Depositories Act, 1996 – Securities Laws and Capital Markets Important Questions

Depositories Act, 1996 – Securities Laws and Capital Markets Important Questions

Question 1.
Distinguish between: Depository & Custodian [Dec. 2006 (2 Marks)]
Answer:
Following are the main points of distinction between Depository & Custodian:

Points Depository Custodian
Meaning The depository is an organization, which holds securities of investors in electronic form and provides services related to transactions in securities. A Custodian is a person who carries on the business of providing custodial services to the client.
Transfer of ownership A depository can legally transfer beneficial ownership. Custodians cannot transfer legal ownership.
Regulation Depositories are governed by the SEBI (Depositories & Participants) Regulations, 1996. Custodian are governed by the SEBI (Custodian of Securities) Regulations, 1996
Net wroth The depository must have a net worth of a minimum of ₹ 100 Crores. Custodian must have a net worth of a minimum of ₹ 50 Crores.
Numbers There are only two depositories registered with SEBI. There are many custodians are registered with the SEBI.

Question 2.
Distinguish between: Shares in physical form and Shares in the dematerialized form [June 2008 (4 Marks)]
Answer:
Following are the main points of distinction between ‘Shares in physical | form’ and ‘Shares in dematerialized form’:

Points Shares in physical form Shares in dematerialized form
Nature Share certificates are issued in physical form. No physical scrips are in existence. An only electronic record is maintained by the depository.
Account No necessity of opening accounts. It is necessary to open a Demat account.
Time in transfer Transfer of shares takes a longer time due to the physical movement of documents. Since there is electronic transfer, it takes effect immediately.
Stamp duty To transfer shares held in physical form, stamp duty has to be paid. No stamp duty is payable for transferring the share in dematerialized form.
Theft & forgery There are chances of theft and forgery. The chances of theft and forgery are remote.
Bad delivery There are chances of bad delivery. There are no chances of bad delivery.

Question 3.
Explain the term ‘Demat’. State the benefits of Demat securities. [June 2009 (3 Marks)]
Answer:
‘Demat’ refers to dematerialization which is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form.

The main aim of depositories is to introduce paperless trading and smooth J functioning of settlement of security transactions. Following are the advantages of the depository scheme/Demat:
1. No stamp duty: In the case of transfer of physical shares, stamp duty is payable on the market value of shares being transferred. However, for the transfer of securities in the electronic form no stamp duty is payable.

2. Immediate transfer and registration of securities: Physical transfer of shares was a lengthy process as the process usually takes around three to four months. Since the depository is a system that works in an electronic environment, there is an immediate transfer of securities.

3. Elimination of bad deliveries: In the case of transfer of physical shares, transfers could be withheld for bad deliveries e.g. signature of transfer is not tallying. In the depository environment, the question of bad delivery does not arise Le. they cannot be held “under objection”.

4. Elimination of all risks associated with physical certificates: All risks associated with physical certificates such as delays, loss-in-transit, theft, mutilation, etc. eliminated. This problem does not arise in the depository environment.

5. No “odd lot”: In the traditional system, shares are required to be transferred in lots say 50 or 100. Now, with the introduction of the depository scheme, the concept of an “odd lot” in respect of dematerialized shares stands abolished, i.e. in the Demat mode, a market lot becomes one share.

6. Faster disbursement of non-cash corporate benefits: Depository system provides for direct credit of non-cash corporate benefits like bonus, right issue, and dividend to an investor’s account, thereby ensuring faster disbursement and avoiding the risk of loss in transit.

7. Reduction in transaction cost: In the physical transfer of shares transaction costs like brokerage and handling charges were high. Further courier/postal charges for sending share certificates/transfer deeds are also required to be incurred. But in depository scheme brokerage charges are getting reduced and other charges like courier/postal charges are required at all.

8. Elimination of problems related to change of address of investor, transmission, etc.: In case of change of address or transmission of Demat shares, investors are saved from undergoing the entire change procedure j with each company or registrar. Investors have to only inform their DP with all relevant documents and the required changes are effected in the database of all the companies, where the investor is a registered holder of securities.

9. Elimination of problems related to selling securities on behalf of a minor: A natural guardian is not required to take court approval for selling demands securities on behalf of a minor.

