Depository Act

The Depository Act was enacted by the Indian Parliament to provide a legal framework for the establishment of depositories. The term "Depository" is a registered organization which helps an investor to buy or sell securities such as shares, debentures and bonds in an electronic form.

Securities and Exchange Board of India is liable for the registration, regulation and inspection of the depository. In this article, we look at the Depository Act in detail.

Functions of Depository

A Depository facilitates to hold securities of investors in the electronic form and enables securities transactions to be processed by depository participants. A depository participant can be a financial institution, bank, broker or any other entity eligible as per SEBI guidelines.

Benefits of Depository System

The following are the benefits of the depository system are listed below:

Depository system holds all securities in the country listed in the particular stock exchange.
In a depository system, blank transfers are avoided, and holding of shares in Benami names is also prevented.
Through this depository system, interest and dividend on securities are evenly distributed.
Depository system avoids delay in registration of transfers.
Depository Acts as collateral security for raising of loans from any banks or financial institution.

Learn more: SME Stock Exchange in India

Certificate of Commencement of Business

All depository needs to be registered with the SEBI or Securities and Exchange Board of India to receive a

Certificate for commencement of business on fulfilment of such conditions as specified below:

The depository should maintain adequate systems and safeguards to prevent manipulation of records and transactions.
The depository should conduct an annual inspection of these procedures and forward a copy of the inspection report to SEBI.

Agreement between depository and participant

Any investor who seeks to avail the services of a depository has to enter into an agreement with any Depository Participant. Then the Depository Participant will make the depository services available to the investor.

Surrender of Certificate of Security

To avail the services of a depository, the person should surrender the certificate of security to the issuer( the person making an issue of securities) as specified by the regulations: On receipt of a certificate of security, the issuer would cancel the certificate of security and register the name of the depository as a registered owner with respect of the security received and inform the same to the depository. On receipt of information, the depository would enter the name of the person as the beneficial owner of the securities.

Registration of Transfer of Securities with Depository

Upon receipt of intimation from a participant, the depository would register the transfer of security in the name of the transferee. If a transfer of any security seeks to have custody of such security, then the depository would inform the same to the issuer.

Options to hold securities or receive a security certificate

Any person subscribing to securities offered by an issuer will have to either receive the security certificates or hold securities with a depository.

Records of Depository

Every depository should furnish the information about the transfer of securities in the name of investors.

Power of Board

The Board on being satisfied by the investor may furnish some information related to the securities held in a depository. Also, the Board would authorize the person to make an inspection with respect to the affairs of the issuer, investor, depository or participant, who submit a report of such enquiry or inspection within the specified period.

Process involved in Depository System

According to SEBI guidelines, the investor has to open a

Demat account through any depository participant for dematerialization of the transferring and holding securities. The depository system consists of a deposit of securities by the various investors with the depository. Once the shares are deposited with the depository, their transfer would be made through book-entry transfers in accounts owned by the depository. Thus the main functions of a depository system are to dematerialize the securities deposited and enable their transaction in the book-entry form.

Penalty

Any registered issuer fails to issue the certificate of securities to the investors within the specified time, and such issuer is responsible for paying a penalty of Rs. 1 lakh per day during which such failure continues.

Back to Learn

Frequently Asked Questions

Common questions about Depository Act: Legal Framework for Securities in India.

A Depository is a registered organization that enables investors to hold securities like shares, debentures, and bonds in an electronic form and facilitates the buying and selling of these securities.

SEBI is responsible for the registration, regulation, and inspection of depositories in India, as per the Depository Act.

The Depository system eliminates the need for physical transfer of securities, prevents holding of securities in benami names, ensures timely distribution of interest and dividends, avoids delays in transfer registration, and allows securities to be used as collateral for loans.

A Depository must maintain adequate systems and safeguards to prevent manipulation of records and transactions, conduct annual inspections of these procedures, and share the inspection report with SEBI.

An investor must enter into an agreement with a Depository Participant, who will then provide the Depository services to the investor.

The investor must surrender the physical security certificates to the issuer, who will cancel the certificates and register the Depository as the registered owner. The Depository will then enter the investor's name as the beneficial owner.

Yes, when subscribing to securities offered by an issuer, an investor has the option to either receive physical security certificates or hold the securities with a Depository.

A Depository must furnish information about the transfer of securities in the name of investors and maintain records related to the same.

SEBI can authorize inspections or inquiries into the affairs of issuers, investors, Depositories, or participants, and can seek information related to securities held in a Depository.

If an issuer fails to issue security certificates to investors within the specified time, they are liable to pay a penalty of Rs. 1 lakh per day until the failure is rectified.