UNIT-III

UNIT-III

Meaning, need and benefits of depository system in India

An effective and fully developed depository system is essential for maintaining and enhancing the efficiency of a mature capital marketBefore introduction of Depository system, the problems faced by investors and corporates in handling large volume of paper were as follows:Bad deliveriesFake certificates Loss of certificates in transitMutilation of certificatesDelays in transferLong settlement cyclesMismatch of signaturesDelay in refund and remission of dividend etcTheDepositoriesActdefinesadepositoryasacompany formed and registered under the Companies Act, 1956 and whichhasbeengrantedacertificateofregistrationundersubsection(1A)ofsection12ofSecuritiesandExchangeBoardof India Act, 1992.A depository is a firm where in the securities of an investor are held in an electronic form in the same way as abank holds money. It carries out the transactions of securitiesbymeansofbookkeepingentry,withoutanyphysical movementofsecurities. Depository systemessentially aimsat eliminatingthevoluminousandcumbersomepaperworkinvolvedinthescript-basedsystemandoffersscopeforpaperlesstrading through state-of-the-art technology. It is an institution which maintains an electronic record of ownership of securities.

NEED FOR DEPOSITORY SYSTEM

In India the need for setting up a depository was realized after the large scale of irregularities in securities transactions of 1992 exposed the limitations of the prevailing system. Therefore, the need for depository system was realised for the growth of primary market, which would reduce the time between the allotment of shares and transfer of entitlements arising out of each allotment.The idea of setting up of a depository and the introduction of script less trading and settlement for improving the efficiency and eliminating the various problems associated with dealings in physical certificates.A depository system benefits the investing public, the issuers of securities, the intermediaries and the nation as a whole. The depository system in our country was initiated by the Stock Holding Corporation of India Limited (SHCIL) in July,1992. The Depositories Act was passed by the parliament in the August,1996. Which lays down the legislative frame work for facilitating the dematerialisation and book entry transfer of securities in a depository.The Act provides that a depository, which is required to be a company under the Companies Act,1956, and depository participant i.e. agents of the depository need to be registered with Stock Exchange Board of India (SEBI).The depository shall carry out the dematerialization of securities and the transfer of beneficial ownership through electronic book entry. The investors, however, have the option to hold securities in physical or dematerialized form, or to rematerialize securities previously held in dematerialized form.SEBI has notified the regulations in May,1996, with regard to norms for registration of depositories and participants, the eligibility criteria for admission of securities to a depository.The National Securities Depository Limited (NSDL), the first depository in India which has been promoted by IDBI, UTI and NSE. It has commenced its operation from November 8,1996.To begin with only the capital market segment of NSE has been associated with the NDSL as only the NSE has a clearing corporation (NSCCL), which guarantees performance of trade obligations and has been admitted into the depository.

BENEFITSBenefits of depository system Elimination of bad deliveries, elimination of risks associated with physical certificates, Immediate transfer & registration of securitiesFaster disbursement of non cash benefits rights, bonus etc. Reduction in brokerage, Reduction in handling of paper & periodic reports to investorElimination of problems related to change of address of investor, transmission etc.Benefits To the nation:Growing and more liquid marketsIncrease in competitiveness in the international market place attracting many investorsImproved prospects for privatisation of public sector units by creating a conducive environmentConsiderable reduction in delayMinimises settlement risk and fraud restoring investors faith in the capital marketsTo the investing publicReduction of risks associated with loss, mutilation, theft and forgery of physical scripElimination of financial loss from loss of physical scripGreater liquidity from speedier settlementsReduction in delays in registrationFaster receipt of corporate benefitsReduced transaction costs through greater efficiencyTo issuers:Up-to-date knowledge of shareholders names and addressesReduction in printing and distribution costs of new issuesEasy transfer of corporate benefitsImproved ability to attract international investors without having to incur expenditure of issuance in overseas markets

Depositories in India

Presently there are two Depositories working in India:National Securities Depository Limited (NSDL) It was registered by the SEBI on june 7 1996 as Indias first Depository to facilitate trading and settlement of securities in the demat form. It is promoted by IDBI, UTI, NSECentral Depository Services (India) Limited (CSDL) It commenced its operations during feb 1999 and was promoted by Stock Exchange Mumbai in association with Bank of Baroda, Bank of India, SBI and HDFC Bank At present 10 Stock Exchanges are connected to the DepositoriesNSEThe SE , mumbai Calcutta Stock ExchangeDelhi SELudhiana SEBangalore SEOver the counter exchange of IndiaMadras SEInter connected SEAhmedabad SEMarket trade: trade done settled through a SE and clearing corporation.Off market trades: trades done privately without involvement of stock brokers and SEAgain investor may either choose to invest privately, through SB or DP

Constituents of a Depository System

DepositoryDepository Participant (DP)Securities, Issuers and Registrars and Share Transfer AgentsStock Exchanges and Stock BrokersClearing Corporation/ Clearing House and Clearing MembersBanking systemInvestors

Depository : it is an organisation where the securities are held in electronic form and carries out the securities transaction by book entry.

