The move on depository was initiated by the Stock Holding Corporation of India Limited (SCHCIL) in July 1992 when it prepared a concept paper on ‘National Clearance and Depository Systems’ in collaboration with Price warehouse under a program sponsored by the US Agency for international Development. Thereafter, the Government of India constituted a technical group which submitted its report in 1993.
Subsequently, the Securities and Exchange Board of India (SEBI) constituted a seven member squad to discuss the various structural and operational parameters of the depository system. The Government of India promulgated the Depositories Ordinance in September 1995, thus paving the way for setting up of depositories in the country.
Some features of Depositories Ordinance are as follows:
1. The depository is a registered owner of the share we the shareholders is the beneficial owner retaining all the economic and voting rights arising out of share ownership.
2. Shares in the depository will be fungible.
3. Transfers pertaining to sale and purchase will be effected automatically
4. Any loss or damage caused to the participant will be indemnified by the depository.
5. If trades are routed through depository, there is no need to pay stamp duty.
The depositories Act was passed by parliament in August 1996. It lays down the legislative framework for facilitating dematerialization and book entry transfer of securities in a depository. The Act provides that a depository is required by a company under the Companies Act, 1956 and depository participants (DPs) need to be registered with SEBI. The investors have the option to hold securities in physical or dematerialized form or to rematerialize securities previously held in dematerialized form.
SEBI issued a consultative paper No X on the draft regulation for depositories and participants in October 1995 for wide consultation and notified the regulations in May 1996. SEBI has allowed multiple depositories to ensure competition and transparency.
The Depositories Related laws (Amendment) Ordinance, 1997 issued in January 1997, enabled units of mutual funds and UTI securities of statutory corporations and public corporations to be dealt through depositories. The Dhanuka Panel in its draft Depository Act (Amendment) Bill, 1998 recommended empowering SEBI it make trading in demat shares mandatory. SEBI laid down an elaborate time schedule envisaging that beginning January 4, 1999 till March 26, 2001, 3145 listed scrips or 40 per cent of the total listed securities would be traded compulsorily in the demat form, besides equity new debt issues will also be in demat form.
The Depository Process:
There are four parties in a demat transaction: the customers, depository and share registrar and transfer agent (R&T).
Opening an Account:
An investor who wants to avail of the services will have to open an account with the depository through a depository participant, who could either be a custodian a bank a broker, or individual with a minimum net worth of Rs 1 crore. The investor has to enter into an agreement with the DP after which he is issued a client account number or client ID number.
To convert his physical holdings of securities into the dematerialized form, the investor makes an application to the DP in a dematerialization request form (DRF). Within seven days, the DP forwards the form along with the security certificates to the issuer or its registrar and transfer agent after electronically registering the request with the depository.
The depository electronically forwards the demat request to the respective issuer or its registrar and transfer agent who verifies the validity of the security certificates as well as the fact that DRF has been made by a person recorded as a member in its register of members.
After verification, the issuer or its registrar and transfer agent authorizes an electronic credit for the security in favor of the client. Thereafter the depository causes the credit entries to be made in the account of the client.