Maharashtra Board Class 12 Secretarial Practice Chapter 9 Depository System Solutions

Class 12 Secretarial Practice Chapter 9 Exercise Solutions

1A. Select The Correct Answer From The Options Given Below And Rewrite The Statements.

Question 1. In physical mode, securities are held in ________ form.
(a) Paper
(b) Dematerialization
(c) Electronic
Answer: (a) Paper
In simple words: In the traditional physical mode, securities are represented by actual paper certificates. These certificates serve as tangible proof of ownership.

🎯 Exam Tip: Understanding the basic differences between physical and electronic holding of securities is crucial for multiple-choice questions.

Question 2. Risk of losing certificates exist in ________ mode.
(a) Physical
(b) Dematerialization
(c) Digital
Answer: (a) Physical
In simple words: When securities are held as physical certificates, there is always a risk of them being lost, damaged, or stolen, unlike electronic forms.

🎯 Exam Tip: Questions about risks associated with different security holding modes are common; focus on the vulnerability of physical documents.

Question 3. In Depository system, securities are held in ________ form.
(a) Scrip based
(b) Electronic
(c) Physical
Answer: (b) Electronic
In simple words: A depository system eliminates physical certificates, storing all securities information and ownership records in an electronic format.

🎯 Exam Tip: Remember that the core function of a depository system is to facilitate electronic holding and transfer of securities.

Question 4. ________ is the institute which facilitates electronic holding of securities.
(a) Depository Participant
(b) Issuer
(c) Depository
Answer: (c) Depository
In simple words: The Depository is the central institution that holds securities in electronic form and enables their transfer, while Depository Participants act as its agents.

🎯 Exam Tip: Distinguish between a Depository (the main institution) and a Depository Participant (the intermediary) for clarity.

Question 5. There is no payment of ________ when securities are demated.
(a) Octroi
(b) Wealth Tax
(c) Stamp Duty
Answer: (c) Stamp Duty
In simple words: Dematerialization of securities eliminates the need to pay stamp duty during the transfer process, making transactions more cost-effective.

🎯 Exam Tip: Highlight the benefits of dematerialization, such as the elimination of stamp duty, as this is a key advantage.

Question 6. Depository Act was passed in ________
(a) 1919
(b) 1996
(c) 1999
Answer: (b) 1996
In simple words: The Depository Act, enacted in 1996, provided the legal framework for the establishment and functioning of depositories in India.

🎯 Exam Tip: Knowing the year of key legislation like the Depository Act is important for historical context and specific questions.

Question 7. India has a ________ depository system.
(a) Sole
(b) Multi
(c) Single
Answer: (b) Multi
In simple words: India operates a multi-depository system, primarily with NSDL and CDSL, offering choice and competition in the electronic holding of securities.

🎯 Exam Tip: Be aware that India has more than one depository (NSDL and CDSL), which signifies a 'multi' system.

Question 8. ________ is a constituent of depository system.
(a) Government
(b) Issuer
(c) Trust
Answer: (b) Issuer
In simple words: The issuer company, which issues the securities, is a fundamental part of the depository system as it works with the depository to dematerialize its shares.

🎯 Exam Tip: Remember the four main constituents: Depository, Depository Participant, Beneficial Owner, and Issuer Company.

Question 9. ________ is the oldest depository in India.
(a) Dow Jones
(b) NSDL
(c) CDSL
Answer: (b) NSDL
In simple words: NSDL, or National Securities Depository Limited, was the first depository established in India, playing a pioneering role in electronic security holdings.

🎯 Exam Tip: Identifying NSDL as the oldest Indian depository is a factual recall point frequently tested.

Question 10. Demat account is opened by ________
(a) Beneficial owner
(b) CDSL
(c) SEBI
Answer: (a) Beneficial owner
In simple words: A Demat account is opened by an investor, known as the beneficial owner, to hold their securities in an electronic format.

🎯 Exam Tip: Understand that the beneficial owner is the ultimate investor who opens and maintains a Demat account.

Question 11. Demated shares are ________
(a) Non-transferable
(b) Fungible
(c) Bearer
Answer: (b) Fungible
In simple words: Demated shares are fungible, meaning they are interchangeable and lack unique identification numbers, simplifying trades.

🎯 Exam Tip: The concept of fungibility is key to understanding electronic trading, as it streamlines transactions by removing unique identifiers from shares of the same class.

Question 12. ________ is a unique code given to a security.
(a) IBM
(b) BBM
(c) ISIN
Answer: (c) ISIN
In simple words: ISIN, or International Securities Identification Number, is a globally recognized code used to uniquely identify specific securities.

🎯 Exam Tip: Familiarity with acronyms like ISIN and their full forms is crucial for direct questions and understanding financial instruments.

Question 13. In India ISIN for corporate securities is allotted by ________
(a) NSDL
(b) Central Government
(c) State Government
Answer: (a) NSDL
In simple words: In India, NSDL is the designated authority responsible for allotting International Securities Identification Numbers (ISINs) for corporate securities.

🎯 Exam Tip: Note that NSDL's role extends beyond just being a depository to also include ISIN allocation for corporate securities in India.

Question 14. ________ has to apply for ISIN.
(a) Company
(b) Depository Participant
(c) Depositors
Answer: (a) Company
In simple words: The company that issues the securities is responsible for applying for an ISIN to uniquely identify its financial instruments.

🎯 Exam Tip: Differentiate responsibilities: the company applies for ISIN, the depository allocates it, and investors use it for trading.

Question 15. ________ has to pay charges to maintain Demat Account.
(a) Investor
(b) Issuer
(c) Depositor
Answer: (a) Investor
In simple words: The investor, or beneficial owner, is responsible for paying the maintenance charges associated with their Demat account.

🎯 Exam Tip: Understand that account maintenance fees are typically borne by the account holder (investor/beneficial owner) for services rendered.

Question 16. NSDL is promoted by ________
(a) NSE
(b) BSE
(c) FTSE
Answer: (a) NSE
In simple words: NSDL was promoted by the National Stock Exchange (NSE), along with other financial institutions, to facilitate electronic trading.

🎯 Exam Tip: Linking depositories to their promoters (e.g., NSDL with NSE, CDSL with BSE) is a common knowledge-based question.

Question 17. CDSL is promoted by ________
(a) NSE
(b) BSE
(c) FTSE
Answer: (b) BSE
In simple words: CDSL, or Central Depository Services Limited, was primarily promoted by the Bombay Stock Exchange (BSE) to provide depository services.

🎯 Exam Tip: Remember the association of CDSL with BSE and NSDL with NSE to correctly answer questions about their promoters.

1B. Match The Pairs.

Question 1.

🎯 Exam Tip: For match the pairs, ensure a clear understanding of each term and its direct association to avoid confusion between similar options, especially for dates and roles.

1C. Write A Word Or A Term Or A Phrase That Can Substitute Each Of The Following Statements.

Question 1. This mode of holding securities may result in loss and theft of certificates.
Answer: Physical mode of securities
In simple words: Holding securities in physical form, meaning with paper certificates, carries risks such as loss, theft, or damage of these tangible documents.

