Dr.

Ram Manohar Lohiya National

Law
University, Lucknow

Semester VIII
B .A. LL.B . (Hons .) Course
A doctrinal Research project carried out on the topic of

C.D.S.L and N.S.D.L: An Analysis

In the Course of

“Investment & Securities Law”

SUBMITTED TO: SUBMITTED BY:

DR. MANOJ KUMAR Sameer Srivastava
ASSTT. PROFF SEM: VIII
RMLNLU ROLL NO.: 115

1|Page
 ACKNOWLEDGEMENT

I am very grateful to my teacher Dr. MANOJ KUMAR, Assistant Professor, Dr. Ram Manohar
Lohiya National Law University, for giving me such a platform to research on the topic “Central
Depository Services Ltd. and National Securities Depository Ltd.: An Analysis”.

I also want to thank my parents, friends and Almighty God for their kind support, without their
help it would have been a difficult task for me to complete this project work.

At last, I am deeply indebted to the eminent logical experts, government of India, philosophers and
other scholars of repute whose valuable work has been highly useful in writing this project.

2|Page
 INDEX

Sr. No. Title Page No.

01. Research Methodology 04
02. Research Questions/Problems 05
03. Introduction 06
04. Significance of Depository System 07
05. CDSL 15
06. NSDL 16
07. Management of NSDL 21
08. Inspection, Accounting and Internal Audit 24
09. Suggestions and Conclusion 26
10. Bibliography 27

Abbreviations Used:
Abbreviations Meaning
NSDL National Securities Depository Limited
CDSL Central Depository Securities Limited
UTI Unit Trust of India
NSE National Stock Exchange
BSE Bombay Stock Exchange
SEBI Security Exchange Board of India
H-n Hypothesis Number ROI
Return of Investment R&T
Register and Transfer T+2
Trade date plus two days DP
Depository Participant BO
Beneficial Owner
NCFM NSE Certificate in Finance Management

3|Page
Research Methodology
Secondary data: Here, it is collected from the website of Reserve Bank of India; SEBI
(www.sebi.co.in); Ministry of Corporate Governance, publications of National Company Law
Tribunal and Government of India as well as from works of eminent logical experts and
philosophers and other scholars of repute in Company Law and Investment law.

The Main objective of the study are:

1) To understand the basic concepts behind the depository system as well as CDSL and NSDL in
lucid form.

2) To study the Organizational frame work, Operational policies, Problems and Prospects and
financial performance of Company in India with respect to investment law.

Research Hypotheses
The main hypotheses formulated for the study are as given below:

H-1: NSDL and CDSL’s contribution for investor awareness towards depository services are
significant.

H-2: There is significance difference in the awareness of Stock market and regulatory system
among the investors at the selected Depository participants.

H-3: There is significance difference in the dematerialization benefits offered to the investors by
select depository participants.

H-4: There is significance difference among the depository participants on the efficiency of the
capital market.

H-5: Depository Participants Performance has association with availability of DP services to

rural areas.

4|Page
H-6: There is significance difference in the market segment dealings of select depository
participants.

H-7: There is significance difference in the investor’s services satisfaction of select depository
participants.

H-8: There is significance difference in the return on investment (ROI) of CDSL and NSDL.

RESEARCH QUESTIONS OR PROBLEM

1. What is the idea and concept behind CDSL and NSDL...?

2. What is the scope, legal position and critical analysis of depository system in India with
respect to Investment Law...?

5|Page
 Introduction:
Technology has changed the face of the Indian stock markets in the post-liberalization era.
Competition amongst the stock exchanges, increase in the number of players and changes in the
trading system led to a tremendous increase in the volume of activity. The traditional settlement
and clearing system has been proved inadequate due to operational inefficiencies, delay in transfer,
registration, fake certificates and forgery, non-availability of depositories, impeding the healthy
growth of the capital market. To overcome the problems regarding the stock markets world over,
many task forces were setup inducing group of 30 to suggest an alternative for the exiting
settlement system, which involved physical movement of securities. The depository system was
initiated by Stock Holding Corporation of India Limited (SHCIL) in July 1992, when it prepared a
concept on paper on "National Clearance and Depository System "in collaboration with Price Water
House under a program sponsored by the US Agency for International Development. Thereafter,
Government of India promulgated the Depositories Ordinance in September 1995, thus paving the
way for setting up of depositories in the country1. SEBI notified regulations under the Ordinance
in May 1996 in order to provide the regulatory framework for the depositories. Accordingly, the
Government of India enacted the Depositories Act 1996 to start depository’s services in India. The
depository system revolves around the concept of paperless or free trading because the shares in a
depository are held in the form of electronic accounts, i.e. de-materialized form Presently, there
are two such depositories in India, viz. National Securities Depository Limited (NSDL) and Central
Depository Services (India) Limited (CDSL). NSDL was set up as the first depository company in
the country which is sponsored by the Unit Trust of India (UTI), NSE, State Bank of India, HDFC
Bank and Citi Bank; and managed by Board of Directors as a public limited company. The Mumbai
Stock Exchange (BSE) in association with the Bank of India, Bank of Baroda, State Bank of India
and HDFC Bank promoted CDSL as the second depository in India for dealing in the securities in
the electronic form, by the name of Central Depository Services (India) Limited (CDSL). The
major objective of these depositories is the growth of free trading, protection to the individual
investor's
participation in the depository and to enhance liquidity.2

