Meaning of Depository: The word ‘depositary’ is defined as “the party of the institution (eg bank or trust company) receiving a deposit. One with whom anything is lodged in trust, as ‘depository’ is the place where it is put. The obligation upon the depositary is that he keeps the thing with reasonable care and upon request restores it to the depositor.” 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. It acts as a trustee of the owner since the securities are entrusted with him in trust. He is also the agent of the owner of the securities. According to sub-section (1A) of section 12 of the Securities and Exchange Board of India Act, 1992;"depository" means 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 the Securities an Exchange Board of India Act, 1992.
A Depository facilitates holding of securities in the electronic form and enables securities transactions to be processed by book entry by a Depository Participant (DP), who is an agent of the depository, offers depository services to investors. According to SEBI guidelines, financial institutions, banks, custodians, stockbrokers, etc. are eligible to act as DPs. The investor who is known as beneficial owner (BO) has to open a demat account through any DP for dematerialisation of his holdings and transferring securities. The depository system envisages a deposit of securities by the various investors with the depository. This would take the form of a transfer by the various investors with the depository. This would take the form of a transfer by the holder of securities in favour of depository. Once the shares are lodged with the depository, their transfer would be through book entry transfers in accounts maintained by the depository. Thus the main functions of a depository are to dematerialize the securities and enable their transaction in book entry form. In the absence of depositories, which provide for maintenance of ownership records in a book entry form, every share transfer is required to be accomplished by physical movement of share certificates to, and registration with, the company concerned. Registration of transfer of securities with depository.Benefits of Depository: The depository system gives a less risky settlement with implementation of collateral bases payment systems and greater profits from increased trading volume which are made possible by NCDS systems with reduced operational costs per transaction and reduced risk. There is an improved cash flow from not having funds tied up for long periods. Further forgery and counterfeit have been eliminated with attendant reduction in settlement risk from bad deliveries. The system has led to an opportunity for development of retail brokerage business and for development of more sophisticated custodial services which can be offered to the smaller investor. There are now standardised communications between NCDS, registrars and other intermediaries. Also, there is an ability to arrange pledges without movement of physical scrip and further increase overall level of trading activity, liquidity and profits. 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 standard that handles most of the trading and settlement in dematerialised form in Indian capital market. The procedure relating to depositories is mainly governed by the regulations and bye laws that are framed by the SEBI and the depositories under the power provided by the Depositories Act. There are immense benefits to the public by reduction of risks associated with loss, mutilation, theft and forgery of physical scrip. Further there is an elimination of financial loss owing to loss of physical scrip and greater liquidity from speedier settlements and reduction in delays in registration. There will be greater opportunities for investment offered by new instrument and services that can be provided only when NCDS is implemented and faster receipt of benefits and rights resulting from corporate actions. There is also an improved protection of shareholder’s rights resulting from more time communications from the issuer and reduced transaction costs through greater efficiency. The system provides Up-to-date knowledge of shareholder’s names and addresses. And there will be savings in costs of new issues from reduction in printing and distribution costs. It may also lead to increased efficiency of registrar and transfer agent functions and better facilities for communication with shareholders, conveying benefits of corporate actions and information notices. Furthermore there will be an improved ability to attract international investors without having to incur the expenditure of issuance in overseas markets. Immobilisation of securities is done by storing or lodging the physical security certificates with an organisation that acts as a custodian - a securities depository. All subsequent transactions in such immobilised securities take place through book entries. The actual owners have the right to withdraw the physical securities from the custodial agent whenever required by them. Rule 28- The following securities shall be eligible for being held in dematerialized form in a depository:-
- Every depository shall, on receipt of intimation from a participant, register the transfer of security in the name of the transferee.
- If a beneficial owner or a transferee of any security seeks to have custody of such security, the depository shall inform the issuer accordingly.
- the depository,
- the beneficial owner;
- the participant;
- the issuer.
- 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;
- units of mutual funds, rights under collective investment schemes and venture capital funds, commercial paper, certificates of deposit, securitized debt, money market instruments