Near to sixty three old ages of Independence, India has emerged to be one of the drive forces of the World Economy. However, with the recent reverse of the Global Recession of 2007, a demand had been felt to look into the bing constructions of the Financial Institutions nowadays. Consequently, a Committee was established by Securities and Exchange Board of India ( SEBI ) , under the chairmanship of Bimal Jalan, former Reserve Bank of India ( RBI ) governor, in February 2010. It was setup with the position to underline an of import differentiation between ordinance and control, and to guarantee that the former does non devolve into the latter. The commission has besides instituted an interesting term called the Market Infrastructure Institutions. The term ‘marker substructure ‘ denotes such cardinal installations and systems functioning the market.

As per the Report[ 1 ], Stock exchanges, depositaries and glade corporations are jointly referred to as securities Market Infrastructure Institutions ( MIIs ) . They can be defined to be establishments supplying basic, implicit in model or characteristics for the market. Well working MIIs are the anchor of any economic system, which in bend is straight relative to the wellbeing of the economic system. Infrastructure Institutions can be characterized by proviso of indispensable services, offering networking services, exhibiting economic systems of graduated table, showing sunk costs and runing natural monopolies.[ 2 ]


Depositories form an of import portion of the securities Market Infrastructure Institutions in India.

As per subdivision 2 ( vitamin E ) of the Depositories Act, 1996, a ‘depository ‘ means a company formed and registered under the Companies Act, 1956 and which has been granted a Certificate of Registration under sub-section ( 1A ) of subdivision 12 of the Securities and Exchange Board of India Act, 1992 ( 15 of 1992 ) .

In simple words, a Depository is an organisation which is similar to a bank. It holds the securities of investors in an electronic book entry signifier at their petition and provides services related to minutess in securities with velocity, truth and safety. It interacts with its clients through a `Depository Participant ‘ with whom the client is required to open a Demat Account.

A depositary participant is defined in subdivision 2 ( g ) of the Depositories Act, 1996 as ‘participant means a individual registered as such under sub-section ( 1A ) of subdivision 12 of the Securities and Exchange Board of India Act, 1992 ( 15 of 1992 ) . ‘

An application for the grant of certification of enrollment as Depository Participant is made to the Board Form E along with application fee as specified in Part A of the 2nd agenda of the Depository Participant Regulations.

Public financialA establishments, scheduled commercial Bankss, A foreign Bankss runing in India with the blessing of the Reserve Bank of India, province fiscal corporations, A keepers, stock-brokers, uncluttering corporations /clearing houses, NBFCs and Registrar to an Issue or Share Transfer Agent following with the demands prescribed by SEBI can be registered as Depository Participants.

Development of Depository System in India

The growing in the Indian capital market both in figure of minutess and the value of trade and attendant colony of securities exposed the restriction of managing securities in the paper manner. Physical ( paper ) manner of keeping securities was non merely cumbrous and inefficient but besides held legion hazards for the participant and led to dissatisfaction of issuers and investors likewise. Due to restrictions and jobs associated it necessitated the puting up of depositaries to travel off from paper based retention of securities. Therefore, Depository system was established to extinguish the incommodiousness and confusion caused by the paper based trading and a scripless trading system came to be recognized.

The passage of Depositories Act in August 1996 paved the manner for debut of Depository system in India. Following the presentment of the SEBI ( Depositories and Participants ) Regulations, 1996, National Securities Depository Ltd ( NSDL ) , a company sponsored by the NSE, IDBI and UTI was granted a certification of enrollment as a depositary on June 7,1996. Some of the other stockholders are State Bank of India, HDFC Bank Limited, Deutsche Bank A.G. , Axis Bank Limited, Citibank N.A.Standard Chartered Bank, The Hongkong and Shanghai Banking Corporation Limited, Oriental Bank of Commerce etc.

The higher shareholding ( of at least 51 % ) by patrons, including stock exchanges in depositaries was permitted in the initial phases for easing the puting up of depositaries.

