Legal Framework
- NSDL, set up as a result of Depositories Act, 1996 is a public limited company formed under the Companies Act, 1956.
- The legislative framework governing the operations of NSDL essentially comprises a three tier structure:
- Depositories Act, 1996 (hereinafter referred to as the Act)enacted in August 1996, provides the broad framework for the setting up and working of depositories in India.
- SEBI (Depositories & Participants) Regulations, 1996 (hereinafter referred to as the Regulations) notified under the Depositories Act, 1996 provide the regulatory framework for depositories.
- Bye Laws & Business Rules of NSDL govern the functioning & operational procedures of NSDL & its business partners.
Key Features:
[Demat Home]
Investor has the option to hold shares in physical or demat form
The investor has the option to hold securities either in the dematerialised form or physical form. There is no mandate or compulsion on the form of holding of securities by an investor. The investor can also convert his demat securities to physical form by opting for rematerialisation. However, feedback received from large cross section of players in the capital market including brokers and investors suggested regulatory intervention to give a strong nudge to the dematerialisation process and trading. In this background, SEBI decided that all FIIs, FIs, mutual funds and banks will have to compulsorily settle all their trades only in dematerialised securities with effect form January 15, 1998 with respect to a select basket of eight scrips. SEBI has however subsequently announced that these categories of investors can buy in the physical form provided they immediately dematerialise the same. SEBI has also added new scrips to this list periodically. Further , with effect from January 4, 1999, SEBI first introduced a list of scrips for compulsory demat settlement by retail investors. This list, too, is being expanded by SEBI from time to time.
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Dematerialisation
Dematerialisation as the route for depositories World-wide, depositories have two options available to hold securities:
Immobilisation - Wherein securities are held in the physical form but transfer is done electronically (i.e. through book entries).
Dematerialisation - Wherein certificates are destroyed once they are admitted to the depository and corresponding credit is given in the account which is maintained electronically. India has opted for the dematerialisation route which is a better option given the large amount of paper work involved.
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Dematerialised holdings are fungible
This means that once the securities are dematerialised, the cease to have any unique characteristics such as distinctive nos., folio nos., etc. i.e. the holdings of a particular security will be identical to each other and interchangeable.
No stamp duty - Transfers of equity instruments and units of mutual funds in the depository are exempt form stamp duty of 0.5% as applicable in the physical form.
Investors - to interface through participants - The depository will interact with the investors and clearing members through market intermediaries called "Depository participants"(DP).
Multiple Depositories - The Depositories Act allows multiple depositories. At present, there are two depositories in India – National Securities Depository Ltd. and Central Depository Services (India) Ltd..
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No stamp duty
Transfers of equity instruments and units of mutual funds in the depository are exempt frorm stamp duty of 0.5% as applicable in the physical form.
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Investors to interface through participants
The depository will interact with the investors and clearing members through market intermediaries called "Depository participants"(DP).
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Multiple Depositories
The Depositories Act allows multiple depositories. At present, there are two depositories in India - National Securities Depository Ltd. and Central Depository Services (India) Ltd.
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Business Partners
NSDL carries out its operations through various functionaries called Business Partners. The depository interface with the investor and these Business Partners is represented below:
NSDL is electronically linked to its Business Partners; viz., the depository participants, the issuer company and /or it's registrar & transfer agent and the clearing corporation/clearing house of the stock exchange,This is done in order to facilitate settlement of trades and to perform a daily reconciliation of all the account balances held with NSDL. The entire system is called the NEST (National Electronic Settlement & Transfer) system. Thus , a highly integrated set up for maintenance of investor accounts has been developed and implemented
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Depository Participant
As mentioned earlier, NSDL interfaces with the investors and clearing members through its agents called "Depository Participants"(DP).
The Regulations have specified ten categories of organisations which are eligible to become a DP. These are:
- Public Financial Institutions
- Scheduled Banks
- RBI Approved Foreign banks operating in India
- State Financial Corporations
- Institutions engaged in providing financial services, promoted by any of the institutions mentioned above, either jointly or severally
- Custodians of securities who are registered with SEBI
- Clearing Corporation or Clearing Houses of Stock Exchanges
- Stock Brokers registered with SEBI
- Non-banking Finance Companies
- Registrar and Transfer Agents
NSDL has laid down in its bye laws, detailed admission criteria for its DPs. The application for registration as a DP by an organisation is forwarded to SEBI by NSDL, only if the applicant meets this admission criteria.
