ON
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ABSTRACT :
A bank or company which holds funds or securities deposited by others, and where exchanges
of these securities take place. In this paper we studied about Depositories, Depositories System
and its role in role in the Indian Capital Market. Apparently a depository can be equally treated
like a bank. Generally we open an account in a bank where our money is kept for giving us their
services in money transaction mostly in a transparent way. Likewise, a depository holds
shares, debentures, bonds and units etc of an investor in electronic form and offers their
transactional services towards selling and buying of shares/stocks in stock market also in a
transparent manner.
RESEARCH METHODOLOGY:
The methodology adopted by me is that of literature review wherein I have referenced some past
researches and have taken help of already done and existent data to draw conclusions. My
research I solely based upon secondary means in which I have taken help of books, magazines
articles and law journals to form opinions.
RESEARCH QUESTIONS
To find out what is the Functions and role of depository in secutiries market ? advantage and
disadvantage of depository system ?
LITERATURE CONSULTED
Law relating to Depositories with Special Reference to India: An Analytical Study”- Atin Kumar
Das and The Company Law- C.R Dutta .
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INTRODUCTION
On the simplest level, depository is used to refer to any place where something is
deposited for storage or security purposes. More specifically, it can refer to a
company, bank or an institution that holds and facilitates the e xchange of securities. Or a
depository can refer to a depository institution that is allowed to accept monetary deposits
from customers. Depository is an institution or a kind of organization which holds securities
with it, in which trading is done among shares, debentures , mutual funds, derivatives, F&O
and commodities.
Indian capital market has been witnessing rapid growth in recent past. However, this growth
has not watched with supporting infrastructure to handle the growing volume of paper that
has flooded the market, choking our existing system. This has caused problems like delay in
transfers, long settlement period, high levels of failed trade and bad deliveries, high-risk e
xposure etc. These characteristics were normally the attributes of an under developed
market. To overcome delay in forgerly certificates , mutilation of certificates , settlement,
loss in transit, , stolen certificates, lit igation etc. a new system of trading, viz. Depository
system was introduced, which facilitates investor to hold securities in electronic form and to
trade in these securities.
The needs for depository occur mainly due the following reasons:
The first depository set up in India is National Securities Depository Limited (NSDL)
and is promoted by IDBI, UTI and NSE.
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Services provided by Depository
DEPOSITORY PARTICIPANT
DEPOSITORY SYSTEM
The Depository System is an improvement over the age-old scrip based share trading
system, where shares were held in the form of physical share certificates.
Under the Depository System, shares are kept in the form of electronic entries in the records
of Depository. The share- related transactions are also done electronically. The actual
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shareholders enjoy all their rights, viz., dividend, voting rights etc.
CDSL: Central Depository Services Limited (CDSL), is the second Indian central
securities depository based in Mumbai. Its main function is the holding securities either in
certificated or uncertificated (dematerialized) form, to enable book entry transfer of
securities.
All the functions of depositories are undertaken by NSDL with the help of electronic
network. The magnitude of transactions of NSDL could be judged by the volume of
transactions undertaken by NSE which has gone up multifold. This is no mean an
achievement, especially when the NSE could overtake BSE within 10 years of its
inception. Comparatively, BSE is 125 years old. Their role comes into play from the time
an investor makes a decision on investing. Their role comes into play from the time an
investor makes a decision on investing. In India, there are two depositories namely
National Securities Depository Limited (NSDL) or Central Depository Services (India)
Limited (CDSL) that are registered with SEBI.
Securities Market- Functions and Classifications:
The definition of 'Securities' as per the Securities Contracts Regulation Act (SCRA), 1956,
includes instruments such as shares, bonds, scrips, stocks or other marketable securities of
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similar nature in or of any incorporate company or body corporate, government securities,
derivatives of securities, units of collective investment scheme, interest and rights in securities,
security receipt or any other instruments so declared by the Central GovernmentSecurities.
Markets is a place where buyers and sellers of securities can enter into transactions to purchase
and sell shares, bonds, debentures etc. Further, it performs an important role of enabling
corporates, entrepreneurs to raise resources for their companies and business ventures through
public issues. Transfer of resources from those having idle resources (investors) to others who
have a need for them (corporates) is most efficiently achieved through the securities market.
Stated formally, securities markets provide channels for reallocation of savings to investments
and entrepreneurship. Savings are linked to investments by a variety of intermediaries, through a
range of financial products, called 'Securities'.