🎯 Exam Tip: Focus on distinguishing between the risks of physical and electronic holdings; physical mode inherently involves more tangible security risks.

Question 2. The organization holds the securities in electronic mode.
Answer: Depository
In simple words: The Depository is the central entity that maintains and holds securities in a digital or electronic format on behalf of investors.

🎯 Exam Tip: Clearly identify the Depository as the primary holder of electronic securities, distinguishing it from the DP, who acts as its agent.

Question 3. This system eliminates storing of certificates.
Answer: Depository system
In simple words: The depository system modernizes security holding by converting physical certificates into electronic records, thus removing the need for physical storage.

🎯 Exam Tip: The core benefit of a depository system is paperless transactions, which directly eliminates the physical storage of certificates.

Question 4. This system allows faster and easier transfer of securities.
Answer: Depository system
In simple words: By facilitating electronic transactions, the depository system significantly speeds up the process of transferring securities, making it more efficient than manual methods.

🎯 Exam Tip: Emphasize speed and ease of transfer as key advantages of the electronic depository system over traditional physical processes.

Question 5. The oldest Depository of India.
Answer: NSDL (National Security Depository limited)
In simple words: The National Securities Depository Limited (NSDL) holds the distinction of being India's first and oldest operational depository.

🎯 Exam Tip: Knowing the full name and identifying NSDL as the oldest depository is a direct recall question that can secure easy marks.

Question 6. The country where the Depository system started for the first time.
Answer: Germany
In simple words: Germany pioneered the concept of the depository system, establishing the first such system globally to dematerialize securities.

🎯 Exam Tip: While India's depositories are important, also remember global origins for a broader understanding of the topic.

Question 7. The registered owner of securities.
Answer: Beneficial Owner
In simple words: The Beneficial Owner (BO) is the actual investor who holds the securities in a Demat account and enjoys all the rights associated with ownership.

🎯 Exam Tip: Distinguish between the Depository (legal owner) and the Beneficial Owner (actual investor) when discussing security ownership in the demat system.

Question 8. The agent of the Depository.
Answer: Depository Participant
In simple words: A Depository Participant (DP) acts as an intermediary between the investor and the depository, facilitating the dematerialization and transfer of securities.

🎯 Exam Tip: A clear understanding of the DP's role as an agent connecting investors to the depository is fundamental.

Question 9. This process converts securities into an electronic form from a physical form.
Answer: Dematerialization
In simple words: Dematerialization is the process where physical share certificates are converted into an equivalent electronic balance in an investor's Demat account.

🎯 Exam Tip: Define Dematerialization clearly; it's a core concept of the depository system and a frequent exam topic.

Question 10. This process converts securities into physical form from electronic form.
Answer: Rematerialization
In simple words: Rematerialization is the reverse process of dematerialization, where electronic securities are converted back into physical share certificates.

🎯 Exam Tip: Understand Rematerialization as the opposite of Dematerialization, allowing investors to revert to physical certificates if desired.

Question 11. This means securities are without distinctive identity numbers.
Answer: Fungibility
In simple words: Fungibility implies that all securities of the same class from a particular issuer are identical and interchangeable, lacking unique serial numbers when held electronically.

🎯 Exam Tip: Fungibility is a key characteristic of dematerialized securities, facilitating easy trading as any unit is equivalent to another.

Question 12. This is the unique code for security given in the Depository system.
Answer: International Securities Identification Number
In simple words: The International Securities Identification Number (ISIN) is a standard global code used to uniquely identify specific security issues, regardless of where they are traded.

🎯 Exam Tip: Remember the full form and purpose of ISIN – it's a universal identifier for securities, crucial for global trading.

1D. State Whether The Following Statements Are True Or False.

Question 1. The physical mode of holding Securities is risky.
Answer: True
In simple words: Holding securities as physical certificates is indeed risky due to potential issues like loss, theft, damage, or forgery.

🎯 Exam Tip: This is a direct factual question; know the inherent disadvantages of physical security holdings.

Question 2. Allotment of Securities takes a longer time when in physical mode.
Answer: True
In simple words: Processing physical share certificates for allotment involves manual steps, leading to a much longer timeline compared to electronic allocations.

🎯 Exam Tip: Compare the efficiency of physical versus electronic modes; physical processes are generally slower and more cumbersome.

Question 3. Transfer of Securities is easier in electronic mode.
Answer: True
In simple words: Transferring securities electronically is significantly simpler and faster, requiring fewer documents and eliminating physical movement of certificates.

🎯 Exam Tip: Ease and speed of transfer are primary benefits of the electronic depository system.

Question 4. Bad delivery is likely in the Depository system.
Answer: False
In simple words: Bad delivery, which refers to faulty or rejected physical share certificates, is virtually eliminated in the electronic depository system as there are no physical documents to scrutinize.

🎯 Exam Tip: The electronic nature of the depository system inherently removes issues like bad delivery associated with physical certificates.

Question 5. The depository system began in the USA for the first time in the world.
Answer: False
In simple words: The depository system was first established in Germany, not the USA, before gaining global adoption.

🎯 Exam Tip: Remember that Germany was the pioneer in establishing the depository system globally, not the USA.

Question 6. India has a multi-depository system.
Answer: True
In simple words: India indeed operates with a multi-depository system, primarily featuring two main depositories: NSDL and CDSL.

🎯 Exam Tip: Knowing the existence of multiple depositories (NSDL and CDSL) confirms India's multi-depository structure.

Question 7. The depository system is very similar to the banking system.
Answer: True
In simple words: The depository system functions much like a bank, where securities are held in electronic accounts and transferred without physical handling, mirroring how money is managed in bank accounts.

🎯 Exam Tip: Analogy questions are common; comparing the depository system to banking helps explain its operational similarities like electronic accounts and transfers.

Question 8. DP is a constituent of the Depository system.
Answer: True
In simple words: The Depository Participant (DP) is an essential component of the depository system, serving as the direct interface between investors and the depository.

🎯 Exam Tip: Recall the four main constituents of a depository system; DP is one of them, crucial for its functioning.

Question 9. DP is an Agent of the Depository.
Answer: True
In simple words: A Depository Participant (DP) acts as an authorized agent for the main depository, providing services to investors on its behalf.

🎯 Exam Tip: Clarify the DP's role as an agent, highlighting their function as an authorized representative of the depository.

Question 10. A bank can work as a DP.
Answer: True
In simple words: Various financial institutions, including banks, stockbrokers, and non-banking financial companies, can register and act as Depository Participants.

🎯 Exam Tip: Understand that DPs are not limited to stockbrokers; banks and other financial entities can also serve this function, expanding accessibility for investors.

Question 11. DRF is required for conversion from physical to electronic.
Answer: True
In simple words: To convert physical securities into electronic form (dematerialization), an investor must submit a Demat Request Form (DRF) to their Depository Participant.

🎯 Exam Tip: Remember specific forms like DRF (Demat Request Form) and RRF (Remat Request Form) and their purposes for converting securities.

Question 12. ISIN is a unique code given to the specific Securities.
Answer: True
In simple words: The International Securities Identification Number (ISIN) serves as a distinct, globally recognized code assigned to uniquely identify each security issue.