DP : DP is an agent of the depository and functions as the interacting medium between the depository and the investor.He should be registered with the SEBI.Must possess requisite qualifications prescribed by the concerned depository of which he is a participantHe is responsible for maintaining the investors securities a/c with the depository and handles them as per the investors written instructionsHe is linked to a broker who trades on behalf of investorsTo avail their services an account similar to a bank a/c has to be opened with the DPAs per SEBI Regulations , financial institutions, banks, custodians, stock brokers etc can become DPsHowever investors may choose DPs of their choice and also deal with 1 or more DP;s at a timeSecurities, Issuers and Registrars and Share Transfer Agents: eg: an agreement between the depository , issuer of security and the designated registrar/ share transfer agents for the underlying security in the cases of issues like transfer of securities by their beneficial owners

Stock Exchanges and Stock BrokersSE is an organised market for dealings in securities commonly referred as secondary market.one of its main functions is price discovery i.e to cause prices to reflect currently avalable information about a securitySB are members of SE primarily engaged in 2 main activities i.e buy and sell securities for their clients charging a comm and as dealers or traders and dealers they buy and sell on their own a/c for trading gainsClearing Corporation/ Clearing House and Clearing MembersA clearing corporation is a central organisation created to facilitate efficient , fast and economical settlement of transactions at a SE . it being an internal department of a SE is an independent entityThe members of Clearing Corporation brokerage firms, banks or other financial institutions who are called as clearing members.Eg:all trades done at NSE & OTCEI are settled through National Securities Clearing Corporation Limited (NSCCL)It acts as a central mechanism for consolidating and settling transactions instead of the member firms settling each trade individually amongst themselves

Banking systemDepository essentially plays a dual role i.e of a depository and a limited bankIt maintains current a/cs for participants and executes fund transactions relating to securities transactions for participantsInvestors :may be individuals or corporates who have acquired shares either in primary market or in secondary market

Facilities offered by Depository SystemOpening of depository systemDematerialisation Rematerialisation Settlement of trades in dematerialised securitiesAccount transferTransfer ,transmission and transpositionPledge and hypothecationRedemption or repurchaseStock lending and borrowingCorporate actionAccount freezingNominationDemat of debt instrumentsDealing in govt securities

Opening of depository system: SEBI has made compulsory trading of shares of all the companies listed in stock exchanges in demat form w.e.f 2nd jan 2002Hence if the investor wants to trade in respect of the companies which have established connectivity with NSDL & CSDL, he may have to open a beneficiary a/cBeneficiary a/c is an a/c opened by the investor or a broker with a DP of his choice to hold shares in demat form and undertake scripless tradingFor opening demat a/c, the following documents are required:Demat opening form duly filledAddress proofphotographOnce a demat a/c is opened investor must sign an agreement with the DP and the investor will be allotted an account no. called as client identityNo minimum balance is required The investor is provided with a transaction statement by his DP at regular intervals based on which the investor will know his security balances

Dematerialisation It means conversion of the physical certificates into dematerialised holdings at the request of the investorOnly shares registered in the name of the a/c holder are accepted for dematerialisation at the depository

Procedure:First open a demat a/c or security a/c with any DP of investors choiceObtain a/c no. from his DPA dematerialisation request form (DRF) to be submitted to the DP who intimates depository of the requestDP then submits the certificate along with the DRF to the registrar who confirms the demat requestRegistrar validates the request, updates records ,destroys the certificates and informs depository who in turn credits the DP a/c Depository participant updates the investor a/c and informs the investor Once the company is admitted into depository system, an ISIN (international securities identification number) is allotted by the depository. This no. is unique for each security of the company that is admitted in the depositoryThe entire process takes about 15 days time.However when large no. of certificates are submitted from institutions, it takes upto 30 days for demat An investor may demat a part of his holdings and hold the balance in physical mode for the same securityDemat shares are fungible because they do not have any distinctive or certificate numbers

Rematerialisation It means conversion of demat holdings back into certificatesIf the investors wish to get the securities in physical form ,all he has to do is to request DP for remat

