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Trading T+3 at a Glance Book Building Index Futures Options Mutual Fund
Dematerialized Trading
The Indian investor community has undergone sea changes in the past few years. India now has a very large investor population and ever increasing volumes of trades. However, this continuous growth in activities has also increased problems associated with stock trading. Most of these problems arise due to the intrinsic nature of paper based trading and settlement, like theft or loss of share certificates. This system requires handling of huge volumes of paper leading to increased costs and inefficiencies. Risk exposure of the investor also increases due to this trading in paper. Some of these risks are:
The introduction of NSE NEAT and BSE BOLT has increased the reach of capital market manifolds. The increase in number of investors participating in the capital market has increased the possibility of being hit by a bad delivery. The cost and time spent by the brokers for rectification of these bad deliveries tends to be higher with the geographical spread of the clients. The increase in trade volumes lead to exponential rise in the back office operations thus limiting the growth potential of the brokering members. The inconvenience faced by investors (in areas that are far flung and away from the main metros) in settlement of trade also limits the opportunity for such investors, especially in participating in auction trading. This has made the investors as well as broker wary of Indian capital market. In this scenario dematerialized trading is certainly a welcome move.
Dematerialization or "Demat" is a process whereby your securities like shares, debentures etc, are converted into electronic data and stored in computers by a Depository. Securities registered in your name are surrendered to depository participant (DP) and these are sent to the respective companies who will cancel the physical paper after "Dematerialization" and credit your depository account with the DP. The securities on Dematerialization appear as balances in your depository account. These balances are transferable like physical shares. If at a later date, you wish to have these "demat" securities converted back into paper certificates, the same can be done with the help of the Depository.
Depository functions like a securities bank, where the dematerialized physical securities are traded and held in custody. This facilitates faster, risk free and low cost settlement. Depository is much like a bank and perform many activities that are similar to a bank. Following table compares the two. At present there are two depositories in India, National Securities Depository Ltd. (NSDL) and Central Depository Services (CDS).
These depositories have appointed different Depository Participants (DP) for them. An investor can open an account with any of the depositories' DP. But transfers arising out of trades on the stock exchanges can take place only amongst account-holders with NSDL's DPs. This is because only NSDL is linked to the stock exchanges (nine of them including the main ones-National Stock Exchange and Bombay Stock Exchange). In order to facilitate transfers between investors having accounts in the two existing depositories in the country the Securities and Exchange Board of India has asked all stock exchanges to link up with the depositories. SEBI has also directed the companies' registrar and transfer agents to effect change of registered ownership in its books within two hours of receiving a transfer request from the depositories. Once connected to both the depositories the stock exchanges have also to ensure that inter-depository transfers take place smoothly. It also involves the two depositories connecting with each other. The NSDL and CDS have signed an agreement for inter-depository connectivity.
NSDL carries out its activities through various functionaries called business partners who include Depository Participants (DPs), Issuing corporates and their Registrars and Transfer Agents, Clearing corporations/ Clearing Houses etc. NSDL is electronically linked to each of these business partners via a satellite link through Very Small Aperture Terminals (VSATs). The entire integrated system (including the VSAT linkups and the software at NSDL and each business partner's end) has been named as the "NEST" [National Electronic Settlement & Transfer] system. The investor interacts with the depository through a depository participant of NSDL. A DP can be a bank, financial institution, a custodian or a broker.
Transacting the depository way has several advantages over the traditional system of transacting using share certificates. Some of the benefits are:
How the
Depository Services could be Availed A
depository offers its services to the investors through its agents called
Depository Participants (DPs). If the depository service has to be
availed, the investor has to
open an account with a DP. This is similar to opening an account with any
branch of a bank in order to utilise the bank's services. Account
Opening Procedure To
open an account, you can
approach any DP of your choice and fill up an account opening form. You
will have to provide the required paper as requested by the DP. At the
time of opening an account, you have to sign an agreement with DP in the
Depository(in our case, the NSDL) prescribed standard agreement, which details the rights and
duties of the investor and his/her DP. All investors have to submit their
proof of identity and proof of address along with the prescribed account
opening form.