1
Company Law, Avatar Singh (Eastern Book Company 16th Edition, New Delhi.)
2
depository system in India - a comparative study of nsdl and cdsl; international journal of research in commerce,
economics & management; volume no: 1 (2011), issue no. 3 (july); issn 2231-4245

6|Page
A bank or company which holds funds or securities deposited by others, and where exchanges of
these securities take place. In this paper we studied about Depositories, Depositories System and
its role in role in the Indian Capital Market. Apparently, a depository can be equally treated like a
bank. Generally, we open an account in a bank where our money is kept for giving us their services
in money transaction mostly in a transparent way. Likewise, a depository holds shares, debentures,
bonds and units etc. of an investor in electronic form and offers their transactional services towards
selling and buying of shares/stocks in stock market also in a transparent manner.3

Significant of Depository System4

A Depository is an organization where the securities of shareholders are held in the electronic
format the request of the shareholder through the medium of a depository participant. In
September, 1995 the Government have accepted in principle the proposed law for settling up of
depositories and of a central depository for immobilization of physical certificates. The central
depository is to be set up as trust to hold the physical custody of shared and effect transfers by book
entries without the need to deal and transfer the physical certificates between parties. This is to be
sponsored by public financial institutions and banks and will have a minimum net worth of Rs. 50-
100 crores as proposed by the SEBI. This central depository can be connected to a number of share
depositories for effecting transfer in book entries. The Foreign financial institutions agencies,
NRI’s etc. have for long required the depository of this type for facilitating their trade in the Indian
stock markets. These foreign security firms who were linked by the SEBI are operating in India,
but physical custody of the Indian securities has to be handled by Indian custodian such as a bank
which taken converted into depository participants. The guidelines and regulations in respect of
the operations of depository participants will help smooth operations among participants and their
operations with the central depository. A national securities depository corporation was set up in
November, 1996.

The Central Depository system aims at immobilization of physical certificates. This is done by
means of book entries with central depository who keeps custody of all physical certificates as a
first step. As a next step, new issues will be made as book entries only and not as physical
3
A Study on Depositories and their Role in the Indian Capital Market Dr. Pawan Verma1, Dr. Shiv Ram Singh
Jhajharia; Assistant Professor, OPJS University, Churu ; Professor, NDB Govt. PG College Nohar, Hanumangarh
4
www.investopedia.com

7|Page
certificates. Book entries transfers will lead to quicker transfers and at lower costs. It meets the
increasing work load of investment activity and dealings to increasing volume of transfer work. In
the Depository system, the Depository extends its services to investors through intermediaries
called depository participants (DP) who as per SEBI regulations could be organizations involved
in the business of providing financial services like banks, broker, custodians and financial
institutions. Realizing the potential in this market all the custodians in India and a number of banks,
financial institutions and major brokers have already joined as DPs and they are providing services
in a number of cities. Many more organizations are in various stages of establishing connectivity
with Depositories. The admission of the DPs involves an evaluation by Depository of their
capability to meet with the strict services standards of Depository and a further evaluation and
approval by SEBI.

The trading in physical segment is full of inefficiencies due to handling of large volumes of
certificates and also involves various other problems like delays in transfer, delay in settlement,
loss in transit, forgery certificates, stolen certificates, mutilation of certificates, postal losses, court
cases, litigation etc. To overcome these deficiencies, a new system of trading, viz. Depository
system was introduced, which facilitates investor to hold securities in electronic form and to trade
in these securities. The first depository set up in India is National Securities Depository Limited
(NSDL) and is promoted by IDBI, UTI and NSE.5

Constituents of Depository System6:

I. Depository: Depository functions like a securities bank, where the dematerialized physical
securities are traded and held in custody. This facilitates faster risk free and low-cost
settlement. Depository is much like a bank and performs many activities that are similar to a
bank depository:

• Enables surrender and withdrawal of securities to and from the depository through the
process of ‘de-mat’ and ‘re-mat’;

• maintains investors’ holdings in electronic form;

5
www.livemint.com
6
a project report on “depository system” in the subject financial services submitted to university of mumbai for
2nd semester of m.com. by heena parveen b. shaikh (roll no. 49) under the guidance of prof. sunil gujaran;2013 –
2014.