🎯 Exam Tip: Reiterate the fundamental role of ISIN as the unique identifier for securities, crucial for their differentiation in the market.

1E. Find The Odd One.

Question 1. Elimination of storage of certificates, theft of certificates, torn certificates
Answer: Elimination of storage of certificates
In simple words: While theft and torn certificates are problems in the physical system, the "elimination of storage of certificates" is a benefit of the depository system, not a problem like the others.

🎯 Exam Tip: Distinguish between problems/risks associated with physical certificates and the advantages offered by the electronic depository system.

Question 2. NSDL, CDSL, NBFC
Answer: NBFC
In simple words: NSDL and CDSL are the two main depositories in India, whereas NBFC (Non-Banking Financial Company) is a type of financial institution, making it the odd one out.

🎯 Exam Tip: Identify the categories; NSDL and CDSL belong to 'depositories,' while NBFC is a broader financial institution category.

Question 3. Depository, DP, RBI
Answer: RBI
In simple words: Depository and Depository Participant (DP) are direct constituents of the depository system, while RBI (Reserve Bank of India) is the central bank and regulator, but not a direct constituent of the depository structure.

🎯 Exam Tip: Focus on the direct constituents of the depository system; RBI is a broader regulatory body, not a functional part of the daily depository process.

Question 4. DP, BO, State Government
Answer: State government
In simple words: Depository Participant (DP) and Beneficial Owner (BO) are both active participants in the depository system, while 'State government' is a broader administrative body not directly involved in its core functioning.

🎯 Exam Tip: Clearly define the roles of direct stakeholders in the depository system to differentiate them from external government entities.

Question 5. Issuer, BO, Central Government
Answer: Central government
In simple words: The Issuer and Beneficial Owner (BO) are key constituents of the depository system, whereas the Central Government is a regulatory and policy-making body, not a direct participant in securities handling.

🎯 Exam Tip: Reinforce the understanding of the four primary constituents of the depository system: Depository, DP, BO, and Issuer Company.

Question 6. DRF, RRF, PPF
Answer: PPF
In simple words: DRF (Demat Request Form) and RRF (Remat Request Form) are forms used for dematerialization and rematerialization respectively, while PPF (Public Provident Fund) is a long-term investment scheme, making it the odd one out.

🎯 Exam Tip: Distinguish between specific forms used within the depository system and general financial instruments or schemes.

1F. Complete The Sentences.

Question 1. Central location for keeping Securities in demated form is ________
Answer: Depository
In simple words: The Depository serves as the central hub where all securities are held and managed in an electronic or dematerialized format.

🎯 Exam Tip: The definition of a depository often revolves around it being the central repository for electronic securities.

Question 2. Freezing of debit/credit of Securities is possible in ________
Answer: Dematerialized Securities
In simple words: In the electronic system, investors can instruct their Depository Participant to temporarily 'freeze' their Demat account, preventing any unauthorized debit or credit of dematerialized securities.

🎯 Exam Tip: The ability to 'freeze' an account is a security feature unique to dematerialized holdings, protecting investors from unexpected transactions.

Question 3. First Depository of the world started in the year ________
Answer: 1947
In simple words: The world's first depository system was established in Germany in 1947, marking a significant step towards electronic securities management.

🎯 Exam Tip: While India's depository system started in 1996, remember the global origin of the concept in 1947 for historical questions.

Question 4. The Indian Depository Act was passed in the year ________
Answer: 1996
In simple words: India's legal framework for the depository system, the Indian Depository Act, was enacted in 1996, enabling the establishment of depositories like NSDL and CDSL.

🎯 Exam Tip: The year 1996 is crucial as it signifies the legal inception of the depository system in India.

Question 5. Link between Depository and investor is ________
Answer: Depository participant
In simple words: The Depository Participant (DP) serves as the essential intermediary, creating a link between the investor and the central Depository.

🎯 Exam Tip: Understand the triangular relationship: investor <-> DP <-> Depository, with the DP as the direct contact for the investor.

Question 6. Account of Securities of the investor is maintained by ________
Answer: Depository Participant
In simple words: Although the securities are held by the Depository, the investor's individual Demat account and its related activities are managed and maintained by the Depository Participant.

🎯 Exam Tip: Clarify that the DP is responsible for account maintenance and investor interaction, even though the ultimate custodian is the Depository.

Question 7. The process which converts physical Securities in electronic form is ________
Answer: Dematerialization
In simple words: Dematerialization is the specific process used to transform physical share certificates into electronic book-entry form within the depository system.

🎯 Exam Tip: This is a direct definition; ensure a clear understanding of what dematerialization entails.

Question 8. The process which converts digital Securities in physical form is ________
Answer: Rematerialization
In simple words: Rematerialization is the process that allows an investor to convert their electronically held securities back into physical share certificates upon request.

🎯 Exam Tip: Remember rematerialization as the reverse process of dematerialization, allowing physical certificates to be re-issued.

Question 9. The issuer company must register with ________
Answer: Depository
In simple words: For its securities to be dematerialized and traded electronically, an issuer company must first register with a depository.

🎯 Exam Tip: The issuer company's registration with a depository is a prerequisite for electronic trading of its securities.

Question 10. The unique code identifying a security is ________
Answer: (ISIN) International Securities Identification Number
In simple words: The International Securities Identification Number (ISIN) is a globally accepted, unique alphanumeric code assigned to each specific security for identification purposes.

🎯 Exam Tip: Consistently recall ISIN as the unique identifier for securities to avoid confusion with other codes.

Question 11. The first Depository of India is ________
Answer: NSDL (National Security Depository Limited)
In simple words: NSDL, the National Securities Depository Limited, was the pioneering institution for electronic holding of securities in India.

🎯 Exam Tip: This is a key historical fact; NSDL was India's first depository, established to facilitate paperless trading.

1G. Select The Correct Option From The Bracket.

Question (I).

🎯 Exam Tip: For fill-in-the-blanks in match the pairs, carefully cross-reference all available options from the bracket to ensure correct logical connections.

Question (II).

🎯 Exam Tip: Ensure precise matches by understanding definitions and characteristics; for example, Fungibility directly implies no distinctive numbers, and ISIN is specifically a 12-digit code.

1H. Answer In One Sentence.

Question 1. What is the Depository system?
Answer: A depository system is a system where Securities are held in electronic form.
In simple words: A depository system is a modern financial framework that allows securities to be held and transferred electronically, eliminating physical paperwork.

🎯 Exam Tip: The concise definition of a depository system focusing on electronic holding is a frequently asked fundamental question.

Question 2. Give examples of actions termed as corporate action.
Answer: Payment of dividend, issue of Bonus Shares, offering of right Shares, Early Redemption of Debentures, Mergers and Acquisitions, etc.
In simple words: Corporate actions are events initiated by a company that affect its shareholders, such as distributing dividends, issuing bonus shares, or undergoing mergers.

🎯 Exam Tip: Listing specific examples like dividends, bonus shares, and mergers will effectively answer questions about corporate actions.

Question 3. When was Depository Act passed in India?
Answer: Depository Act was passed in India in the year 1996.
In simple words: The Depository Act, which laid the foundation for electronic securities transactions in India, was enacted in 1996.

