Answer the following questions.
1. What is Depository System and explain its advantages.
Ans: Meaning :
(a) Under Depository System, securities / shares are held in an electronic form. The Depository System maintains accounts of the shareholders, enables transfer, collects dividends, bonus shares, etc. on behalf of the shareholder. This system is also called as ‘Scripless Trading System’.
(b) In India the Depository System was introduced by passing the Depository Act in 1996. The Depository System resembles the Banking system in many aspects.
BENEFITS / ADVANTAGES OF DEPOSITORY SYSTEM
A) To Investors :
1) Elimination of Risk : All risks associated with physical certificates like delays, lost, theft, mutilation, bad deliveries, etc. are totally eliminated.
2) Safety : It is the most safe and secure way of holding securities. The entire system functions under the Depository Act and is monitored by SEBI. eg. The Investor can keep his account in a ‘Freeze / Lock’ mode to avoid prevent unexpected debit or credit or both by giving instructions to the DP.
3) Easy Transfer of shares :
(a) Efforts in filling transfer forms and lodging the documents is eliminated
(b) Also the stamp duty levied on transfer of physical shares is not applicable.
(c) Processing time in transfer of securities is reduced and neither the securities nor the Cash is tied / held up for unnecessarily long time.
4) Updates and Intimation : The Investor is provided with the status of the holdings and transactions by DP and occasionally by the Depository too.
5) Security against Loan: Dematerialised securities are preferred by banks and financial institutions as security against loan,
6) No concept of Lots: The system of odd and even lot stands abolished. The market lot is one share for dematerialised securities.
7) Nomination Facility : Individual Investors can avail of nomination facility. This simplifies the process in the event of the death of the investor.
8) Automatic Credit: The account of investor is automatically credited/debited in case of change initiated by the company which impacts the securities. This is called ‘Corporate a Action’. Few examples which can be termed as Corporate Action are : Payment of Dividend, Issue of Bonus Shares, Offering of Rights Shares. Early Redemption of Debentures, Mergers and Acquisitions, etc.
B) To Companies:
1) Up-to-date Information: The up-to-date information about investors is provided by the depository
2) Reduction in costs and efforts: Costs, efforts and time involved in printing and distribution of certificates in cases of new issues, bonus, transfers, etc. is saved.
3) Better Investor – Company Relationships : The complaints arising out of loss of certificates, signature differences, long lapses of time in executing requests, etc, is substantially reduced. It leads to better communication with investors and increased goodwill for the company.
4) International Investment: Under Depository System, better and quicker services can be provided and this attracts investments from abroad.
2. Explain the constituents of Depository system.
Ans: All operations under the Depository System is performed by Depository with the help of its constituents as explained below:
(1) The Depository:
Constituents of Depository System
(1) The Depository:
1) It is an organization like the Central Bank where securities are held in electronic form at the investor’s request.
2) It also provides different services related to different transactions in such securities.
3) It is responsible for safe-keeping of the investor’s securities.
4) There is no direct access of investor with the Depository.
5) It works as a link between the company and investors.
(2) Depository Participant (DP) :
1. It is the agent of Depository
2. DP is registered under the SEBI Act. It enjoys rights and obligations as specified under SEBI (Depository and Participants) Regulations of 1996.
3. It is an intermediary appointed by Depository.
4. DP acts as a link between Depository and the investor.
5. It directly deals with customers. It sends statement of accounts periodically.
6. It functions like a securities bank.
7. It facilitates Demateralisation.
8. It credits securities in the event of Rights Issue, Bonus Issue, etc.
9. It handles instant transfers of pay-outs like dividend, interest, etc.
10. It settles trade electronically.
11. Following can work as DP’s :
a) Financial Institutions
b) Banks
c) Approved Foreign Banks
d) Custodians : Responsible for overseeing operations of assets/fund.
e) Stock Brokers
f) Clearing Corporation
g) NBFC (Non Banking Financial Company)
h) Registrar to an Issue or Share Transfer Agents
12. The DP maintains account of securities of each investor.
13. The DP has a unique number for identification.
(3) The Beneficial Owner (BO):
1. The BO is the investor of securities who has availed the services of Depository Participant
2. BO is entitled to all rights, benefits and is subject to all liabilities with respect to securities held by Depository.
3. The BO can also be called as client of Depository and DP
4. BO Client is required to open a Demat account with the DP for electronic holding of securities. BO has to pay charges to the DP for availing the services of DP
5. BO is given a unique account number in which securities are held.
(4) The Issuer Company :
1. It means the company which has issued the securities which are dematerialized.
2. It must register with the depository.