Procedure :Investor must fill up a remat request form (RRF)The DP will forward the request to depository after verifying that the shareholder has the necessary balancesDepository will in turn intimate the registrarRTA (registrar & transfer agent) will print the certificates and dispatch the same to the investor

Settlement of trades in dematerialised securitiesThe following stock exchanges have been admitted on the depository to conduct this activityNSEThe SE , mumbai Calcutta Stock ExchangeDelhi SELudhiana SEBangalore SEOver the counter exchange of IndiaMadras SEInter connected SEAhmedabad SE

Account transferDepository gives effect to all transfers resulting from the settlement of trades and other transactions that take place between various beneficial owners. Buying of securities:It is similar to buying of physical securitiesProcedure: Investor purchases securities in any of the SE connected to Depository through a brokerInvestor pays brokerBroker pays clearing corporationOn the pay out day broker receives credit for securitiesHe gives instructions to DP to debit clearing a/c and credit clients a/cInvestor receives shares into his a/cInvestor has to make sure that the broker transfers the securities into his a/c before the book closureOr else the company may hive corporate benefits to the broker

Selling of securities: procedure Investor sells securities in any SE linked to depository through a brokerInvestor gives instruction to DP to debit his a/c and credit broker a/cBefore the pay-in day, investors broker transfers the securities to clearing corporationBroker receives payment from SEInvestor receives payment from brokerSale in demat form is similar to sale under physical modeTransfer:Depository being electronically linked to DPs, issuer company or registrar & transfer agent and the clearing corporation of the SE, serves as an integrated set up for maintenance of investor a/csHence , here transfer of securities occur merely by passing book entries in the records of the depository as and when instructed by the beneficial owners

Transmission: the claimant will have to fill a TRF i.e a transmission request form supported by documents like death certificate, succession certificate etcThe DP after verifying that the application is genuine, will transfer securities to demat a/c of claimantDemat transmission all the formalities can be completed in one goTranspositionSecurity certificates for this purpose must be submitted along with TRF and DRF to the DPPledge and hypothecationDepositories allow the securities placed with them to be used as collateral to secure loans and other creditsPledging demat securities is easier and advantageous than pledging physical securitiesProcedure:Both borrower (pledger) and lender (pledgee) must have depository a/csDetails of securities to be pledged should be submitted by the pledger to his DP in a standard formatPledgee should confirm the request through his DPOnce this is done, securities are pledged.then the financial transactions between pledger and pledgee are handled outside the depository systemAfter the loan is repaid, the borrower can request for a closure of pledge by instructing his DPIf the pledgee agrees , the investor may change the securities offered in a pledge.

Redemption or repurchaseThis occurs when the securities are surrendered to the issuer either on maturity or in pursuance of an option given by the issuer , in lieu of agreed consideration.The consideration may be in cash or new securities in lieu of existing securitiesProcedure:RRF (repurchase request form) is used instead of remat RFClient may be paid in cash or new securities in lieu of existing securitiesStock lending and borrowingIt involves lending and borrowing of securities under an approved schemeIt is executed through approved intermediaries duly registered with SEBI under the securities lending act 1997Intermediaries may deal in a depository system only through a special a/c known as intermediary a/c opened with a participantCorporate actionNomination Like shares in physical form, shares in electronic form also can be nominated Nomination can be made only by individuals holding beneficiary a/cMinor can nominate only through guardianIt can be made demat a/c wise and not security wise

Demat of debt instrumentsDebt instruments can also be held in demat formInstruments like bonds, debentures, CPs, CDsFrom oct 31st 2001, RBI has mentioned that banks and financial institutions shall make investment in deb and bonds only in demat formInvestor need not open separate demat a/c for demat of debt or instrumentsProcedure for demat of debt instruments is same as that of equity sharesThe investor has to ensure that before the certificates are handed over to the DP for demat, he marks surrendered for dematerialisation on the face of the certificatesDealing in govt securities A subscriber to govt securities who opts for SGL securities may open an SGL a/c with RBI or any other approved entity on its own a/c are held in SGL 1 a/c and investments held on a/c of other clients are held in SGL 2 a/cSafety features in depositoryTo ensure safety to the investors the following measures are existing:DP cannot effect any debit or credit in the demat a/c of the investor the valid authorisation of the investorRegular reconciliation between DP and depositoriesPeriodic inspection by depositories of the office of DP and registrar ( RTA) All investors have a right to receive their statement of a/cs periodically from the DPIf the depository goes bankrupt, the creditors of the DP will have no access to the holdings in the name of the clients of the DP. Such investors may however transfer their holdings to another DPCompulsory internal audit of operations of DP by practicing Chartered Accountant every quarter Steps to be taken for safe keeping and back up of data at all levels