Transfer of ownership (securities markets transfer existing stocks and bonds from owners
who no longer desire to maintain their investments to buyers who wish to increase those
specific investments. There is no net change in the number of securities in existence, for
there is only a transfer of ownership. The role of securities market is to facilitate this transfer
of ownership. This transfer of securities is extremely important, for securities holders know
that a secondary market exists in which they may sell their securities holdings. The ease with
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which securities may be sold and converted into cash increases the willingness of people to
hold stocks and bonds and thus increases the ability of firms to issue securities)
Insurance (hedging) of operations though securities market (options, futures, etc...)
Primary market:
Fresh issues of shares and other securities are effected though the Primary market. It provides
issuers opportunity to issue securities, to raise resources to meet their requirements of business.
Equity issues can be effected at face value or at discount/premium. Issues at discounts are rare
and almost unheard of. Issuers can issue the securities in domestic market and/or international
market through ADR/GDR/ECB route.
Secondary market
Investors can buy and sell securities in secondary market from/to other investors. The securities
are traded, cleared and settled through intermediaries as per prescribed regulatory framework
under the supervision of the Exchanges and oversight of SEBI. The regulatory framework has
prohibited trading of securities outside the exchanges. There are 24 exchanges (The Capital
Stock Exchanges, the latest in the list, is yet to commence trading) today recognised over a
period of time to enable investors across the length and breadth of the country to access the
market.
Derivatives market
Derivatives are contracts that are based on or derived from some underlying asset, reference rate,
or index. Most common financial derivatives are: forwards, futures, options and swaps,
Derivatives trading commenced in India in June 2000 after SEBI granted the final approval to
this effect in May 2000 for trading in index futures, currently, the Indian markets provide equity
derivatives of the following types:
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• Index Futures-Two Indices
Derivatives help to improve market efficiencies because risks can be isolated and sold to those
who are willing to accept them at the least cost. Using derivatives breaks risk into pieces that can
be managed independently. Corporations can keep the risks they are most comfortable managing
and transfer those they do not want to other companies that are more willing to accept them.
From a market-oriented perspective, derivatives offer the free trading of financial risks.
Financial derivatives have changed the face of finance by creating new ways to understand,
measure, and manage financial risks. Ultimately, derivatives offer organizations the opportunity
to break financial risks into smaller components and then to buy and sell those components to
best meet specific risk-management objectives. Moreover, under a market-oriented philosophy,
derivatives allow for the free trading of individual risk components, thereby improving market
efficiency. Using financial derivatives should be considered a part of any business’s
riskmanagement strategy to ensure that value-enhancing investment opportunity can be pursued.
CONCLUSION
Share certificates, on dematerialization, are cancelled and the same will not be sent back
to the investor. The shares, represented by dematerialized share certificates are fungible
and, therefore, certificate numbers and distinctive numbers are cancelled and become
non-operative.
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It enables processing of share trading and transfers electronically without involving share
certificates and transfer deeds, thus eliminating the paper work involved in scrip-based
trading and share transfer system.
Transfer of dematerialized securities is immediate and unlike in the case of physical
transfer where the change of ownership has to be informed to the company in order to be
registered as such, in case of transfer in dematerialized form, beneficial ownership will be
transferred as soon as the shares are transferred from one account to another.
The investor is also relieved of problems like bad delivery, fake certificates, shares under
litigation, signature difference of transferor and the like.
There is no need to fill a transfer form for transfer of shares and affix share transfer
stamps.
There is saving in time and cost on account of elimination of posting of certificates.
The threat of loss of certificates or fraudulent interception of certificates in transit that
causes anxiety to the investors, are eliminated.
Some disadvantages were about the depository system were known beforehand. But since the
advantages outweighed the shortcomings of dematerialisation, the depository system was given
the go-ahead.
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dematerialization. These may cause anxiety to the investor desirous of simplicity in terms
of transactions in dematerialized securities.
Besides the above mentioned disadvantages, some other problems with the system have been
discovered subsequently. With new regulations people are finding more and more loopholes in
the system. Some examples of the malpractices and fraudulent activities that take place are:
ANNOTATED BIBLIOGRAPHY
[4].www.indiastudychannel.com/resources/158299-Role-Depository-Participants-stock-
market.aspx
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[5]. Essays, UK. (November 2013). The Need For Depository Systems In India
Finance Essay.Retrieved from www.ukessays.com/essays/finance/the-need-for-depository-
systems-in-india-finance-essay.php?cref=1
[14] Law relating to Depositories with Special Reference to India: An Analytical Study”- Atin
Kumar Das
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