8|Page
 • Effects settlement of securities traded in depository mode on the stock exchanges;

• carries out settlement of trades not done on the stock exchanges (off market trades).

In India, a depository has to be promoted as a corporate body under Companies Act,

1956. It is also to be registered as a depository with SEBI. It starts operations after
obtaining a certificate of commencement of business from SEBI. It has to develop
automatic data processing systems to protect against unauthorized access. A network to link
up with depository participants, issuers and issuer’s agent has to be created.

Depository, operating in India, shall have a net worth of rupees one hundred crore and
instruments for which depository mode is open need not be a security as defined in the
Securities Contract (Regulations) Act 1956. The depository, holding securities, shall
maintain ownership records in the name of each participant. Despite the fact that legal
ownership is with depository, it does not have any voting right against the securities held
by it. Rights are intact with investors. There are two depositories in India at present, i.e.

1. NSDL: National Securities Depository limited

2. CDSL: Central Depository Services (India) Limited

ii) Depository Participants (DP):

A DP is investors’ representative in the depository system and as per the SEBI guidelines,
financial institutions/banks/custodian’s/stock brokers etc. can become DPs provided they
meet the necessary requirements prescribed by SEBI. DP is also an agent of depository
which functions as a link between the depository and the beneficial owner of the securities.
DP has to get itself registered as such under the SEBI Act. The relationship between the
depository and the DP will be of a principal and agent and their relation will be governed
by bye-laws of the depository and the agreement between them. Application for registration
as DP is to be submitted to a depository with which it wants to be associated. The
registration granted is valid for five years and can be renewed. As
depository holding the securities shall maintain ownership records in the name of each

9|Page
 Depository Participants, DP in return as an agent of depository, shall maintain ownership
records of every beneficial owner (investor) in book entry form7.

A DP is the first point of contact with the investor and serves as a link between the investor
and the company through depository in de-materialization of shares and other electronic
transactions. A company is not allowed to entertain a de-mat request from investors directly
and investors have to necessarily initiate the process through a DP.

Legal provisions for eligibility criteria for depository participants:

The following entities are eligible for becoming depository participant in accordance with
Regulation 19 of the SEBI (Depositories and Participants) Regulations, 19968.

• A public financial institution as defined in Section 4A of the Companies Act,

1956.

• A bank included in the second schedule of the Reserve Bank of India Act, 1934.

• A foreign bank, operating in India with the approval of Reserve Bank of India.

• A state financial corporation established under the provisions of section 3 of the

State Financial Corporations Act, 1951.

• An institution engaged in providing financial services, promoted by any of the

four institutions mentioned above.

• A custodian of securities, who has been granted a certificate of registration by

SEBI under Section 12(1A) of the SEBI Act, 1992.

• A clearing corporation or a clearing house of a stock exchange.

• A stockbroker having a minimum net worth of rupees Two Crores. The aggregate
value of the portfolio of securities of the BOs, held in dematerialized form in a

7
Law of Investment and Securities, Dr. S.R. Myneni, forwarded by Prof. A Laxminath, 1st Edition, Asia Law
House, Hyderabad.
8
www.sebi.gov.in/cms/sebi_data/commondocs/deppartamend_p.pdf

10 | P a g e
 depository through him, shall not exceed 100 times of the net worth of the
stockbroker. (Not applicable for DPs whose net worth is Rs. 10 crores). In case the
stockbroker seeks to act as a participant in more than one depository, he shall
comply with the net worth criteria separately with each such depository.

• A non-banking finance company (NBFC), having a net worth of not less than rupees
fifty lakhs provided that such company shall act as a participant only on behalf of
itself and not on behalf of any other person. Provided further that a non- banking
finance company may act as a participant on behalf of any other entity, if it has a
net worth of Rest. 50 crores in addition to the net worth specified by any other
authority.

• A registrar to an issue or share transfer agent who has a minimum net worth of
Rest. 10 crores and who has been granted a certificate of registration by SEBI.

