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.
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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.
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.