4. Index
Serial Particulars Page
No. No.
1 About Ludhiana stock exchange
7
2 Introduction to capital market
16
3 Introduction to depository
29
4 DEPOSITORY SYSTEM 35
5 LEGAL FRAMEWORK 44
6
DEPOSITORY
ABOUT CDSL and NSDL 51
7 Types of Accounts SYSTEM 58
8 DEMAT & REMAT
71
Bibliography 79
Annexures 80
APPLICATION Form FOR OPENING AN ACCOUNT
For Individuals Only
For Corporates/Clearing Members only
APPLICATION Form FOR CLOSING AN ACCOUNT
4
6. About Ludhiana stock exchange:
The Ludhiana Stock Exchange Limited was established in 1981, by Sh. S.P. Oswal
of Vardhman Group and Sh. B.M. Lal Munjal of Hero Group, leading industrial
luminaries, to fulfil a vital need of having a Stock Exchange in the region of Punjab,
Himachal Pradesh, Jammu & Kashmir and Union Territory of Chandigarh. Since its
inception, the Stock Exchange has grown phenomenally. The Stock Exchange has
played an important role in channelizing savings into capital for the various industrial
and commercial units of the State of Punjab and other parts of the country. The
Exchange has facilitated the mobilization of funds by entrepreneurs from the public
and thereby contributed in the overall, economic, industrial and social development
of the States under its jurisdiction.
Ludhiana Stock Exchange is one of the leading Regional Stock Exchange and has
been in the forefront of other Stock Exchange in every spheres, whether it is
formation of subsidiary for providing the platform of trading to investors, for brokers
etc. in the era of Screen based trading introduced by National Stock Exchange and
Bombay Stock Exchange, entering into the field of Commodities trading or imparting
education to the Public at large by way of starting Certification Programmes in
Capital Market.
The vision and mission of Stock Exchange is:
"Reaching small investors by providing services relating to Capital Market including
Trading, Depository Operations etc. and creating Mass Awareness by way of
education and training in the field of Capital Market.
To create educated investors and fulfilling the gap of skilled work force in the domain
in Capital Market."
Further, the Exchange has 295 members out of which 162 are registered with
National Stock Exchange as Sub-brokers and 121 with Bombay Stock Exchange as
sub-brokers through our subsidiary.
6
7. DETAILS OF PRESIDENTS AND VICE PRESIDENTS
LSE SALUTES ITS PRESIDENT/ CHAIRMEN VICE PRESIDENT/ VICE CHAIRMEN
PRESIDENTS/ CHAIRMEN
Sr. No. Name of the person Tenure
1 Sh. S.P. Oswal 16.08.1983 to 27.07.1986
2 Sh. B.M. Lal Munjal 28.07.1986 to 15.10.1989
16.10.1989 to 30.10.1992
3 Sh. V.N. Dhiri
30.09.1998 to 04.10.2000
4 Sh. G.S. Dhodi 31.10.1992 to 22.12.1993
23.12.1993 to 05.10.1995
5 Sh. Jaspal Singh 01.10.1996 to 29.09.1998
06.10.2001 to 01.07.2002
6 Sh. M.S. Gandhi 06.10.1995 to 30.09.1996
7 Sh. R.C. Singal 05.10.2000 to 05.10.2001
8 Dr. B. B. Tandon, Chairman 25.06.2007 to 10.12.2007
9 Sh. S.P. Sharma, Chairman 15.07.2007 to 23.09.2008
10 Sh. Jagmohan Krishan 23.09.2008 to 29.09.2009
11 Prof Padam Parkash Kansal 30.09.2009 to till date
VICE PRESIDENTS/ VICE CHAIRMEN
Sr. No. Name of the person Tenure
1 Sh. Rajinder Verma 14.07.1984 to 08.08.1987
09.08.1987 to 15.10.1989
2 Sh. B.K. Arora
31.10.1992 to 22.12.1993
3 Sh. G.S. Dhodi 28.10.1991 to 30.10.1992
16.10.1989 to 27.10.1991
4 Sh. B.S. Sidhu
23.12.1993 to 05.10.1995
5 Sh. D.P. Gandhi 06.10.1995 to 26.09.1997
6 Sh. M. S. Sarna 27.09.1997 to 29.09.1998
7 Sh. T.S. Thapar 30.09.1998 to 04.10.2000
8 Sh. Tarvinder Dhingra 05.10.2000 to 05.10.2001
7
8. 9 Dr. Rajiv Kalra 06.10.2001 to 01.07.2002
10 Sh. D.K. Malhotra, Vice Chairman 025.06.2007 to 10.12.2007
Sh. Jagmohan Krishan, Vice
11 15.07.2007 to 23.09.2008
Chairman
12 Sh. Ravinder Nath Sethi 23.09.2008 to 08.10.2008
13 Prof Padam Parkash Kansal 09.10.2008 to 29.09.2009
14 Sh. Joginder Kumar 30.09.2009 to till date
Governance and management:
LSE has a strong governance and administration, which encompasses a right
balance of Industry Experts with highest level educational background, practicing
professionals and independent experts in various fields of Financial Sector. The
administration is presently headed by Sr. General Manager CUM Company
Secretary and team of persons having in-depth knowledge of Secretarial, Legal and
Education & Training.
The Governing Board of our Exchange comprises of eleven members, out of which
two are Public Interest Directors, who are eminent persons in the fields of Finance
and Accounts, Education, Law, Capital Markets and other related fields, Six are
Shareholder Directors, and Three are Broker Member Director and the Exchange
has four Statutory Committees namely Disciplinary Committee, Arbitration
Committee, Defaults Committee and Investor Services Committee. In addition, it has
advisory and standing committees to assist the administration.
LSE has a Code of Conduct in place that governs the elected Board Members and
the Senior Management Team. The same is monitored through periodic disclosure
procedures. The Exchange has an Ethics Committee, which looks into any issue of
conflict of interest and has in place general code of conduct for the Senior Officials.
The composition of the Governing Board is as under:-
8
9. Composition of the Governing Board
Sr. No. Name of Director Category
Chairman
1 Prof. Padam Parkash Kansal
(Shareholder Director)
Vice Chairman
2 Sh. Joginder Kumar
(Shareholder Director)
3 Sh. Rajinder Mohan Singla Shareholder Director
4 Sh. Satish Nagpal Shareholder Director
5 Sh. Vikas Batra Shareholder Director
6 Sh. Varun Chhabra Shareholder Director
Registrar of Companies (Public
7 Dr. Raj Singh
Interest Director)
8 Sh. Ashwani Kumar Public Interest Director
9 Sh. V.P. Gaur Public Interest Director
10 Sh. Jaspal Singh Trading member Director
11 Sh. Sunil Gupta Trading Member Director
12 Sh. Sanjay Anand Trading member Director
Strength of LSE group
9
10. 1. “LSE” brand is popular among masses. The brand image of LSE can be
capitalized.
2. We have requisite infrastructure for the Capital Market activities which includes a
multi-storeyed, centrally air conditioned building situated in the financial hub of the
city i.e. Feroze Gandhi Market.
3. We have well experienced staff handling operations of Stock Exchange.
4. We have competent Board and professional management.
5. We have much needed networking of sub brokers in the entire region, who are
having rich experience in Stock Market operations for the last 25 years.
6. We have more than 40,000 clients spread across Punjab, Himachal Pardesh,
Jammu & Kashmir and adjoining areas of Haryana and Rajasthan.
7. The turnover of our subsidiary is the highest amongst all subsidiaries of Regional
Stock Exchanges in India.
Infrastructure and asset base at Ludhiana stock exchange
10
11. The Exchange building is situated at Feroze Gandhi Market, Ferozepur Road,
Ludhiana. It is a six storeyed building, which is centrally air-conditioned. The building
has 262 rooms, which are located on various floors ranging from second to fifth. The
first floor of the building houses the administrative office and rooms from second to
fifth floors have been leased out to brokers. The first floor also has canteen and
banking facilities. Investor Service Centre is also located at first floor which houses a
well-equipped library and view-terminals to provide “live” rates of NSE and BSE to
investors. Investors are also provided with Cable TV for the purpose of viewing the
latest happenings in the Capital Market and around. Basement of the building has
air-conditioning plant and Generators to provide air-conditioned environment and
twenty-four hours power back up.
The Exchange has also an additional plot of land measuring 2333 sq. yards in the
prime location of city, to enhance its infrastructure and source of income.
Status of subsidiary – LSE Securities Limited
Due to Nation-wide reach of bigger Stock Exchanges, the trading volumes at
Ludhiana Stock Exchange declined and ultimately, the trading stopped in February,
2002, but the Stock Exchange converted the threat of bigger Exchanges into
opportunities and acquired the corporate membership of these exchanges through
its subsidiary company i.e. LSE Securities Limited.
We have now been providing Trading Platforms of Bigger Stock Exchanges to the
Investors of the region. The vast network of Brokers of the Exchange is servicing
millions of Investors. The subsidiary company is also providing depository services in
the State of Punjab and Himachal Pradesh. The allied services like PAN Service
11
12. Centre, Investor Service Centres are also being provided at major locations of the
region.
The turnover of subsidiary is highest amongst all the subsidiaries of Regional Stock
Exchanges. The growth of subsidiary is swift and it has been providing a range of
services to the public at large such as Trading, Depository, and IPO bidding
collection Centre.
