Report on depository system

SUMMER TRAINING REPORT ON
“DEPOSITORY SYSTEM IN INDIA”
AT
LUDHIANA STOCK EXCHANGE
Submitted to Punjab University, Chandigarh
in the partial fulfillment of the requirements for the award
of the degree of
MASTERS OF COMMERECE
SESSION – 2012-14
Internal Guide: Submitted by:
Prof. A.K Singla Bharti Verma
(HOD Department of commerce) Uni. Roll no. 2804
College Roll no. 2220
ARYA COLLEGE, LUDHIANA

DECLARATION
I here by declare that the project report entitled ―DEPOSITORY
SYSTEM IN INDIA‖ submitted to Punjab University, Chandigarh in
partial fulfillment of the requirement for the award of degree of M.Com
is a record of bonafide project work carried out by me under the
guidance of Mr. Sadhu Ram. I further declare that all the particulars
given herein are true to best of my knowledge and belief. The assistance
and help during the execution of the project has been fully
acknowledged.
Bharti Verma

PREFACE
The successful completion of this project was a unique experience for me because
by visiting many place and interacting various person, I achieved a better
knowledge about this system. The experience which I gained by doing this project
was essential at this turning point of my carrier this project is being submitted
which content detailed analysis of the research under taken by me.
The research is on the topic ―Depositary system‖

ACKNOWLEDGEMENT
Behind this successful undertaking is the blessing and guidance of many. This
formal piece of acknowledgement may not be sufficient to express my feeIings of
gratitude and deep respect that have experienced during my learning process at
Ludhiana stock exchange.
I am extremely thankful to Mrs .Pooja M. Kohli, executive director
(officiating),Ludhiana stock exchange, for assigning me the project ―Depository―,
and also taking a keen interest and rendering valuable help that ultimately proved
to be very helpful in the successful completion of my project.
I am also very thankful to Mr.Sadhu Ram, coordinator of the training programme,
for the knowledge and experience that I have gained from him during the course of
training which I can easily look at my most rewarding phase the course of my
study. He in spite of his busy schedule, provided me valuable guidance and has
shown utmost interest in imparting this training.

CONTENTS
Sr No. Topics Page No.
1. Chapter-1 About Ludhiana Stock
Exchange
 Governance & management
 Strengths of LSE group
 Subsidary of LSE
 Listing companies at LSE
 Investor related services
 Educational Initiatives of Exchange
1
3
5
6
7
8
9
2. Chapter-2 Introduction to Depository 12
3. Chapter-3 Review of literature 15
4. Chapter-4 Depository system
 Depository Players
 Legal Framework
 Depository
 Depository Participant
 Functions
18
22
22
24
28
31
5. Chapter-5 Depositories in India
 NSDL
 CDSL
41
41
42
6. Chapter-6 Role of Depository in capital 45

market
 Comparison between Physical
Shares and Demat shares 54
7. Chapter-7 Objectives of the study
 Research Methodology
60
61
8. Chapter-8 Analysis and Interpretation
 Findings
 Limitations of the study
 Suggestions and Recommendations
 Conclusion
69
78
79
80
81
9. Chapter-9 Bibliography 83
10. Annexure 84

LUDHIANA STOCK EXCHANGE DEPOSITORY SYSTEM
1
ABOUT LUDHIANA STOCK EXCHANGE
The Ludhiana Stock Exchange Limited was established in 1981, by Sh. S.P. Oswal
of Vardhman Group and Sh. B.M. Lal Munjal of Hero Group, leading industrial
luminaries, to fulfill a vital need of having a Stock Exchange in the region of
Punjab, Himachal Pradesh, Jammu & Kashmir and Union Territory of Chandigarh.
Since its inception, the Stock Exchange has grown phenomenally. The Stock
Exchange has played an important role in channelizing savings into capital for the
various industrial and commercial units of the State of Punjab and other parts of
the country. The Exchange has facilitated the mobilization of funds by
entrepreneurs from the public and thereby contributed in the overall, economic,
industrial and social development of the States under its jurisdiction.
Ludhiana Stock Exchange is one of the leading Regional Stock Exchange and has
been in the forefront of other Stock Exchange in every spheres, whether it is
formation of subsidiary for providing the platform of trading to investors, for
brokers etc. in the era of Screen based trading introduced by National Stock

2
Exchange and Bombay Stock Exchange, entering into the field of Commodities
trading or imparting education to the Public at large by way of starting
Certification Programmes in Capital Market.
The vision and mission of Stock Exchange is:
"Reaching small investors by providing services relating to Capital Market
including Trading, Depository Operations etc. and creating Mass Awareness
by way of education and training in the field of Capital Market.
To create educated investors and fulfilling the gap of skilled work force in the
domain in Capital Market."
Further, the Exchange has 295 members out of which 171 are registered with
National Stock Exchange as Sub-brokers and 124 with Bombay Stock Exchange as
sub-brokers through its subsidiary.
LIST OF BOARD OF DIRECTORS OF THE EXCHANGE AS ON
05.03.2012
Name of member Designation
Sh. V.P. Gaur Chairperson,
Dr. R. L. Behl Public Interest Director
Sh. Jasminder Singh Public Interest Director

3
Sh. Ashwani Kumar Public Interest Director
Dr. Raj Singh, ROC Public Interest Director
Sh. Anup Kumar Jain Shareholder Director
Sh. Ashok Kumar Shareholder Director
Sh. Rajinder Mohan Singla Shareholder Director
Sh. Padam Parkash Kansal Shareholder Director
Sh. Vikas Batra Shareholder Director
Governance and management
LSE has a strong governance and administration, which encompasses a right
balance of Industry Experts with highest level educational background, practicing
professionals and independent experts in various fields of Financial Sector. The
administration is presently headed by Sr. General Manager CUM Company
Secretary and team of persons having in-depth knowledge of Secretarial, Legal and
Education & Training.
The Governing Board of the Exchange comprises of eleven members, out of which
two are Public Interest Directors, who are eminent persons in the fields of Finance
and Accounts, Education, Law, Capital Markets and other related fields, Six are
Shareholder Directors, and Three are Broker Member Director and the Exchange

4
has four Statutory Committees namely Disciplinary Committee, Arbitration
Committee, Defaults Committee and Investor Services Committee. In addition, it
has advisory and standing committees to assist the administration.
LSE has a Code of Conduct in place that governs the elected Board Members and
the Senior Management Team. The same is monitored through periodic disclosure
procedures. The Exchange has an Ethics Committee, which looks into any issue of
conflict of interest and has in place general code of conduct for the Senior
Officials.
Composition of the Governing Board
Sr. No. Name of Director Category
1 Prof. Padam Parkash Kansal
Chairman
(Shareholder Director)
2 Sh. Joginder Kumar
Vice Chairman
(Shareholder Director)
3 Sh. Rajinder Mohan Singla Shareholder Director
4 Sh. Satish Nagpal Shareholder Director
5 Sh. Vikas Batra Shareholder Director
6 Sh. Varun Chhabra Shareholder Director
7 Dr. Raj Singh Registrar of Companies (Public

5
Interest Director)
8 Sh. Ashwani Kumar Public Interest Director
9 Sh. V.P. Gaur Public Interest Director
10 Sh. Jaspal Singh Trading member Director
11 Sh. Sunil Gupta Trading Member Director
12 Sh. Sanjay Anand Trading member Director
Strengths of LSE group
1. ―LSE‖ brand is popular among masses. The brand image of LSE can
be capitalized.
2. It has requisite infrastructure for the Capital Market activities which
includes a multi-storeyed, centrally air conditioned building situated in
the financial hub of the city i.e. Feroze Gandhi Market.
3. LSE have well experienced staff handling operations of Stock
Exchange.
4. LSE have competent Board and professional management.
5. LSE have much needed networking of sub brokers in the entire

6
region, who are having rich experience in Stock Market operations for
the last 25 years.
6. LSE have more than 40,000 clients spread across Punjab, Himachal
Pardesh, Jammu & Kashmir and adjoining areas of Haryana and
Rajasthan.
7. The turnover of ITS subsidiary is the highest amongst all subsidiaries
of Regional Stock Exchanges in India.
Status of subsidiary – LSE Securities Limited
Due to Nation-wide reach of bigger Stock Exchanges, the trading volumes at
Ludhiana Stock Exchange declined and ultimately, the trading stopped in
February, 2002, but the Stock Exchange converted the threat of bigger Exchanges
into opportunities and acquired the corporate membership of these exchanges
through its subsidiary company i.e. LSE Securities Limited.
Stock exchange have now been providing Trading Platforms of Bigger Stock
Exchanges to the Investors of the region. The vast network of Brokers of the
Exchange is servicing millions of Investors. The subsidiary company is also
providing depository services in the State of Punjab and Himachal Pradesh. The
allied services like PAN Service Centre, Investor Service Centres are also being
provided at major locations of the region.
The turnover of subsidiary is highest amongst all the subsidiaries of Regional