Characteristics of depository participant9:

• Acts as an Agent of Depository

• Directly deal with customer

• Functions like Securities Bank

• Account opening

• Facilitates dematerialization

• Instant transfer on pay – out

• Credits to investor in IPO, rights, bonus

• Settles trades in electronic segment

9
CBSE – Introduction to Financial Markets – II, pg. – 113; Chapter 8 Operations of Depository Participants.

11 | P a g e
iii) Issuer / Companies:
The issuer is the company which issues the securities. It maintains a register for recording
the names of the registered owners of securities and the depositories. The issuer sends a list
of shareholders who opt for the depository system. And only that companies can issue the
securities which are registered under stock exchanges.

iv) Beneficial Owner/ Investor:

Beneficial owner is a person whose name is recorded as such with a depository. It means a
person who is engaged in buying and selling of securities issued by the companies and is
registered his/ her securities with the depository in the form of book entry and he/ she has
all the rights and liabilities associated with the securities

Facilities offered by depository system10:

1) Dematerialization: It is a process of conversion of physical share – certificate into
electronic – form. So, when a shareholder uses the dematerialization facility, company
take back the shares, through depository – system and equal numbers of shares are credited
in his account in e-form.

2) Re-materialization: Re-materialization is the exact reverse of Dematerialization. It refers

to the process of issuing physical securities in place of the securities held electronically in
book-entry form with a depository.

Other Services:
a) Pledging Dematerialized Shares: Dematerialized shares could be pledged; in fact, this is
more advantageous as compared to pledging share certificates. After loan is repaid, one can
request for a closure of pledge by instructing one’s DP through a standard format.
The pledgee on receiving the repayment as well as the request for closure of pledge will

10
S. Kanan (2008), “Market Comparable Approach”, Journal of Financial Services Research, Vol. 24, No.2-3, pp. 121-
148.

12 | P a g e
 instruct his DP accordingly. Even the locked-in securities can be pledged. The pledger
continues to remain the beneficiary holder of those securities even after the securities are
pledged.

b) Initial Public Offerings: Credits for public offers can be directly received into de-mat
account. In the public issue application form of depository eligible companies, there will
be a provision to indicate the manner in which securities should be allotted to the applicant.
One is to mention one’s client account number and the name and identification number of
DP. All allotment due to investor will be credited into required account.

c) Receipt of Cash/non-cash Benefits: When any corporate event such as rights or bonus or
dividend is announced for a particular security, depository will give the details of all the
clients having electronic holdings in that security as of the record date to the registrar. The
registrar will then calculate the corporate benefits due to all the shareholders. The
disbursement of cash benefits such as dividend/ interest will be done directly by the
registrar. In case of non-cash benefits, depository will directly credit the securities
entitlements in the depository accounts of all those clients who have opted for electronic
allotment based on the information provided by the registrar.

d) Stock Lending and Borrowing: Through the depository account securities in the de-mat
form can be easily lent/ borrowed. Securities can be lent or borrowed in electronic form
through an approved intermediary, who has opened a special ‘intermediary’ account with a
DP. Instructions are to be given to DP through a standard format (which is available with
DP) to deposit securities with the intermediary. Similarly, to borrow securities from the
intermediary, one has to instruct DP through a standard format.

e) Transmission of Securities: Transmission of securities due to death, lunacy, bankruptcy,

insolvency or by any other lawful means other than transfer is also possible in the
depository system. In the case of transmission, the claimant will have to fill in a
transmission request form, (which is available with the DP) supported by valid
documents.

f) Freezing Account with DP: If at any time as a security measure one wishes that no
transaction should be effected in one’s account; one may advise one’s DP accordingly.

13 | P a g e
 DP will ensure that account of such investor is totally frozen until further instructions
from him.

Benefits of Depository System11:

1) This system will eliminate paper work as the book entry system does not need physical
movement of certificates for transfer process.

2) The risk of bad deliveries, fraud and misplaced, mutilated and lost share certificates will
not exist.

3) The electronic media will shorten settlement time and hence the investor can save time
and increase the velocity of security movement.

4) Investors will be able to change portfolio more frequently.

5) The capital market will be more transparent as the trading, clearing and settlement
mechanism have to be highly automated and interlinked with the depository among them.

6) The market will be highly automated and efficient due to the usage of computing and
telecommunication technology for the back-office activities for all the capital market
players.

11
Lectures On Company Law, K S Anantharaman (LexisNexix,12th Edition, New Delhi)

14 | P a g e
 Central Depositary Securities Limited (CDSL)12:
A Depository facilitates holding of securities in the electronic form and enables securities
transactions to be processed by book entry by a Depository Participant (DP), who as an agent of
the depository, offers depository services to investors. According to SEBI guidelines, financial
institutions, banks, custodians, stockbrokers, etc. are eligible to act as DPs. The investor who is
known as beneficial owner (BO) has to open a de-mat account through any DP for
dematerialization of his holdings and transferring securities.