The Company in its continuous endeavour to provide qualitative services to its
valued clients, has started e-broking trading services for its clients, thereby
increasing the geographical reach of the company.
LISTING OF SECURITIES OF COMPANIES AT LUDHIANA STOCK EXCHANGE
At present, Ludhiana Stock Exchange has 330 listed companies, out of which 214
are regional and 116 are Non-regional. The total listed capital of aforesaid
companies is Rs. 3168.91 Crores approx. The market capitalization of the said
companies is more than Rs. 3372.34 crores. The Stock Exchange is covering the
vast investor base through the listing of above said companies, which are situated in
the region comprising of Punjab, Himachal Pardesh, Jammu & Kashmir, and
Chandigarh.
Despite the fact, the implementation of SEBI (Delisting of Securities) guidelines,
2003 has resulted into the Delisting of good companies listed at Exchange, however
still there are leading Companies listed with our Exchange, notable among them are
United Breweries Limited, Vardhman Acrylics Limited, SMC global securities limited,
Himachal Futuristic Communications Limited etc.
Ludhiana Stock Exchange has facilitated the capital generation for agro based
industries as Punjab is an agricultural led economy. It will continue to do so, once it
12
13. gets approval for a tie up with bigger Exchanges for commencing trading operations.
INVESTOR RELATED SERVICES
The Exchange has been providing a variety of services for the benefit of investing
public. The services include Investor Service Centres, Investor Protection fund and
Investor Educational Seminars.
(i).Investor Service Centres
The Exchange has set-up Investor Service Centres at various DP branches of its
subsidiary for providing information relating to Capital Market to the general public.
The Centres subscribe to leading economic, financial dailies and periodicals. They
also store the Annual Reports of the companies listed at the Stock Exchange. The
Investor Service Centres are also equipped with a Terminal for providing “live” rates
of trading at NSE and BSE. A large number of the investors visit the centres to utilize
the services being provided by the Exchange.
(ii).Investor Awareness Seminars
The Exchange has been organizing Investor Awareness Seminars for the benefit of
Investors of the region comprising State of Punjab, Himachal Pradesh, Jammu &
Kashmir, Chandigarh and adjoining areas of Haryana and Rajasthan. This massive
exercise of organizing Investor Awareness Seminars has been launched as a part of
Securities Market Awareness Campaign launched by SEBI in January, 2003. The
Exchange apprises the investors about Do’s and Don’ts to be observed while dealing
in Securities Market. Till date, Exchange has organized more than 200 workshops in
the region mentioned above.
(iii).Website of the Exchange: www.lse.co.in
The Exchange has its own website with the domain name www.lse.co.in. The
website provides valuable information about the latest market commentary, research
reports about companies, daily status of International markets, a separate module for
Internet trading, information about listed companies and brokers and sub-brokers of
the Exchange and its subsidiary. The website also contains many useful links on
13
14. portfolio management, investor education, frequently asked questions about various
topics relating to Primary and Secondary Market, information about Mutual Funds,
Financials of the Company including Quarterly Results, Share Prices, Profit and Loss
Accounts, Balance Sheet and Many More. The website also contains daily Technical
Charts of various scripts being traded in BSE and NSE
EDUCATIONAL INITIATIVES OF EXCHANGE
LSE has carved out its unique position among the Stock Exchanges of the country for the
Knowledge Management. It has set up an Education and Training Cell and the same has
emerged as a leading facility in various Financial Services in India. The Exchange has been
conducting a unique certification programme in Capital Market in association with Centre for
Industry Institute Partnership Programme Punjab University, Chandigarh for the last three
year. This programme has widened the horizons of participants vis-à-vis Capital Market
Operations as practical skill based knowledge is provided by Stock Brokers, Stock Exchange
Officials, Professors of Finance and Business Management and above all Professionals
working in different areas of Capital Market. We have completed series of batches of this
programme and we now want to scale up this programme and are planning to launch various
other programmes on areas relating to Securities Market.
We have edge over others as far as Education and Training in Financial Services is
concerned due to following factors:
a. Directly connected with the Industry as Regional Stock Exchange.
b. Connected with large base of Investors as they use the Stock Exchange as a Trading
Platform for their liquidity needs
c. Presence in the region of Punjab, Himachal Pradesh, Jammu & Kashmir and Chandigarh
through our branches Network and the area being under the jurisdiction of our Exchange.
d. Already running Certification programmes in Capital Market successfully.
e. Continuously holding Investor Awareness Programmes for Investors & Investor Groups
through association with Brokers, Sub-brokers, Colleges, Universities and Consumer
Groups.
14
16. Capital Markets
Introduction
Markets exist to facilitate the purchase and sale of goods and services. The financial
market exists to facilitate sale and purchase of financial instruments and comprises
of two major markets, namely the capital market and the money market. The
distinction between capital market and money market is that capital market mainly
deals in medium and long-term investments (maturity more than a year) while the
money market deals in short term investments (maturity up to a year).
Capital market can be divided into two segments viz. primary and secondary. The
primary market is mainly used by issuers for raising fresh capital from the investors
by making initial public offers or rights issues or offers for sale of equity or debt. The
secondary market provides liquidity to these instruments, through trading and
settlement on the stock exchanges.
Capital market is, thus, important for raising funds for capital formation and
investments and forms a very vital link for economic development of any country.
The capital market provides a means for issuers to raise capital from investors (who
have surplus money available from saving for investment). Thus, the savings
normally flow from household sector to business or Government sector, which
normally invest more than they save.
A vibrant and efficient capital market is the most important parameter for evaluating
health of any economy.
16
17. Functions of the capital market
The major objectives of capital market are:
• To mobilize resources for investments.
• To facilitate buying and selling of securities.
• To facilitate the process of efficient price discovery.
• To facilitate settlement of transactions in accordance with the predetermined time
Schedules.
Investment Instruments
Investment is a deployment of funds in one or more types of assets that will be held
over a period of time. Various forms of investment options are available to an
investor. They cover bank deposits, term deposits, recurring deposits, company
deposits, postal savings schemes, deposits with non-bank financial intermediaries,
government and corporate bonds, life insurance and provident funds, equity shares,
mutual funds, tangible assets like gold, silver and jewellery, real estate and work of
arts, etc.
Capital market instruments can be broadly divided into two categories namely
• Debt, Equity and Hybrid instruments.
• Derivative Products like Futures, Options, Forward rate agreements and Swaps.
Debt: Instruments that are issued by the issuers for borrowing monies from the
investors with a defined tenure and mutually agreed terms and conditions for
payment of interest and repayment of principal.
Debt instruments are basically obligations undertaken by the issuer of the instrument
as regards certain future cash flows representing interest and principal, which the
issuer would pay to the legal owner of the instrument. Debt instruments are of
17
18. various types. The key terms that distinguish one debt instrument from another are
as follows:
• Issuer of the instrument
• Face value of the instrument
• Interest rate and payment terms
• Repayment terms (and therefore maturity period / tenor)
• Security or collateral provided by the issuer
Different kinds of money market instruments, which represent debt, are commercial
papers (CP), certificates of deposit (CD), treasury bills (T-Bills), Govt. of India dated
securities (GOISECs), etc.
Equity: Instruments that grant the investor a specified share of ownership of assets
of a company and right to proportionate part of any dividend declared. Shares issued
by a company represent the equity. The shares could generally be either ordinary
shares or preference shares.
Major difference between Equity and Debt: Share represents the smallest unit of
Ownership of a company. If a company has issued 1, 00,000 shares, and a person
owns 10of them, he owns 0.01% of the company. A debenture or a bond represents
the smallest unit of lending. The bond or debenture holder gets an assured interest
only for the period of holding and repayment of principal at the expiry thereof, while
the shareholder is part-owner of the issuer company and has invested in its future,
with a corresponding share in its profit or loss. The loss is, however, limited to the
value of the shares owned by him.
Hybrids: Instruments that include features of both debt and equity, such as bonds
with equity warrants e.g. convertible debentures and bonds.
Derivatives: Derivative is defined as a contract or instrument, whose value is derived
from the underlying asset, as it has no independent value. Underlying asset can be
18
19. securities, commodities, bullion, currency, etc. The two derivative products traded on
the Indian stock exchanges are Futures and Options.
Futures (Index and Stock): Futures are the standardised contracts in terms of
quantity, delivery time and place for settlement on a pre-determined date in future. It
is a legally binding agreement between a seller and a buyer, which requires the
seller to deliver to the buyer, a specified quantity of security at a specified time in the
future, at a specified price. Such contracts are traded on the exchanges.
Options (Index and Stock): These are deferred delivery contracts that give the buyer
the right, but not the obligation to buy or sell a specified security at a specified price
on or before a specified future date. At present in India, both Futures and Options
are cash settled.
Segments of capital market
The Capital Market consists of
A) Primary Market
B) Secondary Market
Primary Market: A market where the issuers access the prospective investors
directly for funds required by them either for expansion or for meeting the working
capital needs. This process is called disintermediation where the funds flow directly
from investors to issuers.
The other alternative for issuers is to access the financial institutions and banks for
funds. This process is called intermediation where the money flows from investors to
banks/ financial institutions and then to issuers.