Question 4.
What do you understand by the dematerialization of securities? [Dec. 2009 (5 Marks)]
Answer:
Dematerialization is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form.

An investor will have to first open an account with a Depository Participant g and then request for the dematerialization of his share certificates through the Depository Participant so that the dematerialized holdings can be credited into that account. This is very similar to opening a Bank Account.

Dematerialization of shares is optional and an investor can still hold shares in physical form. However, he/she has to Demat the shares if he/she wishes to sell the same through the Stock Exchanges. Similarly, if an investor purchases shares from the Stock Exchange, he/she will get delivery of the shares in Demat form.

Question 5.
Explain the term: Depository Participants [June 2010 (2 Marks)]
Answer:
A Depository Participant is an agent of the depository through which it; interfaces with the investor and provides depository services.

According to SEBI guidelines, Financial Institutions like banks, custodians, stockbrokers, etc. can become participants in the depository.

DP is one with whom a client needs to open an account to deal in electronic j form. While the Depository can be compared to a Bank, DP is like a branch of a bank with which one can have an account. Therefore, DPS is authorized to maintain accounts of dematerialized shares. They help in the instantaneous electronic transfer of shares held in Demat form through the electronic book-entry system.

Characteristics of a depository participant:

  • Acts as an agent of Depository
  • The customer interface of Depository
  • Functions like Securities Bank
  • Account opening
  • Facilitates dematerialization
  • Instant transfer on pay-out
  • Credits to an investor in IPO, rights, bonus
  • Settles trades in the electronic segment.

Question 6.
The depository system functions very much like the banking system. Comment. [Dec. 2010 (3 Marks)]
Answer:
The Depository system functions very much like the banking system. The following points are given in support of this statement.

  • A bank holds funds in accounts whereas a depository holds securities in accounts for its clients.
  • A bank transfers funds between accounts whereas a depository transfers securities between accounts.
  • Both the bank and the depository are accountable for the safekeeping of funds and securities respectively.

A depository is a system that holds shares in the form of an electronic account. A Depository performs the functions of holding safe-keeping, transferring, and allowing withdrawal of securities like a bank performs functions of holding, safe-keeping, transferring, and withdrawal of money. When you deposit money your money, your account is credited. When you withdraw cash, your account is debited.

The currency notes paid to you will be different from the ones you deposited. Thus, a serial number of currency notes deposited and withdrawn will never be the same – the same will be the situation in the depository scheme. The depository participant with whom you have opened a Demat account gives you a periodic statement of your account just like the bank gives you a statement/passbook regarding your deposit and withdrawal of funds from the accounts.

Question 7.
Dematerialization and immobilization are distinct terms. [Dec. 2011 (3 Marks)]
Answer:
Following are the main points of distinction between dematerialization and immobilization:

Points Dematerialization Immobilization
Meaning Dematerialization is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form. Immobilization is the process where physical share certificates are kept in vaults with the depository for safe custody.
Withdraw of original share certificate Physical share certiíicate surrendered at the time of dematerialization cannot be withdrawn but investors can ask for a fresh certificate by adopting the rematerialization process. The actual owner has the right to withdraw his original share certificate is kept in vaults with the depository.
Cost This model is simple and cost-effective. This model is not popular as it is complex and expensive.

Question 8.
Write a short note on Depository Agreement [June 2011 (4 Marks)]
Answer:
Every depository is required to enter into an agreement with the issuer in respect of securities disclosed as eligible to be held in Demat form. No agreement is required to be entered into where the depository itself is an issuer of securities.

Depository Agreement also sets forth the rights and duties of the depository in respect of the deposited shares and all other securities.

The depository is also required to enter into a tripartite agreement with the issuer, its transfer agent, and itself where the company has appointed a transfer agent.

Question 9.
Write a short note on Depository Participant (DP) [June 2012 (5 Marks)]
Answer:
A Depository Participant is an agent of the depository through which it; interfaces with the investor and provides depository services.

According to SEBI guidelines, Financial Institutions like banks, custodians, stockbrokers, etc. can become participants in the depository.

DP is one with whom a client needs to open an account to deal in electronic form. While the Depository can be compared to a Bank, DP is like a branch of a bank with which one can have an account. Therefore, DPS is authorized to maintain accounts of dematerialized shares. They help in the instantaneous electronic transfer of shares held in Demat form through the electronic book-entry system.

