1. Home
    2. /
  2. Maharashtra Board
    3. /
  3. 12th Standard
    4. /
  4. Commerce Group
    5. /
  5. SP
    6. /
  6. Chapter 9 – Depository...

Chapter 9 – Depository System.

11 Dec 2020 4:45 pm

Chapter 9, Depository System, hsc, sp, secretarial practice, maharashtra board, full solution,

Select the correct answer from the options given below and rewrite the statement.

1.In physical mode, securities are held in ______ form.

Options
  • Paper
  • Dematerialization
  • Electronic

2.Risk of losing certificates exists in ______ mode.

Options
  • Physical
  • Dematerialised
  • Digital

3.In Depository System, securities are held in ______ form.

Options
  • Scrip based
  • electronic
  • Physical

4.______ is the institute which facilitates electronic holding of securities.

Options
  • Depository participant
  • Issuer
  • Depository

5.There is no payment of ______ when securities are demated.

Options
  • Octroi
  • Wealth Tax
  • Stamp Duty

6.Depository Act was passed in __________.

Options
  • 1919
  • 1996
  • 1999

7.India has a ______ depository system.

Options
  • sole
  • multi
  • single

8.______ is a constituent of depository system.

Options
  • Government
  • Issuer
  • Trust

9.______ is the oldest depository in India.

Options
  • Dow Jones
  • NSDL
  • CDSL

10.Demat account is opened by ______.

Options
  • Beneficial Owner
  • CDSL
  • SEBI

11.Demated shares are ______.

Options
  • Non-transferable
  • Fungible
  • Bearer

12.______ is a unique code given to a security.

Options
  • IBM
  • BBM
  • ISIN

13.In India ISIN for corporate securities is allotted by ______.

Options
  • NSDL
  • Central Govt.
  • State Govt.

14.______ has to apply for ISIN.

Options
  • Company
  • Depository participant
  • Depositors

15.______ has to pay charges to maintain Demat Account.

Options
  • Investor
  • Issuer
  • Depository

16.NSDL is promoted by ______.

Options
  • NSE
  • BSE
  • FTSE

17.CDSL is promoted by ______.

Options
  • NSE
  • BSE
  • FTSE

Match the pairs.

Group ‘A’Group ‘B’
a) Bad Delivery1) 1956
b) Depository Act2) A 12 digit number/code.
c) ISIN3) Connects Government and Bank.
d) Depository participant4) Second Depository in India.
e) CDSL5) The Issuer Company.
f) Depository6) Problem faced in physical mode.
g) Beneficial owner7) A 10 digit number/code.
 8) Connects Depository and Investor.
 9) First Depository in the world.
 10) Coustodian of securities in electronic form.
 11) Problem faced in electronic mode.
 12) 1996
 13) Government Organisation.
 14) The Investor.

SOLUTION

Group ‘A’Group ‘B’
a) Bad Delivery6) Problem faced in physical mode.
b) Depository Act12) 1996
c) ISIN2) A 12 digit number/code.
d) Depository participant8) Connects Depository and Investor. 
e) CDSL4) Second Depository in India.
f) Depository10) Coustodian of securities in electronic form.
g) Beneficial owner14) The Investor.

Write a word or a term or a phrase which can substitute the following statement.

1.This mode of holding securities may result in loss and theft of certificates.

Match the Columns

SOLUTION

This mode of holding securities may result in loss and theft of certificates. – Physical mode

  2. The organization which holds the securities in electronic mode.

SOLUTION

This mode of holding securities may result in loss and theft of certificates. – Physical mode

3.This system eliminates storing of certificates.

SOLUTION

This system eliminates storing of certificates. – Depository system

4.This system allows faster and easier transfer of securities.

SOLUTION

This system allows faster and easier transfer of securities. – Depository system

5.The oldest Depository of India.

SOLUTION

The oldest Depository of India. – National Security Depository Limited (NSDL)

6.The country where depository system started for the first time.

SOLUTION

The country where depository system started for the first time. – Germany

7.The registered owner of securities.

SOLUTION

The registered owner of securities. – Beneficial owner

8.The Agent of the Depository.

SOLUTION

The Agent of the Depository. – Depository participant

9.This process converts securities into electronic form from physical form.

SOLUTION

This process converts securities into electronic form from physical form. – Dematerialisation

10.This process converts securities into physical form from electronic form.