Primary market comprises of a market for new issues of shares and debentures,
where investors apply directly to the issuer for allotment of shares/ debentures and
pay application money to the issuer. Primary market is one where issuers contact
directly to the public at large in search of capital and is distinguished from the
secondary market, where investors buy/ sell listed shares / debentures on the stock
exchange from / to new / existing investors.
19
20. Primary market helps public limited companies as well as Government organizations
to issue their securities to the new / existing shareholders by making a public issue /
rights issue. Issuer’s increase capital by expanding their capital base. This enables
them to finance their growth plans or meet their working capital requirements, etc.
After the public issue, the securities of the issuer are listed on a stock exchange(s)
provided it complies with requirements prescribed by the stock exchange(s) in this
regard. The securities, thereafter, become marketable. The issuers generally get
their securities listed on one or more than one stock exchange. Listing of securities
on more than one stock exchange enhances liquidity of the securities and results in
increased volume of trading.
A formal public offer consists of an invitation to the public for subscription to the
equity shares, preference shares or debentures has to be made by a company
highlighting the details such as future prospects, financial viability and analyse the
risk factors so that an investor can take an informed decision to make an investment.
For this purpose, the company issues a prospectus in case of public issue and a
letter of offer in case of rights issue, which is essentially made to its existing
shareholders. This document is generally known as Offer document. It has the
information about business of the company, promoters and business collaboration,
management, the board of directors, cost of the project and the means of finance,
status of the project, business prospects and profitability, the size of the issue,
listing, tax benefits if any, and the names of underwriters and managers to the issue,
Etc.
The issuers are, thus, required to make adequate disclosures in the offer documents
to enable the investors to decide about the investment.
Making public issue of securities is fraught with risk. There is always a possibility that
the issue may not attract minimum subscription stipulated in the prospectus. The risk
may be high or low depending upon promoters making the issue, the track record of
the company, the size of the issue, the nature of project for which the issue is being
made, the general economic conditions, etc. Issuers would like to free themselves of
this worry and attend to their operations wholeheartedly if they could have someone
20
21. else to worry on their behalf. For this purpose the companies approach underwriters
who provide this service.
Normally, whenever an existing company comes out with a further issue of
securities, the existing holders have the first right to subscribe to the issue in
proportion to their existing holdings. Such an issue to the existing holders is called
‘Rights issue’. The price of the security before the entitlement of rights issue is
known as the cum-rights price. The price after the entitlement of rights issue is
known as the ex-rights price. The difference between the two is a measure of the
market value of a right entitlement. An existing holder, besides subscribing to such
an issue, can let his rights lapse, or renounce his rights in favour of another person
(free, or for a consideration) by signing the renunciation form.
The companies declare dividends, interim as well as final, generally from the profits
after the tax. The dividend is declared on the face value or par value of a share, and
not on its market price. A company may choose to capitalize part of its reserves by
issuing bonus shares to existing shareholders in proportion to their holdings, to
convert the reserves into equity. The management of the company may do this by
transferring some amount from the reserves account to the share capital account by
a mere book entry. Bonus shares are issued free of cost and the number of
shareholders remains the same. Their proportionate holdings do not change. After
an issue of bonus shares, the price of a company’s share drops generally in
proportion to the issue.
Activities in the Primary Market
1. Appointment of merchant bankers
2. Pricing of securities being issued
3. Communication/ Marketing of the issue
4. Information on credit risk
5. Making public issues
6. Collection of money
7. Minimum subscription
8. Listing on the stock exchange(s)
9. Allotment of securities in demat / physical mode
10. Record keeping
21
22. Secondary Market:
In the secondary market the investors buy / sell securities through stock exchanges.
Trading of securities on stock exchange results in exchange of money and securities
between the investors.
Secondary market provides liquidity to the securities on the exchange(s) and this
activity commences subsequent to the original issue. For example, having
subscribed to the securities of a company, if one wishes to sell the same, it can be
done through the secondary market.
Similarly one can also buy the securities of a company from the secondary market.
A stock exchange is the single most important institution in the secondary market for
Providing a platform to the investors for buying and selling of securities through its
members. In other words, the stock exchange is the place where already issued
securities of companies are bought and sold by investors. Thus, secondary market
activity is different from the primary market in which the issuers issue securities
directly to the investors.
Traditionally, a stock exchange has been an association of its members or stock
brokers, formed for the purpose of facilitating the buying and selling of securities by
the public and institutions at large and regulating its day to day operations. Of late
however, stock exchanges in India now operate with due recognition from Securities
and Exchange Board of India (SEBI) / the Government of India under the Securities
Contracts (Regulation) Act, 1956.
The stock exchanges are either association of persons or are formed as companies.
There are 24 recognized stock exchanges in India out of which one has not
commenced its operations. Out of the 23 remaining stock exchanges, currently only
on four stock exchanges, the trading volumes are recorded. Most of regional stock
exchanges have formed subsidiary companies and obtained membership of Bombay
Stock Exchange, (BSE) or National Stock Exchange (NSE) or both. Members of
these stock exchanges are now working as sub-brokers of BSE / NSE brokers.
22
23. Securities listed on the stock exchange(s) have the following advantages:
• The stock exchange(s) provides a fair market place.
• It enhances liquidity.
• Their price is determined fairly.
• There is continuous reporting of their prices.
• Full information is available on the companies.
• Rights of investors are protected.
Stockbroker is a member of the stock exchange and is licensed to buy or sell
securities for his own or on behalf of his clients. He charges a commission
(brokerage) to the clients on the gross value of the transactions done by them.
However, some of the stockbrokers, apart from buying and selling of securities for
their clients for a commission, offer facilities such as safekeeping clients’ shares and
bonds, offering investment advice, planning clients’ portfolio of investments,
managing clients’ portfolio. There are experts who believe that by identifying and
processing relevant information pertaining to financials of the companies "correctly"
and quickly (as compared to the market as whole), they can predict the share price
movement faster than the market and thus outperform the market. Such experts are
known as fundamental analysts. These experts use the fundamental approach to
security valuation, for estimating the fundamental price (or fundamental price-
earnings multiple) of a security.
Fundamental Analysis refers to scientific study of the basic factors, which determine
a share’s value. The fundamental analyst studies the industry and the company’s
sales, assets, liabilities, debt structure, earnings, products, market share; evaluates
the company’s management, compares the company with its competitors, and then
estimates the share’s intrinsic worth. The fundamental analysts’ tools are financial
ratios arrived at by studying a company’s balance sheet and profit and loss account
over a number of years. Fundamental analysis is more effective in fulfilling long-term
growth objectives of shares, rather than their short-term price fluctuations.
23
24. Ratios of values obtained from a company’s financial statements are used to study
its health and the price of its securities. The most important among these are current
ratio, price earning (P/E) ratio, earnings to equity ratio, price-book value ratio, profit
before tax to sales ratio, and quick ratio. Accounting figures, which help to arrive at
these ratios, include book value, dividend, current yield, earning per share (EPS),
volatility, etc.
Unlike the fundamental analysts, there are other experts who believe that largely the
forces of demand and supply of securities determine the security prices, though the
factors governing the demand and supply may themselves be both objective and
subjective. They also believe that notwithstanding the day-to-day fluctuations, share
prices move in a discernible pattern, and that these patterns last for long periods to
be identified by them. Such analysts are called as ‘Technical Analysts’.
Technical analysis is a method of prediction of share price movement based on a
study of price graphs or charts on the assumption that share price trends are
repetitive, and that since investor psychology follows certain pattern, what is seen to
have happened before is likely to be repeated. The technical analyst is not
concerned with the fundamental strength or weakness of a company or an industry;
he studies investor and price behaviour.
A stock market operator who expects share prices to fall in the immediate future and
keeps selling (with the intention to pick up the shares later at a lower price for actual
delivery), causing selling pressure and lowering the prices further is called a "Bear”.
The term is derived from the attacking posture of the bear, pushing downwards.
A stock market operator who expects share prices to rise and keeps buying (to sell
the shares later at higher price), causing buying pressure and increasing the prices
further is called a “Bull”. The term is derived from the attacking posture of the bull,
pushing upwards.
Stag is a person who subscribes to a new issue with the primary objective of selling
at profits no sooner than he gets the allotment.
Contract Note is a document given by the stockbroker to his clients giving particulars
of the securities bought / sold, rate and date of transaction and the broker’s
24
25. commission. The broker sends the contract note after executing the client’s order as
an agreement. The contract note must be carefully preserved, as it is a primary
documentary evidence of clients' transactions being executed by a member of a
stock exchange. In case of any dispute between them, this can be used for the
purpose of arbitration or filing claims / compensation against the member of the
stock exchange who has executed the transaction. It also serves as evidence to the
income tax authorities in verification of computations of short-term or long-term
capital gains or losses.
Buying or selling of securities of a particular company with an expectation that the
prices will increase or decrease in a span of short duration with an objective to
generate income on account of such fluctuations in price is called “Speculation”. This
is an activity in which a person assumes high risks, often without regard for the
safety of his invested principal, to achieve capital gains in a short time. Investing in
securities with the intention of holding them for long term for realizing appreciation in
the value of the securities should be the aim of the investors who wish to derive
benefits from holding investments for long term.
Arbitrage means buying shares on one stock exchange at a lower rate and selling
the same on other stock exchange at a higher rate.