To dematerialize your share certificates you have to:
Dematerialized shares do not have any distinctive or certificate numbers. These shares are fungible - which means that 100 shares of a security are the same as any other 100 shares of that security. The investor can dematerialize only those certificates that are already registered in his name and belong to the list of securities admitted for Dematerialization at NSDL. Shares held in street name (market deliveries) cannot be dematerialized. If the share certificates that investor wants to dematerialize do not belong to the list of securities eligible for Dematerialization specified by NSDL, he can approach the company and request them to sign up with NSDL to make their securities available for Dematerialization. Odd lot share certificates can also be dematerialized. No transfer deed is required
for dematerializing certificates, the certificates have to be accompanied
by a demat request form (DRF) which can be obtained from DPs. It is
compulsory to mention the ISIN number of the company while filling up the
Demat Request form. This, to a certain extent, ensures that the security
mentioned in the Demat Request Form is the same as the one the investor
intends to dematerialize. Dematerialization is not compulsory. According to the Depositories Act, 1996, an investor has the option to hold shares either in physical or in dematerialized form. An investor can hold part of his holdings in demat form and part of his holdings in the form of share certificates for the same security. Although the depository would be a registered owner of securities in the depository, a transaction involving dematerialized securities would not be considered as benami transactions, the Benami Transactions (Prohibition) Act, 1988 have been suitably modified to exclude the securities held by a:
Securities bearing the same distinctive numbers as demat securities can still float in the market. It is a case of forged certificates and normal procedures that are being followed in the physical market will be used to weed them out. The concerned stock exchanges where the securities are listed are informed of the details of securities dematerialized and rematerialized. An investor can dematerialize shares that are pledged with a bank, which is a DP as well.
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 or jumbo lot. If your name has been
wrongly spelt on the certificates given to you after a remat, you can send
it for rectification to the R&T agent along with the relevant
documents.
Selling dematerialized shares in stock exchanges is similar to the procedure for selling physical shares. Instead of delivering physical shares to the broker, you instruct your DP to debit your account with the number of shares sold by you and credit your broker's clearing account. For this, a delivery
instruction has to be given to your DP in a standardized format, which
will be available with your DP. You have to be sure of the execution date
this is the
date on which securities will be actually debited from the seller's
account. If execution date is written on the delivery instruction, the DP
will enter the same in the computer(DPM system )and securities will be
debited from the account only on that date.
In short, for selling demat shares:
There is no difference in
buying the dematerialized shares from market. Once the order is executed, you have to instruct your DP (vide a simple format which is available with the DP) to receive securities from your broker's clearing account. Alternatively, you may give a standing instruction to receive credits into your account and do away with giving a separate receipt instruction each time. You have to ensure that your broker too gives a matching instruction to his DP to transfer the shares purchased on your behalf into your depository account. You should also ensure that your broker transfers the shares purchased from his clearing account to your depository account, before the book closure. This is really important because shares that remain in the clearing account of the broker on the book closure/ record date will not be eligible for corporate benefits like bonus Dividends etc. In brief, the transactions relating to purchase of shares are:
Demat Shares: Are they 100% safe When you buy physical shares from the stock market, you could never be certain of the validity of the title of shares. There were many reasons- the sellers' signature did not match, or the certificates were fake, forged or stolen, and so on. Demat shares are supposed to obviate these problems. Buying shares in the demat form always guarantees you a good title as soon as the settlement is over. The biggest advantage is that the shares you buy come with a clean title and immediately after the settlement on the relevant stock exchange. Rule 100 of market regulator SEBI determines whether the shares delivered in a settlement, are good or not. Under rule 100, The company can still withdraw the shares that have been transferred any number of times, if a transfer is found to be invalid for any