Characteristics of a depository participant:

  • Acts as an agent of Depository
  • The customer interface of Depository
  • Functions like Securities Bank
  • Account opening
  • Facilitates dematerialization
  • Instant transfer on pay-out
  • Credits to an investor in IPO, rights, bonus
  • Settles trades in the electronic segment.

Question 10.
Explain the term: Dematerialization [June 2012 (2 Marks)]
Answer:
Dematerialization is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form.

An investor will have to first open an account with a Depository Participant g and then request for the dematerialization of his share certificates through the Depository Participant so that the dematerialized holdings can be credited into that account. This is very similar to opening a Bank Account.

Dematerialization of shares is optional and an investor can still hold shares in physical form. However, he/she has to Demat the shares if he/she wishes to sell the same through the Stock Exchanges. Similarly, if an investor purchases shares from the Stock Exchange, he/she will get delivery of the shares in Demat form.

Question 11.
Discuss the procedure followed by depository participants regarding issuance and verification of delivery instruction slip (DIS). [June 2013 (4 Marks)]
Answer:
Issuance of DIS: The procedure followed by the Participants with respect to:

  •  Issuance of DIS booklets including loose slips.
  • Existence of controls on DIS issued to Clients including pre-stamping of Client ID and unique pre-printed serial numbers.
  • Record maintenance for issuance of DIS booklets (including loose slips) in the back office.

Verification of DIS: The procedure followed by the Participants with respect to:

  • Date and time stamping (including late stamping) on instruction slips.
  • Blocking of used/reported lost/stolen instruction slips in back office system/manual record.
  • Blocking of slips in the back office system/manual record which are executed in DPM directly.
  • Two-step verification for a transaction for more than ₹ 5 lakhs, especially in the case of off-market transactions.
  • Instructions received from dormant accounts.

Question 12.
Write a short note on Concurrent Audit of Depository Participants (DPs) [Dec. 2013 (3 Marks)]
Answer:

  1. NSDL vide its Circular has provided for concurrent audit of the Depository Participants.
  2. The Circular provides that, the process of Demat account opening, control, and verification of Delivery Instruction Slips (DIS) is subject to Concurrent Audit.
  3. DPS has been advised to appoint a firm practicing CS/CA for conducting the concurrent audit. However, the participants may entrust the concurrent audit to their Internal Auditors.
  4. In respect of account opening, the Concurrent Auditor should verify all the documents including KYC documents furnished by the Clients and verified by the officials of the Participants.
  5. The Concurrent Auditor should conduct the audit in respect of all accounts opened, DIS issued, and controls on DIS during the day, by the 5 next working day.
  6. In case the audit could not be completed within the next working day due to the large volume, the auditor should ensure that the audit is completed within a week’s time.
  7. Any deviation or non-compliance observed should be mentioned in the audit report.
  8. The Management of the DPs should comment on the observations made by the Concurrent Auditor.
  9. The Concurrent Audit Report should be submitted on a quarterly basis in a hard copy to NSDL.
  10. If the Auditor for Internal and Concurrent Audit is the same, a consolidated report may be submitted.

Question 13.
The depository is a boon to the capital market and investor both. Elucidate the statement and bring out the advantage of the depository scheme. [June 2014 (5 Marks)]
Answer:
‘Demat’ refers to dematerialization which is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form.

The main aim of depositories is to introduce paperless trading and smooth functioning of settlement of security transactions. Following are the advantages of the depository scheme/Demat:
1. No stamp duty: In the case of transfer of physical shares, stamp duty is payable on the market value of shares being transferred. However, for the transfer of securities in the electronic form no stamp duty is payable.

2. Immediate transfer and registration of securities: Physical transfer of shares was a lengthy process as the process usually takes around three to four months. Since the depository is a system that works in an electronic environment, there is an immediate transfer of securities.

3. Elimination of bad deliveries: In case of transfer of physical shares, transfers could be withheld for bad deliveries e.g. signature of transfer is not tallying. In the case depository environment, the question of bad delivery does not arise Le. they cannot be held “under objection”.

4. Elimination of all risks associated with physical certificates: All risks associated with physical certificates such as delays, loss-in-transit, theft, mutilation, etc. eliminated. This problem does not arise in the depository environment.