Activities in the Secondary Market
1. Trading of securities
2. Risk management
3. Clearing and settlement of trades
4. Delivery of securities and funds
25
26. Major entities involved in the capital market:
ENTITIES
SEBI (REGULATOR)
STOCK EXCHANGES
CLEARING CORPORATIONS (CC)/ CLEARING HOUSES (CH)
DEPOSITORIES AND DEPOSITORY PARTICIPANTS
CUSTODIANS
STOCK-BROKERS AND THEIR SUB-BROKERS
MUTUAL FUNDS
MERCHANT BANKERS
CREDIT RATING AGENCIES
FINANCIAL INSTITUTUIONS
FOREIGN INSTITUTIONAL INVESTORS
NON-BANKING INSTITUTIONS
ISSUERS/ REGISTRAR AND TRANSFER AGENTS
INVESTO
26
28. INTRODUCTION TO DEPOSITORY
A significant development of the 20th century particularly in its later part is expansion
of financial market world over which mostly was driven by globalization, technology,
innovations and increasing trade volume. India has not been an exception with
probably largest number of listed companies with a very large investor population
and ever increasing volumes of trades.
However, this continuous growth in activities increased problems associated with
stock trading. Most of these problems arose due to the intrinsic nature of paper
based trading and settlement, like theft or loss of share certificates. This system
required handling of huge volumes of paper leading to increased costs and
inefficiencies. The process beginning from buying shares through the stock
exchanges till getting the certificates duly endorsed in the buyer’s name was indeed
quite complex and time-consuming and was riddled with a variety of problems.
Growing number of investors participating in the capital market has increased the
possibility of being hit by a bad delivery, The cost and time spent by the brokers for
rectification of these bad deliveries tends to be higher with the geographical spread
of the clients. The increase in trade volumes lead to exponential rise in the back
office operations thus limiting the growth potential of the broking members. The
inconvenience faced by investors (in areas that are far flung and away from the main
metros) in settlement of trade also limits the opportunity for such investors,
especially in participating in auction trading. The physical form of holding and trading
in securities also acted as a bottleneck for broking community in capital market
operations. Risk exposure of the investor also increased due to this trading in paper.
Some of these associated risks were: delay in transfer of shares, possibility of
forgery on various documents leading to bad deliveries, legal disputes etc., and
possibility of theft of share certificates, prevalence of fake certificates in the market,
mutilation or loss of share certificates in transit. Thus, the system of security
transactions was not as investor-friendly as it ought to be. In this scenario
dematerialized trading under depository system is certainly a welcome move. This
popular financial service emerged in Germany first time.
28
29. Meaning of depository
A depository is an organisation which holds securities (like shares, debentures,
bonds, government securities, mutual fund units etc.) of investors in electronic form
at the request of the investors through a registered Depository Participant. It also
provides services related to transactions in securities.
Comparison between banks and depository
Similarity:
1. Promoted by reputed persons and institutions : promoters of both bank and
depository are reputed persons and institutions
2. Renders safe keeping services: both banks and depository provide safe
keeping services. Banks provides safe custody of cash and locker facility for
keeping valuable articles to its clients. Depositories also provide safe keeping
of shares, debentures, bonds, government securities, mutual fund units to its
clients.
3. Central office and braches
4. Charge of fees
5. Transfer of funds and securities : Funds/securities are transferred only at the
instruction of the account holder
6. Written confirmation of transfer (of shares and currencies )
7. Account is operated by power of attorney: a person under power of attorney
can operate the account.
8. Customers are entitled to get statement s of accounts
9. Nomination facility : customer can nominate any person to whom account will
be transferred in case of death of the person
10. Currencies (in case of banks ) and shares (in case of depositories) when
held do not have any distinctive number
29
30. Differentiation:
Bank Account Vs. Demat Account
S.
Basis Of Differentiation Bank Account Depository
No.
Form of
1. Funds Securities
Holdings/Deposits
2. Used for Safekeeping of money Safekeeping of shares
Transfer of money (without Transfer of shares (without
3. Facilitates
actually handling money) actually handling shares)
A DP of choice (can be a
4. Where to open A bank of choice
bank)
Requirement of PAN Mandatory (effective from
5. Not Mandatory
Number April 01, 2006)
Interest income is subject No interest accruals on
Interest accrual on
6. to the applicable rate of securities held in demat
holdings
interest account
AQB*( Average Quarterly
Minimum balance Balance)
7. No such requirement
requirement maintenance is specified
for certain bank accounts
Either or Survivor
8. Available Not available
facility
30
31. Immobilization and Dematerialization
Conversion of securities from physical (paper) form to electronic form can be
achieved by two methods Immobilization or Dematerialization.
Under the immobilization method, after giving credit of the securities in electronic
form, physical certificates are stored or lodged with an organization, which acts as a
custodian – a securities depository. Subsequent transactions in such immobilized
securities take place through book-entries.
Under the dematerialization method, the securities, issued in physical form are
destroyed and exactly equal numbers of securities are created in the depository
system, which are credited into the account of the investor. Unlike physical
securities, the securities converted into electronic form do not have any distinctive
numbers and they are treated as equal and replaceable in all ways i.e. securities in
electronic form are fungible. All subsequent transactions (transfer of ownership) of
such securities take place in book-entry form.
India has adopted dematerialization method whereas immobilization has been
adopted by some of the countries like Hong Kong and USA. Japan has adopted
both, dematerialization as well as immobilization for achieving a paper-less securities
market.
Whether a country has adopted immobilization or dematerialization, the investor has
a right to get the securities converted back into physical form through a process
called as rematerialisation, in case of need.
Availing of various services offered by a depository
A depository in India cannot open a demat account of an investor and / or provide
services to such a person directly. For opening a demat account or availing the
services offered by the depository, a person is required to approach a Depository
Participant (DP) who is an agent of the depository, complete the account opening
formalities as per the Depositories Act, SEBI regulations, depository byelaws.
Thereafter, the investor can receive securities in the demat account as well as tender
the securities held by him / her in physical form for dematerialization to the DP (as
31
32. explained in the subsequent part) and hold the same in book entry form in the
account.
When an investor holds securities in physical form, his / her name is recorded as
registered owner in the books of the company. As per the laws currently in force in
India, when the securities are converted in electronic form by way of
dematerialization, name of the depository is registered in the books of the company
as registered owner. However, the investor continues to be the real owner of the
securities and is entitled to receive all the benefits such as dividend, interest, bonus
shares etc. in respect of the said security and as such is called as Beneficial Owner
(BO) under the depository system.
Today “demat” has become a common word. The institutional and individual
investors spread all over India are found to be making an extensive use of the
depository participant services for holding their securities in electronic form.
32
34. DEPOSITORY SYSTEM
Depository system essentially aims at eliminating the voluminous and cumbersome
paper work involved in the scrip-based system and offers scope for ‘paperless’
trading through state-of-the-art technology. It is an institution which maintains an
electronic record of ownership or securities. The storage and handling of certificates
is hence immediately eliminated which generates a reduction in costs like back office
cost for handling, transporting and storing certificates.
Depositary participant is an institution akin to bank for securities. When an investor
hands over securities to a depository participant, investor’s account is credited. The
investor’s depository system account will show their holdings. His account is updated
for his transactions of sale and purchase but without physical movement of scripts or
transfer deeds. In depository system, share certificates belonging to the investors
are dematerialised (demats). Dematerialisation or “Demat” is a process whereby
investors’ securities like shares, debentures etc., are converted into electronic data
and stored in computers by a Depository. Securities registered in investor’s name
are surrendered to depository participant (DP) and these are sent to the respective
companies who will cancel them after “Dematerialization” and credit investor’s
depository account with the DP. The securities on Dematerialization appear as
balances in one’s depository account. These balances are transferable like physical
shares. If at a later date, investors wish to have these “demat” securities converted
back into paper certificates, the Depository does this and their names are entered in
the records of depository as beneficial owners. The beneficial ownership will be with
investor but legal ownership will be with the depository. Consequently, benefits like
interest, dividend, and rights: bonus and voting rights will be with investors. Since
depository is to get securities transferred in its name, the depository name will be
registered in the ownership register maintained by the company. Thus, instead of
name of several owners, the name of depository figures in the register of company.
Since transfer will be affected only in depository, register of company need not be
updated on every transactions of sale or purchase of company’s share. It alleviates
the hardships currently faced by the investors and it also offers option for converting
the shares from electronic to physical or paper form through a process of
34
35. rematerialisation (remat). Depository system is, indeed, time tested and long
prevalent in many advance countries and has been playing a significant role in stock
markets around the world.
Constituents of Depository System
The depository system comprises of:
i) Depository
ii) Depository Participants (DPs)
iii) Companies/issuer
iv) Investors
1) Depository:
Depository functions like a securities bank, where the dematerialized physical
securities are traded and held in custody. This facilitates faster risk free and low cost
settlement. Depository is much like a bank and performs many activities that are
similar to a bank depository:
a) Enables surrender and withdrawal of securities to and from the depository through
the process of ‘demat’ and ‘remat’,
B) maintains investors’ holdings in electronic form,
c) Effects settlement of securities traded in depository mode on the stock exchanges,
D) carries out settlement of trades not done on the stock exchanges (off market
trades).