National Securities Depository Limited

National Securities Depository Limited(NSDL) is an Indiancentral securities depositorybased inMumbai.It was established on 8 November 1996 as the first electronic securities depository in India with national coverage based on a suggestion by a national institution responsible for theeconomic developmentof India .It has established a national infrastructure using international standards that handles most of thesecuritiesheld and settled in dematerialisedform in the Indiancapital market.Although India had a vibrantcapital marketwhich is more than a century old, the paper-based settlement of trades caused substantial problems such as bad delivery and delayed transfer of title. The enactment of Depositories Act in August 1996 paved the way for establishment ofNational Securities Depository Limited(NSDL), the first depository in India. It went on to establish infrastructure based on international standards that handles most of the securities held and settled in de-materialised form in the Indian capital markets.In the depository system, securities are held in depository accounts, which are 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. In August 2009, number ofDemat accountsheld with NSDL crossed onecrore.NSDL is promoted byIndustrial Development Bank of India Limited(IDBI) - the largest development bank of India,Unit Trust of India(now, Administrator of the Specified Undertaking of the Unit Trust of India) andNational 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.Other ShareholdersAxis BankLimitedState Bank of IndiaOriental Bank of CommerceCitibankStandard Chartered BankHDFC BankLimitedThe Hongkong and Shanghai Banking CorporationLimitedDeutsche BankDena BankCanara BankUnion Bank of India

Stock Holding Corporation of India Limited

Stock Holding Corporation of India Ltd(SHCIL), Indias largestcustodian and depository participant based inMumbai,Maharashtra.It was established in 1986 under theGovernment of Indiaas public limited company. It is owned by the India's leading Banks and Financial Institutions such as, SU-UTI, IFCI Ltd.,LIC, GIC, NIA, NIC, UIC, and TOICL.SHCIL is known for its online trading portalwith investors and traders.It is also responsible fore-stampingsystem around India.Stock Holding Corporation of India (SHCIL), the country's first and one of the largest security custodians to financial institutions.

DEBT MARKET

The debt market is any market where tradingof debt instruments/ securities take place.

A market where fixed income securities are issued and trade is called Debt MarketGovt. needs large amount of money to carry out many welfare activitiesGovt. raise money by issuing govt. securities (.i.e. Debt Securities)Debt Market is vast in natureThe turnover of Debt Market is greater than Equity Market in all over the worldTotal size of Indian Debt market is in the rang of $91 bn to $100 bn i.e. approximately 30% of Indian GDP

ADVANTAGES

Indian Debt Market Structure

Market Segment

PARTICIPANTS

InstrumentsBondDebenture

Central Govt. SecuritiesT-BillCall MoneyCDCPGovernment Securities Market (G-Sec Market):It consists of central and state government securities. It means that, loans are being taken by the central and state government. It is also the most dominant category in the India debt market.

Certificates of DepositCDs are short-term borrowings issued by all scheduled banks and are freely transferable by endorsement and delivery. Introduced in 1989Maturity of not less than 7 days and maximum up to a year. FIs are allowed to issue CDs for a period between 1 year and up to 3 yearsSubject to payment of stamp duty under the Indian Stamp Act, 1899Issued to individuals, corporations, trusts, funds and associationsThey are issued at a discount rate freely determined by the market/investors Commercial PapersShort-term borrowings by corporates, financial institutions, primary dealers from the money marketCan be issued in the physical form (Usance Promissory Note) or demat formIntroduced in 1990When issued in physical form are negotiable by endorsement and delivery and hence, highly flexibleIssued subject to minimum of Rs. 5 lacs and in the multiple of Rs. 5 lacs after thatMaturity is 7 days to 1 yearUnsecured and backed by credit rating of the issuing companyIssued at discount to the face value