5. No “odd lot”: In the traditional system, shares are required to be transferred in lots say 50 or 100. Now, with the introduction of a depository scheme, the concept of an “odd lot” in respect of dematerialized shares stands abolished, i.e. in the Demat mode, a market lot becomes one share.

6. Faster disbursement of non-cash corporate benefits: Depository system provides for direct credit of non-cash corporate benefits like bonus, right issue, and dividend to an investor’s account, thereby ensuring faster disbursement and avoiding the risk of loss in transit.

7. Reduction in transaction cost: In the physical transfer of shares transaction costs like brokerage and handling charges were high. Further courier/postal charges for sending share certificates/transfer deeds are also required to be incurred. But in depository scheme brokerage charges are getting reduced and other charges like courier/postal charges are required at all.

8. Elimination of problems related to change of address of investor, transmission, etc.: In case of change of address or transmission of Demat shares, investors are saved from undergoing the entire change procedure j with each company or registrar. Investors have to only inform their DP with all relevant documents and the required changes are effected in the | database of all the companies, where the investor is a registered holder | of securities.

9. Elimination of problems related to selling securities on behalf of a minor: A natural guardian is not required to take court approval for selling demands securities on behalf of a minor.

Question 14.
Write a short note on In-Person Verification (IPV) [Dec. 2014 (4 Marks)]
Answer:
SEBI has made it mandatory for all the intermediaries including Depository Participant (DP) to carry out IPV of their clients.

The intermediary shall ensure that the details like the name of the person doing IPV, his designation, organization with his signatures, and date are recorded on the KYC form at the time of IPV.

The IPV carried out by one SEBI registered intermediary can be relied upon by another intermediary.

Question 15.
The depository system functions very much like the banking system. Comment. [Dec. 2014 (3 Marks)]
Answer:
The Depository system functions very much like the banking system. The following points are given in support of this statement.

  • A bank holds funds in accounts whereas a depository holds securities in accounts for its clients.
  • A bank transfers funds between accounts whereas a depository transfers securities between accounts.
  • Both the bank and the depository are accountable for the safekeeping of funds and securities respectively.

A depository is a system that holds shares in the form of an electronic account. A Depository performs the functions of holding safe-keeping, transferring, and allowing withdrawal of securities like a bank performs functions of holding, safe-keeping, transferring, and withdrawal of money. When you deposit money your money, your account is credited. When you withdraw cash, your account is debited.

The currency notes paid to you will be different from the ones you deposited. Thus, a serial number of currency notes deposited and withdrawn will never be the same – the same will be the situation in the depository scheme. The depository participant with whom you have opened a Demat account gives you a periodic statement of your account just like the bank gives you a statement/passbook regarding your deposit and withdrawal of funds from the accounts.

Question 16.
Dematerialization and immobilization are distinct activities. [June 2015 (3 Marks)]
Answer:
Following are the main points of distinction between dematerialization and immobilization:

Points Dematerialization Immobilization
Meaning Dematerialization is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form. Immobilization is the process where physical share certificates are kept in vaults with the depository for safe custody.
Withdraw of original share certificate Physical share certiíicate surrendered at the time of dematerialization cannot be withdrawn but investors can ask for a fresh certificate by adopting the rematerialization process. The actual owner has the right to withdraw his original share certificate is kept in vaults with the depository.
Cost This model is simple and cost-effective. This model is not popular as it is complex and expensive.

Question 17.
Write a short note on Reconciliation of shares under regulation 75 of the SEBI (Depositories & Participants) Regulations, 2018 [June 2015 (4 Marks)]
Answer:
Every issuer shall submit an audit report on a quarterly basis to the concerned stock exchanges audited by a practicing CS or CA.

Purpose of Audit: The audit is conducted for the following purposes:

  • To reconcile total issued capital, listed capital, and capital held by depositories in dematerialized form.
  • To give the details of changes in share capital during the quarter.
  • To give the details of in-principle approval obtained by the issuer from all the stock exchanges where it is listed in respect of further issued capital.
  • To give the updated status of the Register of Members of the issuer.
  • To confirm that securities have been dematerialized as per requests within 21 days from the date of receipt of requests by the issuer.
  • If the dematerialization has not been effected within 21 days, the reasons I for such delay.