The balances in the investors account recorded and maintained with CDSL can be obtained through
the DP. The DP is required to provide the investor, at regular intervals, a statement of account
which gives the details of the securities holdings and transactions. The depository system has
effectively eliminated paper-based certificates which were prone to be fake, forged, counterfeit
resulting in bad deliveries. CDSL offers an efficient and instantaneous transfer of securities.

CDSL was promoted by Bombay Stock Exchange Limited (BSE) jointly with leading banks such
as State Bank of India, Bank of India, Bank of Baroda, HDFC Bank, Standard Chartered Bank,
Union Bank of India and Centurion Bank. CDSL was set up with the objective of providing
convenient, dependable and secure depository services at affordable cost to all market
participants. Some of the important milestones of CDSL system are:
CDSL received the certificate of commencement of business from SEBI in February, 1999
• Honorable Union Finance Minister, Shri. Yashwant Sinha flagged off the operations of
CDSL on July 15, 1999.
• Settlement of trades in the de-mat mode through BOI Shareholding Limited, the clearing
house of BSE, started in July 1999.
• All leading stock exchanges like the National Stock Exchange, Calcutta Stock Exchange,
Delhi stock Exchange; The Stock Exchange, Ahmadabad, etc. have established
connectivity with CDSL.

12
www.cdslindia.com

15 | P a g e
 • It has over 5000 issuers which have admitted their securities (equities, bonds, debenture
and commercial papers), units of mutual funds, certificate of deposits etc. into the CDSL
system.

Shareholders of CDSL13: CDSL 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 inception and has contributed overwhelmingly to
the fruition of the project. The initial capital of the company is Rs.104.50 crores. The total number
of client accounts in CDSL is over 1.06 crores. It has more than 581 depository participants and
161 branches approximately all over the country.

National Securities Depository Limited14:

NSDL carries out its activities through service providers such as depository participants (DPs),
issuing companies and their registrars and share transfer agents and clearing corporations/ clearing
houses of stock exchanges. These entities are NSDL’s business partners and are integrated in to
the NSDL depository system to provide various services to investors and clearing members. The
investor can get depository services through NSDL's depository participants. An investor needs to
open a depository account with a depository participant to avail of depository facilities.
It is possible for a clearing member to open a special account in the depository system to settle
trades completed on stock exchanges. The clearing account helps the clearing member to get
securities from its clients for delivery to the clearing house/clearing corporation and to distribute
the pay-out to its customers. An issuer can offer de-mat services to its shareholders by means of an
agreement with NSDL. The clearing corporations/houses of stock exchanges also need to be
electronically linked to the depository to enable them to electronically receive and give securities
from and to clearing members.
An investor intending to dematerialize its securities needs to have an account with a DP. The
client has to deface and surrender the certificates registered in its name to the DP. After

13
Ibid.
14
https://nsdl.co.in

16 | P a g e
intimating NSDL electronically, the DP sends the securities to the concerned Issuer/ R&T agent.
NSDL in turn informs the Issuer/ R&T agent electronically, using NSDL Depository system, about
the request for dematerialization. If the Issuer/ R&T agent finds the certificates in order, it registers
NSDL as the holder of the securities (the investor will be the beneficial owner) and communicates
to NSDL the confirmation of request electronically. On receiving such confirmation,
NSDL credits the securities in the depository account of the Investor with the DP.

Role of NSDL in Depository System15: In the depository system, the ownership and transfer of
securities takes place by means of electronic book entries. At the outset, this system rids the capital
market of the dangers related to handling of paper.
NSDL provides numerous direct and indirect benefits like:
I. Elimination of bad deliveries in the depository environment, once holdings of an
investor are dematerialized, the question of bad delivery does not arise i.e. they cannot
be held "under objection". In the physical environment, buyer was required to take the
risk of transfer and face uncertainty of the quality of assets purchased. In a depository
environment good money certainly begets good quality of assets.
ii. Elimination of all risks associated with physical certificates- Dealing in physical
securities have associated security risks of theft of stocks, mutilation of certificates, loss
of certificates during movements through and from the registrars, thus exposing the
investor to the cost of obtaining duplicate certificates etc. This problem does not arise
in the depository environment.
iii. No stamp duty for transfer of any kind of securities in the depository. This waiver
extends to equity shares, debt instruments and units of mutual funds.
iv. Immediate transfer and registration of securities - In the depository environment,
once the securities are credited to the investors account on pay out, he becomes the legal
owner of the securities. There is no further need to send it to the company’s registrar
for registration. Having purchased securities in the physical environment, the investor
has to send it to the company's registrar so that the change of ownership can
be registered. This process usually takes around three to four months and is rarely

