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Total Number of Subscribers: 426 |
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Date: 7 May 2008 |
Compiled by Mr. M. Sathya Kumar |
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Concept of Demat
Shares Dematerialized securities (‘Demat’ in
short) are securities that are not on paper and a certificate to that effect do
not exist. They exist in the form of entries in the book of depositories.
Essentially, unlike the traditional method of possessing a share certificate
to the effect of ownership of shares, in the demat system, the shares are
held in a dematerialized form. This system works through a depository who is
registered with the Securities and Exchange Board of India (SEBI) to perform
the functions of a depository as regulated by SEBI. Under Section 68 B of the
Companies Act, inserted by the Companies (Amendment) Act, 2000, it is
mandated that every Initial Public Offer (IPO) made by a listed company in
the excess of Rs. 10 Crores has to be issued in dematerialized form by
complying with the requisite provisions of the Depositories Act, 1996. Background Indian capital market has seen unprecedented boom in its
activity in the last 15 years in terms of number of stock exchanges, listed
companies, trade volumes, market intermediaries, investor population, etc.
However, this surge in activity has brought with it numerous problems that
threaten the very survival of the capital markets in the long run, most of
which are due to the large volume of paper work involved and paper based
trading, clearing and settlement. Until the late eighties, the common man kept away from capital
market and thus the quantum of funds mobilized through the market was meager.
A major problem, however, continued to plague the market. The Indian markets
were drowned in shares in the form of paper and hence it was problematic to
handle them. Fake and stolen shares, fake signatures and signature mismatch,
duplication and mutilation of shares, transfer problems, etc. The investors
were scared and were under compensated for the risk borne by them. The
century old system of trading and settlement requires handling of huge
volumes of paper work. This has made the investors, both retail and
institutional, wary of entering the capital market. However, lack of
modernization become a hindrance to growth and resulted in creation of
cumbersome procedures and paper work. However, the real growth and change occurred from mid-eighties
in the wake of liberalization initiatives of the Government. The reforms in
the financial sector were envisaged in the banking sector, capital market,
securities market regulation, mutual funds, foreign investments and
Government control. These institutions and stock exchanges experienced that
the certificates are the main cause of investors` disputes and arbitration
cases. Since the paper work was not matching the rapid growth so there was a
need for a better system to ensure removal of these impediments. Government of India decided to set up a fully automated and high
technology based model exchange that could offer screen-based trading and
depositories as the ultimate answer to all such reforms and eliminate various
bottlenecks in the capital market, particularly, the clearing and settlement
system in stock exchanges.[1] A depository in very simple terms is a pool of
pre-verified shares held in electronic mode which offers settlement of
transactions in an efficient and effective way. Meaning of Dematerialization Dematerialization is a process by which physical certificates of
an investor are converted into electronic form and credited to the account of
the depository participant. Dematted securities do not have any certificate
numbers or distinctive numbers and are dealt only in quantity, i.e., the
securities are replaceable. Investors can dematerialize only those certificates that are
already registered in their names and are in the list of securities admitted
for dematerialization. These are: shares, scrips, stocks, bonds, debentures,
stock or other marketable securities of a like nature in or of any
incorporated company or other body corporate, units of mutual funds, rights
under collective investment schemes and venture capital funds, commercial
paper, certificate of deposit, securities debt, money market instruments and unlisted
securities, underlying sharing of American Depository Receipts and Global
Depository Receipts issued to non-resident holders.[2] Dematerialization is
the process of converting physical holdings into electronic form with the
depository wherein the share certificates are shredded and corresponding
entry of the number of shares is done in the opened with the depository. The securities held in dematerialized form are fungible; that
is, they do not bear any notable feature like distinctive number, folio
number or certificate number. Once shares get dematerialized, they lose their
identity in terms of share certificate distinctive numbers and folio numbers. Following requisites are necessary for
dematerialization of securities: 1. Investors should have a depository account. Object Of Demat System India has adopted this system in which book entry is done
electronically. It is the system where no paper is involved. Physical form is
extinguished and shares or securities are held in electronic mode. Before the
introduction of the depository system by the Depository Act, 1996, the
process of sale, purchase and transfer of shares was a huge problem and the
safety perspective was zero.