The issuer is under an obligation to immediately bring to the notice of the depositories and the stock exchanges, any difference observed in its issued, listed, and the capital held by depositories in dematerialized form.

Reconciliation [Regulation 75]: The issuer or its agent shall reconcile the records of Dematerialized securities with all the securities issued by the issuer, on a daily basis.

However, where the State or the Central Government is the issuer of Government securities, the depository shall, on a daily basis, reconcile the records of j the dematerialized securities.

Question 18.
All securities in the same class are identical and interchangeable. [June 2015 (3 Marks)]
Answer:
The Depository system functions very much like the banking system. The following points are given in support of this statement.

  • A bank holds funds in accounts whereas a depository holds securities in accounts for its clients.
  • A bank transfers funds between accounts whereas a depository transfers securities between accounts.
  • Both the bank and the depository are accountable for the safekeeping of funds and securities respectively.

A depository is a system that holds shares in the form of an electronic account. A Depository performs the functions of holding safe-keeping, transferring, and allowing withdrawal of securities like a bank performs functions of holding, safe-keeping, transferring, and withdrawal of money. When you deposit money your money, your account is credited. When you withdraw cash, your account is debited.

The currency notes paid to you will be different from the ones you deposited. Thus, a serial number of currency notes deposited and withdrawn will never be the same – the same will be the situation in the depository scheme. The depository participant with whom you have opened a Demat account gives you a periodic statement of your account just like the bank gives you a statement/passbook regarding your deposit and withdrawal of funds from the accounts.

Question 19.
Briefly explain the role of a Practicing Company Secretary in the concurrent audit of depository participants. [June 2015 (5 Marks)]
Answer:

  1. NSDL vide its Circular has provided for concurrent audit of the Depository Participants.
  2. The Circular provides that, the process of Demat account opening, control, and verification of Delivery Instruction Slips (DIS) is subject to Concurrent Audit.
  3. DPS has been advised to appoint a firm of practicing CS/CA for conducting the concurrent audit. However, the participants may entrust the concurrent audit to their Internal Auditors.
  4. In respect of account opening, the Concurrent Auditor should verify all the documents including KYC documents furnished by the Clients and verified by the officials of the Participants.
  5. The Concurrent Auditor should conduct the audit in respect of all accounts opened, DIS issued, and controls on DIS during the day, by the 5 next working day.
  6. In case the audit could not be completed within the next working day due to the large volume, the auditor should ensure that the audit is completed within a week’s time.
  7. Any deviation or non-compliance observed should be mentioned in the audit report.
  8. The Management of the DPs should comment on the observations made by the Concurrent Auditor.
  9. The Concurrent Audit Report should be submitted on a quarterly basis in a hard copy to NSDL.
  10. If the Auditor for Internal and Concurrent Audit is the same, a consolidated report may be submitted.

Question 20.
Write a short note on Dematerialization and immobilization [Dec. 2015 (4 Marks)]
Answer:
Following are the main points of distinction between dematerialization and immobilization:

Points Dematerialization Immobilization
Meaning Dematerialization is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form. Immobilization is the process where physical share certificates are kept in vaults with the depository for safe custody.
Withdraw of original share certificate Physical share certiíicate surrendered at the time of dematerialization cannot be withdrawn but investors can ask for a fresh certificate by adopting the rematerialization process. The actual owner has the right to withdraw his original share certificate is kept in vaults with the depository.
Cost This model is simple and cost-effective. This model is not popular as it is complex and expensive.

Question 21.
Depository participant provides a link between the company and investors. Comment. [June 2016 (4 Marks)] Answer:
A Depository Participant is an agent of the depository through which it; interfaces with the investor and provides depository services.

According to SEBI guidelines, Financial Institutions like banks, custodians, stockbrokers, etc. can become participants in the depository.

DP is one with whom a client needs to open an account to deal in electronic j form. While the Depository can be compared to a Bank, DP is like a branch of a bank with which one can have an account. Therefore, DPS is authorized to maintain accounts of dematerialized shares. They help in the instantaneous electronic transfer of shares held in Demat form through an electronic book-entry system.