Cardinal Depository Services ( India ) Ltd ( CDSL ) , the 2nd depositary, was promoted by Bombay Stock Exchange Limited ( BSE ) in association with Bank of India, Bank of Baroda, State Bank of India and HDFC Bank. BSE has been involved with this venture right from the origin and has contributed overpoweringly to the fruition of the undertaking. The initial capital of the company is Rs.104.50 crores. The list of major stockholders with consequence from 5th July, 2010 is[ 3 ]:

Name of stockholders

Value of keeping ( in Rupees Lacs )

% Footings to entire equity

Bombay Stock Exchange Limited



Bank of India



Bank of Baroda



State Bank of India



HDFC Bank Limited



Standard Chartered Bank



Canara Bank



Inter-depository transportation through online connectivity between CDSL and NSDL was established in 1999.[ 4 ]

Benefits of the Depository System

The chief aim of the depositary system is to keep and safeguard the ownership and transportation records of securities in an electronic signifier. Depository system eliminates the incommodiousness and confusion caused by the paper based trading. It is a safe and convenient manner of keeping securities and reduces the hazards associated with certifications. In a depositary system, the investors have the advantages like efficient colonies, lower costs and lower hazards of larceny.

It besides facilitates immediate transportation of securities and no cast responsibility is required on transportation of portions. Change in reference recorded with Depository Participant gets registered with all companies in which investor holds securities electronically extinguishing the demand to match with each of them individually.

Besides there is automatic recognition into demat history of portions, originating out of bonus/split/consolidation/merger etc.A natural defender is non required to take tribunal blessing for selling Demat securities on behalf of a child.

Ease in portfolio monitoringA since statement of history gives a amalgamate place of investings in all instruments. Keeping investings in equity and debt instruments in a singleA history is besides another advantage of the depositary system.

Features of Indian Depository System:

Dematerialization: There are two theoretical accounts for depositary system across the world-dematerialization and immobilisation. India has adopted the dematerialization theoretical account. India provides for a competitory multi-depository system. There can be assorted entities supplying depositary ( NSDL and CDSL ) .The theoretical account adopted in India provides merely for Dematerialization of securities. Dematerialization is the procedure of change overing the physical signifier of portions into an electronic signifier and in short called Demat. Dematerialization of securities occurs when securities issued in physical signifier is destroyed and an tantamount figure of securities are credited into the beneficiary proprietor ‘s history.

The depositaries can supply their services to investors through their agents called Depository Participants. These agents are appointed capable to the conditions prescribed under Securities and Exchange Board of India ( Depositories and Participants ) Regulations,1996 and other applicable conditions. The participants and investors get their several ID ‘s which has a alone designation in the depositary system. Any figure of depository histories can be opened.

After opening an history with the Depository Participant the investor should give up the physical certifications held in his name to a depositary participant. These certifications will be sent to the respective companies where they will be cancelled after dematerialization and will recognition the investors account with the Depository Participant. The securities on dematerialization will look as balances in the depositary history. These balances can be transferred like the portions held in physical signifier. The securities in the Demat can once more be converted into physical signifier which is called as dematerialization.

Dematerialization of portions is optional and the investor can keep portions in the physical signifier, nevertheless the investor will hold to demat the portions if he wishes to sell or buy the portions through stock exchanges.

Immobilization of securities is done by hive awaying or lodging the physical security certifications with an organisation that acts as a custodian – a securities depositary. All subsequent minutess in such immobilized securities take topographic point through book entries. The existent proprietors have the right to retreat the physical securities from the tutelary agent whenever required by them. In the instance of IPO, a elephantine certification is issued in the name of the donee proprietors based on which the depositary gives recognition to the history of beneficiary proprietors.

Exchangeability: Section 9 of the Depositories Act, 1996 provinces that securities in depositaries should be in fungible signifier. In the depositary system, the securities dematerialized are non identified by typical Numberss or certification Numberss as in the physical environment. Thus all securities in the same category are indistinguishable and interchangeable. For illustration, all equity portions in the category of to the full paid up portions are interchangeable.

Registered Owner/ Beneficial Owner: In the depositary system, the ownership of securities dematerialized is bifurcated between Registered Owner and Beneficial Owner. For the securities dematerialized, NSDL is the Registered Owner in the books of the issuer, but ownership rights and liabilities rest with Beneficial Owner. All the rights, responsibilities and liabilities underlying the security are on the good proprietor of the security.

