Sunday, January 2, 2011

understanding depository system and How to open demat a/c



DEPOSITORY SYSTEM:


The erstwhile settlement system on Indian stock exchanges was also inefficient and increased risk, due to the time that elapsed before trades were settled. The transfer was by physical movement of papers. There had to be a physical delivery of securities -a process fraught with delays and resultant risks. The second aspect of the settlement relates to transfer of shares in favour of the purchaser by the company. The system of transfer of ownership was grossly inefficient as every transfer involves physical movement of paper securities to the issuer for registration, with the change of ownership being evidenced by an endorsement on the security certificate. In many cases the process of transfer would take much longer than the two months stipulated in the Companies Act, and a significant proportion of transactions would end up as bad delivery due to faulty compliance of paper work. Theft, forgery, mutilation of certificates and other irregularities were rampant. In addition, the issuer has the right to refuse the transfer of a security. All this added to costs and delays in settlement, restricted liquidity and made investor grievance redressal time consuming and, at times, intractable.
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 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 order to streamline both the stages of settlement process, the Act envisages transfer ownership of securities electronically by book entry without making the securities move from person to person. The Act has made the securities of all public limited companies freely transferable, restricting the company's right to use discretion in effecting the transfer of securities, and the transfer deed and other procedural requirements under the Companies Act have been dispensed with. Two depositories, viz., NSDL and CDSL, have come up to provide instantaneous electronic transfer of securities.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.

INTRODUCTION BANKS AND FINANCIAL INSTITUTIONS IN THE FACE OF DEPOSITORY PARTICIPANTS:
Now a days many Banks and financial institutions have also come forward to offer Demat services to its customer. Demat account is opened for the purpose of buying and selling stocks/shares of companies.
  (Here in simple words banks and financial institutions works as an agent to NSDL & CDSL)

DEPOSITORY:

The depositories are an important intermediaries in the securities market that is scrip-less or moving towards such a state. In India, the Depositories Act 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 Board of India Act, 1992." The principal function of a depository is to dematerialise securities and enable their transactions in book-entry form.

DEPOSITORY PARTICIPANTS:

A Depository Participant (DP) is described as an agent of the depository. They are the intermediaries between the depository and the investors. The relationship between the DPs and the depository is governed by an agreement made between the two under the Depositories Act, 1996. In a strictly legal sense, a DP is an entity who is registered as such with SEBI under the provisions of the SEBI Act.

BENEFITS OF DEMAT A/C

   Elimination of bad deliveries - In the depository environment, once the holdings of an investor are dematerialised, the question of bad delivery does not arise, i.e., their transfer cannot be rejected due to defect in the quality of the security. All possible reasons for objecting transfer of title due to deficiencies associated with transfer deed and share certificates are completely eliminated since both transfer deed and share certificates are eliminated in depository system.
  • Elimination of all risks associated with physical certificates - Dealing in physical securities has associated security risks of theft of stocks, mutilation or loss of certificates during movements to and from the registrars. These expose the investor to the cost of obtaining duplicate certificates, advertisements, etc. Such problems do not arise in the depository environment.

No stamp duty - There is no stamp duty for transfer of equity instruments and units of mutual funds in the depository system. In the case of physical shares, stamp duty of 0.5% is payable on transfer of shares.

Immediate transfer and registration of securities - In the depository environment, once the securities are credited to the investors account on pay out, he becomes the legal owner of the securities. There is no further need to send it to the company's registrar for transfer of ownership or registration which is necessary in the case of physical securities. This process normally takes longer than the statutory prescribed period of two months thus exposing the investor to opportunity cost of delay in transfer and to risk of loss in transit. To overcome this, the normally accepted practice is to hold the securities in street names, i.e., not to register the change of ownership. However, if the investors miss a book closure, the securities are not good for delivery and the investor would also stand to loose his corporate entitlements.

Faster settlement cycle - With the introduction of electronic form of settlement, Indian Capital markets have moved from 15 day long settlement cycle to T+2 settlement cycle where the settlement takes place on 2nd day from the day of trading. This enables faster turnover of stock and enhances liquidity with the investor.

Buyer is secured - In the physical environment, seller was secured since the sale proceeds were always fully realisable but the buyer was not, since it was not certain whether shares purchased will get transferred or not. The market principle that buyer is king did not apply to the capital market. This situation has now been corrected.

Faster disbursement of non-cash corporate benefits - It provides of non-cash corporate entitlements like rights, bonus, etc., to an investor's account, therebyensuring faster disbursement and avoiding the risk of certificates getting lost in transit.

