Thereafter, all one has to do is to fill in a DRF (Demat Request Form) and
submit the same with the shares / securities Certificates to the DP for
dematerialization.
3. DP defaces and sends these certificates to the Issuer / Registrar who credits
an equivalent number of securities in the demat account maintained with
CDSL. For each scrip, a separate DRF has to be used.
4. The investor shall fill up the following details in the DRF :
• Investors account number with the DP
® DP ID
• DP Name
• ISIN
® Name of the Issuer
• Type of the Security
• Total quantity to be maintained
• Name (s) of the holder (s)
• Certificate Details : Folio No., Distinctive Nos., Certificate Nos.,
No. of Securities
® Lock in status.
5. The registered holder (s) shall sign the DRF.
® As per the specimen signature (s) recorded with the DP and
• As per the specimen signature (s) recorded with the Issuer /
RTA.
6. The Investor shall also surrender the physical certificate to be
dematerialized along with the duly filled DRF to the DP. Immediately on
receipt of DRF along with the scripts the DP should give the counter
acknowledgement to the BO
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7. The DP shall verify the following :

• Whether the DRF is complete.
• Whether the Certificate details mentioned on the DRF
and on the Certificate enclosed, tally.
• Whether the name (s) of the holder (s) and the order of
the names of the holders appearing on the certificates
exactly tally with those records under the BO Account
maintained with CDSL.
• Whether all the holders have signed the DRF and the
signatures of the account holders tally with those
recorded by the DP.
» If there is any discrepancy in any of the details, the DP
will get it rectified from the investor and the error free
DRFs will be taken up for further processing by the DP.
8. The DP shall capture the details from the DRF & Certificate through the
front-end system provided by the CDSL and shall generate the DRN on the
same day or latest by the next working day from the date of receipt of DRF.
9. In case the Securities are in “ Lock - In “ status the following details need
to be specified:
> Lock in Reason
> Lock in Release date.
10. The DP shall then write down the DRN on the DRF and deface the
certificates by affixing a rubber stamp “ Surrendered for Dematerialization
The DP has to take proper care that the stamp should be affixed in such a
manner that no material information such as distinctive numbers, Folio
Nos., etc., on the Certificate is smudged or becomes illegal.
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1 l.The DP shall then mutilate the certificates, by punching two holes at the top
of the certificates.
12. The DP shall then give a “System Generated acknowledgement” of the
demat request to the BO. This acknowledge will contain details such as BO
A/c No., BO Names, ISIN, Name of the Issuer & Type of Security,
Quantity, Distinctive / Certificate / Folio No., Date of request, DRN. The
DP shall authorize this acknowledgement by putting his seal / rubber stamp
& Signature of the authorized signature (may be printed on the letterhead of
the DP).
13. CDSL shall electronically send the DRF data to the issuer /RTA after the
DRN is generated. The process is done automatically by the system.
14. The DRF shall be authorized by the DP by putting his seal & signature.
The certificates & the original DRF shall be sent to the issuer / RTA along
with a covering letter printed on the DPs letterhead. This covering letter
content will be generated by the CDSL system. A copy of the DRF is to be
maintained by the DP for its own reference and records.
15. The DP then shall capture the dispatch details on the front - end system
such as the dispatch reference no., dispatch date, name of the courier, etc.
The DP must dispatch the physical documents within a maximum of 2 days
from the date of DRN Generation.
16. For items marked confirmed from the Issuer / RTA, CDSL activates the
balances in the BO account and they will be treated as fully dematerialized
securities.
17. The DP will print the statement of holding for the BO account for which the
balances have been activated by CDSL and mail / delivery the same to the
BO.
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18. The dematerialized process must be completed within 15 days or as

specified by the CDSL from time to time.
19.1ncase of rejection of certificates, unless there is a compelling reason, the
RTA / Issuer will print fresh certificates in lieu of the defaced certificates
and return the same under the objection to the DP concerned, along with an
appropriate rejection letter.
PLEDGING OF DEMAT SECURITIES Not only the demat securities can be
pledged, in demat form the BO may be able to get higher loan amounts, with
reduced margins & lower rate of interest. In respect of pledged securities, banks
give advance to the extent of Rs. 20.00 Lacs at a reducing margin of 25% as
against the amount upto Rs. 10.00 Lakhs with 50% margin that is advanced incase
of physical holdings. Some banks even charge lower interest rate for advances
against dematted securities. Moreover procedure for pledging securities in demat
form is more convenient both for the pledgor and the pledgee.
Procedure for pledging securities;-
L The pledgor and the pledgee must have Beneficial Owner accounts with
CDSL. These accounts can be with the same DP or with different DPs.
2. The pledgor has to fill up the “ Pledge Request Form “ (PRF) in
duplicate. The pledge may countersign the PRF.
3. One copy of PRF should be given to the DP for setting up the pledge
and second copy shall be sent to the pledgee.
4. One receipt of the PRF, file pledgor’s DP verifies that the securities to
be pledged are unencumbered and there is a depository system and a
unique pledge sequence no. will be generated.
5. The pledgee’s DP has the facility to access the request online.
6. Based on the pledgee’s DP either accepts or rejects the request using
the accept / reject flag.
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PROCEDURE OF UN-PLEDGING THE SECURITIES IN DEPOSITORY