Characteristics of a depository participant:

  • Acts as an agent of Depository
  • The customer interface of Depository
  • Functions like Securities Bank
  • Account opening
  • Facilitates dematerialization
  • Instant transfer on pay-out
  • Credits to an investor in IPO, rights, bonus
  • Settles trades in the electronic segment.

Question 22.
“Depositary system provides numerous direct and indirect benefits.” [June 2016 (4 Marks)]
Answer:
‘Demat’ refers to dematerialization which is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form.

The main aim of depositories is to introduce paperless trading and smooth J functioning of settlement of security transactions. Following are the advantages of the depository scheme/Demat:
1. No stamp duty: In the case of transfer of physical shares, stamp duty is payable on the market value of shares being transferred. However, for the transfer of securities in the electronic form no stamp duty is payable.

2. Immediate transfer and registration of securities: Physical transfer of shares was a lengthy process as the process usually takes around three to four months. Since the depository is a system that works in an electronic environment, there is an immediate transfer of securities.

3. Elimination of bad deliveries: In case of transfer of physical shares, transfers could be withheld for bad deliveries e.g. signature of transfer is not tallying. In the depository environment, the question of bad delivery does not arise Le. they cannot be held “under objection”.

4. Elimination of all risks associated with physical certificates: All risks associated with physical certificates such as delays, loss-in-transit, theft, mutilation, etc. eliminated. This problem does not arise in the depository environment.

5. No “odd lot”: In the traditional system, shares are required to be transferred in lots say 50 or 100. Now, with the introduction of a depository scheme, the concept of an “odd lot” in respect of dematerialized shares stands abolished, i.e. in the Demat mode, a market lot becomes one share.

6. Faster disbursement of noncash corporate benefits: Depository system provides for direct credit of non-cash corporate benefits like bonus, right issue, and dividend to an investor’s account, thereby ensuring faster disbursement and avoiding the risk of loss in transit.

7. Reduction in transaction cost: In the physical transfer of shares transaction costs like brokerage and handling charges was high. Further courier/postal charges for sending share certificates/transfer deeds are also required to be incurred. But in depository scheme brokerage charges are getting reduced and other charges like courier/postal charges are required at all.

8. Elimination of problems related to change of address of investor, transmission, etc.: In case of change of address or transmission of Demat shares, investors are saved from undergoing the entire change procedure j with each company or registrar. Investors have to only inform their DP with all relevant documents and the required changes are effected in the | database of all the companies, where the investor is a registered holder of securities.

9. Elimination of problems related to selling securities on behalf of a minor: A natural guardian is not required to take court approval for selling demands securities on behalf of a minor.

Question 23.
Write a short note on Rematerialization [June 2017 (4 Marks)]
Answer:
Rematerialization is the process of converting securities held in electronic form in a Demat account back in physical certificate form. For the purpose of rematerialization, the client has to submit the rematerialization request to the DP with whom he has an account. A client can rematerialize his dematerialized holdings at any point in time. The securities sent for rematerialization cannot be traded.

Normally the following procedure is adopted for the dematerialization of shares:

  • Client submits Rematerialization Request Form (RRF) to DP.
  • DP enters the request in its system which blocks the client’s holdings.
  • DP intimates to Depository and simultaneously, DP sends the RRF to the Registrar/Issuer.
  • Registrar/Issuer prints certificates and dispatches them to the client.
  • Registrar/Issuer electronically confirms REMAT to Depository.
  • Client’s account with DP debited.

Question 24.
Write a short note on Designated Depository Participant (DDP) [Dec 2017 (4 Marks)]
Answer:
Designated Depository Participant (DDP) means a person who has been approved by SEBI under Chapter III of the SEBI (Foreign Portfolio Investors) Regulations, 2014. A person shall not act as DDP unless he has obtained the approval of SEBI. As of now, 18 DDP were registered with SEBI which includes is Axis Bank Ltd., HSBC Ltd., India Infoline Ltd., etc.

Eligibility criteria for DDP: SEBI shall grant approval to a person to act as DDP subject to the following conditions:

  • The applicant is a Participant and Custodian registered with the SEBI.
  • The applicant is an Authorized Dealer Category-1 bank authorized by the RBI.
  • The applicant has a multinational presence either through its branches or through agency relationships with intermediaries regulated in their respective home jurisdictions.
  • The applicant has systems and procedures to comply with the requirements of FATF Standards, Prevention of Money-laundering Act, 2002, and the rules and circulars prescribed thereunder.
  • A Certificate of Registration granted to a DDP shall be permanent unless suspended or canceled by SEBI or surrendered by the DDP.