SEBI registers the DP after its scrutiny. Only SEBI registered DPs can carry on the Participant business.
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Issuer Company
As per the Regulations, equity shares, debentures, warrants, bonds, units of mutual funds etc. are eligible to be admitted to the depository for dematerialisation. The depository is empowered by the Depositories Act,to set its own criteria for selection of securities and make securities eligible for dematerialisation
If the Issuer Company proposes to admit its securities on the depository, an agreement is signed between NSDL, the Issuer Company and/or its Registrar & Share Transfer Agent. After, the Issuer Company and/or its Registrar & Share Transfer Agent installs the requisite hardware, software & telecommunication network, the securities are made available for dematerialisation.
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Clearing Corporation (CC) / Clearing House (CH)
As in the case of physical securities, the CC/CH facilitates clearing & settlement of trades that have taken place in the stock exchange in case of demat securities also. Every clearing member trading in demat securities must have a Clearing Member Account with any of the Depository Participants.
In order to facilitate settlement of trades executed in the depository segment on the stock exchange, the CC/CH of the respective stock exchange join NSDL as a CC.
At the end of the trading period, the CC/CH calculates the net obligation of each clearing member. After payin, the CC/CH uploads these net obligation details to NSDL in order to credit respective CM A/cs.
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Services offered by NSDL
NSDL offers a host of services to the investors through its network of DP's:
Maintenance of beneficial holdings through the DPs: NSDL maintains all information on investors' holdings in their accounts with the DPs. NSDL, also keeps updated records of account information of all investors to be channelised to the companies for the purpose of disbursing corporate benefits. A DP has to provide a statement of holdings to all its accountholders on a regular basis.
Dematerialisation: Conversion of physical certificates into dematerialised holdings at the request of the investor is called Dematerialisation. Shares have to be registered in the name of account holder to be accepted for dematerialisation at NSDL. Further, shares of only those companies, who have joined NSDL can be dematerialised. Dematerialisation takes place through the following steps:
- Investor surrenders defaced certificates along with Dematerialisation Request Form (DRF) to his DP
- DP intimates NSDL of the request through the system.
- DP submits the certificates along with DRF to the registrar.
- Registrar receives the dematerialisation request electronically from NSDL.
- Registrar validates the request, updates records & informs NSDL.
- NSDL credits the investor's account with the DP with the dematerialised shares.
- DP updates the investors of demat of his securities by way of a statement of transactions.
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Trading and settlement in dematerialised securities
Trading in dematerialised securities is quite similar to trading in physical securities. The major difference is that at the time of settlement, instead of delivery/receipt of securities in the physical form, the delivery/receipt is effected by means of book entry account transfer between depository account of the parties settling the trades.
Trading in dematerialised shares is presently available at ten major stock exchanges in India. These exchanges collectively account for more than 95% of all equity trades in Indian capital market.
Indian capital market is in a stage of transition with respect to settlement systems. Since the successful implementation of the depository system in India since 1996, SEBI, the market regulator have been providing regulatory nudge to move the market from account period settlement to international practice of rolling settlement.
Presently these stock exchanges have two major settlement segments. These include:
- a segment exclusive for trading in dematerialized securities which follows rolling setllment(T+5);
- a segment where trades could be settled either in the physical or in the dematerialised form as per the choice of the delivering client (unified, erstwhile - physical segment). This segment follows account period settlement.
- Since January 15, 1998, institutional investors can deliver only in dematerialised form in any of the segments in these exchanges with respect to a select list of securities (which is expanded from time to time).
- Since January 4, 1999, all category of investors can must compulsorily deliver only in dematerialised form with respect to a select list of securities (which is expanded from time to time) in both the above segments. For these scrips, from the date they become compulsory, the concept of market lot is eliminated in these exchanges. i.e. the tradable lot for these scrips is one share.
The settlement of trades in the stock exchanges is undertaken by the clearing corporation (CC)/ clearinghouse (CH) of the corresponding stock exchanges. While settlement of dematerialized securities are effected through NSDL, the funds settlement is effected through the clearing banks. The clearing members directly settle the physical securities with the CC/CH.
SEBI has announced that with effect from April 6, 1998, dematerialised securities can be delivered against delivery obligation in the physical market. This means an investor who has sold securities in the physical market can deliver either physical or dematerialised securities. But physical securities cannot be delivered again obligation in the market for dematerialised securities.