SYSTEM
a) The pledgor through his DP makes a request for unpleding the pledged
securities by submitting the “ Unpledge Request Form “ (URF). The DP
sets up an un-pledged request in the depository system.
b) The pledgor should provide a copy of “ URF “ to pledge.
c) The pledgee will instruct his DP to accept the unpledge request by
submitting the copy of “Unpledged Request Form “. The pledgee’d DP
can access the “ Unpledge setup” online.
d) On acceptance / Rejection of the unpledge request, the status is changed
from “setup” to “Accepted” or “Rejected”.
SETTLEMENT OF SECURITIES IN DEMAT FORM :
Settlement; An investor who trades in any security on a stock exchange will have
to do so through a clearing member. A Beneficial Owner (BO) who holds an
account in CDSL will be able to settle all his settlement obligations directly from
his account through his DP. The DP is required to process the instruction received
from the BO’s within the time period as specified by CDSL.
Post Settlement ; During settlement, due to abnormal conditions, securities get
credited to various special purpose accounts. These securities have to be
transferred out of these accounts as laid down in the Byelaws of CDSL. Such
transfers are allowed by execution of instructions of the transferor. The CMs who
wants to transfer the securities out of designated accounts, in which such transfers
are allowed, can do so by giving the instructions to the DP / CH and the
instructions will be executed by CDSL.
OFF MARKET TRADES :
> An Off market trades arises when a BO elects to sell / Transfer securities
to another BO without using the settlement mechanism of any exchange.
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> Off Market trades are the deals generally for bulk quantities of securities,
which are negotiated by the CMs outside the exchange. These trades may
be informed to the respective stock exchanges through their CMs Trading
terminals but the exchange mechanism to settle the transaction is not
used.
> For this identical & matching instructions from both the parties including
confirmation that money has been paid / received has to be received by
CDSL before CDSL effects the actual Debit / Credit.
Features
> All Depositaries Participants (DP) registered with CDSL will be eligible
for conforming the obligations of all the Beneficial Owners (BO) who have
opened account in CDSL through that DP.
> All the DPs will be able to execute the instructions to transfer the securities
as per the instructions of tier BOs. However all such instructions will be
governed by the Byelaws of CDSL.
PROCEDURE FOR SETTLEMENT
The procedure for selling dematerialized securities through any stock exchange is
similar to the procedure for selling physical shares. However, the procedure for
delivery of securities is much simpler when compared to the sale of securities in
physical segment. In case of sale of demat security, immediately on receipt of
intimation of execution of trade from broker, the seller should issue instructions to
the DP with whom he maintains his demat account, for delivery of security either
directly to the Clearing Corporation / Clearing House or to the brokers clearing
account, as advised by his broker.
a) The BO informs the CM the details of the securities in which he wants
to trade and gives him the details of his BO account which he wants to
settle the trade.
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b) After the trade is put through and the CM receives the Net ISIN wise
obligations, he informs the CH the details of all the BO accounts for
whom he has traded. He will do this by using his front-end system with
CH. Each BO wise obligation that the CM informs to the CH will be
allotted a unique obligation - ID and Sr. No.
c) The CM will inform the details of the obligation - ID and Sr. No to the
BO and request him to confirm the obligations through his DP.
d) On receipt of the information from the CM, the BO will fill in the
confirmation slip / form and delivery it to his DP. He will have to fill in
the settlement - ID, obligation - ID, Serial Number, CM ID, ISIN,
Quantity, Type of Transaction (i.e. buy or sell)
e) The DP will first verify the signature of the BO or his power of
attorneys as the case may be on the slip / form and if it tallies, he will
enter the confirmation on his front - end.
f) The DP will receive report of the status of all obligations confirmation
and he will have to scrutinize the mismatched / unmatched obligation
confirmations.
g) In case of mismatch of obligations the DP will immediately contact the
BO and he and inform him of the Mismatch so as to enable the BO to
correct the error. He will take a fresh instruction from his BO.
h) The DP can do the above confirmation process for all the unconfirmed
and mismatched obligations upto the time notified by the Ch. After the
expiry of the time, the unmatched and mismatched obligations are
transferred for the settlement through the CM principal account.
i) The Depository participant will confirm the instructions received from
the CM if the CM wants to settle the trade through the CM principal
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account. Hr will follow the same procedure that he follows for