🎯 Exam Tip: The year 1996 is a crucial date for the Indian depository system; commit it to memory.

Question 4. What is a DP?
Answer: DP means Depository participant, who is an agent of Depository.
In simple words: A DP, or Depository Participant, is an intermediary that acts as an agent of the Depository, facilitating services like opening Demat accounts and processing transactions for investors.

🎯 Exam Tip: Focus on the DP's role as an agent and intermediary, as this is its defining characteristic within the depository system.

Question 5. What is Dematerialisation?
Answer: Dematerialization is the process of converting physical Securities into electronic.
In simple words: Dematerialization is the conversion of physical share certificates into an equivalent electronic form, held in a Demat account.

🎯 Exam Tip: A precise definition of dematerialization, highlighting the conversion from physical to electronic, is essential for foundational understanding.

Exercise 9(I)

Question 6.The electronic mode of holding Securities is risky.
Answer: The physical mode of holding Securities is risky.
In simple words: Electronic mode is generally safer than physical mode, so the risk lies with physical holding due to physical certificate vulnerabilities.

🎯 Exam Tip: Understanding the risks associated with different modes of security holding is crucial for evaluating the benefits of the depository system.

Question 7.Allotment and Transfer of Securities are time-consuming in electronic mode.
Answer: Allotment and Transfer of Securities are time-consuming in physical mode.
In simple words: Physical securities involve more paperwork and manual processes, making their allotment and transfer inherently slow and time-consuming.

🎯 Exam Tip: Compare the efficiency of physical versus electronic modes of security transactions to highlight the advantages of dematerialization.

Question 8.Banking system leads to a script less capital market.
Answer: Depository system leads to a scriptless capital market.
In simple words: A scriptless capital market relies on electronic record-keeping of securities, which is primarily facilitated by a depository system, not a banking system directly.

🎯 Exam Tip: Differentiate between the functions of a banking system and a depository system in the context of capital markets.

Question 4.Storage of certificates is not required in the physical mode of holding.
Answer: Storage of certificates is not required in the electronic mode of holding.
In simple words: Electronic holding eliminates the need for physical certificates, thereby removing all storage requirements for securities.

🎯 Exam Tip: Focus on the key benefits of electronic holding, such as reduced paperwork and the complete elimination of storage needs for physical certificates.

Question 5.India has a single Depository system.
Answer: India has a multi Depository system.
In simple words: India operates with more than one depository (e.g., NSDL and CDSL), which means it has a multi-depository system.

🎯 Exam Tip: Knowing the number of depositories in India (e.g., NSDL, CDSL) helps understand the country's financial market infrastructure.

Question 6.Depository participant in India has to register under the Partnership Act.
Answer: Depository participant in India has to register under the Depository Act.
In simple words: Depository Participants operate under specific legal regulations outlined in the Depository Act, which governs the depository system, not the Partnership Act.

🎯 Exam Tip: Be aware of the legal framework governing financial intermediaries like Depository Participants to ensure accurate understanding of their operations.

Question 7.Demat accounts are opened and maintained by the Depository.
Answer: Demat accounts are opened and maintained by the Depository Participant.
In simple words: While the depository is the central entity, it is the Depository Participant (DP) who directly interacts with investors to open and manage Demat accounts.

🎯 Exam Tip: Clearly distinguish between the roles of a Depository (the central repository) and a Depository Participant (the investor-facing intermediary).

Question 8.Securities are fungible in physical mode.
Answer: Securities are fungible in electronic mode.
In simple words: Fungibility, meaning interchangeability without unique identification numbers, is a characteristic primarily found in securities held in electronic form.

🎯 Exam Tip: Understand the concept of fungibility and how it applies specifically to electronic securities due to their standardized digital format.

Question 9.ISIN is a code given to a company.
Answer: ISIN is a code given to the security of a company.
In simple words: An ISIN (International Securities Identification Number) uniquely identifies a specific security issue (like a bond or share), not the company itself.

🎯 Exam Tip: Remember that ISIN is security-specific, meaning it identifies a particular type of share or bond, not the company that issued it.

Question 10.ISIN of Indian government Securities is issued by NSDL.
Answer: ISIN of Indian government Securities is issued by RBI.
In simple words: For government securities in India, the Reserve Bank of India (RBI) is responsible for allotting ISINs, whereas NSDL typically handles ISINs for corporate securities.

🎯 Exam Tip: Note the distinction in ISIN issuing authorities: RBI for government securities and NSDL/CDSL for corporate securities.

Exercise 9(J)

Question 1.(a) Gets statement of Account
(b) Open Demat Account
(c) Submit DRF
Answer:
(a) Submit DRF
(b) Open Demat Account
(c) Gets statement of Account
In simple words: The correct procedural order for dematerialization is to first submit the Demat Request Form (DRF), then open a Demat account, and finally receive regular statements for that account.

🎯 Exam Tip: Memorize the procedural steps involved in dematerialization, especially the submission of DRF and the subsequent account opening and statement receipt.

Question 2.(a) Investor (BO) submits an application for Securities to the issuer company
(b) Depository intimates the DP about crediting Bo's Account
(c) Issuer company gives details of allotment to Depository.
Answer:
(a) Investor (BO) submits an application for Securities to the issuer company
(b) Issuer company gives details of allotment to Depository
(c) Depository intimates the DP about crediting Bo's Account
In simple words: The process flows from the investor applying for securities to the company, the company then informing the depository about the allotment, and subsequently the depository updating the investor's DP about the credit to the account.

🎯 Exam Tip: Understand the flow of information and actions between the investor, issuer company, depository, and DP during security allotment to accurately arrange these steps.

Explain The Following Terms/Concepts

Question 1.Depository System
Answer:• In the 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 a scriptless trading system. • It keeps the securities safe. It offers scope for paperless trading by using state-of-art technology.
In simple words: A depository system is a facility where securities are held and transferred electronically, eliminating physical certificates and making transactions faster and safer. It manages shareholder accounts and related corporate actions.

🎯 Exam Tip: Define the depository system clearly and list its key functions and benefits, such as paperless trading, electronic settlement, and safe custody of securities.

Question 2.Dematerialization
Answer:• Dematerialization is a process whereby a client can get physical certificates converted into electronic mode. • For this client has to surrender the certificates along with the Demat Request Form (DRF) to the DP.
In simple words: Dematerialization is the process of converting physical share certificates into an electronic form, allowing them to be held and traded digitally in a Demat account. This requires submitting physical certificates and a Demat Request Form to a Depository Participant.

🎯 Exam Tip: Explain the process of dematerialization, including the role of DRF and DP, and its importance in modern securities trading for converting physical holdings to electronic ones.

Question 3.Rematerialization
Answer:• Rematerialization is the process whereby a client can get his electronic holdings of securities converted into physical certificates. • For this client has to give a written request in the form of Remat Request Form (RRF) to the DP.
In simple words: Rematerialization is the reverse process of dematerialization, where electronic securities held in a Demat account are converted back into physical share certificates upon the investor's request using a Remat Request Form (RRF).