reason. EXAMPLE: Suppose A sells physical shares to B and B gets them dematerialized. Later B sells the shares in the stock exchange and C buys them. Meanwhile A discovers that his share certificates were stolen and fraudulently sold by someone else. He gets a court order restraining the company from further transferring the shares and attaching them (currently in possession of C). This is known as 'stop transfer'. So C who has bought dematerialized shares is now struck with the shares. He cannot sell these shares since they would be frozen in his account. In demat shares, pre-demat problems about the validity of a share do not effect the interest of the buyers after dematerialization. Shares go through a verification process at the registrars' before they are dematerialized. Therefore the responsibility lies with the registrar. The registrar must find a remedy if the original transfer of shares, before their dematerialization comes under doubt. But there is a catch. The company and its registrars are not responsible if the reasons for original transfer being invalid were not available at the time of dematerialization. Matters have to be dealt with on a case to case basis. Which means that even demat buyer may find that his shares have been frozen in his demat account. This kind of case has to be contested in court of law by the parties involved. This issue is not directly addressed in The Depositories Act, 1996. SEBI's regulations on depositories and depository participants also do not mention the issue. Matters get more complex if an investor has traded further in shares of the same company in his demat account. Demat shares are fungible and don't have distinctive numbers. It is not easy to track the sale or trade of shares after they are dematerialized. Another worry The Taxman: Another worry in case of
dematerializing the physical holdings is the taxman. Through depositories
or DPs Income Tax department can easily track down your holdings in
capital market. This could be a reason for worry to the people who are
trying to avoid taxes. Security National Security and Depository Ltd. claims to have undertaken sufficient security measures. These measures are:
What is the procedure to open an account with a DP? The account opening form can be obtained from the DP. The procedure to be followed is similar to what you have to follow to open a bank account. How
many Accounts can I open have? What
is the balance I need to holds in my Account? How
many accounts do I need to open for more then one name combination?
If I am holding share in a particular company in my name but the second name in one certificate is of my spouse and in the other of my daughter? I.e. there are two combination? You can dematerialize shares in one account in the same order of holders listed on the share certificate. Thus in this case you will have to open two accounts. Is there a restriction of how many shares I can dematerialize in one account? No, there is no restriction. You can have all your securities deposited in the a single account as long as they are in the similar holding pattern. Can I appoint a nominee?
There is a facility to appointed a nominee by the investor at the time of opening an ac or later. NRI can also appoint a nominee for their A/c However nomination facility is available to companies, trust etc. A minor also, is restricted from nominating anyone by himself or through the guardian. However, a minor can be a nominee. The guardian has to sign on behalf of the minor. Address and photographs of both the minor and the guardian has to be submitted to the Depository.
The
nomination form duly filled-in should be submitted to the DP either at the
time of account opening or later. The account holder, nominee and two witnesses must
sign this form and the name,
address and photograph of the nominee must be
submitted. How
does is the Transmission to Nominee work? In case of the death of the sole holder or all the joint holders, the nominee must submit a duly filled-in transmission
form and give the notarised copy of death certificate and an affidavit in
the prescribed format. After verifying
these documents, the DP will
transmit the securities to the account of the
nominee. Can
a NRI be a Nominee? An
NRI could be appointed as nominated to a depository account. This is
perfectly legal & in accordance to the exchange
regulations Can
a minor sell shares?
A
natural guardian is not required to take court approval for selling demat
securities on behalf of a minor. This eliminated the legal hassle &
smoothen the process Is
there a facility for Transactions through Power of
Attorney? In the absence of the
account holder, a person authorised by the account holder to operate his
account by executing a power of attorney and submitting the same to the
Depository, only can operate the account of an investor. Can I dematerialize shares of any company? No, you can dematerialize
shares of only those companies that have signed agreement to dematerialize
their shares with the depository. Can I dematerialize street
shares/ blank shares?