The SEBI had also issued operating guidelines for DDP who would grant registration to Foreign Portfolio Investors (FPI).

DDPs are authorized to grant registration to FPIs on behalf of the SEBI. The application for grant of registration is to be made to the DDP in a prescribed form along with the specified fees.

Question 25.
Write a short note on Concurrent Audit [June 2018 (4 Marks)]
Answer:

  1. NSDL vide its Circular has provided for concurrent audit of the Depository Participants.
  2. The Circular provides that, the process of Demat account opening, control, and verification of Delivery Instruction Slips (DIS) is subject to Concurrent Audit.
  3. DPS has been advised to appoint a firm practicing CS/CA for conducting the concurrent audit. However, the participants may entrust the concurrent audit to their Internal Auditors.
  4. In respect of account opening, the Concurrent Auditor should verify all the documents including KYC documents furnished by the Clients and verified by the officials of the Participants.
  5. The Concurrent Auditor should conduct the audit in respect of all accounts opened, DIS issued, and controls on DIS during the day, by the 5 next working day.
  6. In case the audit could not be completed within the next working day due to the large volume, the auditor should ensure that the audit is completed within a week’s time.
  7. Any deviation or non-compliance observed should be mentioned in the audit report.
  8. The Management of the DPs should comment on the observations made by the Concurrent Auditor.
  9. The Concurrent Audit Report should be submitted on a quarterly basis in a hard copy to NSDL.
  10. If the Auditor for Internal and Concurrent Audit is the same, a consolidated report may be submitted.

Question 26.
Write a short note on Models of depository [June 2018 (4 Marks)]
Answer:
Models of Depository:
Immobilization: Where physical share certificates are kept in vaults with the depository for safe custody. All subsequent transactions in these securities take place in book-entry form. The actual owner has the right to withdraw his physical securities as and when desired. The immobilization of fresh issues may be achieved by issuing a jumbo certificate representing the entire issue in the name of the depository, as the nominee of the beneficial owners.

Dematerialization: No Physical scrip in existence, only electronic records maintained by the depository. This type of system is cost-effective and simple and has been adopted in India.

Question 27.
Explain the following:
(i) Dematerialization
(ii) Fungibility [Dec. 2018 (4 Marks)]
Answer:
Dematerialization: Dematerialization is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form.

An investor will have to first open an account with a Depository Participant and then request for the dematerialization of his share certificates through the Depository Participant so that the dematerialized holdings can be credited into that account. This is very similar to opening a Bank Account.

Dematerialization of shares is optional and an investor can still hold shares in physical form. However, he/she has to Demat the shares if he/she wishes to sell the same through the Stock Exchanges. Similarly, if an investor purchases shares from the Stock Exchange, he/she will get delivery of the shares in Demat form.

Securities in depositories to be in the fungible form [Section 9 of the Depositories Act, 1996]: All securities held by a depository shall be dematerialized and shall be in a fungible form ie. all certificates of the same security shall become interchangeable in the sense that investor loses the right to obtain the exact certificate he surrenders at the time of entry into the depository. It is like withdrawing money from the bank without bothering about the distinctive numbers of the currencies.

Question 28.
What are the objectives of the Depositories Act, 1996?
Answer:
Objectives of the Depositories Act, 1996 are as follows:

  • To provides for the establishment of depositories like NSDL and CDSL.
  • To curb the irregularities in the capital market.
  • To protect the interests of the investors.
  • To pave a way for the orderly conduct of the financial markets.
  • To enable market-free transferability of securities with speed, accuracy, and transparency.
  • To exempt all transfers of shares within a depository from stamp duty.
  • To provide dematerialization of securities in the depositories mode.

Question 29.
An investor holding shares in electronic form can opt-out of in respect of any security and thus can hold shares in physical form. Comment.
Answer:
It is not necessary that an investor should hold shares in dematerialized form. He can opt out of the depository scheme at any time subject to compliance to provisions of section 14 of the Depositories Act, 1996.