🎯 Exam Tip: Clearly define rematerialization as the opposite of dematerialization, mentioning the RRF and the conversion from electronic to physical form.

Question 4.Fungibility
Answer:• Fungibility means the state of being interchangeable. Securities issued by the same company of the same class have the same value no matter who owns them. • The securities held in electronic form are fungible which means they don't have distinctive numbers.
In simple words: Fungibility refers to the characteristic of electronic securities where all shares of the same company and class are identical and interchangeable, without unique identification numbers, unlike physical certificates.

🎯 Exam Tip: Define fungibility in the context of securities and explain how electronic holdings exhibit this characteristic by not having distinctive numbers, making them interchangeable.

Question 5.ISIN
Answer:• ISIN is a standard numbering system that is accepted globally. • ISIN consists of a 12 (twelve) digit alpha-numeric code which is divided into 3 (Three) parts. • The company has to apply for ISIN for its securities with documents like a prospectus.
In simple words: ISIN (International Securities Identification Number) is a unique 12-digit alphanumeric code assigned globally to identify a specific security issue, facilitating its clear identification in the financial markets. Companies apply for ISINs for their securities.

🎯 Exam Tip: State the full form of ISIN, its purpose as a unique identifier for securities, and its 12-digit alpha-numeric structure.

Study The Following Case/Situation And Express Your Opinion

Question 1. Mr. Z holds 100 shares of peculiar Co. Ltd. In physical mode and wishes to convert the same in electronic mode:

Question (a).Mr. Z holds a savings bank account with CFDH Bank Ltd. Can he deposit his shares in this account for Demat?
Answer: No. He can't, as it is a savings bank account.
In simple words: Shares, whether physical or dematerialized, cannot be held in a regular savings bank account; a specific Demat account is required for electronic holding of securities.

🎯 Exam Tip: Emphasize the clear distinction between a bank account for money and a Demat account specifically designed for holding and transacting securities electronically.

Question (b).What type of account is needed for the same?
Answer: For holding electronic securities, he needs to open a Demat A/c with the Depository Participant (DP).
In simple words: To hold electronic securities, Mr. Z needs to open a Demat account specifically designed for this purpose, through a Depository Participant (DP).

🎯 Exam Tip: Highlight the necessity of a Demat account and the role of a Depository Participant as the intermediary for holding electronic securities.

Question (c).Is it the RBI that will be the custodian of shares of Mr. Z after demating?
Answer: No. RBI won't be the custodian. After demating concerned 'Depository' (NSDL/CDSL) will be the custodian of the shares of Mr. Z.
In simple words: After dematerialization, the actual Depository (like NSDL or CDSL), not the RBI, becomes the custodian of Mr. Z's shares, holding them electronically.

🎯 Exam Tip: Clarify the role of the Depository (NSDL/CDSL) as the custodian of dematerialized shares, distinguishing it from the Reserve Bank of India's (RBI) functions.

Question 2. Mr. R holds 100 shares of Peculiar Co. Ltd. In Demat mode.

Question (a).He wants to transfer one share each to his wife, daughter, and son. Can he do so?
Answer: Yes, Mr. R can do so, as under dematerialized securities market lot is of one share.
In simple words: Yes, Mr. R can transfer single shares because in the dematerialized system, the minimum trading unit or market lot has been abolished and is considered one share.

🎯 Exam Tip: Explain that dematerialization has abolished the concept of 'market lots' for ease of transfer, making single share transfers possible and flexible.

Question (b).Does he need to submit DRF or DIS if he wants to transfer his shares?
Answer: He needs to submit DIS (Delivery Instruction Slip) if he wants to transfer his shares.
In simple words: To transfer shares from his Demat account, Mr. R must use a Delivery Instruction Slip (DIS) to provide electronic instructions, as DRF is specifically for dematerialization itself.

🎯 Exam Tip: Distinguish between a Demat Request Form (DRF) used for conversion of physical shares and a Delivery Instruction Slip (DIS) used for transferring dematerialized shares.

Question (c).Can he nominate his wife in his Demat account?
Answer: Yes. Mr. R can nominate his wife for the Demat account.
In simple words: Yes, nomination facility is available for Demat accounts, allowing Mr. R to designate his wife as a nominee for easier transfer of securities in the future.

🎯 Exam Tip: Mention the availability of nomination facility in Demat accounts, as it simplifies the process of transferring securities to a beneficiary upon the investor's demise.

Question 3. Mrs. Z wishes to open a Demat account in her name.

Question (a).Can she open the account going to the Mumbai office of NSDL?
Answer: No, Mrs. 2 cannot go directly to the Mumbai office of NSDL.
In simple words: Mrs. Z cannot directly open a Demat account with NSDL; she must instead go through a Depository Participant (DP) who acts as an authorized intermediary.

🎯 Exam Tip: Clarify that investors interact with DPs, not directly with the Depositories (NSDL/CDSL), to open and manage Demat accounts.

Question (b).Is she required to pay for the opening of the account and its maintenance?
Answer: Yes, she is required to pay for the opening of the account and its maintenance.
In simple words: Yes, opening and maintaining a Demat account typically involves certain charges (e.g., account opening fees, annual maintenance charges, transaction fees) payable to the Depository Participant.

🎯 Exam Tip: Be aware that Demat accounts usually incur charges for opening, maintenance, and transaction processing, which are important cost considerations for investors.

Question (c).Does she have to send the shares to the respective company for demating?
Answer: Yes, she has to send her original share certificate through Depository Participant to the company.
In simple words: For dematerialization, Mrs. Z must submit her physical share certificates along with the Demat Request Form (DRF) to her DP, who then forwards them to the company/Registrar and Transfer Agent for conversion.

🎯 Exam Tip: Outline the process of submitting physical certificates to the DP for forwarding to the issuer company during dematerialization.

Question 4. Mr. L wants to demat his 25 shares of Peculiar Co. Ltd bearing certificate no 100 and distinctive no 76-100.

Question (a).Which form is he required to fill as a written request to the DP?
Answer: Mr. L is required to fill Demat Request Form (DRF) as a written request to DP.
In simple words: Mr. L needs to fill out a Demat Request Form (DRF) to instruct his Depository Participant (DP) to convert his physical shares into electronic form.

🎯 Exam Tip: Identify the specific form, DRF, used for initiating the dematerialization process with the Depository Participant to convert physical shares.

Question (b).Does he have to fill instrument of transfer if he wishes to transfer the same after demat?
Answer: No, he needs to fill instrument of transfer after opening Demat A/c.
In simple words: No, Mr. L does not need to fill a traditional physical instrument of transfer after dematerialization; instead, he uses electronic instructions like a Delivery Instruction Slip (DIS) to transfer shares from his Demat account.

🎯 Exam Tip: Clarify that for dematerialized shares, physical transfer forms are replaced by electronic instructions (e.g., DIS), significantly simplifying the transfer process.

Question (c).Does he have to quote certificate no. and distinctive no. if he wishes to transfer his shares after it is in Demat form?
Answer: No, Mr. L need not quote certificate no. and distinctive no. if he wishes to transfer his shares after it is in Demat form.
In simple words: No, once shares are in Demat form, their fungible nature means they no longer have distinct certificate numbers or distinctive numbers, so these are not needed for transfer.