The Depository system has the following
benefits to different groups: Benefit to the Country The depository system helps the capital market to be more
liquid, attracting more foreign investors and is in compliance with
international standards, as it creates efficient and risk-free trading
environment. Benefit to the Company The depository system helps in reducing the cost of new issues
due to less printing and distribution cost. Benefit to the Investor The depository system reduces risks involved in holding physical
certificated, e.g., loss, theft, mutilation, forgery, etc. Benefit to Brokers The depository system reduces risk of delayed settlement. Agency in Depositories India has chosen the concept of multi-depositories.[5]
Presently, there are two depositories registered with SEBI; National Securities Depository Limited
(NSDL) Both agencies are linked with each other. NSDL is a public
limited company incorporated under the Companies Act, 1956. Four renowned
institutions participate in it. Unit Trust of India (UTI), Industrial
Development Bank of India (IDBI), National Stock Exchange of India (NSE),
State Bank of India (SBI).UTI is the largest mutual fund of India and IDBI is
the largest development bank, NSE is the largest stock exchange of India and
SBI is the largest commercial bank of India having clearing facility. HDFC
and Citibank also share in this system.[6] NSDL is managed by Board of
directors headed by a managing director. It is governed by its bye-laws and
its business operations are regulated by business rules. NSDL interfaces with
the investors through players or business partners. Constituents of
depository compromise of clearing corporation, brokers, clearing member,
registrar and transfer agents, company or issuer, stock exchange, bank
depository participant and investors. All are electronically linked to the
main depository for the settlement of trades and to perform a daily
reconciliation of all accounts held with NSDL. Central Depository Service (India) Limited
(CDSL) Second agency is CDSL - Central Depository Service (India)
Limited. Main functions of this agency are centralized database and
accounting. Major participant in CDSL[7] are LIC, GIC and BSE. This agency is
set up with the object to keep in mind to accelerate growth of scripless
trading, with major thrust of individual participation and creating
competitive environment, responsible to the users interests and demands to
enhance liquidity. CDSL aims to retain the entire data of the investors in
the central database of CDSL. It has opted for it with the following
objectives: Within time information is available to issuers/registrar’s and share transfer agents. Companies can monitor critical holdings, e.g., holding of FIIs
and FIs, investment companies, etc., by using up the parameters through their
front-end terminals. No additional security or storage cost of data or critical
database residing at the front-end terminals with the issuers/registrars. CDSL signed a memorandum of understanding with NSDL for
inter-depository connectivity. Presently, more than half the business of
depositories is handled by this agency. Role of both these agencies has
become very vital after SEBI’s declaration that there
would be no deals in physical form and only dealing to happen in market through demat
accounts. Depository Participant Similar to the brokers who trade on your behalf in and outside
the Stock Exchange; a Depository Participant (DP) is the representative
(agent) in the depository system providing the link between the Company and
the investor through the Depository. Depository Participant maintains investor’s securities account balances and intimates him the status of your holding from
time to time. According to SEBI guidelines, Financial Institutions like
banks, custodians, stockbrokers etc. can become participants in the
depository. A DP is one with whom you need to open an account to deal in
electronic form. While the Depository can be compared to a Bank, DP is like a
branch of bank with whom one can have an account. Process of Demating Shares The process of opening an account with a Depository Participant
is similar to the opening of a bank account. One has to open an account with a Depository Participant (DP) by
filling up an Account Opening Form and signing a “Participant-Client Agreement”. Then a unique client ID
number will be given, which must be quoted in all correspondence with the DP.
The DP upon receipt of the shares and the DRF will issue an
acknowledgement and will send an electronic request to the Company/
Registrars and Transfer Agents of the Company through the Depository for
confirmation of demat. The DP will simultaneously surrender the DRF and the
shares to the Company / Registrars and Transfer Agents of the Company with a
covering letter requesting the Company to confirm demat. The Registrars and Transfer Agents of the Company, after
necessary verification of the documents received from the DP, will cancel the
physical shares and confirm demat to the Depository. This confirmation will
be passed on by the Depository to the DP which holds investor’s account. After receiving this confirmation from the Depository,
the DP will credit investor account with the number of shares dematerialized.
The DP will hold the shares in the dematerialized form thereafter on behalf
of the investor. And hence one becomes the beneficial owner of these
dematerialized shares. When the beneficial owner submits the shares for
dematerialization, his DP will deface the share certificates with the stamp “SURRENDERED FOR DEMATERIALISATION”. This ensures
that
shares are not lost in transit or misused till credit is received in demat
account. SEBI Guidelines SEBI has taken various policy initiatives to popularize the
demat concept. One of them is delivery of demat shares compulsorily for
institutional investors and OCBs. However, these investors have been allowed
to buy shares in physical form, get them transferred in their names and
thereupon get them dematerialized. The implementation of the guidelines is
subject to the condition that the company shall get a certificate of practice
that the company has followed the procedure mentioned in the scheme and to
affect that: The company has followed the necessary procedures for effecting
the original transfer; The register of members of the company was, accordingly, amended
and the shares were transferred in favour of the transferee; Re-materialization Rematerialisation is a process, by which a client can get his
electronic holdings converted back into the physical holdings, i.e., he can
get back the physical form of share certificates. To get the certificate
back, he has to fill up a remat request form and submit it to its depository
with whom he has an account. The new certificates may not necessarily bear
the same folio or distinctive numbers as previously existed. The facility to
rematerialise again is offered to all those scrips which are eligible for
demat in the depositories` list of securities available for
dematerialisation.The whole process of rematerialisation is completed within
30 days from the receipt of request. This shows how speedy the electronic
system works – that being the essence of today’s business where the prices of scrips change many times a day. Disadvantages of Demat The disadvantages of dematerialization of
securities can be summarised as follows: Trading in securities may become uncontrolled in case of
dematerialized securities. Multiple regulatory frameworks have to be confirmed to,
including the Depositories Act, Regulations and the various Bye Laws of
various depositories. Additionally, agreements are entered at various levels
in the process of dematerialization. These may cause anxiety to the investor
desirous of simplicity in terms of transactions in dematerialized securities. However, the advantages of dematerialization outweigh its
disadvantages and the changes ushered in by SEBI and the Central Government
in terms of compulsory dematerialization of securities is important for
developing the securities market to a degree of advancement. Freely traded
securities are an essential component of such an advanced market and
dematerialization addresses such issues and is a step towards the advancement
of the market. Conclusion Over the last decade, the Indian capital market has been growing
by leaps and bounds. India has the largest number of listed companies in the
world today. It also boasts of a large number of shareholders, about 32
million. Paradoxically, the problems associated with transactions, clearing
and settlement were also on the rise. Simultaneously, they expose the
investors to greater risks. Indian market thus required a new system that would eliminate
all problems of investors and would give them healthy environment, and would
strengthen their faith in the capital market, which was very low due to
scams. Inordinate delay in investigation of these scams and escape of wrongdoers
from law – created doubts in the minds of investors. The position has substantially
improved after the introduction of the depository system. Article
by Atul Billore and Garima Tiwari, National Law Institute
University,Bhopal |
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