After reading this article you will learn about:- 1. Meaning of Depository System 2. Facilities Offered By Depository System 3. Advantages.
Meaning of Depository System:
It is a system whereby the transfer and settlement of scrips take place not through the traditional method of transfer deeds and physical delivery of scrips but through the modern system of effecting transfer of ownership of securities by means of book entry on the ledgers or the depository without the physical movement of scrips.
The new system, thus, eliminates paper work, facilitates automatic and transparent trading in scrips, shortens the settlement period and ultimately contributes to the liquidity of investment in securities. This system is also known as ‘scripless trading system’.
There are essentially four players in the depository system:
(i) The Depository
(ii) The Participant
(iii) The Beneficial Owner, and
(iv) The Issuer.
(i) The Depository:
A depository is a firm wherein the securities of an investor are held in electronic form and who carries out the transactions of securities by means of book entry. The depository acts as a defecto owner of the securities lodged with it for the limited purpose of transfer of ownership. It functions as a custodian of securities of its clients.
The name of the depository appears in the records the issuer as the registered owner of securities.
At present there are two depositories in India:
(a) National Securities Depository Ltd. (NSDL), and
(b) Central Depository Services (India) Ltd. (CDSL).
National Securities Depository Limited which commenced operations during November 1996 was promoted by IDBI, UTI and National Stock Exchange (NSE). Central Depository Services (India) Limited commenced operations during February 1999. It was promoted by Mumbai Stock Exchange in association with Bank of Baroda, Bank of India, State Bank of India and HDFC Bank.
(ii) The Participant:
A participant is an agent of the depository. He functions as a bridge between the depository and the beneficial owners. He maintains the ownership records of every beneficial owner in book entry form. Both the depository and the participant have to be registered with the Securities and Exchange Board of India.
SEBI grants necessary approval for the same only on the satisfaction of the condition that adequate systems and safeguards are available in such companies in order to ensure against manipulation of records and transactions.
(iii) The Beneficial Owner:
Beneficial owner means a person whose name is recorded as such with a depository. A beneficial owner is the real owner of the securities who has lodged his securities with the depository in the form of book entry. He has all the rights and liabilities associated with the securities.
(iv) The Issuer:
The issuer is the company which issues the security. It maintains a register for recording the names of the registered owners of securities, the depositories. These issuers send a list of shareholders, who opt for the depository system, to the depositories.
Facilities Offered By Depository System:
The following are some of important facilities offered by depository system:
(a) Dematerialisation.
(b) Rematerialisation.
(c) Electronic settlement of trade.
(d) Nomination facility.
(e) Electronic credit of securities allotted in public, rights and bonus issue.
(f) Pledging or hypothecation of dematerialised securities.
(g) Freezing of demat accounts.
(h) Stock lending/borrowing facilities, etc.
Advantages of the Depository System:
The introduction of the depository system, it is claimed, would take away many of the ailments facing the present system, make the trading in scrips foolproof, would serve as a panacea and would ultimately contribute to the emergence of a highly efficient capital market. The system is expected to offer the much awaited custodial services to Indian and foreign investors together.
It is likely to bring about the following benefits to various investors, issuing companies as well as the nation:
a. Reduction in paper work.
b. Elimination of risks associated with physical scrips such as theft, forgery, multilation, loss of share certificates etc.
c. Elimination of bad delivers.
d. Increased liquidity of scrips through speedy settlement and reduction in delays in registration.
e. Low transaction costs for purchase and sale of securities compared to physical mode.
f. No stamp duty on transfer of securities.
g. Facilities the issuer companies to update the information regarding shareholders and to communicate with them in better ways.
h. Attract foreign investors and promoting foreign investment.
i. Emergence of healthy and efficient capital market.
j. Greater opportunity for the development of sophisticated custodial services etc.