🎯 Exam Tip: Highlight that electronic securities are fungible and lack distinctive numbers, simplifying transfers by removing the need to quote specific certificate details.

Question 5. Mr. S. holds 50 shares of Peculiar Co. Ltd in Demat form. The company has declared a dividend of Rs 5. Per-share and Bonus of 1 : 1 to its shareholders.

Question (a).How will Mr. S get his dividend?
Answer: Mr. S will get his dividend credited directly to his Demat A/c.
In simple words: Mr. S's dividend will be automatically credited to his bank account linked with his Demat account, a process facilitated by the depository system.

🎯 Exam Tip: Note that dividends for dematerialized shares are automatically credited to the investor's linked bank account, ensuring quick and paperless receipt.

Question (b).Will he get a Bonus share in Physical or Demat?
Answer: He will get Bonus Share in his Demat A/c.
In simple words: As Mr. S holds shares in Demat form, any bonus shares he receives will also be credited directly to his Demat account electronically.

🎯 Exam Tip: Explain that corporate actions like bonus issues are settled electronically in the Demat account for dematerialized holdings, avoiding physical certificates.

Question (c).Who is entitled to dividend and Bonus: Mr. S or the depository? (NSDL in this case).
Answer: Mr. S is entitled to dividends and Bonuses through the depository services.
In simple words: Mr. S, as the beneficial owner of the shares, is entitled to all corporate benefits like dividends and bonus shares, with the depository system merely facilitating their distribution.

🎯 Exam Tip: Emphasize that the beneficial owner retains all rights and entitlements, with the depository system acting as a facilitator for these benefits rather than the owner.

Distinguish Between Dematerialization And Rematerialization

Question 1.Dematerialization and Rematerialization.
Answer:

🎯 Exam Tip: Clearly define both terms and remember they are inverse processes in the depository system. Focus on the transformation of securities between physical and electronic forms and the forms involved.

Answer In Brief

Question 1.Explain the disadvantages of the physical mode of holding securities.
Answer:Securities mean shares, debentures, bonds, units of mutual funds, securities are held in physical form or paper form. Following are the problems/disadvantages of holding the securities in electronic form: (i) Risk factor: Paper certificates can be lost, damaged, torn, stolen, or misplaced during transit, etc. (ii) Efforts in Duplicating: If the original certificate is lost it becomes difficult to obtain duplicate certificates. It consumes time, effort, and money. (iii) Delay in the allotment: Allotment of new securities in physical form requires a longer time. (iv) Delay in Transfer and Transmission: Handling and recording physical certificates take a lot of time in the transfer and transmission of securities. (v) Risk of Bad Delivery: Buying and selling securities can create problems if the certificates are torn, forged etc.
In simple words: The physical mode of holding securities is disadvantageous due to risks like loss, damage, or theft of certificates, the difficulty and effort involved in obtaining duplicate copies, and significant delays in allotment, transfer, and transmission processes, alongside the risk of 'bad delivery' from issues like torn or forged certificates.

🎯 Exam Tip: Focus on identifying the primary risks (loss, damage, theft, bad delivery) and administrative burdens (duplication, delays in allotment/transfer) associated with managing physical share certificates.

Question 2.Explain any four advantages of the Depository system to investors.
Answer:Investor refers to the Beneficial Owner, the one who invests in the company's securities. Advantages of Depository System to the Investor are as follows: (i) No Risk: Risks related to physical certificates like delays, loss of certificates, theft, mutilation, bad deliveries, etc. are totally eliminated. (ii) Safety of Investment: The safest and secure way of holding securities is in the form of DEMAT. It is controlled under Depositories Act and monitored by SEBI. For e.g. If we don't want to deal in securities, for the time being, we can freeze the account instructing DP to avoid unexpected debit or credit. (iii) Easy Transfer of Shares: • There is no need of filling transfer form and submitting documents. • Stamp duty is not applicable in this process. • Cash realization and security transfer take place very fast. (iv) Updated information: The investor receives updated information about his transactions and holdings from DP and also sometimes from Depository. (v) Loan against securities: An investor can raise a loan from the banks against the security of Dematerialized securities. (vi) No 'Lots': The lot system has been abolished. The market lot is one share for dematerialized securities. (vii) Nomination Facility: Nomination Facility is allowed under the Depository system. In the event of the death of the investor, the process becomes simple. (viii) Automatic Credit: The investor's account is automatically credited or debited by the company. This is called 'Corporate Action.' For e.g. Payment of dividend, Bonus Issue, Right Issue, Redemption, etc.
In simple words: The depository system offers investors significant advantages, including the elimination of risks associated with physical certificates, enhanced investment safety through regulatory oversight and account freezing options, and simpler, faster share transfers without physical forms or stamp duty. Additionally, investors receive updated information, can obtain loans against securities, benefit from the abolition of 'market lots,' have nomination facilities, and receive automatic credit/debit for corporate actions.

🎯 Exam Tip: When discussing investor advantages, list at least four key benefits such as reduced risk, increased safety, easy transfers, and automatic corporate action processing, elaborating on each point for a comprehensive answer.

Question 3.Explain any four advantages of the Depository system to the company.
Answer:Benefits/Advantages of Depository System: (A) Investors: (i) Safety: A safe and secure way of holding securities is in electronic form/mode. The depository system is monitored by SEBI. 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. (ii) Easy Transfer of Shares: These securities can be easily transferred in electronic mode. Filling out the transfer form and uploading the documents can be easily done online. It is a time and efforts saving process. No stamp duty is levied on the depository system. (iii) Update and Intimation: The investor can check his status of holding securities at any time. Depository Participant provides investors with his statement of accounts periodically. (iv) Automatic Credit: Under, the depository system the investor's account is automatically credited/debited. This credit or debit of accounts is usually in case of Payment of Dividend, Issue of Bonus Shares, Offering of Rights Shares, Early Redemption of Debentures, Mergers, and Acquisitions, etc. (B) Companies: (i) Up-to-date Information: The depository system enables the company to maintain the information of the investors holding. It also helps the company to keep updated information about its shareholding pattern. The company is able to know the particulars of beneficial owners and their holdings periodically. (ii) Reduction in costs and efforts: Due to the depository system, maintaining the documents physically, the printing of certificates has saved a lot of time and cost. (iii) Better Relationships: The transfer process under the depository system is prompt and free from defects. So, complaints against the company by an investor are avoided in this regard. This helps the company build a good corporate image. (iv) International Investment: Paperless trading is a boon for the company management as it provides better and quicker services to the investors staying within the country and abroad. This attracts investment from abroad.
In simple words: The depository system offers companies advantages such as access to up-to-date information on shareholder patterns, significant reduction in administrative costs and efforts by eliminating physical document management, fostering better investor relationships through efficient transfers, and attracting international investment due to streamlined paperless trading and enhanced transparency.

🎯 Exam Tip: When explaining company benefits, emphasize aspects like improved data management, cost reduction, better investor relations due to efficient services, and enhanced appeal to global investors as key outcomes of adopting the depository system.