Call money market Is an integral part of the Indian money market where day-to-day surplus funds (mostly of banks) are traded.The loans are of short-term duration (1 to 14 days). Money lent for one day is called call money; if it exceeds 1 day but is less than 15 days it is called notice money. Money lent for more than 15 days is term moneyThe borrowing is exclusively limited to banks, who are temporarily short of funds.Call loans are generally made on a clean basis- i.e. no collateral is requiredThe main function of the call money market is to redistribute the pool of day-to-day surplus funds of banks among other banks in temporary deficit of fundsThe call market helps banks economise their cash and yet improve their liquidityIt is a highly competitive and sensitive marketIt acts as a good indicator of the liquidity position Call Money Market ParticipantsThose who can both borrow and lend in the market RBI , banks and primary dealersOnce upon a time, select financial institutions viz., IDBI, UTI, Mutual funds were allowed in the call money market only on the lenders sideThese were phased out and call money market is now a pure inter-bank market (since August 2005)Bill MarketTreasury Bill market- Also called the T-Bill marketThese bills are short-term liabilities (91-day, 182-day, 364-day) of the Government of IndiaIt is an IOU of the government, a promise to pay the stated amount after expiry of the stated period from the date of issueThey are issued at discount to the face value and at the end of maturity the face value is paidThe rate of discount and the corresponding issue price are determined at each auctionRBI auctions 91-day T-Bills on a weekly basis, 182-day T-Bills and 364-day T-Bills on a fortnightly basis on behalf of the central government

Players in Government Securities

Central & State GovernmentCommercial Banks, RBI, SBI, Cooperative Banks.Specialized Financial Institutions Like:- IDBI, IFCI, SFC etc.Joint Stock companies.Non Banking Financial Companies.Investing institutions like:- LIC, GIC & UTI.Provident FundsIndividuals (w.e.f. Dec., 2001)

Bond Market:

It consists of Financial Institutions bonds, Corporate bonds and debentures and Public Sector Units bonds. These bonds are issued to meet financial requirements at a fixed cost. Features of Bond Instruments1. Higher Risky2. High Rate of Return3. TaxableBonds issued by corporations or government are usually taxableBonds issued by state governments or municipalities are usually exempt from tax4. Maturity5. INTEREST RATES

Secondary Market For Debt Market

PRIMARY MARKETIt is that market in which shares, debentures and other securities are sold for the first time for collecting long term capital.This market is concerned with new issues. Therefore the primary market is also called new issue market.In this market, the flow of funds is from savers to borrowers. Hence, it helps directing in the capital formation of the country

Secondary Market Segments

Clearing and SettlementClearingClearing is all steps of the post-trade processes apart from the final settlement i.e. apart from the final payment and change in ownership.SettlementSettlement is the last step in the post-trade process. Settlement is a two way process which involves transfer of funds and securities on the settlement date.Salient features of Clearing and Settlement in Debt Market segment Clearing and settlement of all trades in the Debt Market shall be subject to the Bye Laws, Rules and Regulations of the Capital Market Segment and such regulations, circulars and requirements etc. as may be brought into force from time to time in respect of clearing and settlement of trading in Debt Market (Government securities).Settlement in Debt Market is on T + 2 Rolling basis viz. on the 2nd working day. For arriving at the settlement day all intervening holidays, which include bank holidays, NSE holidays, Saturdays and Sundays are excluded. Typically trades taking place on Monday are settled on Wednesday, Tuesday's trades settled on Thursday and so on.NSCCL shall compute member obligations and make available reports/data by T+1. The existing clearing bank accounts shall be used for funds settlement.STRIPSSeparate Trading of Registered Interest and Principal Securities(STRIPS) It is that whose interest and principal portions of the security have been separated, or "stripped"; these may then be sold separately in the secondary market. Example--a Treasury note with 10 years remaining to maturity consists of a single principal payment, due at maturity, and 20 interest payments, one every six months over a10 year duration. When this note is converted to STRIPS form, each of the 20 interest payments and the principal payment becomes a separate security.Features of STRIPSSTRIPS let investors hold and trade the individual interest and principal components of eligible Treasury notes and bonds as separate securities.STRIPS are popular with investors who want to receive a known payment on a specific future date.It is issued at discount.These are zero coupon instrument with single maturity value.

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UNIT-III OVER :D

AdvantagesAdvantages

RegulatorsSEBI, RBIMarket segmentThe Sovereign IssuerThe Public SectorThe Private SectorCentral Govt.State Govt.IssuersInstrumentsGOI dated securities, T-Bills, state Govt.securities index bonds, Zero compound bondsInvestorsRBIDFIGovt. Agencies & State Govt. BodiesPSUCommercial Bank, DFIGovt. bonds, DebenturesPSU bond, Debentures, CPCD, Debentures, BondsBanksPension FundsFIICorporatesIndividualsProvident FundsInsurance companies, Trusts, Mutual FundsCorporatePvt. Sectors BanksBonds, Debentures, CPBonds, Debentures, CD & CP

Participants

PRIMARY ISSUANCE PROCESS