They fear that the Securities Exchange Commission (SEC) of the US may take a strong view on the matter, although Sebi officials have said that nothing of the sort will happen as the BSE-promoted Central Securities Depository (CSDL) will not kick off operations without connectivity with the existing depository.

Sebi had earlier this week given a certificate of commencement to CSDL. However, it is yet to obtain connectivity with the National Securities Depository (NSDL).

The SEC had allowed FIIs to invest through NSDL after it was convinced that NSDL was the sole depository. In the event of there being a second depository, continuous connectivity will have to be ensured between the two, it was stipulated.

At a meeting of the working group on depositories on Friday, a foreign custodian said that FII clients had expressed concern overthe lack of connectivity between the two depositories and were keen to know whether this will be done soon.

Sebi has, in its certificate of commencement to CSDL, not specified that connectivity should be ensured, but Sebi executive director Pratip Kar says that the two depositories and Sebi have been discussing the issue for over a month.

"The market apprehension is totally misplaced. The same set of market players who are now expressing apprehensions on the connectivity issue had expressed apprehensions over the SEC approvals earlier. Today, we have left those apprehensions far behind and SEC has given the no-objection certificate. In fact, we had to use compulsion to get these players to trade through the depository", he said.

"Similarly, the apprehensions on connectivity are unfounded. Sebi has taken steps and discussions between NSDL and CSDL have been concluded. Technically, they are not connected today but we are told that DoT has allowed them to connect through I-Net. The two depositories wouldhave to be connected before the second depository starts operations", said Kar.

Continuous connectivity involves obtaining approvals from DoT and this could take some time. Although technically two depositories can function without connectivity, it is felt that this could lead to a virtual split of the market.

As per Sebi regulations on depositories, it is imperative for two depositories to have continuous connectivity.