Question 4.Explain Depository as a constituent of Depository System.
Answer:• The depository is a company registered under the Companies Act, to deal in securities. • It holds the securities in electronic form. • It is responsible for safeguarding the investor's securities and preventing any manipulation of records and transactions. • There is no direct access of investors with the Depository. • It works as a link between the company and investors. • Statement of accounts is provided to the investor periodically.
In simple words: A Depository is a core constituent of the depository system, functioning as a company registered under the Companies Act that holds and safeguards securities electronically, ensures transaction integrity, and acts as a crucial link between companies and investors by providing periodic account statements, without direct investor interaction.

🎯 Exam Tip: Define the Depository as the central entity that holds and manages electronic securities, emphasizing its legal registration, responsibility for security safeguarding, and its role as an indirect link in the system.

Question 5.Explain DP as the constituent of the Depository System.
Answer:• Depository Participant acts as a link between the Depository and the Investor. In other words, it is an agent of the depository. • DP is registered under the SEBI Act. It enjoys rights and obligations as specified under SEBI Regulations of 1996. • It is an intermediary appointed by Depository. • DP directly deals with customers and sends a statement of accounts periodically. • The DP has a unique number for identification. • Banks, Financial Institutions, Stock Brokers, etc. can function as Depository Participants. • Thus, it is rightly justified that DP is an important constituent of the Depository system.
In simple words: A Depository Participant (DP) is an essential constituent of the depository system, acting as an agent of the Depository and a crucial intermediary, registered under SEBI, that directly interfaces with investors to open and maintain Demat accounts, process transactions, and send statements.

🎯 Exam Tip: Describe the DP as the direct point of contact for investors, emphasizing its intermediary role, SEBI registration, unique identification number, and the types of entities that can function as DPs.

Justify The Following Statements

Question 1.Electronic holding of securities is safer than physical holding.
Answer:• Electronic holding of securities means holding the securities in dematerialized form. • Conversion of physical certificates into electronic form is known as 'Dematerialization'. • Holding securities in electronic form eliminates a huge volume of paperwork. • The use of technology facilitates paperless trading which eliminates storage and handling of certificates. It also helps in reducing costs and efforts. • There is no risk of getting lost, damaged, torn, stolen, misplaced during transit, etc. • Delay in transfer and allotment of securities is also avoided. • Thus, it is rightly justified that, electronic holding of securities is safer than physical holding.
In simple words: Electronic holding is safer than physical holding because it converts physical certificates into a dematerialized form, eliminating extensive paperwork, storage issues, and the risks of loss, damage, theft, or misplacement during transit, while also avoiding delays in transfers.

🎯 Exam Tip: To justify safety, contrast the elimination of physical risks (loss, damage, theft, transit issues) and paperwork in electronic holding with the inherent vulnerabilities of physical certificates.

Question 2.Depository provides easy and quicker transfer of shares.
Answer:• Under the Depository system, securities are held in electronic form. • Not only the transfer and settlement of securities are done electronically but it also maintains the accounts of the shareholder, collects dividends, bonus shares, etc. on behalf of the shareholder. • Depository Participant acts as a link between the Depository and the Investor. • No stamp duty is levied on the depository system. • Processing time in the transfer of securities is reduced and neither the securities nor the cash is held up for an unnecessarily long time. • Hence it is also called a "Scripless trading system”. Thus, it is rightly justified that the Depository provides easy and quicker transfer of shares.
In simple words: The depository system ensures easy and quicker share transfers because securities are held electronically, enabling immediate settlement, eliminating physical paperwork and stamp duty, thereby significantly reducing processing time and bottlenecks associated with physical transfers.

🎯 Exam Tip: Justify the ease and speed of transfers by citing electronic holding, abolition of stamp duty, reduced processing time, and the overall efficiency of the 'scripless trading system' as key factors.

Question 3.Depository System results in reduced time, cost and efforts.
Answer:• The depository System has a very important role to play in the successful functioning of the Capital market. • 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. • It eliminates a huge volume of paperwork, storage, and handling of physical certificates. • Thus, it is rightly justified that, Depository system results in reduced time, cost and efforts.
In simple words: The depository system reduces time, cost, and effort by holding securities electronically and facilitating digital transfers and settlements, thereby eliminating the extensive paperwork, storage, and manual handling traditionally associated with physical certificates.

🎯 Exam Tip: To justify reduced time, cost, and effort, emphasize the shift from physical to electronic processes, which eliminates paperwork and streamlines all aspects of security management, contributing to capital market efficiency.

Question 4.The depository system is very similar to the Banking system.
Answer:• The depository system is similar to the Banking system in many aspects. • Depository keeps the securities safe, just like the bank keeps the money of the account holder safe. • In banks, funds are held in accounts having unique numbers. Similarly, securities are held in accounts having unique IDs. • There is no physical handling of money in the bank. Similarly, there is no physical handling of securities by the depository. • Bank facilitates the transfer of funds between accounts. Depository facilitates the transfer of securities between accounts. • Thus, it is rightly justified that the Depository system is very similar to the Banking system.
In simple words: The depository system is highly comparable to a banking system because both safely hold assets (securities vs. money) in unique, electronic accounts, without physical handling, and both facilitate seamless electronic transfers between these accounts.

🎯 Exam Tip: Justify the similarity by drawing clear parallels between the functions of a bank (holding money, electronic transfers) and a depository (holding securities, electronic transfers) regarding safety, account management, and transaction processes.

Question 5.DP is an important constituent of the Depository system.
Answer:• Depository Participant acts as a link between the Depository and the Investor. In other words, it is an agent of the depository. • DP is registered under the SEBI Act. It enjoys rights and obligations as specified under SEBI Regulations of 1996. • It is an intermediary appointed by Depository. • DP directly deals with customers and sends a statement of accounts periodically. • The DP has a unique number for identification. • Banks, Financial Institutions, Stock Brokers, etc. can function as Depository Participants. • Thus, it is rightly justified that DP is an important constituent of the Depository system.
In simple words: A Depository Participant (DP) is crucial because it acts as the direct link and agent between investors and the Depository, facilitating all interactions and transactions, and is an SEBI-regulated intermediary essential for the system's operation.

🎯 Exam Tip: Justify the DP's importance by highlighting its role as the primary interface for investors, its regulatory compliance, and its function as an indispensable intermediary for all Demat account operations.

Question 6.Depository system allows both: Physical to electronic and electronic to physical conversion.
Answer:• Under the Depository system, physical certificates can be converted into electronic ones known as 'Dematerialization'. • Similarly, the conversion of electronic securities into physical certificates is known as 'Rematerialization'. • Due to Dematerialization transfer of securities takes place fast and transactions are also settled immediately. Whereas in Rematerialization, settlement of transactions in the physical system takes more time. • In Rematerialization, storing and handling physical certificates is more time-consuming. Whereas in dematerialization, there is no handling of certificates. • There are chances of certificates getting lost, damaged, torn, stolen, misplaced during transit, etc. • In this technological world, Demat securities are more preferred over Rematerialized securities. • Thus, it is rightly justified that the Depository system allows both: Physical to electronic and electronic to physical conversion.
In simple words: The depository system is justified in allowing both dematerialization (physical to electronic) and rematerialization (electronic to physical) processes, providing essential flexibility to investors, although electronic holdings are generally preferred for their efficiency, speed, and safety.