15
International Journal of Advance Research in Computer Science and Management Studies Volume 1, Issue 7,
December 2013 pg.190-197

17 | P a g e
 completed within the statutory framework of two months thus exposing the investor to
opportunity cost of delay in transfer and to risk of loss in transit. To overcome this, the
normally accepted practice is to hold the securities in street names i.e. not to register
the change of ownership. However, if the investors miss a book closure the securities
are not good for delivery and the investor would also stand to lose his corporate
entitlements.
v. Faster settlement cycle - The settlement cycle follows rolling settlement on T+2 basis
i.e. the settlement of trades will be on the second working day from the trade day. This
will enable faster turnover of stock and more liquidity with the investor.
vi. Faster disbursement of non-cash corporate benefits like rights, bonus, etc. - NSDL
provides for direct credit of non-cash corporate entitlements to an investors account,
thereby ensuring faster disbursement and avoiding risk of loss of certificates in transit.
vii. Reduction in brokerage by many brokers for trading in dematerialized securities
Brokers provide this benefit to investors as dealing in dematerialized securities reduces
their back-office cost of handling paper and also eliminates the risk of being the
introducing broker.
viii. Reduction in handling of huge volumes of paper
ix. Periodic status reports to investors on their holdings and transactions, leading to better
controls.
x. Elimination of problems related to change of address of investor - In case of change
of address, investors are saved from undergoing the entire change procedure with each
company or registrar. Investors have to only inform their DP with all relevant
documents and the required changes are affected in the database of all the companies,
where the investor is a registered holder of securities.
xi. Elimination of problems related to transmission of de-mat shares - In case of
dematerialized holdings, the process of transmission is more convenient as the
transmission formalities for all securities held in a de-mat account can be completed by
submitting documents to the DP whereas, in case of physical securities the surviving
joint holder(s)/legal heirs/nominee has to correspond independently with
each company in which shares are held.

18 | P a g e
 xii. Elimination of problems related to selling securities on behalf of a minor - A
natural guardian is not required to take court approval for selling de-mat securities on
behalf of a minor.
xiii. Ease in portfolio monitoring since statement of account gives a consolidated position
of investments in all instruments.

There are various checks and measures in the depository system to ensure safety of the investor
holdings. These include:

I. A DP can be operational only after registration by SEBI, which is based on the

recommendation from NSDL and their own independent evaluation. SEBI has
prescribed criteria for becoming a DP in its regulations.
ii. DPs are allowed to affect any debit and credit to an account only on the basis of valid
instruction from the client.
iii. Every day, there is a system driven mandatory reconciliation between DP and NSDL.
iv. All transactions are recorded at NSDL Central System and in the
databases
maintained by business partners.
v. There are periodic inspections into the activities of both DP and R&T agent by
NSDL. This also includes records based on which the debit/credit is affected.
vi. All investors have a right to receive their statement of accounts periodically from the
DP.
vii. Every month NSDL forwards statement of account to a random sample of investors as
a counter check.
viii. In the depository, the depository holds the investor accounts on trust. Therefore, if the
DP goes bankrupt the creditors of the DP will have no access to the holdings in the
name of the clients of the DP. These investors can transfer their holdings to an account
held with another DP.
ix. The data interchange between NSDL and its business partners is protected by protection
measures of international standards such as encryption hardware lock. The protection
measures adopted by NSDL are more than what is prescribed in the SEBI
Regulations.

19 | P a g e
Freeze Facility: A depository account holder (beneficiary account) may freeze securities lying in
the account for as long as the account holder wants it. By freezing the account, account holder can
prevent unexpected debits or credits or both, creeping into its account. The following types of
freeze facility available in the NSDL system may be availed of by submitting freeze instruction to
the DP in the prescribed form.

I. Freeze for debits only

ii. Freeze for debits as well as credits
iii. Freeze a particular ISIN in the account
iv. Freeze a specific number of securities held under an ISIN in an account

Certification in Depository Operations: NSDL has introduced a Certification Programmed in

Depository Operations (popularly known as NCFM certification), and it has been made
compulsory for all DPs to appoint a person qualified in this certification in each of its branches.
This way, NSDL wants to ensure that each branch of a DP that services investors has at least one
person who has thorough knowledge about depository system.

Investor grievance: All grievances of the investors are to be resolved by the concerned business
partner. If they fail to do so, the investor has the right to approach NSDL.