7
Stock Exchanges. The growth of subsidiary is swift and it has been providing a
range of services to the public at large such as Trading, Depository, and IPO
bidding collection Centre.
The Company in its continuous endevour to provide qualitative services to its
valued clients, has started e-broking trading services for its clients, thereby
increasing the geographical reach of the company.
Listing of securities of companies at ludhiana stock exchange
At present, Ludhiana Stock Exchange has 330 listed companies, out of which 214
are regional and 116 are Non-regional. The total listed capital of aforesaid
companies is Rs. 3168.91 Crores approx. The market capitalization of the said
companies is more than Rs. 3372.34 crores. The Stock Exchange is covering the
vast investor base through the listing of above said companies, which are situated
in the region comprising of Punjab, Himachal Pardesh, Jammu & Kashmir, and
Chandigarh.
Despite the fact, the implementation of SEBI (Delisting of Securities) guidelines,
2003 has resulted into the Delisting of good companies listed at Exchange,
however still there are leading Companies listed with our Exchange, notable
among them are United Breweries Limited, Vardhman Acrylics Limited, SMC
global securities limited, Himachal Futuristic Communications Limited etc.
Ludhiana Stock Exchange has facilitated the capital generation for agro based
industries as Punjab is an agricultural led economy. It will continue to do so, once
it gets approval for a tie up with bigger Exchanges for commencing trading

8
operations.
Investor related services
The Exchange has been providing a variety of services for the benefit of investing
public. The services include Investor Service Centres, Investor Protection fund and
Investor Educational Seminars.
(i) Investor Service Centres
The Exchange has set-up Investor Service Centres at various DP branches of its
subsidiary for providing information relating to Capital Market to the general
public. The Centres subscribe to leading economic, financial dailies and
periodicals. They also store the Annual Reports of the companies listed at the
Stock Exchange. The Investor Service Centres are also equipped with a Terminal
for providing ―live‖ rates of trading at NSE and BSE. A large number of the
investors visit the centres to utilize the services being provided by the Exchange.
(ii) Investor Awareness Seminars
The Exchange has been organizing Investor Awareness Seminars for the benefit of
Investors of the region comprising State of Punjab, Himachal Pradesh, Jammu &
Kashmir, Chandigarh and adjoining areas of Haryana and Rajasthan. This massive
exercise of organizing Investor Awareness Seminars has been launched as a part of
Securities Market Awareness Campaign launched by SEBI in January, 2003. The
Exchange apprises the investors about Do‘s and Don‘ts to be observed while
dealing in Securities Market. Till date, Exchange has organized more than 200
workshops in the region mentioned above.

9
(iii) Website of the Exchange: www.lse.co.in
The Exchange has its own website with the domain name www.lse.co.in. The
website provides valuable information about the latest market commentary,
research reports about companies, daily status of International markets, a separate
module for Internet trading, information about listed companies and brokers and
sub-brokers of the Exchange and its subsidiary. The website also contains many
useful links on portfolio management, investor education, frequently asked
questions about various topics relating to Primary and Secondary Market,
information about Mutual Funds, Financials of the Company including Quarterly
Results, Share Prices, Profit and Loss Accounts, Balance Sheet and Many More.
The website also contains daily Technical Charts of various scripts being traded in
BSE and NSE.
Educational initiatives of exchange
LSE has carved out its unique position among the Stock Exchanges of the country
for the Knowledge Management. It has set up an Education and Training Cell and
the same has emerged as a leading facility in various Financial Services in India.
The Exchange has been conducting a unique certification programme in Capital
Market in association with Centre for Industry Institute Partnership Programme
Punjab University, Chandigarh for the last three year. This programme has
widened the horizons of participants vis-à-vis Capital Market Operations as
practical skill based knowledge is provided by Stock Brokers, Stock Exchange
Officials, Professors of Finance and Business Management and above all
Professionals working in different areas of Capital Market. We have completed
series of batches of this programme and we now want to scale up this programme

10
and are planning to launch various other programmes on areas relating to
Securities Market.
Stock exchange have edge over others as far as Education and Training in
Financial Services is concerned due to following factors:
a. Directly connected with the Industry as Regional Stock Exchange.
b. Connected with large base of Investors as they use the Stock Exchange as a
Trading Platform for their liquidity needs
c. Presence in the region of Punjab, Himachal Pradesh, Jammu & Kashmir and
Chandigarh through our branches Network and the area being under the
jurisdiction of our Exchange.
d. Already running Certification programmes in Capital Market successfully.
e. Continuously holding Investor Awareness Programmes for Investors & Investor
Groups through association with Brokers, Sub-brokers, Colleges, Universities and
Consumer Groups.

11
CHAPTER-2

12
INTRODUCTION TO DEPOSITORY
The advent of online automated trading in India brought with it several associated
benefits such as transparency in trading and equal opportunity for market players
all over the country but the problems related to settlement of trades such as high
instances of bad deliveries and long settlement cycles continued. The earlier
settlement system on Indian stock exchanges was very inefficient as it was unable
to take care of the transfer of securities in a quick/speedy manner. Since, the
securities were in the form of physical certificates; their quick movement was
again difficult. This led to settlement delays, theft, forgery, mutilation and bad
deliveries and also to added costs. To wipeout these problems, the Depositories
Act 1996 was passed. It was formed with the purpose of ensuring free
transferability of securities with speed, accuracy & security. SEBI notified
Regulations in order to provide the regulatory framework for the depositories.
Depositories gave a new dimension and a new scope for conducting transactions in
capital market- primary as well as secondary, in a more efficient and effective
manner, in a paperless form on an electronic book entry basis. It provided
electronic solution to the aforementioned problems of bad deliveries and long
settlement cycle.
A Depository is an organization where the securities of share holders are held in
the electronic format the request of the share holder 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

13
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 guidelines and regulations in aspect 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.
History
The first depository was set up way back in 1947 in Germany. In India it is a
relatively new concept introduced in 1996 with the enactment of Depositories Act
1996. Their operations are carried out in accordance with regulations made by
SEBI, bye-laws and rules of Depositories Act and SEBI (Depositories and
Participants) Regulations Act 1996 .

14
CHAPTER-3

15
REVIEW OF LITERATURE
M.T. Raja and Varsha marathe conducted study on Transaction cost
for equity shares in India .The main objectives of the study was to
analyse the cost of equity shares transaction in physical mode and demat
mode. He found that the average cost for the FII in India is lower than
stock market like Singapore, china, and Thailand. Due to
dematerialization the transaction cost of FII have comedown by 60 %
and for mutual funds
by 75%.
Malabika deo conducted a study on depository ordinance: a new
dimension of capital market reform. The objective of the study deals
with operations, functions and benefits of depository system. She
concluded that introduction of depository system would take away
of the ailments facing the present style, making the trading in scrip‘s
fool proof, would serve as a panacea and will ultimately pave the way
for emergence of highly efficient capital market. However improved
banking system, adequate infrastructure and fast information technology
are all going to play a crucial role in the success of depository
system in India.
Chikodikar studies undertaking dematerialization and the
objectives framed was demat process and have detailed discussion on
demat system-its meaning advantages, demat charges (price) depository

16
and depository participants. He found that the electronic trading and
trading of securities is a step in the right direction, paperless trading will
prove to be boon to the stock market in the years to come.
C.R. Ramana conducted study on join in band of electronic
trading in securities .He puts vision at the electronic system of security
demat and remat its features and protocol. He explained the procedure to
sell and buy technique of securities in the demat form.