Option to opt-out in respect of any security [Section 14]:

  1. If a beneficial owner seeks to opt-out of a depository in respect of any security he shall inform the depositor accordingly.
  2. The depository shall on receipt of intimation make appropriate entries in its records and shall inform the issuer.
  3. Every issuer shall, within 30 days of the receipt of intimation from the depository and on fulfillment of conditions and on payment of fees, issue the certificate of securities to the beneficial owner or the transferee.

Question 30.
Write a short note on Pledging of securities in the dematerialized form [June 2006 (4 Marks)]
Answer:
Pledge or hypothecation of securities held in a depository [Section 12]:
A beneficial owner may with the previous approval of the depository create a pledge or hypothecation in respect of a security owned by him through a depository.

Every beneficial owner shall give intimation of pledge or hypothecation to the depository and depository shall make entries in its records accordingly.

Procedure for pledging securities: Any entry in the records of a depository shall be evidence of a pledge or hypothecation. Securities held in Demat mode can be pledged. A Beneficial Owner (BO) not only pledges his Demat securities but, may also be able to obtain higher loan amounts, with a lower rate of interest. Moreover, the procedure for pledging securities in Demat form is very convenient, both, for the pledgor and the pledge.

The procedure for pledging securities is as follows:

  1. The pledgor and the pledgee must have BO accounts with CDSL. These accounts can be with the same DP or with different DPS.
  2. The pledgor has to fill up the Pledge Request Form (PRF) in duplicate available with his DP.
  3. On receipt of the PRF, the pledgor’s DP shall verify that the securities can be pledged.
  4. The DP then sets up a pledge request in the depository system and a unique Pledge Sequence No. (PSN) will be generated. The PSN number should be recorded on the PRF.
  5. An authorized official of the DP should sign the PRF and stamp it. A copy of the PRF is then given to the pledgor.
  6. One copy of PRF (with the PSN) should be sent to the pledgee by the Pledgor. The Pledgee will then countersign the PRF for acceptance/ rejection of the pledge request and submit the PRF to his DP.
  7. The pledgee’s DP has the facility to access the request. Based on a copy of PRF the pledgee’s DP either accepts or rejects the pledge request.

When dematerialized securities are pledged, they remain in the pledgor BOs Demat account but they are blocked so that they cannot be used for any other transaction.

Question 31.
Write a short note on Fungibility [Dec. 2008 (3 Marks)]
Answer:
Securities in depositories to be ¡n fungible form [Section 9 of the Depositories Act, 1996]: AIl securities held b a depository shall be dematerialized and shall be in a fungible form Le. all certificates of the same security shall become interchangeable in the sense that investor loses the right to obtain the exact certificate he surrenders at the time of entry into the depository. It is like withdrawing money from the bank without bothering about the distinctive numbers of the currencies.

Question 32.
Explain the power of the Central Government to grant immunity under the Depositories Act, 1996. [June 2014 (6 Marks)]
Answer:
Power to grant immunity [Section 24B]: The Central Government may grant immunity to a person who has violated the provisions of the SEBI Act, 1992.

Conditions for granting immunity:

  • SEBI makes a recommendation to the Central Government.
  • The concerned person has made full and true disclosure in respect of the alleged violation.
  • Proceedings for the prosecution for any such offense not have been instituted before granting immunity.
  • The Central Government may impose conditions subject to which immunity shall be granted.

Withdrawal of immunity: An immunity granted to a person may be withdrawn by the Central Government if it is satisfied that:

  • Such person had not complied with the condition on which the immunity was granted, or
  • Such a person had given false evidence.

A consequence of withdrawal of immunity: After the withdrawal of immunity, the concerned person may be tried for the offense of which he appears to have been guilty and shall also become liable to the imposition of any penalty.

Question 33.
All securities in depositories shall be in fungible form. Comment. [June 2016 (4 Marks)]
Answer:
Securities in depositories to be ¡n fungible form [Section 9 of the Depositories Act, 1996]: AIl securities held b a depository shall be dematerialized and shall be in a fungible form Le. all certificates of the same security shall become interchangeable in the sense that investor loses the right to obtain the exact certificate he surrenders at the time of entry into the depository. It is like withdrawing money from the bank without bothering about the distinctive numbers of the currencies.

Securities Laws and Capital Markets Questions and Answers

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