In India a depository has to be promoted as a corporate body under Companies Act,
1956. It is also to be registered as a depository with SEBI. It starts operations after
obtaining a certificate of commencement of business from SEBI. It has to develop
automatic data processing systems to protect against unauthorised access. A
network to link up with depository participants, issuers and issuer’s agent has to be
Created.
35
36. Depository, operating in India, shall have a net worth of rupees one hundred crore
and instruments for which depository mode is open need not be a security as defined
in the Securities Contract (Regulations) Act 1956. The depository, holding securities,
shall maintain ownership records in the name of each participant. Despite the fact
that legal ownership is with depository, it does not have any voting right against the
securities held by it. Rights are intact with investors.
There are two depositories in India at present i.e.
1. NSDL: National Securities Depository limited
2. CDSL: Central Depository Services (India) Limited
ii) Depository Participants (DP):
A DP is investors’ representative in the depository system and as per the SEBI
guidelines, financial institutions/banks/custodians/stock brokers etc. can become
DPs provided they meet the necessary requirements prescribed by SEBI. DP is also
an agent of depository which functions as a link between the depository and the
beneficial owner of the securities. DP has to get itself registered as such under the
SEBI Act. The relationship between the depository and the DP will be of a principal
and agent and their relation will be governed by the bye-laws of the depository and
the agreement between them. Application for registration as DP is to be submitted to
a depository with which it wants to be associated. The registration granted is valid for
five years and can be renewed. As depository holding the securities shall maintain
ownership records in the name of each DP, DP in return as an agent of depository,
Shall maintain ownership records of every beneficial owner (investor) in book entry
form.
A DP is the first point of contact with the investor and serves as a link between the
investor and the company through depository in dematerialisation of shares and
other electronic transactions. A company is not allowed to entertain a demat request
from investors directly and investors have to necessarily initiate the process through
a DP.
36
37. Eligibility criteria for depository participants:
The following entities are eligible for becoming depository participant in accordance
with
Regulation 19 of the SEBI (Depositories and Participants) Regulations, 1996.
• A public financial institution as defined in Section 4A of the Companies Act, 1056.
• A bank included in the second schedule of the Reserve Bank of India Act, 1934.
• A foreign bank, operating in India with the approval of Reserve Bank of India.
• A state financial corporation established under the provisions of section 3 of the
State Financial Corporations Act, 1951.
• An institution engaged in providing financial services, promoted by any of the four
institutions mentioned above.
• A custodian of securities, who has been granted a certificate of registration by SEBI
under Section 12(1A) of the SEBI Act, 1992.
• A clearing corporation or a clearing house of a stock exchange.
• A stockbroker having a minimum net worth of rupees TWO CRORES. The
aggregate value of the portfolio of securities, of the BOs, held in dematerialized form
in a depository through him, shall not exceed 100 times of the net worth of the
stockbroker. (Not applicable for DPs who’s net worth is Rs. ten crores). In case the
stockbroker seeks to act as a participant in more than one depository, he shall
comply with the net worth criteria separately with each such depository.
• A non-banking finance company, having a net worth of not less than rupees fifty
lakhs provided that such company shall act as a participant only on behalf of itself
and not on behalf of any other person. Provided further that a non-banking finance
company may act as a participant on behalf of any other entity, if it has a net worth of
Rs. fifty crores in addition to the net worth specified by any other authority.
• A registrar to an issue or share transfer agent who has a minimum net worth of
Rupees ten crores and who has been granted a certificate of registration by SEBI
37
38. Characteristics of depository participant:
1. Acts as an Agent of Depository
2. Directly deal with customer
3. Functions like Securities Bank
4. Account opening
5. Facilitates dematerialization
6. Instant transfer on pay – out
7. Credits to investor in IPO, rights, bonus
8. Settles trades in electronic segment
iii) ISSUER / Companies:
The issuer is the co. which issues the securities. It maintains a register for
recording the names of the registered owners of securities and the
depositories. The issuer sends a list of shareholders who opt for the
depository system. And only those co.’s can issue the securities which are
registered under stock exchanges
iv) BENEFICIAL OWNER/ INVESTER:
Beneficial owner is a person whose name is recorded as such with a
depository. It means a person who is engaged in buying and selling of
securities issued by the companies and is registered his/ her securities
with the depository in the form of book entry. And he/ she has all the rights
and liabilities associated with the securities
38
39. Facilities offered by depository system:
1. Dematerialization: It is a process of conversion of physical share – certificate
into electronic – form. So, when a shareholder uses the dematerialization
facility, company take back the shares, through depository – system and
equal numbers of shares are credited in his account in e-form.
2. Rematerialization: Rematerialization is the exact reverse of Dematerialization. It
refers to the process of issuing physical securities in place of the securities
held electronically in book-entry form with a depository.
Other Services
a) Pledging Dematerialized Shares: Dematerialized shares could be pledged; in fact,
this is more advantageous as compared to pledging share certificates. After loan is
repaid one can request for a closure of pledge by instructing one’s DP through a
standard format. The pledgee on receiving the repayment as well as the request for
closure of pledge will instruct his DP accordingly. Even the locked-in securities can
be pledged. The pledger continues to remain the beneficiary holder of those
securities even after the securities are pledged.
b) Initial Public Offerings: Credits for public offers can be directly received into demat
account. In the public issue application form of depository eligible companies, there
will be a provision to indicate the manner in which securities should be allotted to the
applicant. One is to mention one’s client account number and the name and
identification number of DP. All allotment due to investor will be credited into required
account.
c) Receipt of Cash/non-cash Benefits: When any corporate event such as rights or
bonus or dividend is announced for a particular security, depository will give the
details of all the clients having electronic holdings in that security as of the record
date to the registrar. The registrar will then calculate the corporate benefits due to all
the shareholders. The disbursement of cash benefits such as dividend/ interest will
be done directly by the registrar. In case of non-cash benefits, depository will directly
credit the securities entitlements in the depository accounts of all those clients who
39
40. have opted for electronic allotment based on the information provided by the
registrar.
d) Stock Lending and Borrowing: Through the depository account securities in the
demat form can be easily lent/ borrowed. Securities can be lent or borrowed in
electronic form through an approved intermediary, who has opened a special
‘intermediary’ account with a DP. Instructions are to be given to DP through a
standard format (which is available with DP) to deposit securities with the
intermediary. Similarly to borrow securities from the intermediary, one has to instruct
DP through a standard format (which is available with your DP).
e) Transmission of Securities: Transmission of securities due to death, lunacy,
bankruptcy, insolvency or by any other lawful means other than transfer is also
possible in the depository system. In the case of transmission, the claimant will have
to fill in a transmission request form, (which is available with the DP) supported by
valid documents.
f) Freezing Account with DP: If at any time as a security measure one wishes that no
transaction should be effected in one’s account, one may advise one’s DP
accordingly. DP will ensure that account of such investor is totally frozen until further
instructions from him.
Benefits of Depository System:
1. This system will eliminate paper work as the book entry system does not need
physical movement of certificates for transfer process.
2. The risk of bad deliveries, fraud and misplaced, mutilated and lost share
certificates will not exist.
3. The electronic media will shorten settlement time and hence the investor can save
time and increase the velocity of security movement.
4. Investors will be able to change portfolio more frequently.
40
41. 5. The capital market will be more transparent as the trading, clearing and settlement
mechanism have to be highly automated and interlinked with the depository among
them.
6. The market will be highly automated and efficient due to the usage of computing
and telecommunication technology for the back office activities for all the capital
market players.
41
43. LEGAL FRAMEWORK
Introduction
The depositories in India are regulated under the following legal framework:
• The Depositories Act, 1996
• SEBI (Depositories and Participants) Regulations, 1996
• Companies Act, 1956
• Securities and Exchange Board of India Act, 1992
• Prevention of Money Laundering Act, 2002
Apart from the above-mentioned Acts and Regulations, following govern the
business and operations of a depository.
• Bye Laws of the depository
• Operating Instructions of the depository
43
44. The Depositories Act, 1996 gives power to depositories to make bye-laws
But such bye laws should be consistent with the provisions of this Act and the SEBI
Regulations. Such bye-laws shall provide for:
a) The eligibility criteria for admission and removal of securities in the depository;
b) The conditions subject to which the securities shall be dealt with;
c) The eligibility criteria for admission of any person as a participant;
d) The manner and procedure for dematerialisation of securities;
e) The procedure for transactions within the depository;
f) The manner in which securities shall be dealt with or withdrawn from a depository;
g) The procedure for ensuring safeguards to protect the interests of participants and
beneficial owners;
h) The conditions of admission into and withdrawal from a participant by beneficial
owner;
i) The procedure for conveying information to the participants and beneficial owners
on dividend declaration, shareholder meetings and other matters of interest to the
beneficial owners;
j) The manner of distribution of dividends, interest and monetary benefits received
from the company among beneficial owners;
k) The manner of creating pledge or hypothecation in respect of securities held with
a depository;
l) Inter se rights and obligations among the depository, issuer, participants, and
beneficial owners;
m) The manner and the periodicity of furnishing information to the Board, issuer and
other persons;
n) The procedure for resolving disputes involving depository, issuer, company or a
beneficial owner;
o) The procedure for proceeding against the participant committing breach of the
regulations and provisions for suspension and expulsion of participants from the
depository and cancellation of agreements entered with the depository;
p) The internal control standards including procedure for auditing, and monitoring.