17
CHAPTER-4

18
DEPOSITORY SYSTEM
The rapid growth in number, volume of value of securities in the Indian capital
market exposed the limitation of handling securities in the physical / paper mode.
The shortcomings of the market became manifest is terms of bad deliveries, delays
in the transfer and irregular settlement etc. The result is, a in line with the
developments in the securities industry worldwide and is the wake of the
increasing trading volume as the local bourse, there emerged the need to replace
the existing settlement and clearing system with depository system or a scrip less
trading system. Technology is revolutionizing every field of human endeavor and
activity. Electronic medium of trading, it was introduced by NSE followed by BSE
in 1995, which inducted efficiency in trading system but physical mode of delivery
also continue to be a drag. Depositary system providing for dematerialization of
securities, custody and trading in electronic book entry form became the
unavailable answer to the capital market played by aforesaid ills.
Bank for international settlements define depositary, as ―A depositary is a
facility for holding securities, enables; Securities transaction to be processed by
book entry. Physical securities may be immobilized by the depository or securities
may be dematerialized (to that they exist only as electronic records)‖.
Depositary means a company formed and registered under companies act, 1956
and which has been granted to certificate of registration under section 12 (1 n) of
the Security Exchange Board of India Act 1992.
To obviate these problems, the Depositories Act, 1996 was passed. It provides for
the establishment of depositories in securities with the objective of ensuring free

19
transferability of securities with speed, accuracy and security. It does so by:- a)
making securities of public limited companies freely transferable, subject to certain
exceptions; (b) dematerialising the securities in the depository mode; and (c)
providing for maintenance of ownership records in a book entry form.
In any stock exchange, trades or transactions have to be settled by either
squaring up the carrying forward positions or settling by payment of net cash or net
delivery of securities. This account settlement period, if it is long leads to several
price distortions and allows for market manipulation. It increases the chances of
speculation resulting in volatility, which hurts the small investors. With the
application of IT in the securities market - screen-based trading and trading
through the Internet - it has been possible to reduce this settlement period.
Concept of a depository system
Depository system essentially aims at eliminating voluminous and cumbersome
paper work involved in the script-based system and offers scope for ‗paperless‘
trading through state of-the-art technology. Depository system enables conversion
of physical securities in the electronic form through a process of
‗dematerialization‘ (also known as ‗demat‘) of share certificates and facilitates
share transactions and transfers electronically without involving any share
certificate or transfer deed. Depository system offers option for converting the
shares from electronic form to physical or paper from through a process of
‗dematerialization‘ (also known as ‗remat‘).
Need for depository system
At present, the Indian stock exchanges are following screen based trading and
electronic settlement system. The market width are also enlarged, quantity of
investors scattered to various distance places from trading and settlement

20
place. There are some problems arising in the settlement and transfer system, in
stock and share trading. In this circumstance there are a limited number of studies
in this area. There is a need for evaluation o f depository system with in the area of
investors prospers. The present study is in this direction of research analysis and
testing by Parasuraman, (1988) have condensed these into five dimensions of
service quality and applied in Depository Participants as follows.
1.Tangibility: Physical facilities, equipment, appearance of personal.
2. Reliability : Ability to perform the promised service dependably and accurately.
3.Responsiveness : Willingness to help customers and provide prompt service.
4.Assurance : Knowledge and Courtesy of employees and their ability to convey
trust and confidence.
5.Empathy : Caring individualized attention the company provides to its
customers.
The first depository set up in India is National Securities Depository Limited
(NSDL) and is promoted by IDBI, UTI and NSE.
How depository system is beneficial?
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.

21
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 themselves.
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.
Safety features in the depository system
To ensure safety to the investors the following measures exist-
Strict norms for becoming depository participant- Net worth criteria, SEBI
approval etc. is mandatory.
DP cannot effect ant debit or credit in the demat account of the investor
without the valid authorization of the investor.
Regulation reconciliation between DP and the depositories.
Periodic inspection by Depositories of the office of the DP and Registrar.
All investors have a right to receive their statements of accounts periodically
from the DP.
In the depository system, 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.
Compulsory internal audit of operations of DP by practicing company
secretary of the chartered accountant every quarter.
Various procedures for backup and safe keeping of data at all the levels.
SEBI has made compulsory trading of shares of all the companies listed in
Stock Exchange in demat form w.e.f 2 January 2002. Hence, if the investor wants

22
to trade in respect of the companies, which have established connectivity with
NSDL & CDSL, he may have to open a beneficiary account.
The main depository players are
a) Depository (new NSDL and CDSL)
b) Issuer companies/Registrars of transfer agent (RTA)
c) Depository participant
d) Investors
e) Brokers (clearing members (CM)
LEGAL FRAMEWORK
Depositories Act, 1996 and is regulated by SEBI. The depository business in India
is regulated by-
The depositories Act, 1996
The SEBI (Depositories and Participants) Regulations, 1996
Bye-laws of Depository
Business rules of Depository
Apart from the above, Depositories are also governed by certain provisions of:-
The Companies Act, 1956
The Indian Stamp Act, 1899
Securities and Exchange Board of India Act, 1992
Securities Contracts (Regulation) Act, 1956
Income Tax Act, 1961
Banker‘s Books Evidence Act, 1891

23
Legal Linkage
ISSUER
DEPOSITORY
DEPOSITORY
PARTICIPANT
INVESTOR
STD. LEGAL
AGREEMENT
STD. LEGAL
AGREEMENT
STD. LEGAL
AGREEMENT

24
DEPOSITORY
A depository is a centralized warehouse of securities (like shares, debentures,
bonds, government securities, mutual fund units etc.) in dematerialized form. The
eligible securities are warehoused in the depository in computerized form to enable
securities trading and other transactions in electronic mode. Thus, the recordings
are done in the form of a book-entry and securities are not issued or exchanged in
physical form. The depository system offers an efficient transfer mechanism by
interfacing with the stock market related clearing operations.
―Depository means a company formed and registered under Companies Act,
1996 and which has been granted a certificate of registration under section 12(1A)
of the Securities and Exchange Board of India Act, 1992‖.
It is system whereby it transfer and settlement of scrip‘s take place not
through the traditional method of transfer deeds and physical delivery of scrip‘s
through the modern system of effective transfer takes of ownership of securities by
means of book entry on the ledgers of the depository without physical movement
of scrip‘s.
Depositories Act, 1996
The Depositories Act, 1996 provides for the establishment of depositories in
securities with the objective of ensuring free transferability of securities with
speed, accuracy and security by:
(a) making securities freely transferable subject to certain exceptions;
(b) dematerialization of the securities in the depository mode; and
(c) providing for maintenance of ownership records in a book entry form.

25
Role of depository
Depository is an organization where the securities of an investor are held in
electronic form through the medium of Depository Participants (DPs). It enables
surrender and withdrawal of securities to and from the depository through the
process of demats and remats. Maintains investor‘s holdings in electronic form.
Effect settlement of securities traded in depository made on the stock exchanges.
Carries out settlement of traders not done on the stoc k exchanges (off-market
trades)
Difference between depository and custodian
Custodian is a person who keeps custody of securities and carry out certain other
custodial activities. Both depository and custodian are different. Following
differences can be enumerated between the two:-
Depository Custodian
Function It a part from keeping the
shares in e-form , manages
the shares on behalf of
investor
It function is merely ‗safe
keeping‘ of shares. It handle
Huge – paper work.
Position It is a institution or can be
called as an organization
itself.
It is an in term diary.
ACT There is a separate Act i.e.
Depositories Act – 1956, a
part from SEBI (depositories
There is no separate Act and
it is regulated by SEBI
(Custodian of Securities)

26
and participant ) Reg . 1996 Reg. 1996
Models of Depository :
1. Dematerialization: It is a process of conversion of physical share –
certificate into electronic – form. So, when a shareholder uses the
dematerialization facility, company takes back the shares, through depository –
system and equal numbers of shares are credited in his account in e-form.
2. Immobilisation : It is a process of storing of physical share certificates, with
depository for safe custody. In this model the original share certificates, can be
withdrawn, as it is lodged in depository method.
Comparison between Bank account and Demat account
S.
No.
BASIS OF SIMILARITY PARTICULARS
1. Security and Convenience
Both are very safe and convenient means of
holding deposits/securities
2. Number of accounts
No legal barrier on the number of bank or
demat accounts that can be opened
3.
Transfer of deposits (funds
or securities)
Funds/securities are transferred only at the
instruction of the account holder
4.
Physical transfer of
money/securities
Physical transfer of money/securities is not
involved

27
5. Nomination Facility Available
Bank Account Vs Demat Account
S.
No.
Basis Of
Differentiation
Bank Account Demat Account
1.
Form of
Holdings/Deposits
Funds Securities
2. Used for Safekeeping of money Safekeeping of shares
3. Facilitates
Transfer of money
(without actually handling
money)
Transfer of shares
(without actually handling
shares)
4. Where to open A bank of choice
A DP of choice (can be a
bank)
5.
Requirement of PAN
Number
Not Mandatory
Mandatory (effective from
April 01, 2006)
6.
Interest accrual on
holdings
Interest income is subject
to the applicable rate of
interest
No interest accruals on
securities held in demat
account
7.
Minimum balance
requirement
AQB* maintainance is
specified for certain bank
accounts
No such requirement
8.
Either or Survivor
facility
Available Not available