Rolling Settlement (T+5) - In case of rolling settlement cycle, the account period is reduced to one day. This means that if the broker executes the transaction (on behalf of the investor) on Monday, settlement of the same will be on the next Monday. Similarly, for trades executed on Tuesday, settlement will be on the next Tuesday and so on. Trading in dematerialised securities can be bifurcated into market trades and off market trades Market Trades are those trades that are cleared & settled through the CC/CH of the stock exchange. Market Trade (sale of securities) - An investor selling securities intimates his broker to sell his securities in the depository or physical segment of the market. After the deal is executed, the investor gives his DP a Delivery Instruction Slip, thus authorising the DP to debit his account. The Clearing Member gives his DP a corresponding Receipt Instruction Slip (or a standing instruction), authorising his DP to credit his account. Based on these two instructions, securities are transferred from the investor's account to the clearing member's account. On the Pay-in day, the CM's DP(at the instruction of the Clearing Member) debits the Clearing members account and delivers the securities to the CC/CH.
Market Trade (purchase of Securities) - An investor purchasing securities intimates his broker to purchase securities from the depository segment of the market . After the deal is executed, the investor gives his DP a Receipt Instruction Slip (or a standing Instruction), thus authorising the DP to credit his account. On the Pay-out day, Clearing Member gets credit into his account from the CC/CH. The Clearing Member then gives a corresponding Delivery Instruction Slip to his DP, authorising the DP to transfer the securities from his account to the investor's account. The DP transfers the purchased securities. In the depository segment, pay in & pay out of securities takes place on the same day.
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Off Market Trades are those trades that are cleared and settled without the participation of the CC/CH of the stock exchange.
In this case, the buyer and the seller negotiate the trade with each other. The seller then gives his DP a Delivery Instruction Slip, authorising the DP to debit his account with the sold securities. The buyer gives his DP a corresponding Receipt Instruction Slip (or a standing Instruction), authorising the DP to credit his account with the purchased securities.
Receipt of allotment in the dematerialised form: In case of public issues, the applicant can specify upfront the manner in which he wishes to receive his allotment i.e. in the form of physical certificates or in the form of electronic credit in an account maintained with a DP. In case the investor prefers the electronic mode, he has to mention his depository account number, name of his DP and DP Identification Number, so that the allotted securities are credited into his account. Thus it is possible for an investor (beneficial owner) to receive allotment of securities directly into his account.
Receipt of corporate benefits: NSDL provides details of the beneficial owners as on (the record date) to the issuer company/registrar so as to enable the company to calculate the benefits arising out of these holdings.
Shareholders are given the option by the issuer, of receiving their securities entitlements (like bonus or rights) in the form of physical certificates or in the form of dematerialised holdings. If the investor chooses to receive securities in the dematerialised form, he gets a direct credit to his account through NSDL, thereby avoiding the risk of loss of certificates in transit.
The cash corporate benefits dividend and interest are forwarded to the investor by the company' or its registrar and transfer agents directly.
Rematerialisation: The conversion of dematerialised holdings back into physical certificates is called rematerialisation. Typically, a rematerialisation takes place through the following steps:-
Beneficial owner submits Rematerialisation Request Form (RRF) to DP
- DP intimates NSDL of the request through the system
- DP submits RRF to the registrar
- NSDL confirms rematerialisation request to the registrar
- Registrar updates accounts and prints certificates & inform NSDL
- NSDL updates investor's accounts and downloads details to DP
- Registrar despatches certificates to investor
Pledging & Hypothecation facilities : NSDL provides beneficial owners with the facility to pledge/hypothecate securities held in dematerialised form.
The securities lying in the beneficiary account of the investor - borrower (pledgor) can be pledged infavour of a lender (pledgee). The pledged securities are blocked in favour of the lender /pledgee who can release the pledge once his loan is re-paid by the borrower. If the borrower fails to repay the loan, the pledgee can invoke the pledge in accordance with the pledge deed. On invoking the pledge, the securities will get transferred to the lenders account, in it's name immediately.
Freezing/locking of investor accounts: An investor can freeze/lock his account for any given period of time if he so desires. During this period, no debits can be made to the investors account.
Stock lending & borrowing facilities: NSDL also facilitates stock lending & borrowing of securities held in dematerialised form.
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