Justify the following statements.
1. Electronic holding of securities is safer than physical holding.
Ans. (a) The process of holding securities in electronic form is known as Dematerialization. Depository is the custodian of the securities and it is the most secure and safe way of holding securities.
(b) In physical holding of shares, there is a limitation like certificates can be lost, damaged, stolen, torn, etc. Whereas, securities in electronic mode eliminates the risk which existed in physical holding.
(c) Under this system, transactions of shares carried out in electronic form. Thereby the process involved in it is fast, secure and safe.
(d) So, shares are held in electronic form with depository so as to avoid fraud, thefts, forgery of shares certificates. Thus, it is rightly justified that, electronic holding of securities is safer than physical holding.
2. Depository provides easy and quicker transfer of shares.
Ans. (a) Depository is a system or an organisation which holds the securities in demat form. In other words, shares are held in electronic form.
(b) Under this system, efforts in filling transfer forms and lodging the documents is eliminated. 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.
(d) Thus, it is rightly justified that, Depository provides easy and quicker transfer of shares.
3. Depository system results in reduced time, cost and efforts.
Ans. (a) Under depository system, shares are kept in electronic form. So, electronic transaction of securities / shares save time.
(b) It eliminates handling of huge volumes of paper work involved in filing the transfer deeds.
(c) Also, it reduces the efforts in filling transfer forms and lodging the documents with the company.
(d) Thus, it is rightly justified that, depository system results in reduced time, cost and efforts.
4. Depository system is very similar to the Banking system.
Ans. (a) The Depository System resembles the Banking system in many aspects. The bank transfers money without handling money. The depository system transfers securities / shares without handling securities / shares.
(b) A bank facilitates safe keeping of money. The depository system facilitates safe keeping of securities / shares.
(c) A bank holds funds in an account. The depository system holds securities / shares in an account.
(d) The bank transfer funds between accounts on the instruction of account holders. The depository system transfer securities / shares between accounts on the instruction of account holders. Thus, it is rightly justified that, Depository system is very similar to the Banking system.
5. DP is an important constituent of Depository system.
Ans.(a) A Depository Participant is an agent of the depository. It functions as a bridge between the depository and the beneficial owners.
(b) The DP maintains account of securities of each investor and has a unique number for identification.
(c) It enjoys rights and obligations as specified under SEBI (Depository and Participants) Regulations of 1996.
(d) DP directly deals with customers and send statement of accounts periodically to them. Thus, it is rightly justified that, DP is an important constituent of Depository system.
6. Depository system allows both : Physical to electronic and electronic to physical conversion.
Ans. (a) Dematerialization is a process of converting physical certificates of securities into electronic form. Whereas, Rematerialization is the process of conversion of electronic form of securities into physical form.
(b) Under Demat, the client has to surrender the certificates along with the Demat Request Form (DRF). The DP forwards certificate and DRF to the Depository who in turn forwards it to the Issuer. After confirmation from Issuer, the Depository will credit the securities in the Demat A/c with DP.
(c) Under Remat, the client have to fill up a Remat Request Form (RRF) and submit it to the depository participant. The DP forwards the request to depository and issuer after verifying the client’s balances, prints the certificates and despatches the same to the client. After that, the Depository via the DP debits account of the client with those securities.
(d) Thus, it is rightly justified that, Depository system allows both physical to electronic and electronic to physical conversion.
7. ISIN is necessary component of Demat.
Ans. (a) An International Securities Identification Number (ISIN) uniquely identifies a security. The ISIN code is a 12-character alphanumeric code that serves for uniform identification of a security. ISIN’s in any country are allotted by National Numbering Agency (NNA) of that country.
(b) In India, the task of issuing ISIN for various securities has been assigned by the Securities and Exchange Board of India (SEBI) to the National Security Depository Limited (NSDL).
(c) For the government securities, the allotment of the ISIN code is regulated by the Reserve Bank of India (RBI).
(d) The company has to apply for ISIN for its securities of documents like prospectus. It is also needed for the companies seeking to raise capital whether debt or equity to investors in demat mode. Thus, it is rightly justified that, ISIN is necessary component of Demat.