28
Depository Participant
Depository Participant just as a brokers act an agent of the investor at the stock
exchange; a Depository Participant (DP) is the representative (agent) of the
investor in the depository system providing the link between the company and
investor through the Depository. The depository participant maintains securities
account balances and intimate the status of holding to the account holder from time
to time. According to the SEBI guidelines, financial institutions like banks,
custodians, stockbrokers etc. can become participants in the Depository.
A DP is one with whom an investor needs to open an account to deal in
shares in electronic form. While the depository can compare to bank with which an
account can be opened. The main characteristics and role of depository participant
are as under:
 Acts as an Agent of Depository
 Customer interface of Depository
 Functions like Securities Bank
 Account opening
 Facilities dematerialization
 Instant transfer on pay-out
 Credits to investor in IPO, rights, bonus
 Settles trades in electronic segment
 Facilitates pledge or hypothecation of securities held in demat account

29
Criteria of eligibility of depository participants
SEBI regulations have selected various categories of market participants who are
eligible to become depository participants. These categories already have a well-
established customer interface network and are, therefore, the ideal choice to
become the agents of depository. These categories are:
Public Financial Institutions
Scheduled Banks
RBI approved foreign banks operating in India
State Financial Corporations
Certified custodian of securities
Clearing corporations of stock exchanges
Registered stock brokers
Non-Banking Financial Companies
Registrars and transfer agents
The regulations specify certain net worth requirements for certain categories. Also
NBFCs are allowed to hold securities on their own behalf only and not clients.
STEPS INVOLVED IN JOINING DEPOSITORY SYSTEM
There are 3 steps in which an investor can covert his physical certificate into
electronic form.
1. Open an account with one of the participants of NSDL (A participant is a market
intermediary through whom NSDL interacts with the investors).
2. Sign an Agreement with the participant.
3. Submit Dematerialisation Request form along with share certificate to the Issuer.

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ROLE OF DEPOSITORY PARTICIPANTS
A depository participant is a representative in the depository system of an investor.
As per the SEBI guidelines, financial institutions/banks/custodians/stock brokers
etc. can become depository participants provided they meet the necessary
requirements prescribed by SEBI. A depository participant is a first point of
contact with the investor. The depository participant serves a link between the
investor and the company through the depository in dematerialization of shares and
other electronic transactions.
BENEFITS OF PARTICIPATION IN DEPOSITORY
1. Immediate transfer of securities
2. No stamp duty on transfer of securities
3. Elimination of risk associated with physical certificate such as bad delivery, fake
securities, etc
4. Reduction in paper work involved in transfer of securities
5. Reduction in transactions cost
6. Nomination facility
7. Change in address recorded with DP get registered electronically with all
companies in which investors hold securities eliminating the need to correspond
with each of them separately
8. Transmission of securities is done by DP eliminating correspond companies
9. Convenient method of consolidation of accounts
10. Holding investment in equities, debt instrument and government securities in
single account

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Functions of depository
1 SERVICES OFFERED BY NSDL
The following services are offered by NSDL to the investors, through its agents
viz. Depository Participants.
Holding the investors securities in electronic form.
Dematerialization and rematerialization of securities.
Settlement of trades in electronic form.
Electronic credit of public offerings and non-cash corporate actions such as
rights, bonus etc.
2 ACCOUNT OPENING
Opening a depository account is as simple as opening a bank account. You can
open a depository account with any DP convenient to you. There is no restriction
on the number of depository accounts a person can open. However, if your existing
physical shares are in joint names, you have to open the account in the same order
of names before you submit your share certificates for demat.
3 DEMATERIALIZATION
Dematerialisation and trading in the demat mode is the safer and faster alternative
to the physical existence of securities. Demat as a parallel solution offers freedom
from delays, thefts, forgeries, settlement risks and paper work. This system works
through depository participants (DPs) who offer demat services and the securities
are held in the electronic form for the investor directly by the Depository.

32
4 REMATERIALIZATION
Remat means converting electronic form into physical form. During a
rematerialization process, the request goes from the DP to the r&t agent via NSDL.
The r&t agent, after processing the request, will print and dispatch the share
certificate directly to you. No transfer duty will be charged to you when you
rematerialize your shares. You have the option of rematerializing your total
holdings or part of it. In addition to this, you have the option to get the certificates
in market lot.

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5 TRADING & SETTLEMENTS
At present, the facility of trading and settlement in dematerialised shares is
available in The Stock Exchange, Mumbai (BSE), National Stock Exchange
(NSE), Bangalore Stock Exchange (BSE), The Calcutta Stock Exchange Ltd
(CSE), The Delhi Stock Exchange Association Ltd (DSE), Ludhiana Stock
Exchange (LSE) and the Over The Counter Exchange of India (OTCEI).
These Stock Exchanges have distinct trading segments viz. the unified (physical)
and depository (dematerialised). In the unified segment, investor has the option of
delivering physical or dematerialised shares. However, with effect from 4th
January, 1999 shares included in the list of select list of companies (including of
RELIANCE ENERGY) can be delivered only in the dematerialised form in all
stock exchanges linked to NSDL. The other stock exchanges, at present, have only
the physical segment. However, in times to come, other stock exchanges too may
be providing depository segments.
The settlement of trades done in the exclusive dematerialised segments at
BSE, DSE, NSE, BSE, CSE, DSE and OTCEI follow the rolling settlement
concept, where trade done on each day is settled after a fixed number of days.
Right now, the dematerialized segments follow T+5 rolling settlement, which
means that trades are settled on the fifth working day from the date of the trade.
Current Scenario
SEBI has since introduced T+2 rolling settlements from April 1, 2003. T+2
settlement cycle means that the final settlement of transactions done on T, i.e.,
trade day by exchange of monies and securities between the buyers and sellers
respectively occurs on second business day after the trade day excluding
Saturdays, Sundays, bank holidays and exchange holidays.

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DAY ACTIVITY
T �Trading and daily downloading of statements showing details of transactions
and margins at the end of each trading day.
T+1 �Confirmation of 6A/7A data by the custodians up to a specified deadline
time. Downloading of securities and funds obligation statements by members.
T+2 �Pay-in of funds and securities and pay-out of funds and securities by pre
specified deadline times. The members are required to submit the pay-in
instructions for funds and securities to banks and depositories respectively.
T+3 �Auction for shortages in delivery of securities.
T+4 �Auction pay-in and pay-out of funds and securities.
6 CORPORATE ACTIONS
When any corporate event such as rights or bonus or dividend is announced for a
particular security, NSDL will give the details of all the clients having electronic
holdings in that security as of the record date to the registrar or share transfer
agent. 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 by the registrar whereas NSDL will do the distribution of securities
entitlements (Rights or Bonus) based on the information provided by the registrar
to all those clients who have opted for electronic allotment.
7 NOMINATION
The investors have an option of nominating persons who would be entitled to
receive shares outstanding in their names in the event of their death. While opening
the account with the DP, the investor is required to fill up an application form for

35
operating the Account , wherein the investor has an option to fill in the names of
their nominees. Shareholders have an option to hold securities in joint names with
or without nomination or in single name with nomination which is optional. Such a
facility has been recently introduced under the Companies (Amendment)
Ordinance, 1998 for shares held in physical form. As far as concerned the nominee
entered by the investor while opening the demat account will be the beneficiary
and shall be deemed to be the member of the Company.
8 ACCOUNT TRANSFER INSTRUCTIONS
An account holder can transfer his account from one DP to another DP account in
the prescribed format given by the SEBI.
9 INTERDEPOSITORY INSTRUCTIONS
There are two depository i.e., NSDL and CSDL. For e.g. if my depository account
is with NSDL, can I receive my securities from an account holder having account
with some other depository in India.
10 FREEZING / DEFREEZING
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
holder can prevent unexpected debits or credits or both, creeping into its account.
The following types of freeze facility available in the NSDL the system may BE
availed of by submitting freeze instructions to the DP in a prescribed form.
Defreezing is vice versa to freeze.