🎯 Exam Tip: Justify the dual conversion capability by defining dematerialization and rematerialization, explaining their respective processes and implications for transaction speed, security, and investor choice.

conversion.
Answer:

• Under the Depository system, physical certificates can be converted into electronic ones known as 'Dematerialization'.
• Similarly, the conversion of electronic securities into physical certificates is known as 'Rematerialization'.
• Due to Dematerialization transfer of securities takes place fast and transactions are also settled immediately. Whereas in Rematerialization, settlement of transactions in the physical system takes more time.
• In Rematerialization, storing and handling physical certificates is more time-consuming. Whereas in dematerialization, there is no handling of certificates.
• There are chances of certificates getting lost, damaged, torn, stolen, misplaced during transit, etc.
• In this technological world, Demat securities are more preferred over Rematerialized securities.
• Thus, it is rightly justified that the Depository system allows both: Physical to electronic and electronic to physical conversion.

In simple words: The Depository system facilitates both the conversion of physical securities to electronic (Dematerialization) and electronic securities back to physical (Rematerialization), offering flexibility while promoting the efficiency of electronic holdings.

🎯 Exam Tip: Understanding both dematerialization and rematerialization is key to grasping the comprehensive nature of the depository system.

Question 7. ISIN is a necessary component of Demat.
Answer:

• International Securities Identification Number (ISIN) is a code that uniquely identifies a specific securities issue.
• ISINs are allotted by that country's NNA (National Numbering Agency).
• ISIN is a standard numbering system that is accepted globally.
• The ISIN's structure is currently defined by the International Organization of Standardization (ISO).
• ISIN consists of a 12 (twelve) digit alpha-numeric code which is divided into 3 (three) parts.
• The company has to apply for ISIN for its securities with documents like a prospectus.
• In India, issuing ISIN to securities is assigned by SEBI to NSDL (for Demat shares). SEBI works as NNA in India.
• Thus, from the above points, it is rightly justified that ISIN is a necessary component of Demat.

In simple words: ISIN is a unique 12-digit alphanumeric code that identifies a specific security globally, essential for electronic trading and management within the Demat system. Without an ISIN, a security cannot be traded or held in dematerialized form.

🎯 Exam Tip: Remember the structure and purpose of ISIN, especially its role in uniquely identifying securities in the Demat system and the assigning authority in India (SEBI/NSDL).

7. Answer The Following.

Question 1. What is Depository System? Explain its advantages?
Answer:The depository system came into existence in the year 1996. It is a system where securities are held in electronic form. It also maintains accounts of the shareholder, enables transfer, collects dividends, bonus shares, etc. on behalf of the shareholder. In other words, it is also called a scriptless trading system. Benefits/Advantages of Depository System: (A) Investors:
(i) Safety: A safe and secure way of holding securities is in electronic form/mode. The depository system is monitored by SEBI. 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.
(ii) Easy Transfer of Shares: These securities can be easily transferred in electronic mode. Filling out transfer forms and uploading the documents can be easily done online. It is a time and efforts saving process. No stamp duty is levied on the depository system.
(iii) Update and Intimation: The investor can check his status of holding securities at any time. Depository Participant provides investors with his statement of accounts periodically.
(iv) Automatic Credit: Under, the depository system the investor's account is automatically credited/debited. This credit or debit of accounts is usually in case of Payment of Dividend, Issue of Bonus Shares, Offering of Rights Shares, Early Redemption of Debentures, Mergers, and Acquisitions, etc. (B) Companies:
(i) Up-to-date Information: The depository system enables the company to maintain the information of the investors holding. It also helps the company to keep updated information about its shareholding pattern. The company is able to know the particulars of beneficial owners and their holdings periodically.
(ii) Reduction in costs and efforts: Due to the depository system, maintaining the documents physically, the printing of certificates has saved a lot of time and cost.
(iii) Better Relationships: The transfer process under the depository system is prompt and free from defects. So, complaints against the company by an investor is avoided in this regard. This helps the company build a good corporate image.
(iv) International Investment: Paperless trading is a boon for the company management as it provides better and quicker services to the investors staying within the country and abroad. This attracts investment from abroad.In simple words: A Depository System holds securities in electronic form, enabling easy, safe, and scriptless trading. It offers advantages to investors like no risk, easy transfers, updated information, and automatic credit for corporate actions, while companies benefit from up-to-date information, reduced costs, better relationships, and attracting international investment.

🎯 Exam Tip: When explaining the advantages, ensure to differentiate between benefits for investors and companies, providing specific examples for each. Listing multiple points under each category shows comprehensive understanding.

Question 2. Explain the constituents of the depository system.
Answer:
ℹ️ चित्र व्याख्या (Diagram Explanation): यह आरेख एक डिपोजिटरी सिस्टम के चार प्रमुख घटकों को दर्शाता है। शीर्ष पर 'Constituents of Depository System' लिखा है, जिसके नीचे चार बॉक्स हैं जो इन घटकों को क्रमवार प्रस्तुत करते हैं: 'The Depository', 'The Depository Participant (DP)', 'The Beneficial Owner (BO)', और 'The Issuer Company'। यह चित्र सिस्टम में शामिल विभिन्न संस्थाओं के पदानुक्रम और भूमिकाओं को सरल तरीके से प्रस्तुत करता है। (i) Depository:

• Depository is an organization or a system where securities/shares are held in electric form.
• Depository transfers securities/shares between accounts on the instruction of the account holders.
• Depository contacts the customer through a depository participant.
• Transfer of shares is made through mere computerized book-entry in the depository.
• This becomes possible because shares are dematerialized.
• Only those securities which are held in the form of the share certificate are one's names can be dematerialized.
• At present, there are two depositories. They are:
  • National Securities Depository Limited (NSDL)
  • Central Depository Services Limited (CDSL).

(ii) Depository Participant:

• The depository participant is the representative of the depository.
• Depository participant acts as an intermediary between investors and depositories.
• The depository participants have an identity number for identification.
• It has to maintain accounts of securities of each investor.
• Depository participant gives intimation about holdings from time to time by sending a statement of holding.
• According to SEBI guidelines financial institutions, banks, stockbrokers can act as depository participants.

(iii) Beneficial Owner:

• An investor is known as 'Beneficial Owner' on whose name Demat account is opened.
• He enjoys the rights and benefits of members such as getting dividends, getting bonus shares, to vote at meetings.
• He is allotted an account number where securities are held.

(iv) Issuer Company:

• It is a company that makes an issue of securities.
• It must get registered with the depository.

In simple words: The Depository System comprises four key constituents: the Depository (holds electronic securities and facilitates transfers), Depository Participant (DP) (an intermediary between the investor and the depository), Beneficial Owner (BO) (the actual investor holding the Demat account), and the Issuer Company (the company issuing the securities).

🎯 Exam Tip: When describing the constituents, clearly define the role of each entity and how they interact within the depository system. Mentioning NSDL and CDSL as the two main depositories in India is crucial.