Reviewing
44
45. SEBI (Depositories and Participants) Regulations, 1996
Board (SEBI) grants a certificate of registration to a depository subject to the
following conditions, namely:
a) The depository shall pay the registration fee specified within fifteen days of receipt
of intimation from the Board;
b) The depository shall comply with the provisions of the Act, the Depositories
Ordinance, the bye-laws, agreements and these regulations;
c) The depository shall not carryon any activity other than that of a depository unless
the activity is incidental to the activity of the depository;
d) the sponsor shall, at all times, hold at least fifty one per cent of the equity capital
of the depository and the balance of the equity capital of the depository shall be held
by its participants;
e) No participant shall at any time, hold more than five per cent of the equity capital
of the depository;
f) If any information previously submitted by the depository or the sponsor to the
Board is found to be false or misleading in any material particular, or if there is any
change in such information, the depository shall forthwith inform the Board in writing;
g) The depository shall redress the grievances of the participants and the beneficial
owners within thirty days of the date of receipt of any complaint from a
Participant or a beneficial owner and keep the Board informed about the number and
the nature of redressals:
h) The depository shall make an application for commencement of business under
regulation 14 within one year from the date of grant of certificate of registration under
this regulation; and
i) The depository shall amend its bye-laws as directed by SEBI.
Certificate of Commencement of Business
The Board shall take into account for considering grant of certificate of
commencement of business, the following points, namely, whether
a) The depository has a net worth of not less than rupees one hundred crore;
b) The bye-laws of the depository have been approved by the Board;
45
46. c) The automatic data processing systems of the depository have been protected
against unauthorised access, alteration, destruction, disclosure or dissemination of
records and data:
d) the network through which continuous electronic means of communications are
established between the depository, participants, issuers and issuer’s agents is
secure against unauthorised entry or access;
e) The depository has established standard transmission and encryption formats for
electronic communications of data between the depository, participants, issuers and
issuers’ agents;
f) the physical or electronic access to the premises, facilities, automatic data
processing systems, data storage sites and facilities including back up sites and
facilities and to the electronic data communication network connecting the
depository, participants, issuers and issuer’s agents is controlled, monitored and
recorded;
g) the depository has a detailed operations manual explaining all aspects of its
functioning, including the interface and method of transmission of information
between the depository,- issuers, issuers’ agents, participants and beneficial owners;
h) the depository has established adequate procedures and facilities to ensure that
its records are protected against loss or destruction and arrangements have been
made for maintaining back up facilities at a location different from that of the
depository;
i) the depository has made adequate arrangements including insurance for
indemnifying the beneficial owners for any loss that may be caused to such
beneficial owners by the wrongful act, negligence or default of the depository or its
participants or of any employee of the depository or participant; and
j) The grant of certificate of commencement of business is in the interest of investors
in the securities market.
The Board shall, before granting a certificate of commencement of business makes a
Depository
Physical verification of the infrastructure facilities and systems established by the
Depository.
46
47. Record of Services by Depository Participant (DP)
i) Types of records
Every participant shall maintain the following records and documents, namely:
a) Records of all the transactions entered into with a depository and with a beneficial
owner;
b) Details of securities dematerialised, rematerialised on behalf of beneficial owners
with whom it has entered into an agreement;
c) Records of instructions received from beneficial owners and statements of
account provided to beneficial owners; and
d) Records of approval, notice, entry and cancellation of pledge or hypothecation, as
the case may be.
Every participant shall make available for the inspection of the depository in which it
is a participant all records referred above. Every participant shall allow persons
authorised by the depository in which it is a participant to enter its premises during
normal office hours and inspect its records.
Every participant shall intimate the Board the place where the records and
documents are maintained.
The participant shall preserve records and documents for a minimum period of five
years.
ii) Where records are kept electronically by the participant, it shall ensure that the
integrity of the data processing systems is maintained at all times and take all
precautions necessary to ensure that the records are not lost. Destroyed or
tampered with and in the event of loss or destruction, ensure that sufficient back up
of records is available at all times at a different place.
iii) If a participant enters into an agreement with more than one depository, it shall
maintain the specified records separately in respect of each depository.
iv) No participant shall assign or delegate its functions as participant to any other
person, without the prior approval of the depository.
Agreement by Issuer
Every issuer whose securities have been declared as eligible to be held in
dematerialised form in a depository shall enter into an agreement with the
depository.
47
48. Records to be maintained by Depository
Every depository shall maintain the following records and documents, namely:
a) Records of securities dematerialised and rematerialized;
b) The names of the transferor, transferee, and the dates of transfer of securities;
c) A register and an index of beneficial owners;
d) Records of instructions received from and sent to participants, Issuers, issuers’
agents and beneficial owners;
e) Records of approval, notice, entry and cancellation or pledge or hypothecation, as
the case may be;
f) Details of participants;
48
50. ABOUT CDSL and NSDL
There are two depositories in India at present i.e.
1. NSDL: National Securities Depository limited
2. CDSL: Central Depository Services (India) Limited
NSDL: National Securities Depository limited:
About NSDL
Although India had a vibrant capital market which is more than a century old, the
paper-based settlement of trades caused substantial problems like bad delivery and
delayed transfer of title till recently. The enactment of Depositories Act in August
1996 paved the way for establishment of NSDL, the first depository in India. This
depository promoted by institutions of national stature responsible for economic
development of the country has since established a national infrastructure of
international standards that handles most of the securities held and settled in
dematerialised form in the Indian capital market.
Using innovative and flexible technology systems, NSDL works to support the
investors and brokers in the capital market of the country. NSDL aims at ensuring
the safety and soundness of Indian marketplaces by developing settlement solutions
that increase efficiency, minimise risk and reduce costs. At NSDL, we play a quiet
but central role in developing products and services that will continue to nurture the
growing needs of the financial services industry.
In the depository system, securities are held in depository accounts, which is more or
less similar to holding funds in bank accounts. Transfer of ownership of securities is
done through simple account transfers. This method does away with all the risks and
hassles normally associated with paperwork. Consequently, the cost of transacting in
a depository environment is considerably lower as compared to transacting in
certificates.
50
51. Promoters / Shareholders
NSDL is promoted by Industrial Development Bank of India Limited (IDBI) - the
largest development bank of India, Unit Trust of India (UTI) - the largest mutual fund
in India and National Stock Exchange of India Limited (NSE) - the largest stock
exchange in India. Some of the prominent banks in the country have taken a stake in
NSDL.
Promoters
Industrial Development Bank of India Limited (Now, IDBI Bank Limited)
Unit Trust of India (Now, Administrator of the Specified Undertaking of the
Unit Trust of India)
National Stock Exchange of India Limited
Other Shareholders
State Bank of India
HDFC Bank Limited
Deutsche Bank A.G.
Axis Bank Limited
Citibank N.A.
Standard Chartered Bank
The Hong Kong and Shanghai Banking Corporation Limited
Oriental Bank of Commerce
Union Bank of India
Dena Bank
Canara Bank
Legal Framework
As a part of its on-going market reforms, the Government of India promulgated the
Depositories Ordinance in September 1995. Based on this ordinance, Securities and
51
52. Exchange Board of India (SEBI) notified its Depositories and Participants
Regulations in May 1996. The enactment of the Depositories Act the following
August paved the way for the launch of National Securities Depository Ltd. (NSDL) in
November 1996. The Depositories Act has provided dematerialisation route to book
entry based transfer of securities and settlement of securities trade.
In exercise of the rights conferred by the Depositories Act, NSDL framed its Byelaws
and Rules. The Byelaws are approved by SEBI. While the Byelaws define the scope of
the functioning of NSDL and its business partners; the Business Rules outline the
operational procedures to be followed by NSDL and its "Business Partners."
CDSL: Central Depository Services (India) Limited:
It is a Depository facilitates holding of securities in the electronic form and enables
securities transactions to be processed by book entry by a Depository Participant
(DP), who as an agent of the depository, offers depository services to investors.
According to SEBI guidelines, financial institutions, banks, custodians, stockbrokers,
etc. are eligible to act as DPs. The investor who is known as beneficial owner (BO)
has to open a demat account through any DP for dematerialisation of his holdings
and transferring securities.
The balances in the investors account recorded and maintained with CDSL can be
obtained through the DP. The DP is required to provide the investor, at regular
intervals, a statement of account which gives the details of the securities holdings
and transactions. The depository system has effectively eliminated paper-based
certificates which were prone to be fake, forged, counterfeit resulting in bad
deliveries. CDSL offers an efficient and instantaneous transfer of securities. CDSL
was promoted by Bombay Stock Exchange Limited (BSE) jointly with leading banks
such as State Bank of India, Bank of India, Bank of Baroda, HDFC Bank, Standard
Chartered Bank, and Union Bank of India and Centurion Bank.
52
53. CDSL was set up with the objective of providing convenient, dependable
and secure depository services at affordable cost to all market participants.
Some of the
important milestones of CDSL system are:
CDSL received the certificate of commencement of business from SEBI in
February, 1999.
Honourable Union Finance Minister, Shri Yashwant Sinha flagged off the
operations of CDSL on July 15, 1999.
Settlement of trades in the demat mode through BOI Shareholding
Limited, the clearing house of BSE, started in July 1999.