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11 ACCOUNT CLOSING
An account holder can close his account by just filling the closing form, which is
available with the entire depository participant
12 TRANSMISSION
Transmission of securities due to death, lunacy, bankruptcy, and 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. The
DP, after ensuring that the application is genuine, will transfer securities to the
account of the claimant. For this, the claimant must have a depository account. The
major advantage in transmission of dematerialized holdings is that the transmission
formalities for all securities held with a DP can be completed in one go, unlike in
the case of share certificates, where the claimant will have to interact with each
issuing company or its R&T Agent. In case where the deceased was one of the
joint holders in the Client account, the surviving client(s) shall be the person(s)
recognized by depository as having title to the securities held in that joint Client
account.
16 PLEDGING
The Depositories Act permits the creation of pledge against securities. Securities
held in depository mode can be pledged against a loan or credit or such other
facility availed by beneficial owner of such securities.
Procedure:
1. Pledgor gives a pledge creation request to DP who enters it in the system.
2. The request reaches the pledgee‘s DP through the NSDL system. Pledgee is
intimated by his DP.

37
3. Pledgee gibes a pledge creation confirmation to his DP who enters it in the
system.
4..Securities are transferred from ‗free balances‘ head to ‗pledged balances‘ head.
5. Loan is given by pledgee to pledgor outside the NSDL system
Registered Owner/ Beneficial Owner - In the depository system, the ownership
of securities dematerialised is bifurcated between Registered Owner and Beneficial
Owner. For the securities dematerialised, NSDL is the Registered Owner in the
books of the issuer; but ownership rights and liabilities rest with Beneficial Owner.
All the rights, duties and liabilities underlying the security are on the beneficial
owner of the security.
Free Transferability of shares: Transfer of shares held in dematerialised form
takes place freely through electronic book-entry system.
Issuing company and registrar and transfer agent
The issuing company is that organization which issues the securities. The issuing
company sends a list of the shareholders to the depositories. An Issuer of share is
the company which had launched its shares in the market via IPO.
Registrar and Transfer Agents(RTA) are appointed by Issuer companies to act
on their behalf.R&T Agents form an important link between the investors and
issuers in the securities market. A company, whose securities are issued and traded
in the market, is known as the Issuer. The R&T Agent is appointed by the Issuer to
act on its behalf to service the investors in respect of all corporate actions like
sending out notices and other communications to the investors as well as dispatch
of dividends and other non-cash benefits. R&T Agents perform an equally

38
important role in the depository system as well... RTA is a trust company, bank or
similar financial institution assigned by a corporation to maintain records of
investors and account balances and transactions, to cancel and issue certificates, to
process investor mailings and to deal with any associated problems.
Clearing corporations
Clearing corporation is an entity who takes the responsibility of every trade, which
is being dealt on the floor of stock exchange. It acts as a central mechanism for
consolidating and settling transactions instead of the member firms settling each
trade individually amongst themselves. The members of Clearing Corporation are
called as clearing members.
Stock bokers/ stock exchange
Stockbrokers are the intermediaries who are allowed to trade in securities on the
exchange of which they are members. They buy and sell on their own behalf as
well as on behalf of their clients. Traditionally in India, partnership firms with
unlimited liabilities and individually owned firms provided brokerage services.
There were, therefore, restrictions on the amount of funds they could raise by way
of debt. With increasing volumes in trading as well as in the number of small
investors, lack of adequate capitalisation of these firms exposed investors to the
risks of these firms going bust and the investors would have no recourse to
recovering their dues.
Stock Exchange (SE) is an organised market for dealings in securities commonly
referred as secondary market. One of its main functions is price discovery i.e to
cause prices to reflect currently available information about a security.

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Investor
He is a person who wants to deal in shares and whose name is recorded with a
depository. The investor is the real owner of the shares who has lodged them with
the depository through book entry till the day he sells them.

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CHAPTER-5

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DEPOSITORIES IN INDIA
1. National Securities Depository Limited (NSDL)
National Securities Depository Limited is the first depository to be set-up in India.
It was incorporated on December 12, 1995. The Industrial Development Bank of
India (IDBI) - the largest development bank in India, Unit Trust of India (UTI) -
the largest Indian mutual fund and the National Stock Exchange (NSE) - the largest
stock exchange in India, sponsored the setting up of NSDL and subscribed to the
initial capital. NSDL commenced operations on November 8, 1996. The aim is to
provide facilities for holding and handling securities in electronic form.
Ownership
NSDL is a public limited company incorporated under the Companies Act, 1956.
NSDL had a paidup equity capital of Rs. 105 crore. The paid up capital has been
reduced to Rs. 80 crore since NSDL has bought back its shares of the face value of
Rs. 25 crore in the year 2000. However, its net worth is above the Rs. 100 crore, as
required by SEBI regulations.
The following organisations are shareholders of NSDL as on December 31, 2009:
1. Industrial Development Bank of India
2. Unit Trust of India
3. National Stock Exchange of India Limited
4. State Bank of India
5. Oriental Bank of Commerce
6. Citibank N.A.
7. Standard Chartered Bank

42
8. HDFC Bank Limited
9. The Hongkong and Shanghai Banking Corporation Limited
10. Deutsche Bank A.G.
11. Dena Bank
12. Canara Bank
13. Union Bank of India
Management of NSDL
NSDL is a public limited company managed by a professional Board of Directors.
The day-today operations are conducted by the Managing Director and CEO. To
assist the MD and CEO 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.
2. CENTRAL DEPOSITORY SERVICES (INDIA) LTD. (CDSL)
Bombay Stock Exchange Limited (BSE) promoted CDSL jointly with
leading banks such as State Bank of India, Bank of India, Bank of Baroda, HDFC
Bank, Standard Chartered Bank, and 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. CDSL
received the certificate of commencement of business from SEBI in February
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.

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NSDL CDSL
Year operation started 1996 1999
Promoters IDBI, UTI and NSE BSE, SBI, BOB, HDFC,
Standard chartered Bank,
Union Bank etc.
Number of Accounts 1,26,88,865 83,27,482
Value of demat securities
(Rs. Cr)
76,79,027 9,73,908
Number of companies 10,843 12,801
DP service centres 14,641 12,601

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CHAPTER-6

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ROLE OF DEPOSITORY IN CAPITAL MARKET
Introduction to capital market
The capital market consists of primary and secondary markets. The primary market
deals with the issue of new instruments by the corporate sector such as equity
shares, preference shares and debt instruments. Central and State governments,
various public sector industrial units (PSUs), statutory and other authorities such as
state electricity boards and port trusts also issue bonds/debt instruments.
The primary market in which public issue of securities is made through a
prospectus is a retail market and there is no physical location. Offer for
subscription to securities is made to investing community. The secondary market
or stock exchange is a market for trading and settlement of securities that have
already been issued. The investors holding securities sell securities through
registered brokers/sub-brokers of the stock exchange. Investors who are desirous of
buying securities purchase securities through registered broker/sub-broker of the
stock exchange. It may have a physical location like a stock exchange or a trading
floor. Since 1995, trading in securities is screen-based and Internet-based trading
has also made an appearance in India. The secondary market consists of 22 stock
exchanges. The secondary market provides a trading place for the securities
already issued, to be bought and sold. It also provides liquidity to the initial buyers
in the primary market to re-offer the securities to any interested buyer at any price,
if mutually accepted. An active secondary market actually promotes the growth of
the primary market and capital formation because investors in the primary market
are assured of a continuous market and they can liquidate their investments.

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Capital Market Participants
There are several major players in the primary market. These include the merchant
bankers, mutual funds, financial institutions, foreign institutional investors (FIIs)
and individual investors. In the secondary market, there are the stock exchanges,
stock brokers (who are members of the stock exchanges), the mutual funds,
financial institutions, foreign institutional investors (FIIs), and individual investors.
Registrars and Transfer Agents, Custodians and Depositories are capital market
intermediaries that provide important infrastructure services for both primary and
secondary markets.
Market Regulation
It is important to ensure smooth working of capital market, as it is the arena for the
players associated with the economic growth of the country. Various laws have
been passed from time to time to meet this objective.
The financial market in India was highly segmented until the initiation of reforms
in 1992-93 on account of a variety of regulations and administered prices including
barriers to entry. The reform process was initiated with the establishment of
Securities and Exchange Board of India (SEBI).
The legislative framework before SEBI came into being consisted of three major
Acts governing the capital markets:
1. The Capital Issues Control Act 1947, which restricted access to the securities
market and controlled the pricing of issues.
2. The Companies Act, 1956, which sets out the code of conduct for the corporate
sector in relation to issue, allotment and transfer of securities and disclosures to be
made in public issues.

