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Chapter 8 Operations of Depository Participants
After reading this chapter, you should be able:
1. To understand meaning and importance of ISIN
2. To understand the importance of dematerialization of securities and the process involved.
3. To understand the process of transfer of shares.
4. To apply the knowledge in real life situation.
Your guide engine to learning:
1. Introduction – Depository System
2. International Securities Identification Number
1. Securities that can be dematerialized
2. Process of Dematerialization
3. Benefits of having a demat account
4. Trading and Settlement of dematted shares:
1. Meaning of transfer of shares
2. Settlement of off-market Trades
3. Settlement of Market Trades
8.1 Introduction – Depository System
The earlier settlement system on Indian stock exchanges was very inefficient as it was unable to take care of the transfer of securities in a quick/speedy manner. Since, the securities were in the form of physical certificates; their quick movement was again difficult. This led to settlement delays, theft, forgery, mutilation and bad deliveries and also to added costs.
To wipeout these problems, the Depositories Act 1996 was passed. It was formed with the purpose of ensuring free transferability of securities with speed, accuracy & security. It has been able to do so by:
a) Making securities of public limited companies freely transferable, subject to certain exceptions;
b) Dematerialising the securities in the depository mode; and
c) Providing for maintenance of ownership records in a book entry form.
For performing the above tasks, two depositories viz, NSDL & CDSL have come up.
National Securities Depository Limited (NSDL) does the above tasks for the trades done on NSE. It is a joint venture of:
- IDBI (Industrial Development Bank of India Limited);
- NSE (National Stock Exchange); and
- UTI (Unit Trust of India).
NSDL is the first depository to be set up in India. It was registered by SEBI on June 7, 1996.
The second depository Central Depository Services Limited (CDSL) has been promoted by Bombay Stock Exchange and Bank of India. It was formed in February 1999. Both depositories have a network of Depository participants (DPs) which are further electronically connected to their clients. So, DPs act as a link between the depositories and the clients.
The Depository system to some extent works like the banking system. There is a
central bank and the rules and regulations related to the working of all the
commercial, foreign, co-operative and other types of banks are framed by the central bank. In order to do the daily transactions, the investors open an account with the associate banks, and not with the central one. Like an investor can have a bank account with more than one bank, similarly one can have more than one Demat Account. We can further bring out the similarities as well as the differences between the two in understanding the depository system. (See Table 8.1)
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