All leading stock exchanges like the National Stock Exchange, Calcutta
Stock Exchange, Delhi Stock Exchange, The Stock Exchange,
Ahmedabad, etc. have established connectivity with CDSL.
As at the end of Dec 2007, over 5000 issuers have admitted their
securities (equities, bonds, debentures, and commercial papers), units of
mutual funds, certificate of deposits etc. into the CDSL system.
Sr. Name of shareholders Value of holding % terms to total
No (in Rupees Lacs) equity
1 Bombay Stock Exchange Limited 5,663.46 54.20
2 Bank of India 582.00 5.57
3 Bank of Baroda 530.00 5.07
4 State Bank of India 1,000.00 9.57
5 HDFC Bank Limited 750.00 7.18
6 Standard Chartered Bank 750.00 7.18
7 Canara Bank 674.46 6.45
8 Union Bank of India 200.00 1.91
9 Bank of Maharashtra 200.00 1.91
10 The Calcutta Stock Exchange Limited 100.00 0.96
11 Others 0.08 0.00
TOTAL 10,450.00 100.00
53
54. WHY A DEMAT ACCOUNT WITH CDSL
Convenience:
Wide DP Network: CDSL has a wide network of DPs, operating from over
6000 sites, across the country, offering convenience for an investor to select
a DP based on his location.
On-line DP Services: The DPs are directly connected to CDSL thereby
providing on-line and efficient depository service to investors.
Wide Spectrum of Securities Available for Demat: The equity shares of
almost all A, B1 & B2 group companies are available for dematerialisation
on CDSL, consisting of Public (listed & unlisted) Limited and Private Limited
companies. These securities include equities, bonds, units of mutual funds,
Govt. securities, Commercial papers, Certificate of deposits; etc. Thus, an
investor can hold almost all his securities in one account with CDSL. A BO
can also hold warehouse receipts pertaining to commodities, in a demat
account. However, a separate account should be opened for holding
warehouse receipts.
Competitive Fees Structure: CDSL has kept its tariffs very competitive to
provide affordable depository services to investors.
Internet Access: A DP, which registers itself with CDSL for Internet access,
can in turn provide demat account holders with access to their account on
the Internet.
Dependability:
On-line Information to Users: CDSL's system is built on centralised
database architecture and thus enables DPs to provide on-line depository
services with the latest status of the investor's account.
Convenient to DPs: The entire database of investors is stored centrally at
CDSL. If there is any system-related issues at DPs end, the investor is not
54
55. affected, as the entire data is available at CDSL.
Contingency Arrangements: CDSL has made provisions for contingency
terminals, which enables a DP to update transactions, in case of any system
related problems at the DP's office.
Meeting User's Requirements: Continuous updating of procedures and
processes in tune with evolving market practices is another hallmark of
CDSL's services.
Audit and Inspection: CDSL conducts regular audit of its DPs to ensure
compliance of operational and regulatory requirements.
Dormant Account Monitoring: CDSL has in place a mechanism for monitoring
dormant accounts.
Helpdesk: DPs and investors can obtain clarifications and guidance from
CDSL's prompt and courteous helpline facility.
Security:
Computer Systems: All data held at CDSL and is automatically mirrored at the
Disaster Recovery site and is also backed up and stored in fireproof cabinets
at the main and disaster recovery site.
Unique BO Account Number: Every BO in CDSL is allotted a unique account
number, which prevents any erroneous entry or transfer of securities. If the
transferor's account number is wrongly entered, the transaction will not go
through the CDSL system, unless corrected.
Data Security: All data and communications between CDSL and its users are
encrypted to ensure its security and integrity.
Claims on DP: If any DP of CDSL goes into liquidation, the creditors of the DP
will have no access to the holdings of the BO.
Insurance Cover: CDSL has an insurance cover in the unlikely event of loss to
a BO due to the negligence of CDSL or its DPs.
55
57. Types of Accounts
Type of depository account depends on the operations to be performed. There are
three types
Of demat accounts which can be opened with a depository participant viz.
(a) Beneficiary Account
(b) Clearing Member Account
(c) Intermediary Account.
Beneficiary Account
This is an account opened by investors to hold their securities in dematerialised form
with a depository and to carry out the transactions of sale and purchase of such
securities in book entry form through the depository system. A beneficiary account
holder is legally entitled for all rights and liabilities attached to the securities (i.e.
equity shares, debentures, government securities, etc.) held in that account.
Therefore, the account is called beneficial owner account".
57
58. A beneficiary account can be in the name of an individual, corporate, Hindu
Undivided Family (HUF), minor, bank, financial institution, trust, etc. or the broker
himself for the purpose of his personal investments in demat form. The account is
opened with a DP.
A new sub-type viz. "Margin Account" has been added to the Client type’s viz.;
'Resident' and 'Body Corporate' under Client Maintenance Module in DPM
Application Software (DPMAS). The new sub-type "Margin Account" is added to
enable Clearing Members (CMs) to open beneficiary accounts to hold securities for
client margin purposes.
New sub-types are also added to enable promoters to separately hold securities
issued as "Promoter" of the company.
House account vs. non-house account –
An account opened by a DP for the custody of and transactions in its own
investments is referred to as a house account, and all other beneficiary accounts are
referred to as non-house account. DPs are required to open house accounts for their
own investments to prevent co-mingling of their assets with that of their clients.
Neither the Depositories Act nor the regulations made under the Act lay down any
specifications about who can open a beneficiary account. Since all beneficial owners
are deemed to be members of a company (under section 41(3) of the Companies
Act), only those who are eligible to become members of a company under the
Companies Act, can open a beneficiary account with a depository. Thus, all legal
entities with the exception of partnership firms can open an account in the depository
system.
Documents for Verification
I. Non-body Corporate Investors: For the purpose of verification, all non-body
corporate investors have to submit the following documents, as prescribed by SEBI,
along with the stipulated account opening form.
A beneficiary account must be opened only after obtaining a proof of identity and
address of the applicant. An authorised official of the Participant should verify the
photocopies of any of following documents submitted with their corresponding
58
59. originals and put his/her signature on them with remarks "verified with original"
before proceeding to open the account.
(a) Proof of Identity (POI)-
I. Passport
II. Voter ID card
III. Driving license
IV. PAN card with photograph
V. MAPIN card (SEBI vide its Circular No. MRD/DoP/Cir-08/2007 dated June 25,
2007 has communicated its decision to discontinue with the requirement of Unique
Identification Number (UIN) under the SEBI (Central Database of Market
Participants) Regulations 2005 (MAPIN regulations)/circulars.
VI. Identity card/document with applicant's Photo, issued by
a) Central/State Government and its Departments,
b) Statutory/Regulatory Authorities,
c) Public Sector Undertakings,
d) Scheduled Commercial Banks,
e) Public Financial Institutions,
f) Colleges affiliated to Universities (this can be treated as valid only till the time the
applicant is a student),
g) Professional Bodies such as ICAI, ICWAI, ICSI, Bar Council etc., to their
Members; and
h) Credit cards/Debit cards issued by Banks.
(b) Proof of address (POA) –
I. Ration card
II. Passport
III. Voter ID card
IV. Driving license
V. Bank passbook
Bank passbook is one of the Proof of Address (POA) being submitted by applicant(s)
59
60. To the DP at the time of opening depository account. In this regard, procedure is as
Follows,
(i) Computer generated original bank statement:
DPs may accept the computer generated original bank statement as POA if
Neither obtaining the copy of bank passbook nor attestation (stamp and signature)
Of the authorised official of the bank on the original bank statement is feasible.
Provided such original bank statement is printed on the stationery of the bank
Carries logo & name of the bank, displays the name, address and bank
Transactions/holdings of the Client for the latest quarter ending.
(ii) Computer generated bank statement on plain paper:
DPs may accept the computer generated bank statement which is printed on a
Plain paper as POA provided it clearly mentions the name, address and bank
Transactions/holdings of the Client for the latest quarter ending. Provided such
A bank statement is duly attested (signed and stamped) by the authorised official
Of the bank mentioning the name and designation of such authorised official.
In both the aforesaid circumstances, DPs are advised as follows:
a) Obtain a cancelled cheque in original and signature of the applicant(s) (all
The holders in case of joint holdings) on the bank statement.
b) The bank statement should be of the latest quarter ending e.g. depository
Accounts opened in the month of April, May and June should be supported
By the bank statement of the quarter ending March 31.
Capturing of landmark details
Clients prefer to write landmark details viz., name of the building/mall/junction/
School/garden/hotel/bank/railway station/company name/bus depot etc. with the
Preceding words such as 'nearby', 'adjacent to', 'behind', 'next to', 'opposite to'
'Off' etc. in the account opening form as it facilitates for easy location of their
Addresses and prompt delivery of various communications to be received by
The Clients. In this context, procedure is as follows,
60
61. A. At the time of opening demat accounts:
DPs should ensure compliance with the various guidelines/circulars issued
By NSDL on account opening and after satisfying itself, may capture the
Address including landmark details in the DPM System as provided by the
Clients in the account opening forms.
B. Change in landmark details:
In case of change (addition/deletion/modification) in the landmark details
Already captured in the DPM system at the time of opening demat accounts,
DPs may limit the changes to the landmark details after obtaining a request
From the Clients on a plain paper, which is signed by all the holder(s) (in
Case of joint holdings). DPs are advised to note that the primary address
Captured in the DPM system as mentioned in the proof of address, at the
Time of opening demat accounts should remain intact, limiting the changes
To the landmark details.