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3. The Securities Contracts (Regulation) Act, 1956, SC(R)A which regulates
transactions in securities through control over stock exchanges. In addition, a
number of other Acts, e.g., the Public Debt Act, 1942, the Income Tax Act, 1961,
the Banking Regulation Act, 1949, have substantial bearing on the working of the
securities market.
Indian Capital Market has been linked to the International Financial Market
and the standard has been increased in terms of efficiency and transparency
through Dematerialization of the Indian Capital Market. Considering the
limitations exposed by the Indian Capital Market in terms of handling and dealing
in securities in paper mode, the main objective of this study is to analyse trends in
growth of dematerialization process in the Indian Capital Market.
Data‘s were collected from the website of Bombay Stock Exchange during
the period of 1998 to 2000 and statistical tools like average percentage and
regression analysis were used.
The findings clearly revealed that the growth in the Dematerialization
process was not keeping pace with the Indian Capital Market due to
unpopularity of Demat, lack of information, short direction after the
inception of the scheme or the earliest time taken to evaluate its popularity.
Dematerialization is the process of conversion of physical certificate in to
electronic balances maintained with the depository participants.
The securities held in dematerialized form are fungible i.e they do not bear
any distinguishing features. In investor should first open an account with a
DP and than request for a dematerialization of his certificates by submitting
the same to the participant.

48
Dematerialization is a process by which physical certificates are converted
into electronic form. The certificates are returned to issuer/ registrar by the
Beneficial owner (BO) through his depository participant (DP) and one then
defaced/ destroyed and an equitant number of securities are credited in the
Bo's securities account maintained by the depository, Indian has opted for
dematerialization route which is a better option is view of the given the huge
paper work involved.
An investor makes a dematerialization request, along with the investor‘s
physical certificates of securities, to the issuer or its registrar through a depository
participant. After prescribed verification and confirmation, their registrar
substitutes in its records NSDL as registered owner is respect of the securities and
informs NSDL accordingly. NSDL then enters the name of the investor as the
beneficial owner of securities, credits the investor‘s accounts and informs the
investors depository participant.The introduction of demat system is made on
December 1996. But the effective trading on demat commenced only on January
1998. Therefore the investors have converted their physical holding into demat
segment to enjoy the benefits of available in demat segment.
According to regulation 28 of the SEBI (Depositories and Participants)
Regulation 1996, the following securities shall be eligible for being held in
Dematerialized form in depository:
a. Shares, scrip, stocks, bonds, debentures, debentures stock or other marketable
securities of any incorporated company or other body corporate.
b. 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 form in a Depository

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WHAT IS DEPOSITORY SYSTEM IN CAPITAL MARKET?
The Depositories Act, 1996, defines a depository to mean "a company formed and
registered under the Companies Act, 1956 and which has been granted a certificate
of registration under sub-section (IA) of section 12 of the Securities and Exchange
BoardofIndiaAct,1992. The principal function of a depository is to dematerialise
securities and enable their transactions in book-entry form. The securities are
transferred by debiting the transferor's depository account and
crediting the transferee's depository account. A depository is very much like a bank
in many of its operations. We can draw an analogy between the two in order to get
a better understanding of the depository system.
In a bank the medium of exchange is money, whereas a depository deals in
securities. In a bank, money is given for safe-keeping. In a depository, securities
are kept safely. Banks hold and transfer funds; depositories perform the same
function with securities. Banks can transfer funds from one account to another
without handling cash; a depository can do the same with physical securities. Just
as in a bank an account is opened to avail of the banking services, an account has
to be opened with a DP for holding scrips in the depository segment.
➨ Either of holders can sign instructions
➨ All joint holders to sign instructions
➨ Minimum balance to be maintained
➨ No minimum balance required
➨ Entitled for interest

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➨ Interest can be earned only by participating in Stock Lending Scheme
➨ Uses balances in accounts
➨ Does not move balances in account without account holder‘s authorization
➨ Nomination is kept confidential
➨ Signature and photograph of nominee to be provided
In case of transactions in a bank account, any one of the joint holders can sign the
instructions (cheques), whereas in the depository, all joint holders are required to
sign all the instructions. Minimum funds balance prescribed by the bank has to be
maintained in the bank account; no minimum balance of securities is required to be
maintained in a depository account. A bank uses the funds held in a bank account
for lending purposes. The securities maintained in a depository account by an
investor can be moved from the account only on basis of a proper
authorisation from the account holder. A depository cannot use the client's security
balances.
Nomination is kept confidential in case of bank accounts. The photograph and
signature of the nominee is required to be affixed on the nomination form for
registering the nomination for a depository account.

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The model for Dematerialization of NSDL
(a) Investor surrender certificates for dematerialization to depositary participant.
(b) Depositary participant intimates NSDL of the request through the system.
(c) Depositary participant‘s submits the certificate to the registers.
(d) Registrar confirms the dematerialization request from NSDL
(e) NSDL up dates its account of informs the depositary participant.
(f) Depositary participant up dates its accounts and inform the investor.
The entire process of dematerialization may take about 15 days. An Investor makes
a dematerialization request, along with the investor physical certificates of
securities, to the issuer or its registrar through a depositary participant. After
prescribed verification and confirmation, their registrar substitutes in its records
NSDL as registered owner in respect of the securities and inform NSDL
accordingly. NSDL then enters the name of the investor as the beneficial owner of
the securities, credits the investor‘s account, and informs the investor‘s depositary
participant accordingly.
investor depository participant NSDL
Register

52
Statement of the problem
The studies have explored the various aspects in the depository system like cost
aspects., difficulties faced by the investor and others of the benefits available to the
investor. The Indian capital market has witnessed numerous changes in the recent
past as seen earlier. Traditionally stock market booms and decline have resulted in
a number of problems for the lay investor. A close introspection of these problems
will reveal that most of them are due to intrinsic nature of the paper based trading
and settlement system. The capital market exposed the limitation of handling and
dealing in securities in physical/paper
mode. The short learning‘s of the market became manifest in terms of bad
deliveries, delays in transfer and irregular settlement e.t.c. The remedial measure
for this may be the system of dematerialization (also called demat) under
depositary system. Hence it is an attempt to study about the trends in the growth of
the demat process its popularity, the
parties involved in the depository system, the location and mechanism in trading
and settlement in demat mode.
Indian capital market has been linked to the International Financial Market,
and the standard has been increased in terms of efficiency and transparency
through Dematerialization of the Indian Capital Market. In this context
dematerialization is one of the right steps taken by the Government to make the
share transfer process easier and on other hand the earlier demerits of the paper
transfer process can be rectified. Dematerialization is a process in which the
company takes the physical certificates of an investor back and equivalent number
of shares is credited in the electronic holdings of the investor.
The Indian Capital Market has been showing rapid grow the in the recent
part this can be observed from the key indicators of the capital market. But this

53
growth has not matched with the supporting infrastructure to handle the growing
volume of paper that has flooded the market choking in our existing system this
has caused a lot of problems like delay in transfer of shares, settlement of claims
high level of failed trade, bad deliveries and high systematic risk exposure etc.
The problem of Indian Capital Market is not its size but the lack of infrastructure
services to handle its present size and potential growth in the future with the entry
of foreign investors and the institutionalization of markets.
There had been tremendous pressure on the stock market. For its smooth
operations the capital market regulator, SEBI, mandated that stock exchanges must
begin the phased introduction of compulsory trading in dematerialized shares by all
investors.

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COMPARISON BETWEEN PHYSICAL AND
DEMAT SHARES
Meaning of physical shares
In the past, shareholders received a physical paper stock certificate that indicated
that they owned "x" shares in a company. Today, brokerages have electronic
records that show ownership details. Owning a "paperless" share makes conducting
trades a simpler and more streamlined process.
While shares are often used to refer to the stock of a corporation, shares can also
represent ownership of other classes of financial assets, such as mutual funds.
At present, some shares are still held in physical form as India is still going
through the process of popularising the demat format. A time will come when
physical shares are finally retired.
Over the last 20 years, India has seen boom in the capital market. There has been
tremendous increase in the number of companies and the shares issued by these
companies. Many investors are participating in the share market today. Earlier,
when companies sold their shares to public, share certificates were issued to
investors in paper format and the owner of the shares to physically hold the
certificates. However, keeping shares in physical form is now leading to a series of
problems.
Currently, many investors—especially senior citizens—who have physical shares
are finding it difficult to convert them into demat form. These investors are also
struggling to claim their bonus shares and split shares issued by their respective
companies. A large number of investors still hold shares in physical form.