Free Transferability of portions: Transportation of portions held in dematerialized signifier takes topographic point freely through electronic book-entry system.

Legal Framework

The depositary concern in India is regulated by:

a. The Depositories Act, 1996

It was enacted to supply for ordinance of depositoriesA in securities and for affairs connected therewith or incidental thereto. It came into force from 20th September, 1995. It provides for the constitution of individual and multiple depositaries. Anybody to be eligible demands to be formed and registered as a company under the Companies Act, 1956 and seek enrollment with SEBI and obtain a Certificate of Commencement of Business from SEBI on fulfilment of the prescribed conditions.

B. The SEBI ( Depositories and Participants ) Regulations, 1996

SEBI on 6th May, 1996 issued SEBI ( Depositories and Participants ) Regulations, 1996 which apply to depositaries and its participants. The Depositories Act requires that the enrollment of the depositary, depositary participant and custodian, is compulsory with SEBI.[ 5 ]These ordinances besides contain commissariats for operations and operation of depositaries, for application and certifications used and agenda of fees for participants etc.

c. Bye-Laws of Depository

Depository is required to border its bye-laws[ 6 ]with the anterior blessing of SEBI, consistent with the commissariats of the Act and the ordinances made by SEBI thereunder. However on non-compliance SEBI has the power to amend or revoke the bye-laws on its ain.

d. Other Laws

Apart from the above, Depositories are besides governed by certain commissariats of Companies Act, 1956, The Indian Stamp Act, 1899, SEBI Act,1956, SCRA,1956, Benami Transaction Prohibition Act,1988, Income Tax Act,1961, Bankers Book Evidence Act,1891.

Ownership Norms

Puting up of a Depository:

An application for the grant of a certification of enrollment as a depositary shall be made to the Board by the patron in Form A. A Sponsor ( anchor investor ) , as per subdivision 2 ( g ) , SEBI ( Depositories and Participants ) Regulations, 1996, means any individual or individuals who, moving entirely or in combination with another proposes to set up a depositary and undertakes to execute the duties of a patron under these ordinances.

It is to be accompanied by the fee[ 7 ]and be paid in the mode specified thereof.[ 8 ]

The application should be accompanied by bill of exchange bye-laws of the depositary that is proposed to be set up. The patron is to be from one of the mentioned classs:

( I ) A public fiscal establishment as defined in subdivision 4A of the Companies Act, 1956 ( 1 of 1956 ) ;

( two ) A bank included for the clip being in the Second Schedule to the Reserve Bank of India Act, 1934 ( 2 of 1934 ) ;

( three ) A foreign bank runing in India with the blessing of the Reserve Bank of India ;

( four ) A recognized stock exchange within the significance of clause ( J ) of subdivision 2 of the Securities Contracts ( Regulation ) Act, 1956 ( 42 of 1956 ) ;

( V ) A organic structure corporate engaged in supplying fiscal services where non less than 75 per cent of the equity capital is held by any of Securities and Exchange Board of India the establishments mentioned in sub-clause ( I ) , ( two ) , ( three ) or ( four ) jointly or independently ;

( six ) A organic structure corporate constituted or recognized under any jurisprudence for the clip being in force in a foreign state for supplying tutelary, uncluttering or colony services in the securities market and approved by the Cardinal Government ;

( seven ) An establishment engaged in supplying fiscal services established outside India and approved by the Cardinal Government ;

The applier is supposed to be a fit and proper individual.[ 9 ]

Soon, patrons are required to keep at least 51 % of the equity portion capital in the depositary, either entirely or together.[ 10 ]Besides, no participant shall at any clip, hold more than 5 % of the equity capital of the depositary[ 11 ]

No individual other than a patron, whether ‘resident in India ‘ , or non, shall at any clip, either separately or together with individuals moving in concert, hold more than 5 % of the equity portion capital in the depositary.[ 12 ]

The look “ individual occupant in India ” shall hold the significance assigned to it in clause ( V ) of subdivision 2 of the Foreign Exchange Management Act, 1999 ( 42 of 1999 ) .

