Advantages Of The Depository System 655g3

Advantages of the Depository System The advantages of dematerialization of securities are as follows: 

Share certificates, on dematerialization, are cancelled and the same will not be sent back to the investor. The shares, represented by dematerialized share certificates are fungible and, therefore, certificate numbers and distinctive numbers are cancelled and become non-operative.

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It enables processing of share trading and transfers electronically without involving share certificates and transfer deeds, thus eliminating the paper work involved in scrip-based trading and share transfer system.

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Transfer of dematerialized securities is immediate and unlike in the case of physical transfer where the change of ownership has to be informed to the company in order to be ed as such, in case of transfer in dematerialized form, beneficial ownership will be transferred as soon as the shares are transferred from one to another.

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The investor is also relieved of problems like bad delivery, fake certificates, shares under litigation, signature difference of transferor and the like.

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There is no need to fill a transfer form for transfer of shares and affix share transfer stamps.

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There is saving in time and cost on of elimination of posting of certificates.

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The threat of loss of certificates or fraudulent interception of certificates in transit that causes anxiety to the investors, are eliminated. Disadvantages/Problems of the Depository System Some disadvantages were about the depository system were known beforehand. But since the advantages outweighed the shortcomings of dematerialisation, the depository system was given the go-ahead.

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Lack of control: Trading in securities may become uncontrolled in case of dematerialized securities.

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Need for greater supervision: It is incumbent upon the capital market regulator to keep a close watch on the trading in dematerialized securities and see to it that trading does not act as a detriment to investors. The role of key market players in case of dematerialized securities, such as stock brokers, needs to be supervised as they have the capability of manipulating the market.

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Complexity of the system: Multiple regulatory frameworks have to be confirmed to, including the Depositories Act, Regulations and the various Bye Laws of various depositories. Additionally, agreements are entered at various levels in the process of dematerialization. These may cause anxiety to the investor desirous of simplicity in of transactions in dematerialized securities. Besides the above mentioned disadvantages, some other problems with the system have been discovered subsequently. With new regulations people are finding more and more loopholes in the

system. Some examples of the malpractices and fraudulent activities that take place are: 

Current regulations prohibit multiple bids or applications by a single person. But investors open multiple demat s and make multiple applications to subscribe to IPOs in the hope of getting allotment of shares.

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Some listed companies had obtained duplicate shares after the originals were pledged with banks and then sold the duplicates in the secondary market to make a profit.

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Promoters of some companies dematerialised shares in excess of the company’s issued capital.

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Certain investors pledged shares with banks and got the same shares reissued as duplicates.

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There is an undue delay in the settlement of complaints by investors against depository participants. This is because there is no single body that is in chargeof ensuring full compliance by these companies.

Depositories Depository is an organization where the securities of the shareholders are held in electronic form at the request of the shareholder through the medium of a Depository Participant. In the following article we are going to learn more about depository and depository participant. Definition of Depository: Depository means a company formed and ed under the companies act, 1956 and it has been granted a certificate of registration under section 12(1A) of SEBI Act, 1992. Two Depositories are regulated in India: 1. National Securities Depository limited (NSDL) 2. The Central Depository Services (India) Limited (CDS) Functions of Depository: 1. Services to investors 2. Services to Participants in the capital market such as clearing , stock exchanges , investment institution, banks and issuing corporate 3. opening 4. Dematerialization 5. Rematerialization 6. Settlement of trades 7. Advanced facilities like pledging, distribution of non- cash corporate actions, distribution of securities to allot tees in case of public issues etc. 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 ofsecurity movement. 4. Investors will be able to change portfolio more frequently. 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 themselves.

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. Difference between Depository and Custodian : Function It a part from keeping the It function is merely „safe shares in e-form , manages keeping‟ of shares. It handle the shares on behalf of Huge – paper work. investor Position It is a institution or can be It is an in term diary. called as an organization itself. ACT There is a separate Act i.e. There is no separate Act Depositories Act – 1956, a and it is regulated by SEBI part from SEBI (Custodian of Securities) (depositories and Reg. 1996 participant ) Reg . 1996

Models of Depository : 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 number of shares are credited in his in e-form. 2. Immobilisation : It is a process of storing of physical share certificates, with depository for safe custody. In this model the original share certificates, can be withdrawn, as it is lodged in depository method. Meaning of Depository Participant and its characteristics: Depository Participant (DP): is the representative or agent of the investor in the depository system providing the link between the Company and investor through the Depository Characteristics of depository participant: 1. Acts as an Agent of Depository 2. Directly deal with customer 3. Functions like Securities Bank 4. opening

5. Facilitates dematerialization 6. Instant transfer on pay – out 7. Credits to investor in IPO, rights, bonus 8. Settles trades in electronic segment Difference between dematerialization and remateriaisation : Difference Dematerialisation Re – materialisation Definition It is a process of conversion It is a process of conversion of physical shares of electronic shares into certificates into electronic physical shares. When a form. So, under beneficial – owner opt out dematerialization facility, of a depository, he will company take back the inform about it, to the shares, through depository – company, through system and equal number of depository. The company shares are credited in will issue fresh share – in e-form. certificate to the beneficial – owner, within 30 days from the date of request. Conversion In this, physical share In this, e- records are certificates converted into e- converted into physical – records. shares certificate. Sequence Firstly shares are Firstly shares are dematerialize, so it is dematerialize then it is primary and principal rematerialize, so it is secondary and ing se of form

In this process it requires In this process it requires “Dematerialization Request “Rematerialisation Request Form” form” (RRF)

Rights and Obligations of Depositories and its constituents : 1. Every depository has to enter into an agreement with the issuer in respect of securities to become eligible to held the securities in demat form. 2. Every depository is to maintain the following records and documents : (a) Records of securities dematerialised and rematerialised (b) Names of the transferor, transferee, and the dates of transfer of securities (c) A and an index of beneficial owners

(d) Details of holding of the securities of the beneficial owners as at the end of every day. (e) Records of instruction received from and sent to participants, issuers‟ agents and beneficial owners, 3. Details and the maintenance of records and documents should be intimated to Board. 4. All the records and documents should be preserved for minimum 5 years.