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Most of these shares were purchased by investors as long term investment. Also,
they didn‘t intend to trade or sell their shares. Hence these investors didn‘t convert
their shares to demat form and pay for demat or annual maintenance charges of
depository participants.
What is demat?
Dematerialisation is the process of converting physical shares into electronic
format. An investor who wants to dematerialise his shares needs to open a demat
account with Depository Participant. Investor surrenders his physical shares and in
turn gets electronic shares in his demat account.
In order to mitigate the risks associated with share trading in paper
format, dematerialisation concept was introduced in Indian Financial Market.
Dematerialisation or Demat in short is the process through which an investor‘s
physical share certificate gets converted to electronic format which is maintained
in an account with the Depository Participant.
India adopted the demat System successfully and there are plans to facilitate
trading of almost all financial assets in demat format in future. Through this article,
we will try to understand the demat process and its benefits from common
investor‘s perspective.
Storage of Dematerialised Shares – Depository
Depository is the body which is responsible for storing and maintaining investor's
securities in demat or electronic format. In India there are two depositories i.e.
NSDL and CDSL.

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Process of dematerialisation
Dematerialisation process
1. Investor surrenders the physical certificates to the DP for
dematerialisation
2. DP informs the Depository about the request
3. DP submits the certificates to the registrar of the issuer
company
4. Registrar communicates with the Depository to confirm the
request
5. Dematerialisation of the certificates is done by the registrar
6. Accounts are updated by the Registrar & the depository is
informed about the completion of dematerialisation
7. Accounts are updated by the Depository & DP is informed
about the same
8. Demat account of the investor is updated by DP

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Advantages of Demat
Dealing in demat format is beneficial for investors, brokers and companies alike. It
reduces the risk of holding shares in physical format from investor‘s perspective.
It‘s beneficial for brokers as it reduces the risk of delayed settlement and enhances
profit because of increased participation. From share issuing company‘s
perspective, issuance in demat format reduces the cost of new issue as papers are
not involved. Efficiency and timeliness of the issue is also maintained while
companies deal in demat format.
There are a lot of other benefits, but let‘s focus on benefits with respect to
common investor and the same are listed below.
• Demat format reduces the risk of bad deliveries.
• Time and money is saved as you are not dealing in paper now. You need not go
to the notary, broker for taking delivery or submitting the share certificate.
• Liquidity is very high in case of demat format as whole process in automated.
• All the benefits of corporate action like bonus, stock split, rights etc are
managed through the depository leading to elimination of transit losses
• Interest on loan against demat shares are less as compared to physical shares
• Investors save stamp duty while transferring shares in demat format.
• One needs to pay less brokerage in case of demat shares
Demat Conversion
Most of the trading in shares are done in demat format now a day, but there are few
investors who still hold shares in paper format. You cannot deal in paper shares
now, so you need to dematerialise them first. In order to dematerialise

58
physical/paper shares, investors need to fill Demat Request Form (DRF), and
submit the same along with physical shares. DRF is available with the DP and you
simply need to raise a request for demat conversion with the DP.
Their representative will come and get the DRF form signed. So the complete
process of dematerialisation involves:
1. Investor surrenders the physical certificates for dematerialisation to the DP
along with DRF.
2. DP updates the account of the investor and shares are allocated in investor
demat holding.

59
CHAPTER-7

60
OBJECTIVES OF THE STUDY
At Present the Indian stock exchanges are following screen based trading and
electronic settlement system. But investors scattered at various distant places from
trading and settlement place. So there are some problems arising in the settlement
and transfer system. Thus, there is a need to evaluate the effectiveness of Indian
Depository system.
The Main objectives of the study are:
1) To evaluate the performance of the Depository system in India with
reference to NSDL.
2) To study the Organizational frame work, Operational policies, Problems
and Prospects and financial performance of NSDL.
3) To present legislative measures of dematerialization and to understand the
present status of dematerialization in India.
4) To analyze services rendered and quality among the DPs and opinions of
investors with regard to the functioning of NSDL.
5) To identify the Investors expectations from the DP companies and to exhibit
the Investor‘s perceptions on the services offered by the DP companies .
6) To make appropriate and relevant recommendations to the management of
the organization under study.

61
RESEARCH METHDOLOGY
Although India adopted multi-depository system model to provide competitive and
healthy depository system for surpass services to Investors. There is a chance to
various entities to enter into Depository system but only two organizations
National Securities Depository Ltd (NSDL) and Central Depository Services Ltd
(CDSL) are providing depository services presently.
The data has been collected from the following sources:-
1. Primary data
2. Secondary data
Primary data
In this study the questionnaire method have been used to collect primary data.
Secondary data
Secondary data is collected from the website of NSDL (www.nsdl.co.in) and
CDSL (www.cdsl.ac.in), website of Indian central depository system (CDS),
published reports of NSDL and Govt. of India, Depository Act-1996, SEBI Act-
1992, and Capital Market Services, published books and printed material on
financial services or Intermediaries.
Sampling Plan
a. Sampling units – it consist of investors.
b. Sampling size – 50 investors were questioned.

62
CHAPTER-8

63
ANALYSIS AND INTERPRETATION
Q.1 Are you aware of the services of Depository?
Particulars Respondents Percentage
Yes 45 90%
No 5 10%
Total 50 100%
Interpretation:-
The above table shows the opinion of the investors about the Depository services.
90% of the respondents are aware of the Depository services but only 10% are not
aware about the Depository services. So the majority of the investors are aware of
the Depository Services.
Yes
90%
No
10%

64
Q.2 How do you come to know about Demat?
Brokers 12 24%
Friends 28 56%
Newspaper 10 20%
Others 0 0
Total 50 100%
Interpretation:-
The above data represents that 56% of the respondents came to know about the
demat from their friends, 24% from the brokers and 20% from newspaper. So,
most of the investors are aware of it from their friends.
24%
56%
20%
0
0
5
10
15
20
25
30
Brokers Friends Newspaper Others

65
Q.3 In which Depository do you hold an account?
LSE 15 30%
India Bulls 10 20%
Karvy 12 24%
Master Trust 8 16%
Others 5 10%
Total 50 100%
Interpretation:-
From the above table it has been observed that about 30% of the respondents hold
their Depository account in LSE, 20% in Indian Bulls, 24% in karvyi, 16% in
Master Trust and 10% of the respondents hold their Depository account in others.
LSE
30%
India Bulls
20%
Karvy
24%
Master
Trust
16%
Others
10%

66
Q.4 What is your opinion about the Depository System?
Excellent 20 40%
Very Good 15 30%
Good 9 18%
Average 6 12%
Total 50 100%
Interpretation:-
The above table enlists the investor‘s opinion about the Depository. 40% of the
respondents commented that the Depository organization is excellent and another
30% gave their opinion as very good. 18% of the respondents claimed the
Depository system as good and another 12% respondents gave their opinion as
average.
40%
30%
18%
12%
0
5
10
15
20
25

67
Q.5 Since how long have you been operating Demat?
Less than 1 years 10 20%
1-2 years 8 16%
2-3 years 14 28%
More than 3years 18 36%
Total 50 100%
Interpretation:-
It is clear from the above data that 30% of the investors are operating their demat
for more than 3 years, 28% b/w 2-3 years, 20% less than 1 year and 16% are
operating b/w 1-2 years. The majority investors are operating their demat for more
than 3 years.
0
5
10
15
20
Less than 1
years
1-2 years 2-3 years More than
3years
20%
16%
28%
36%

68
Q.6 Are the Depository participants service center are assessable to the
common investors?
Yes 42 84%
No 8 16%
Total 50 100%
Interpretation:-
The above table shows the accessibility of the depository services center to the
common investor. 84% of the total respondents disclosed the essay accessibility of
depository participants‘ service center to the common investor and only 16% has
negative opinion. So it can be concluded that majority of the participants are
positive with accept of accessibility of the depository service centers.
Yes
84%
No
16%

69
Q.7 Do you receive regular statements about your Demat account?
Particulars Frequency Percentage
Yes 40 80%
No 10 20%
Total 50 100%
Interpretation:-
The above table shows that 80% out of the total respondents receive regular
statement about their demat account and only 20% of the respondents did not
receive regular statement about their demat account. So, majority of the investors
are aware of it.
Yes
80%
No
20%

