The move implies that there would be no option for an investor to trade in physical shares at a smaller exchange. Sebi had mandated that investors would be able to trade in only demat shares of some select stocks at those exchanges which had signed up for connectivity with the depository.

Hence, an investor could still trade in physical shares at exchanges which had not signed up with the depository. Currently, out of the 25-and-odd stock exchanges, only nine stock exchanges have signed up with the depository.

These include the National Stock Exchange and the stock exchanges of Mumbai, Bangalore, Chennai, Calcutta, Delhi, Ludhiana, the Over The Counter Exchange of India (OTCEI) and the newly-created Inter Connected Stock Exchange (ICSE).

Although these exchanges account for a bulk of the trades thattake place in the Indian market, the smaller exchanges were providing an ideal platform to some operators to continue trading in physical shares, which was nullifying the very purpose of spreading the demat culture across the country, especially to smaller cities and towns.

In a circular issued on May 19, Sebi says: "In view of the increase in volumes in dematerialised trading on account of the increase in number of scrips to be compulsorily traded in dematerialised form and increase investor preference for dematerialisation, it is now felt necessary that the clearing houses/corporations of all the stock exchanges should be connected to all the depositories for effective and prompt clearance and settlement of the trade in dematerialised securities."

"Under regulation 31 of Sebi (Depository and Participants) Regulations, 1996, every depository is required to maintain continuous electronic means of communication with the clearing houses and clearing corporations of the stock exchanges. This is necessary forthe effective, prompt and accurate clearance and settlement of trade in dematerialised securities. You are therefore, required to establish connectivity of your clearing house/clearing corporation with all the depositories registered with Sebi in the form of continuous electronic means of communication to enable speedy and smooth settlement of transactions in dematerialised securities," states the Sebi circular.

The National Securities Depository Ltd (NSDL), till recently the only depository in operation had stipulated that an exchange must have a trade guarantee fund of adequate corpus before being allowed to connect to the depository.