Insurance Cover: NSDL has taken a comprehensive insurance policy to help DP to

indemnifying investors for the loss accrued to them due to errors, omissions, commission or
negligence of DP.
Computer and communication infrastructure: NSDL and its business partners use hardware,
software and communication systems, which conform to industry standards. Further, the systems
are accepted by NSDL only after a rigorous testing procedure. NSDL's central system comprises
an IBM mainframe system with a back-up facility and a remote disaster back-up site.

20 | P a g e
NSDL offers the following facilities16: -

i. Dematerialization i.e., converting physical certificates to electronic form;

ii. Re-materialization i.e., conversion of securities in de-mat form into
physical certificates;
iii. Facilitating repurchase / redemption of units of mutual funds;
iv. Electronic settlement of trades in stock exchanges connected to NSDL;
v. Pledging/hypothecation of dematerialized securities against loan;
vi. Electronic credit of securities allotted in public issues, rights issue;
vii. Receipt of non-cash corporate benefits such as bonus, in electronic form;
viii. Freezing of de-mat accounts, so that the debits from the account are not permitted;
ix. Nomination facility for de-mat accounts;
x. Services related to change of address;
xi. Effecting transmission of securities;
xii. Instructions to your DP over Internet through SPEED-e facility. (Please check with
your DP for availing the facility);

Management of NSDL17:

NSDL is a public limited company managed by a professional Board of Directors. The day-today
operations are conducted by the Chairman & Managing Director (CMD). To assist the CMD in his
functions, the Board appoints an Executive Committee (EC) of not more than 15 members. The
eligibility criteria and period of nomination, etc. are governed by the Bye-Laws of NSDL in
this regard.

16
International Journal of Scientific and Research Publications, Volume 6, Issue 12, December 2016 135
ISSN 2250-3153
www.ijsrp.org
17
www.nsdlindia.com

21 | P a g e
Bye-Laws of NSDL18: Bye-Laws of National Securities Depository Limited have been framed
under powers conferred under section 26 of the Depositories Act, 1996 and approved by
Securities and Exchange Board of India. The Bye-Laws contain fourteen chapters and pertain to
the areas listed below:

1. Short title and commencement 2. Definitions 3. Board of Directors

4. Executive Committee 5. Business Rule 6. Participants

7. Safeguards to protect interest of clients and participants 8. Securities

9. Accounts/transactions by book entry 10. Disciplinary Action

11. Reconciliation, accounts and audit 12. Appeals

13. Conciliation

Arbitration Amendments to NSDL Bye-Laws require the approval of the Board of Directors of
NSDL and SEBI.

Inspection, Accounting and Internal Audit19

NSDL obtains audited financial reports from all its DPs once every year. NSDL also carries out
periodic visits to the offices of its constituents - R&T agents, DPs and clearing corporations – to
review the operating procedures, systems maintenance and compliance with the Bye-Laws,
Business Rules and SEBI Regulations.

Additionally, DPs are required to submit to NSDL, internal audit reports every quarter. Internal
audit has to be conducted by a chartered accountant or a company secretary in practice.

The Board of Directors appoints a Disciplinary Action Committee (DAC) to deal with any matter
relating to DPs clients, Issuers and R&T agents. The DAC is empowered to suspend or expel a

18
Ibid.
19
www.investopedia.com

22 | P a g e
DP, declare a security as ineligible on the NSDL system, freeze a DP account and conduct
inspection or call for records and issue notices.

If a DP is aggrieved by the action of the DAC, it has the right to appeal to the EC against the action
of the DAC. This has to be done within 30 days of the action by DAC. The EC has to hear the
appeal within two months from the date of filing the appeal. The EC has the power to stay the
operation of the orders passed by the DAC. The information on all such actions has to be furnished
to SEBI.

Settlement of Disputes20: All disputes, differences and claims arising out of any dealings on the
NSDL, irrespective of whether NSDL is a party to it or not, have to be settled under the Arbitration
and Conciliation Act 1996.

Disadvantage of Depository System21:

I. Discrimination between dematerialized and physical shares will affect transactions in
the market. This has to be avoided.
ii. Lack of control.
iii. Depository system is not effectively regulated by SEBI. This is evident from the fact
that the Clearing and Settlement Corporation is not effectively handled by the SEBI.
iv. Complexity of the system.
v. Promoters of some companies dematerialized shares in excess of the company’s
issued capital.
vi. Some listed companies had obtained duplicate shares after the originals were pledged
with banks and then sold the duplicates in the secondary market to make a profit.