VI. Verified copies of
a) Electricity bills (not more than two months old),
b) Telephone bills (not more than two months old) pertaining to only Landline
telephones (other than Fixed Wireless Phone) irrespective of the service provider
can be accepted by DPs as POA. (DP may ascertain the fact that such telephone
number exists in the name of the entity, by making a call or by any other means) and
c) Leave and License Agreement / Agreement for sale.
VII. Self-declaration by High Court & Supreme Court judges, giving the new address
In respect of their own accounts.
VIII. Identity card/document with address, issued by
a) Central/State Government and its Departments,
b) Statutory/Regulatory Authorities,
c) Public Sector Undertakings,
d) Scheduled Commercial Banks,
e) Public Financial Institutions,
f) Colleges affiliated to Universities (this can be treated as valid only till the time
The applicant is a student) and
61
62. g) Professional Bodies such as ICAI, ICWAI, Bar Council etc., to their Members.
In case of joint holdings, POI and POA documents must be collected in respect of all
Account holders.
The aforesaid documents are the minimum requirement for opening a BO Account.
Participants are advised to exercise due diligence while establishing the identity of
the person to ensure the safety and integrity of the depository system. Participants
can apply stricter criteria and accordingly, decide to accept, select documents out of
the list of documents prescribed by SEBI, as proof of identity/address.
II. for Corporate Investors: For the purpose of verification, all corporate investors
have to submit the following documents as prescribed by SEBI along with the
stipulated account opening form.
(1) Memorandum & Articles of Association (MOA & AOA), Board resolution for
opening demat account and the list of authorised signatories along with their
specimen signatures and photographs, etc.
(2) Introduction by an existing account holder or by the applicant's bank.
(3) Proof of address of the corporate, evidenced by the document registered with
Registrar of Companies or acknowledged copy of Income Tax Return or Bank
Statement or Leave and License Agreement/Agreement for sale.
An authorised official of the Participant shall verify the proof of address with the
original documents and affix his/her signature on the documents submitted by the
Client, while exercising such due diligence.
Common Information
The process of opening an account with a depository, nature of such an account,
and various factors to be considered for opening a depository account is explained
below. Some details are common to all types of accounts. These are:
1. Name of the holder
2. Date of birth (for individual accounts)
62
63. 3. Occupation
4. Address & phone/fax number
5. Bank details like name of bank, type of account (current/savings), account
number, branch address, MICR, etc.
6. PAN number
7. Details of nomination (for individual accounts only)
8. Specimen signatures
9. MAPIN UIN (s)
10. E-mail address
11. Mobile number
12. Address for communication
Clearing Member Account:
The entities that are authorised to pay in and receive the pay out from a Clearing
Corporation (CC)/ Clearing House against trades done by them or their clients are
known as clearing members (CM). CMs are identified in the system through their
CM-BP-ID. All pay-in and pay-out transactions are carried out through their
accounts.
There are two types of clearing members:
1. All members of a stock exchange popularly known as brokers are clearing
members;
2. Custodians who are permitted by the stock exchange to act as a clearing member.
63
64. Procedure to Open a Clearing Member Account
The steps undertaken to open the account are same as those of individuals,
difference lies in the type of form and details to be filled in and documents to be
submitted. The only major difference is that the clearing member has to first register
it with the clearing corporation and obtain a CCCM- ID. The clearing account is
identified by the combination of CC-CM-ID given by the clearing corporation, CM-BP-
ID given by the depository and the Client-ID given by the DP.
Before opening a clearing account, the DP should send to the depository the clearing
member's account opening form. The Depository then allots the CM-BP-ID. Based
on the CM-BP-ID so allotted, the account gets activated. The DP then generates
Client-ID and communicates the date of opening the account in DPM system to the
depository.
Details to be filled in the form are:
1. Name of the Clearing Member
2. Company's short name, if any
3. Address of the registered office, telephone number, fax number, e-mail, if any
4. Name and address of the authorised signatories, their designations and telephone
numbers, status code, sub-status code
5. Bank account particulars, bank name and its branch, current account number, RBI
reference number, RBI approval date, PAN/ GIR number
6. Signatures of Authorised signatory (ies)
Details of Introducer - If an existing client has introduced a new client to the DP his
signature is required on the form. In other cases, the DP may ask for details that it
64
65. considers appropriate. A separate enclosure has to be attached to the account
opening form specifying the following details:
1. Name and address of the clearing member
2. Name and address of the clearing corporation
3. Clearing Corporation Id (CC-ID)
4. Clearing Member Id (CM-ID)
5. Stock Exchange clearing code
6. SEBI Registration number
7. Trade name
8. Copy of Board Resolution for authorised signatories should also be submitted.
Generally, there will be only one CM account per broker for a stock exchange.
Checklist for a Clearing Member Account
• Ensure that all compulsory fields in the account opening form have been entered.
• Ensure that a copy of the board resolution for authorised signatories has been
enclosed in case of corporates.
• Ensure that required letter from Stock Exchange giving CC-ID is enclosed.
• Ensure CM is informed of standing instruction facility for receipt.
• Ensure CM is informed that in case of delivery to CC instruction, either of the joint-
holders can sign the instruction.
• If the forms are received at the branch of a DP, ensure that the account opening
form along with required references is dispatched to head office in a proper and
timely manner. If required, retain a copy.
65
66. • Ensure follow up with head office in case defined deadline in respect of account
opening is not met.
The clearing account should only be used for clearing and settlement purposes and
not for any other purpose, e.g., holding of securities. All the securities received in a
settlement account should be transferred to respective beneficial accounts as soon
as possible, but in no case later than the time prescribed by the depository/ stock
exchange/SEBI in this regard. The opening of clearing member account constitutes a
"standing instruction" to receive credits from the clearing corporation when there is a
pay-out.
Intermediary Account: An intermediary account can be opened by a SEBI registered
intermediary for the purpose of stock lending and borrowing. The clearing member
account and the intermediary account are transitory accounts. The securities in
these accounts are held for a commercial purpose only.
Client types
There are several client types in the depository system and different codes are
allotted to them.
These are listed below:
1. Resident
_ Ordinary
_ Hindu Undivided Family (HUF)
2. Financial Institutions (FI)
_ Government-sponsored FI
_ State Financial Corporation
_ Others
66
67. 3. Foreign Institutional Investors (FIIs)
_ Mauritius-based
_ Others
4. Non-resident Indian (NRI)
_ Repatriable
_ Non-Repatriable
5. Body Corporate
_ Domestic Company
_ Overseas Corporate Body (OCB)
_ Government Company
_ Central Government
_ State Government
_ Co-operative Body
_ Non-Banking Finance Companies (NBFC)
_ Non-NBFC
_ Broker
_ Foreign Bodies
_ Group Companies
_ OCB-NonRepatriable
_ Foreign Venture Capital
_ Limited Liability Partnership
_ Others
6. Clearing Member (CM)
7. Foreign National
8. Mutual Fund
67
68. 9. Trust
10. Bank
_ Foreign Bank
_ Co-operative bank
_ Nationalised Bank
_ Others
11. Intermediary
68
70. DEMATERIALISATION
Definition
Dematerialisation is the process of converting physical shares (share certificates)
into an electronic form. Shares once converted into dematerialised form are held in a
Demat account.
Dematerialisation Process
70
71. An investor having securities in physical form must get them dematerialised, if he
intends to sell them. This requires the investor to fill a Demat Request Form
(DRF) which is available with every DP and submit the same along with the
physical certificates. Every security has an ISIN (International Securities
Identification Number). If there is more than one security than the equal number
of DRFs has to be filled in.
The whole process goes on in the following manner:
i) Appointing DP
Any investor who intends to transact through depository system has to engage
one depository participant (DP). He can approach a DP of his choice and open
an account with him just like one opens an account with a bank. Investor gets an
identification number called Client ID (just as one gets ones bank account
number) which serves as a reference point for all his transactions with D.P.
71
72. Every investor before getting his holding dematerialised has to enter into an
agreement with the depository through a participant. This step is necessary
whether investor already has securities or securities are yet to be issued in a
fresh issue. The investor contracts only with that depository which accepts his
security in ‘depository mode’ since it is not necessary that all eligible securities
must be in depository mode and with all the depositories. The decision on
whether or not to hold securities within the depository mode and if in depository
mode, with which depository or participants, would be entirely with the investor.
ii) Request for ‘Demat’
After any agreement is entered for getting securities dematerialised and his
account is opened, the investor makes an application to depository participants in
form called ‘Dematerialisation Request Form’ (DRF) to be provided by the DP
and hands over his share certificates duly cancelled by writing’ surrendered for
dematerialisation’ to them for demat. The DP will accept certificates registered
only in investor’s name.
The request for dematerialisation with the depository participants is sent to the
depository through depository network with which DP is connected.
Simultaneously DP submits the securities certificates to the issuer company or
it’s Registrar of transfer.
iii) Approach the Company or Registrar of Transfer
The depository will electronically intimate the issuer or its ‘Registrar and transfer
agent’ of the dematerialisation request. The issuer or the ‘Registrar and transfer
Agent’ has to verify the validity of the security certificates as well as the fact that
the DRF has been made by the person recorded as a member in its Register of
72