confirmations (mentioned above).
j)After the time for confirmation is over the confirmed sales obligations
are sent by CH to CDSL for earmarking. The DP will not be allowed to
enter any confirmation after the allotted time for that settlement.
Over the last fifteen years, the depository system has grown steadily. Along
the way, the regulatory framework in place, consisting of the Regulations, the
various circulars issued by SEBI, the byelaws and circulars of the Depositories
have undergone several changes and have been strengthened to address the
regulatory challenges that have emerged over time. However, as is the case in the
growth of any regulatory system, despite the steady growth to maturity, there
always remained considerable scope for constant learning and consequent
refinement of the framework. The issues that further needed to be addressed came
to the fore when SEBI detected a wide scale misuse of the depository system in
what is generally referred to as the IPO scam.
To derive the fullest extent of the benefit of the fully automated systems in
the depository, it was equally important to strengthen the human interface
primarily for verifying that the beneficial owner in the records in the depository
system truly corresponded with an actual person or legal entity. Firstly, the person
admitted to the depository system would have to verified and found genuine and
secondly the actual persons who have control over the ownership of shares would
need to be identified. This called for continuous improvements to the KYC regime
prevalent in the securities market.
In response to the deficiencies and weaknesses that were observed over these
years, SEBI felt that Depositories should assume greater responsibility in the
interest of investors and integrity of the market and carry out necessary changes so
that chances of misuse of its systems are minimal. The systemic issues that were
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addressed at different points in time over this period of evolution and growth of the
depositories are summarized under four heads below:
• Strengthening of KYC Norms
• Audit procedures and Systems Audit
• Improving disclosures and Surveillance
• Strengthening of the Regulatory Framework for Depositories

Strengthening of KYC Norms

1. PAN has been made mandatory for opening of dematerialized accounts with
effect from 31st March 2006.
2. The Depository Participants are required to obtain a photocopy of the PAN
card of applicants) and verify the same with the original PAN card.
3. Further, PAN card details of demat account holder(s) are cross checked with
the details appearing on the website of the Income Tax Department (ITD for
the same PAN).
4. In respect of accounts that are opened till March 31, 2006, account holders
were advised to get verification of PAN done as is the case with new
account (as per Para above), at the earliest but not later than October 1, 2006
(later extended till December 31, 2006) in respect of all account holders)
otherwise the accounts were to be frozen for debits.
5. With effect from January 1, 2007, all PAN non-compliant accounts have
been frozen. It was directed that PAN non-compliant accounts which do not
have any security balances should be closed latest by November 15, 2008.
6. The depositories have advised the DPs to verify whether the account
opening documents submitted by the investor in respect of such accounts
viz: proof of identity and proof of residence are available, the copies of these
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documents have been verified with the originals and KYC norms prescribed
by SEBI have been followed.
7. The PAN compliance status as on 15th November, 2009 is as shown in the
Table below:

Table 5.3: The PAN compliance status as on 15th November, 2009

Depository Total no. of PAN Frozen A/cs. As on

accounts compliant given date
NSDL 1,02,18,478 97,22,273 4,96,205

CDSL 61,73,489 60,84,082 89,407

Table 5.4: The progress of PAN compliance on frozen accounts as on 15th

November 2009
Depository PAN non Unfrozen A/cs. Frozen No. of A/cs. No. of A/cs.
Compliant Since 01-01-07 A/cs. as With nil With holdings
account as on after on given holdings (from (from column
01/01/07 furnishing date column 4) 4)
PAN
NSDL 37,44,849 32,48,644 4,96,205 17,306 4,78,899
CDSL 6,06,945 5,17,538 89,407 3,697 85,710
Source: www.sebi.gov.in
b
CONCLUSIONS:

The demat account opening is same as bank account, i.e. single or joint accounts
or with nominee. Some amount has to be paid (i.e. 250/- per year+25) for the
demat account. For each transaction the DP’s may charge nearly Rs.30 +
brokerage/commission is common. The growth rates of demat account holder in
increasing over years. The Indian system of capital market is a Two Tire System.
Indian government allows holding securities in any form i.e. either in physical
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securities or in electronic (demat) form. The transaction of securities is

completely (i.e. 99.99 %) done through electronic format. Most of the
speculators do not utilize demat account in day-to-day online trading. Finally it
can be concluded that depository system in India has resulted new dimension in
securities trading. There are only two depositories in India till date , the need of
hour is to open some other DPs to facilitate the online trading of securities.