You cannot dematerialize shares if they are not in your name, ie shares held in street name (market deliveries) cannot be dematerialized. However, when you send shares to the registrar to be transferred to your name you can request that you want those shares in dematerialized form. Since the depository would be a registered owner of securities in the depository, will a transactions involving dematerialized securities be considered as benami transactions? The Benami Transactions (Prohibition) Act, 1988 has been suitably amended to exclude those securities held by
Do I need to sign transfer form for dematerializing the certificates? No, instead you have to fill a demat request form (DRF) which will be supplied by the DP and you don't have to sign a transfer deed. Will the dematerialized shares bear distinctive/ certificate number? No. The dematerialized shares do not bear any distinctive or certificate numbers. Since in the electronic form these shares are fungible thus 100 security of any company are similar to any other 100 shares of that security. Can odd lot shares be dematerialized? Yes. Odd lot share certificates can also be dematerialized. In fact demat has led to abolition of the concept of market lot and you can trade in one of thousands of shares with equal ease and without any price differential. As
a investor how is the Faster settlement cycle helpful to me?
As
a long term investor how will I change address etc?
This
is elimination of problems related to address Change, Transmission etc In
case of change of address or transmission of demat shares, investors are
saved from undergoing the entire change procedure with each company or
registrar. Investors have to only inform their DP with all relevant
documents and the required changes are effected in the database of all the
companies, where the investor is a registered holder of securities Is dematerialization compulsory? It is benefits that makes it very convenient to have a demat a/c Though under the Depositories Act, 1996, there is no compulsion and the investor can hold shares either in physical or in dematerialized form. But according to Sebi's directive certain shares have to be traded compulsorily in dematerialized form where the seller cannot sell in physical form. However, after he has bought the shares the investor can ask for rematerialization of the shares. What
id Market Trade and Off market trade? Any trade done and settled
through a clearing corporation of a Stock Exchange is termed as the Market
Trade. The Off Market Trade is one which is settled directly between two
parties without the involvement of stock exchange or
broker.
Even if the securities are pledged, the pledgor continues to remain the beneficiary holder and will receive benefits of a corporate action, if any. Will there by any change in the way that the investor receives dividend/interest, if the securities he is holding is dematerialised? No, there will be no change. Since the depositories do not handle cash corporate actions, yet. Thus the same procedure that is followed in the physical segment will also be followed in the demat segment. Since the depository has the final list of the beneficial owners it will forward the same to the issuer/ R&T agent of the security for which dividend/interest has to be paid. On the record/book closure date the depository will submit the list of the beneficial owners and based on this list, the issuer/ R&T agent forwards dividend payment to the investor. Will the bonus/ rights issue against the securities he is holding come in demat form. If the investor has dematerialized his holdings? The option is with the investor. If he wants he can get his bonus/ rights entitlement against his holding in dematerialized form or in physical form. If however the investor does not indicate his preference the securities, by default, will be issued in the physical form. If the investor is holding securities in physical form, can he ask bonus/ rights in dematerialized form? Yes, if the investor wants to receive the new security in dematerialized form, the security will be credited to his depository account. Can the investor holding security in dematerialized form, get his bonus/ rights credited to another account? The option is with the investor as to which account he wants to receive this non cash corporate action in. He can receive the same in the same account or a different account. This account details have to be intimated along with the intimation to R&T agent about the form (physical / dematerialized) of allotment of bonus/ rights issue. Will the rights issue form be sent by the depository or Issuer? As is the current practice in physical segment the issuer/ their R&T agent will mail the rights form directly to all the investors including those in the electronic segment. Will
this improve disbursement of non cash corporate benefits?
