Maharashtra Board Class 12 Secretarial Practice Chapter 9 Depository System PDF Download

Depository System

Introduction

Securities can be held in two modes:

A) Physical B) Electronic / Dematerialized

Securities means shares, debentures, bonds, units of mutual funds, securities issued by the Government etc.

A) Physical mode of holding securities: It means securities are held in the form of paper certificates. It has following disadvantages:

1) Risk: Certificates of papers can be lost, damaged, torn, stolen, misplaced during transit, etc.

2) Efforts in Duplicating: Obtaining duplicate certificates (if original certificate is lost) involves time, efforts and money.

3) Delay in allotment of securities: Allotment of new securities takes longer time.

4) Delay in Transfer and Transmission of securities: More time is involved in transfer and transmission of securities as it involves actual handling of physical certificates.

5) Risk of Bad Delivery: Delivering certificates which are torn, forged, etc. creates problems in buying and selling of securities.

B) Electronic / Dematerialized mode of holding securities: It means securities are held in electronic or dematerialized form.

9.1 Meaning Of Depository System

Under Depository System, securities are held in electronic form. The transfer and settlement of securities are done electronically. The Depository System maintains accounts of the shareholder, enables transfer, collects dividends, bonus shares, etc. on behalf of the shareholder. This system is also called as scripless trading system.

In India, the Depository System was introduced by passing the Depository Act in 1996. Under this Act, a competitive multi-depository system consisting of two depositories, viz. NSDL and CDSL was set up. It will be of interest to note that the world's first Depository was set up in 1947 in Germany.

The Depository System resembles the Banking system in many aspects.

In the Depository System, the Depository is the custodian of the securities in electronic form and the Depository Participant acts as a link between the Depository and the Investor.

Teacher's Note

Just like a bank safely keeps your money in an account with a unique number, the Depository System keeps your shares safely in an electronic account, making investments more secure and convenient.

9.2 Importance Of Depository System

Depository System has a very important role to play in the successful functioning of the capital market.

1) It aims at eliminating huge volume of paperwork involved in paper or scrip based system.

2) It offers scope for paperless trading by using the state-of-art technology.

3) It leads to elimination of storage and handling of certificates.

4) It reduces the cost and efforts involved in storage and handling of physical certificates.

Teacher's Note

By eliminating physical paper certificates and enabling electronic transfers, the Depository System makes the stock market much faster and cheaper to operate, similar to how online banking has made banking simpler than visiting branches.

9.3 Benefits / Advantages Of Depository System

A) To Investors:

1) Elimination of Risk: All risks associated with physical certificates like delays, lost, theft, mutilation, bad deliveries, etc. are totally eliminated.

2) Safety: It is the most safe and secure way of holding securities. The entire system functions under the Depository Act and is monitored by SEBI. e.g. The Investor can keep his account in a 'Freeze / Lock' mode to avoid / prevent unexpected debit or credit or both by giving instructions to the DP.

3) Easy Transfer of shares:

a) Efforts in filling transfer forms and lodging the documents is eliminated.

b) Also the stamp duty levied on transfer of physical shares is not applicable.

c) Processing time in transfer of securities is reduced and neither the securities nor the cash is tied / held up for unnecessarily long time.

4) Updates and Intimation: The investor is provided with the status of the holdings and transactions by DP and occasionally by the Depository too.

5) Security against Loan: Dematerialised securities are preferred by banks and financial institutions as security against loan.

6) No concept of 'Lots': The system of odd and even lot stands abolished. The market lot is one share for dematerialised securities.

7) Nomination Facility: Individual Investors can avail of nomination facility. This simplifies the process in the event of the death of the investor.

8) Automatic Credit: The account of investor is automatically credited/debited in case of a change initiated by the company which impacts the securities. This is called 'Corporate Action'. Few examples which can be termed as Corporate Action are : Payment of Dividend, Issue of Bonus Shares, Offering of Rights Shares, Early Redemption of Debentures, Mergers and Acquisitions, etc.

B) To Companies:

1) Up-to-date Information: The up-to-date information about investors is provided by the depository.

2) Reduction in costs and efforts: Costs, efforts and time involved in printing and distribution of certificates in cases of new issues, bonus, transfers, etc. is saved.

3) Better Investor - Company Relationships: The complaints arising out of loss of certificates, signature differences, long lapses of time in executing requests, etc. is substantially reduced. It leads to better communication with investors and increased goodwill for the company.

4) International Investment: Under Depository System, better and quicker services can be provided and this attracts investments from abroad.

Teacher's Note

Companies save money by not printing physical certificates, and investors enjoy instant updates about their holdings—making the whole investment experience faster and more transparent for everyone involved.

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