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D S Mehta
A large number of investors are ignorant of the recently introduced `depository services' in India to replace the present scrip-based system with `paperless' trading through state of the art technology.
What is the depository system? What services does it provide? How is it different from the existing system? What are its constituents? What are the benefits for investors in it? Should it be introduced on a compulsory basis?A knowledge of the depository mechanism is important before an investor opts for it. We at present follow long prevalent scrip-based transactions in shares involving enormous paper work.
The process of buying shares through the stock exchanges and getting the certificates duly endorsed in the buyer's name is quite complex, time consuming and riddled with problems like bad deliveries, arising out of differences in signatures, duplicate, and forged share certificates, fake endorsements, fraudulent transfer of shares, interception of certificates and transfer documents in transit,inordinate delay in transfer by companies, cost towards payment of stamp duty, posted or courier cost.
In simple terms, a depository is a bank. It functions very much like the banking system. Banks hold funds in accounts, transfer funds between accounts, and transfer the same without handling money. It also safeguards the money of the bank depositors. Similarly, the depository holds securities in accounts, transfers securities between accounts and does it without handling securities. It also keeps securities. The depository system enables conversion of physical securities to electronic form. It also helps in settlement through a process of dematerialisation of share certificates.
It also facilitates share transaction and transfers electronically without involving any share certificate or transfer deed. with a view to eliminate the cumbersome paperwork and associated problems, the National Securities Depository Ltd (NSDL) has been promoted by UTI, IDBI and NSE.
Depositories are licensed by the Securitiesand Exchange Board of India (Sebi). They have a number of benefits. There are no bad deliveries.
Transfer of shares and registration of securities is immediate, increasing liquidity of stocks with investors. There is no stamp duty on transfer of shares. The depository system not only reduces transaction cost but also eliminates the risk associated with physical certificates such as loss, theft, mutilation and forgery. Disbursement of corporate benefits like rights and bonus is faster. there is also reduction in rate of interest on loans granted against pledge of dematerialised securities by banks.
reduction in brokerage, for trading in dematerialised securities is yet another advantage.
There are four constituents of depository system, namely depository participants (DP), companies and registrars and the investors. According to Sebi guidelines, financial institutions, banks, custodians and stock brokers can become depository participants.
The process of opening an account with a DP is similar to theopening of a bank account. One can approach any DP and fill up an account opening form. At the time of opening an account, DPs will sign a standard agreement with the investor, which details the rights and duties of the investor and DP. The investor is allotted an unique ID number, which is to be quoted in all future correspondence.
There are absolutely no restrictions on the number of DPs, one can open an account with. If one holds shares in different permutations and combinations, he has to open as many accounts as one holds jointly in various names. The depository does not prescribe any minimum balance. In fact, one can even have zero balance.
Dematerialisation is the process by which physical certificates of an investor is converted to an equivalent number of securities in electronic form and credited to the investor's account with his DP, same as cash is deposited in the bank account. One can get back his securities in physical form. This can be done by rematerialisation through DPs.
The procedurefor selling dematerialised shares in stock exchanges is similar to the procedure for selling physical shares. In this case, instead of delivering physical shares to the broker, one instructs the DP to debit your account with the number of shares sold by you and credit the broker's clearing account. the delivery instruction has to be given to the DP in a standardised form.
The procedure for buying dematerialised shares in stock exchanges is also similar to that of buying physical shares. When one wants to purchase shares in electronic form, he has to instruct the broker to purchase the dematerialised shares from the stock exchanges linked to NSDL. Once the order is executed, the buyer has to give instructions to DP to receive securities into his account from the broker's depository (clearing) account.
The advantages of buying dematerialised shares is that the investor becomes the owner of those shares as soon as they are credited into his account.
This is unlike the physical market where it may takeanywhere between two to three months to get the shares transferred. There is also saving on stamp duty. It is possible to get securities allotted to investors in public offering directly to dematerialised form.
In fact, in the public issue application form of depository eligible companies, there is a provision for the investor to indicate the manner in which he wants the allotment of securities. The investor holding shares in dematerialised form has an option of nominating a person who would be entitled to receive shares outstanding in his name in the event of his death. In case of demise of any joint holder, the other joint holders can get the securities transmitted in their favour on furnishing a copy of the death certificate through the DP.
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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