20
www.nsdlindia.com
21
2nd International Conference on Multidisciplinary Research & Practice

23 | P a g e
 Suggestions and Conclusion
Investors in securities must be assured that they will be given a fair deal and protected adequately
against the risks. In order to avoid the time gap in settlement and also the possibility of default by
players, major step in this direction has been taken by introducing the T+2 settlement systems on
the stock exchanges. The risk in transactions done on stock exchange arising due to the time gap
between the executions of the trade and its settlements has been minimized with the introduction
of rolling settlement and this has become possible only due to the introduction of De-mat system
in India.

To eliminate or to minimize these problems, the suggestions are given below:

I) Uniformity in practices of both the Depositories

There are two Depositories in our country. One is NSDL and the other is CSDL. Both these
Depositories are following different patterns of allotting account number and they have different
pricing structures. In NSDL, every account number and the DPID number is required to identify
the account holder, whereas the CDSL allots only one number containing both the information.

ii) Charges for transferring securities to self should be abolished

In the De-mat system, one is allowed to maintain any number of accounts with any of the
Depository Participant. But if a customer is transferring securities from one account to another
account; even then he has to pay sell charges in the account, from where the securities are going.
He also has to pay buy charges in the account where he is transferring the securities.

iii) Re-materialization should not be discouraged

As per Depository Regulations, one can opt for Re-materialization any time he wants. In this
process, electronic shares are converted into physical shares, and the client can keep these physical
shares with him. But this option exists only on the papers, as practically it is very difficult to get
any security rematerialized. The companies don’t pay any attention to the Re-
materialization request.

24 | P a g e
iv) Uniformity of codes of Securities
In Stock Exchanges, securities have different codes and in Depositories, securities have ISIN
number. Steps can be taken to ensure that the uniform codes are followed in every institution of
the country.

v) Framing of Stringent rules

There are Companies, which are not following the procedures, laid down in the Depository
Agreement. These Companies don't send the Dematerialized shares in the account for months.
Together, they are shaking the confidence of the investors in the whole system. The regulator and
the NSDL should ensure that the rules framed are followed in the right spirit.

vi) Increase the Applicability

The regulator should ensure that all the companies adopt the De-Mat System. There are
Companies, which have not entered into the agreement with any of the Depositories. Steps should
be taken to ensure that these Companies also enter into the agreement at the earliest. The investors
of these Companies are feeling a lot of inconvenience, as they are not able to take the advantages,
offered by the Depository System.

vii) Training of Staff

The staff of the Depository Participants should be properly trained to serve the needs of the
investors. It is observed that the staff deployed by the DPs is not trained. SEBI has taken steps to
Ensure by asking Depository Participants to have at least one NCFM qualified person in every
branch.

viii) Online Connectivity

Every DP is not having online connectivity at every branch. It is considered to be very costly affair
to have the connectivity at every branch/center. But it is important from the investor’s point of
view.

ix) Awareness of the Websites

The regulator and the NSDL should ensure that the investors are properly educated about the use
of the websites. Websites offer a lot of information and accessing that information is cost

25 | P a g e
effective also. The Depository Participants should also make sincere efforts to develop this habit
for their clients.

x) Custody fee for non - tradable securities should be abolished

This is another problem caused by the malfunctioning of the Companies. In case, a client has got
some shares and that are not traded in Stock Exchanges for one reason or the other, in that case,
the securities are worthless but at the same time, the client has to pay custody fee on those securities
every month. These charges can be made non applicable if the securities are not traded on any
Stock Exchange.

There is no doubt that the de-materialization of securities has significantly eliminated the risk, such
as bad delivery, inordinate delays in transfer of title, high stamp duty, etc. But that doesn’t mean
that the De-Mat System is totally free from the flaws. In the De-Mat System, there’re other
allied problems faced by the investors.

26 | P a g e
 Bibliography:

Books/Statutes Referred

• Company Law, Avtar Singh (Eastern Book Company 16the Edition, New Delhi.)

• Law of Investment and Securities, Dr. S.R. Manini, forwarded by Prof. A

Lamxminath, 1st Edition, Asia Law House, Hyderabad.

• Lectures on Company Law, K S Anantharaman (LexisNexix,12th Edition,

New
Delhi)

• Company Law and Practice, A K Majumdar and Dr.G K Kapoor (Taxmann

Publications (P) Ltd., 17th Edition New Delhi)

• Taxmann’s Company Law, University Edition (19th Edition),

Taxmann
Publication Pvt. Ltd.

Law Journals/Website Referred

• All India Reporter

• www.manupatra.com

• www.sebi.com

• www.legalindiaservices.com

27 | P a g e