Reduction in rate of interest on loans - Some banks provide this benefit against pledge of dematerialised securities. Dematerialised securities eliminate hassles/risks like getting securities registered in their name at the time of book closure if the pledgee defaults in repayment. Also eliminated is the risk of stocks coming under objections when they are sent to the company's registrar for registration, if the pledge has to be invoked.

Increase in maximum limit of advances - This has increased from Rs. 10 lakh to Rs. 20 lakh per borrower. There is also a reduction in minimum margin from 50% to 25% by banks for advances against dematerialised securities as per the Monetary and Credit Policy of Reserve Bank of India for the first half of 1998-99.

Reduction in brokerage - Since introduction of electronic settlement of securities there has been a significant fall in the brokerage charged for brokers for effecting and settling

Convenient portfolio monitoring - Client can monitor portfolio by checking a single statement of holding/transaction.

Newer services - Opportunities like pledge/hypothecation and stock lending are given specifically by the depository system.

Increased volumes - Due to ease in transaction and reduced costs, many players have entered/ increased their transactions. This helps in improving liquidity.


Elimination of problems related to nomination - An account holder can get securities in all companies transmitted/transferred to his account by completing formalities with a single entity i.e. DP. He need not deal with all companies individually.

OTHER BENEFITS

 (i)       e-Instructions

           One can transfer securities 24 hours a day, 7 days a week through Internet & Interactive Voice Response (IVR) at a lower cost. Now with “Speak to transfer”, one can also transfer  or pledge instruction through  customer care officer of the concerned bank
  
(ii)      Consolidation of Demat Account

          Under this one can Dematerialize the physical shares in various holding patterns  and consolidate all such scattered holdings into primary demat account at reduced cost.

(iii)     Digitally Signed Statement

One can receive account statement and bill by email.

(iv)     Corporate Benefit Tracking.

One can track dividend, interest, bonus etc through one’s account statement.
Mobile Request

          Access one’s Demat account by sending SMS to enquire about Holdings,
Transactions, Bill & ISIN details.


(iv)     Corporate Benefit Tracking.

One can track dividend, interest, bonus etc through one’s account statement.
Mobile Request

Access one’s Demat account by sending SMS to enquire about Holdings,
Transactions, Bill & ISIN details.

(v)      Mobile Alerts

Receive SMS alerts for all debits/credits as well as for any request which cannot be processed.

(vi)   Instant trade matching 

(vii)   Maintain the critical instructions of clients and give them a feedback on each one of those
instructions.

(viii)  Give an acknowledgement for any document that a client submits.


TYPES OF DEMAT A/C AND PROCEDURE FOR OPENING OF A DEMAT A/C

Demat a/c is just similar to a normal bank a/c 
but the only difference is that in case of bank a/c there u  put  your money, but in case of demat a/c u put your share/securities.
  For an individual there generally Beneficiary Account is operated.

This is an account opened by investors to hold their securities in dematerialised form with a depository and to carry out the transactions of sale and purchase of such securities in bookentry form through the depository system. A beneficiary account holder is legally entitled for all rights and liabilities attached to the securities (i.e. equity shares, debentures, overnment securities, etc.) held in that account. Therefore, the account is called beneficial owner account". A beneficiary account can be in the name of an individual, corporate, Hindu Undivided Family (HUF), minor, bank, financial institution, trust, etc. or the broker himself for the purpose of his personal investments in demat form. The account is opened with a DP.

DOCUMENTS TO BE SUBMITTED:

(a) Proof of Identity (POI) 

I. Passport
II. Voter ID Card
III. Driving license
IV. PAN card with photograph
(ANY ONE  OF THE ABOVE)

(b) Proof of address (POA) 
I. Ration card
II. Passport
III. Voter ID Card
IV. Driving license
V. Bank passbook                                                                                                         
  (ANY ONE  OF THE ABOVE)

(C) Common Information
The process of opening an account with a depository, nature of such an account, and various
factors to be considered for opening a depository account are explained below. Some details
are common to all types of accounts. These are:
1. Name of the holder
2. Date of birth (for individual accounts)
3. Occupation
4. Address & phone/fax number
5. Bank details like name of bank, type of account (current/savings), account number, branch
address, MICR, etc.
6. PAN number
7. Details of nomination (for individual accounts only)
8. Specimen signatures
9. MAPIN UIN (s)
10. E-mail address
11. Mobile number
12. Address for communication

All the above documents and information is to be submitted along with Demat a/c opening form to  the sub broker/Depository Participant or Dealer concerned    

No comments:

Post a Comment