If the investor requests for dematerialized securities in case of rights/ bonus issue without having a depository account, will the depository open an account automatically for him? Until and unless the investor has a depository account and intimates to the issuer/R&T agent about it he will get his entitlement in the physical form. If there is a fractional bonus, how will it be credited to the individual investors account? As in the physical segment, the fractional part of a bonus entitlement would be paid in cash so in demat form will he receive cash. However the whole part will be credited to his account. How will the investor come to know that he has received his bonus/rights entitlement? The DP will send the investor a statement showing his holding and new transaction details. This statement will reflect investors any bonus/ rights credited into his account. Besides the issuer/ their R&T agent will send a allotment advise to the investor. Will the applicant get any preference in allotment if he has applied in dematerialized form? The basis of allotment is independent to the way in which the security is held or applied for (physical/ dematerialized). Thus no preference in allotment will be given to an applicant who has applied for securities in dematerialized form. If the applicant is allotted securities in dematerialized form, but the details regarding his beneficiary account are incomplete / wrong, will he get physical delivery of allotted securities'? Yes. If the securities cannot be credited to the investor's account they will be dispatched to him in the physical form. If the applicant is allotted securities in dematerialized form, when will he get electronic credit in his account'? If the securities are allotted in the dematerialized form, then the securities would be credited to the investors account any day between allotment date and listing date, at the discretion of the company. How will the applicant come to know that his application for public issue in electronic form has been accepted? The issuer company/ their R&T agent will dispatch the allotment advise giving details like number of shares allotted in dematerialized form, date when they were credited and in which account to the investor. Is it compulsory for a company making public issue of any security to issue the same only in dematerialized form? The companies can do so in physical form also. However, the company law is being amended to the effect that all future public issues above Rs.100 mn to compulsorily offer securities in dematerialized form. How will partly paid up and fully paid up shares be distinguished in the depository? Separate ISINs (International Securities Identification Number) are allotted to partly paid up shares and fully paid up shares and they are also traded separately on the stock exchanges. If the investor who is the sole shareholder dies, how can his heirs claim the securities lying in the beneficiary account? This is a case of transmission, for which the claimants have to fill in a transmission request form, available with the DPs and has to be supported by valid documents. The DP, after satisfying himself that the application is genuine, will transfer securities to the account of the claimant. The claimants must have their depository account. The biggest advantage for transmission of dematerialized holdings is that the transmission formalities for all the securities held with a DP can be completed in one go, unlike in the case of physical segment, where the claimant will have to interact with each issuing company or its R&T Agent to claim his equity. Can dematerialized securities be traded at all the stock exchanges? No. Dematerialized securities can be traded only on those stock exchanges which have already established electronic connectivity with the depository for settlement of dematerialized securities. Does the broker become irrelevant and can an investor trade in dematerialized securities through his DP? No. Trading at the stock exchanges can be done only through a registered trading member (broker) of that stock exchange irrespective of whether the securities are held in physical or dematerialized form. DPs role will only be to facilitate settlement of trade in the dematerialized form, by transferring securities from the account of the seller to the account of the investor. Is it compulsory for every investor to open a depository account to trade in the capital market? Any investor who buys securities from NSE, BSE and CSE may receive his delivery in the dematerialized form. The dematerialized shares can be delivered in the physical segment at the option of the seller. Therefore those investors who buy securities on these exchanges would necessarily have to open a depository account to take delivery of the shares. What is to be done if there are any discrepancies in the statement of holdings? In case of any discrepancy in the statement of holdings, the investor can contact his DP. If the discrepancy cannot be resolved at the DP level, the investor may approach the depository directly. The depository also mails statement of holdings to clients of DPs picked at random. If the balance as indicated by his DP does not tally with the balance in the investors account as indicated by the depository, the investor can seek clarification from his DP/ depository. How confidential are the depository account details? There are strict systems and procedures established to protect the confidentiality of investor's information at the depository so as to ensure that these are available to only authorized persons. There are sufficient checks and balances to ensure that the information is not misused.
What happens if a DP goes bankrupt? In such cases, the investor can transfer his account from the defunct DP to another DP or get his securities rematerialized. The DPs creditors cannot have any lien on the account-holders assets by creditors of the DP or the depository. This means that the client does not take a credit risk on the DP. |