70
Q.8 Are you satisfied with the existing fee structure of Depository system?
Yes 30 60%
No 20 40%
Total 50 100%
Interpretation:-
The above data shows the opinion of the investors on the existing fee structure of
Depository. 60% of the respondents declared their favourism towards the present
fee structure and 40% of the respondents turned negatively. So, the majority
investors have positive opinion.
60%
40%
0
5
10
15
20
25
30
35
Yes No

71
Q.9 Did you know that how to open a Demat account?
Yes 42 84%
No 8 16%
Total 50 100%
Interpretation:-
The table represents that 84% of the investors are aware of the procedure of the
demat account and only 16% of the total investors don‘t know about the demat
procedure. Therefore, majority investors are aware of the procedure of demat.
Yes
84%
No
16%
Yes
No

72
Q.10 What is your opinion on the security of the new transferring and
settlement system?
Positive 50 100%
Negative 0 0%
Total 50 100%
Interpretation:-
The above table shows the opinion on the security of new transfer and settlement
system. It can be clearly inference that all the respondents unanimously voted
positively in favour of the new transfer and settlement system, which can be
termed as the total positive approach.
Positive
100%
Negative
0%
Positive
Negative

73
Q.11 Are you aware about capital markets?
Yes 38 76%
No 12 24%
Total 50 100%
Interpretation:-
The above data depicts that about 76% of the total respondents are aware of capital
market and only 24% of the investors are not aware of capital market.
Yes
76%
No
24%

74
Q.12 What is your usual mode of trading?
Online Trading 8 16%
Trading through Brokers 30 60%
Both 12 24%
Total 50 100%
Interpretation:-
The above data represents that 60% of the total respondents usually prefers trading
through brokers, 16% prefers online trading and 24% respondents prefers both. So,
the majority investors prefers trading through brokers and the brokers charge
commission from such investors.
0
5
10
15
20
25
30
Online Trading Trading through Brokers Both
16%
60%
24%

75
Q.13 What are the most frequent defaults in the service of the DP?
Insufficient information 16 32%
Enquiry problems 23 46%
Delay in statement delivery 6 12%
Delay in transactions 5 10%
Total 50 100%
Interpretation:-
The above diagram shows that 46% of the total investors think that there is
enquiry problem in the services of DP, 32% think it provide insufficient
information, 12% investors say that there is delay in statement delivery & 10%
says there is delay in transactions.
Insufficient
information
32%
Enquiry
problems
46%
Delay in
statement
delivery
12%
Delay in
transactions
10%

76
Q.14 Are you aware of the working of CDSL and NSDL?
Yes 30 60%
No 20 40%
Total 50 100%
Interpretation:-
The above figure depicts that 60% of the total investors are aware of the working
of NSDL and CDSL but 40% of the investors don‘t know that how NSDL &
CDSL perform its work.
60%
40%
0
5
10
15
20
25
30
35
Yes No

77
Q.15 According to you which one is the most important factor for a trading
company to enhance the loyalty and customers?
Provide maximum profit 20 40%
Provide tips from time to time 15 30%
No hidden charges 10 20%
Other factors 5 10%
Interpretation:-
The above data represents that 40% of the total investors think that Profit
maximization is the most important factor for the company to enhance loyality &
customers, 30% thinks that company should provide time to time tips to the
customers, 20% says there should not be any hidden charges charged by the
company and 10% goes for other than the above factors.
40%
30%
20%
10%
0
5
10
15
20
25
Maximum Profits Time to time tips No hidden charges Other factors

78
FINDINGS
 Majority of the investors are aware of the services provided by the
Depository system.
 Most of the respondents are aware of the basic functions of DEMAT A/C
(like procedure of account opening, transaction statement of DEMAT
Account, nomination facility, Re-materialization of DEMAT Securities etc.)
but most of them do not have any knowledge about NSDL, CDSL and
Depositaries Act 1996.
 There are more number of male respondents as compare to female
respondents.
 The investors are satisfied with the fee structure of Depository System.
 Investors believes that Demat form is better than the physical form of
shares.
 Mostly investors wants to get regular statements of their Demat account.
 Investors are aware of the Capital market. They required full information
about the plans before investment.
 Investors invest large amount of their income in order to earn maximum
profits but mostly investors believes that it is very risky to invest in the stock
market.

79
LIMITATIONS OF THE STUDY
The study suffered from certain limitations which are as under:-
Whole area is not covered in this project so only 50 respondents are
representative for complete area.
The overall sample was restricted to respondents of Ludhiana.
It was difficult to convince the investors that information provided by them
was to be used for study purpose only.

80
SUGGESTIONS AND RECOMMENDATIONS
1. Since dematerialization has a great bearing on the creation and protection of
wealth and investment earnings of an investor, DPs must increase their
efforts in promoting enhanced services in general, and in those involving
security and safety in particular.
2. To encourage the existing and prospective shareholders, all efforts should be
made to ensure good returns, in addition to providing greater security and
safety.
3. Since the investors expect better service form depository participants, it
should provide them value-added services.
4. The processing of the DEMAT account opening should be made fast and
non-tedious.
5. The DEMAT a/c holder should be given basic information about NSDL,
CDSL and Depositaries Act 1996.
6. Clear picture of the deductions made by depository participant or the charges
levied on the customers should be provided in black and white.
7. Bank should expand its network by opening its more branches and franchise
and there should be easy accessibility of services rendered by this system.
8. The processing of the demat account opening should be made fast.

81
CONCLUSION
To conclude, it can be said that the demat account opening is same as bank
account, i.e, single or joint accounts or with nominee. The growth rates of demat
account holder in increasing over years. The Indian system of capital market is a
two tire system. Indian government allows holding securities in any form i.e either
in physical securities or in demat form. The transaction of securities is completely
done through electronic form. Investors are not aware of the services offered by
depositories. Most of the speculators do no utilize demat account in day-to-day
online trading. They trade through broker pool account. Dematerialization process
can be done through online trading by utilizing computers.

82
CHAPTER-9

83
BIBLIOGRAPHY
1 BOOKS
Dematerialisation in the Indian Capital Market
By P.V Nishanth
Security analysis and portfolio management
By Prasanna Chandra
Securities Laws and Compliances
By Institute of Company Secretaries of India
2 WEBSITES
www.indiabulls.com
www.moneycontrol.com
www.nseindia.com
www.bseindia.com
www.wikipedia.com
www.sebi.com
www.google.com

84
ANNEXURE

85
QUESTIONNAIRE
1. Name
2. Age
3. Gender Male ( ) Female ( )
4.Current status Student ( ) Serviceman ( )
Professional ( ) Businessman ( )
5. Monthly Income(Rs.) : Below 5000 ( ) 5001-15000 ( )
15001-25000 ( ) Above 250000 ( )
Q.1 Are you aware of the services of Depository?
Yes ( ) No ( )
Q.2 How do you come to know about demat?
Brokers ( ) Friends ( )
Newspaper ( ) Others ( )
Q.3 In which Depository do you hold an account?
LSE ( ) India Bulls ( )
Karvy ( ) Master Trust ( )
Others ( )
Q.4 What is your opinion about Depository system?

86
Excellent ( ) Very Good ( )
Good ( ) Average ( )
Q.5 Since how long have you been operating Demat?
Less than year ( ) 1-2 years ( )
2-3 years ( ) More than 3 years ( )
Q.6 Are the DP Service centre are assessable to the common investors?
Yes ( ) No ( )
Q.7 Are you satisfied with the existing fee structure of Depository system?
Yes ( ) No ( )
Q.8 Do you know how to open a Demat account?
Yes ( ) No ( )
Q.9 What is your opinion on the Security of new transferring and settlement
system?
Positive ( ) Negative ( )
Q.10 What is your usual mode of trading?
Online Trading ( ) Trading through brokers ( )
Both ( )
Q.11 Do you receive regular statements about your Demat account?
Yes ( ) No ( )
Q.12 Are you aware about capital markets?
Yes ( ) No ( )
Q.13 What are the most frequent defaults in the service of the DP?

87
Insufficient information ( ) Enquiry problem ( )
Delay in statement delivery ( ) Delay in transactions ( )
Q.14 Are you aware of the working of CDSL and NSDL?
Yes ( ) No ( )
Q.15 According to you which one is the most important factor for a trading
company to enhance the loyalty and customers?
Provide maximum profits ( )
Provide tips from time to time ( )
No hidden charges ( )
Other factors ( )
“Thanks for your co-operation”

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