The look “ Persons playing in concert ” shall hold the significance derived from clause ( vitamin E ) of sub-regulation ( 1 ) of Regulation 2 of the Securities and Exchange Board of India ( Significant Acquisition of Shares and Takeovers ) Regulations, 1997.

The combined retention of all individuals resident outside India in the equity portion capital of the depositary shall non transcend, at any clip, 49 % of its entire equity portion capital, capable further to the followers: ‘the patron shall, at all times, hold at least 51 % of the equity capital of the depositary and the balance of the equity capital of the depositary shall be held by its participants. ‘[ 13 ]

At present, the combined retention of all individuals shacking outside India in the equity portion capital of an MII is capped at 49 % topic to the followers:

The combined keeping through FDI[ 14 ]and FII[ 15 ]paths are capped at 26 % and 23 % , severally.

FIIs can get the equity portions of an MII merely through the secondary market.[ 16 ]

An FII can non hold representation on the board of an MII.[ 17 ]

After sing the application, if the Board is satisfied that the company established by the patron is eligible to move as a depositary it may allow a certification of enrollment in Form B to the depositary topic to the prescribed conditions like enrollment fee, righting of grudges etc. A depositary is required to do an application to the Board for beginning of concern in Form C within one twelvemonth from the day of the month of issue of certification of enrollment.

The SEBI ( Depositories and Participants ) Regulations, 1996, provides that: “ the depositary shall non transport on any activity other than that of a depositary unless the activity is incidental to the activity of the depositary ”[ 18 ]

It is provided that a depositary may transport out such activity non incidental to its activities as a depositary, as may be assigned to the depositary, by the Cardinal Government or by a regulator in the fiscal sector, through the constitution of Strategic Business Unit ( s ) , and by following with other conditions specified by the Board.[ 19 ]

A ‘Strategic Business Unit ‘ shall be an organisational unit of a company with its ain mission, aims and concern scheme that is given the duty to function the peculiar demands of one concern country with appropriate technological, fiscal and other segregations.

It is provided that for the intents of clause ( vitamin D ) and ( vitamin E ) no foreign entity,[ 20 ]separately and jointly either as a patron or as a participant or as a patron and participant together shall keep more than 20 % of the equity capital of a depositary.

Board Composition

The Board composing for the two chief depositaries in India can be summarized as follows:

a. National Securities Depository Ltd ( NSDL )

Independent Directors: 5

Stockholder Directors: 5


B. Central Depository Services ( India ) Ltd ( CDSL )

Independent Directors: 2

Stockholder Directors: 5

Whole clip Directors: 1

The board construction for depositaries is non capable to rigorous norms. Merely fiscal institutions/banks/stock exchanges, etc. can be patrons of a depositary and these are largely nominated as stockholder managers. Further there have been no demands for assignment of MD/CEO that have been prescribed for depositaries.

Net Worth of Depositories

The net worth demand for Depositories is 100 crores.


Prior to dematerialization there was about a spread of three months between application day of the month and listing of portions. Dematerialization has reduced this spread to a great extent. Current ordinances prohibit multiple commands or applications by a individual individual. But the investors unfastened multiple demat histories and do multiple applications to subscribe to IPO ‘s in the hope of acquiring allocation.

The recent IPO allocation cozenage proves that even a extremely machine-controlled system is non the solution to forestall malpractices, if there is laxness. The cozenage of Yes bank and IDFC reveal the defect that investor banker fail to weed out multiple applications either direct or In the Yes Bank dirt 13 investors had manipulated the allocation of portions by opening 7500 benami histories and made net income in 1.7crores. Finally all the 13 investors were banned from trading in bank portions instantly.

Lack of coordination between Bankss, DP ‘s, agents depositaries, registrars and investing bankers and lucidity of their functions has given rise to such jobs. The depositary system is complex and in demand of greater supervising and control.

Therefore is the working of the Depository system in India. The advantages of the depositary system outweigh the disadvantages. Few alterations in the complex system and specifications sing the assignment of Board of managers need to be specified.