SOLUTION

This process converts securities into physical form from electronic form. – Rematerialisation

11.This means securities are without distinctive identity number.

SOLUTION

This means securities are without distinctive identity number. – Fungibility

12. is the unique code for security given in depository system.

SOLUTION

This is the unique code for security given in depository system. – ISIN

State whether the following statement is true or false.

1.Physical mode of holding securities is risky.

Options
  • True
  • False

2.Allotment of securities take longer time when in physical mode.

Options
  • True
  • False

3.Transfer of securities is easier in electronic mode.

Options
  • True
  • False

4.Bad delivery is likely in Depository System.

Options
  • True
  • False

5.Depository system began in the USA for the first time in the world.

Options
  • True
  • False

6.India has a multi Depository System.

Options
  • True
  • False

7.Depository system is very similar to banking system.

Options
  • True
  • False

8.DP is a constituent of Depository System.

Options
  • True
  • False

9.DP is an agent of Depository.

Options
  • True
  • False

10.A Bank can work as a DP.

Options
  • True
  • False

11.DRF is required for conversion from physical to electronic.

Options
  • True
  • False

12.ISIN is a unique code given to the specific securities.

Options
  • True
  • False

1.Find the odd one.

Options
  • Elimination of storage of Certificates
  • Theft of Certificates
  • Torn Certificates

2.Find the odd one.

Options
  • NSDL
  • CDSL
  • NBFC

3.Find the odd one.

Options
  • Depository
  • DP
  • RBI

4.Find the odd one.

Options
  • DP
  • BO
  • State Government

5.Find the odd one.

Options
  • Issuer
  • BO
  • Central Government

6.Find the odd one.

Options
  • Issuer
  • BO
  • Central Government

Complete the sentence.

1.Central location for keeping securities in demated form is ______.

SOLUTION

Central location for keeping securities in demated form is depository.

2.Freezing of debit/credit of securities is possible in ______.

SOLUTION

Freezing of debit/credit of securities is possible in depository.

3.First Depository of the world started in the year ______.

SOLUTION

First Depository of the world started in the year 1947.

4.The Indian Depository Act was passed in the year ______.

SOLUTION

The Indian Depository Act was passed in the year 1996.

5.Link between Depository and Investor is ______.

SOLUTION

Link between Depository and Investor is depository participant.

6.Account of securities of the Investors is maintained by ______.

SOLUTION

Account of securities of the Investors is maintained by depository participant.

7.The process which converts physical securities in electronic form is ______.

SOLUTION

The process which converts physical securities in electronic form is dematerialisation.

8.The process which converts digital securities in physical form is ______.

SOLUTION

The process which converts digital securities in physical form is rematerialisation.

9.The Issuer company must register with ______.

SOLUTION

The Issuer company must register with depository.

10.The unique code identifying a security is ______.

SOLUTION

The unique code identifying a security is ISIN.

11.The first depository of India is ______.

SOLUTION

The first depository of India is NSDL.

1.Select the correct option from the bracket.

Group ‘A’Group ‘B’
a) Dematerialization1) ____________
b) ____________2) DP
c) First depository of world3) ____________
d) CDSL4) ____________

(1999, Agent of Depository, Germany, physical to electronic)

SOLUTION

Group ‘A’Group ‘B’
a) Dematerialization1) Physical to electronic
b) Agent of Depository2) DP
c) First depository of world3) Germany
d) CDSL4) 1999

2.Select the correct option from the bracket.

Group ‘A’Group ‘B’
a) First depository in India1) ____________
b) ____________2) Rematerialisation
c) Fungibility3) ____________
d) ____________4) ISIN

(12 digit code, NSDL, Electronic to physical, No distinctive number)

Fill in the Blank

SOLUTION

Group ‘A’Group ‘B’
a) First depository in India1) NSDL
b) Electronic to physical2) Rematerialisation
c) Fungibility3) No distinctive number
d) 12 digit code4) ISIN

Answer in one sentence.

1.What is Depository System?

SOLUTION

The system under which shares are held, transferred, and settled in electronic form is called a depository system.

2.Give examples of action termed as corporate action.

SOLUTION

Payment of dividend, issue of bonus shares, the offering of rights shares, early redemption of debentures, mergers, and acquisitions, etc. are some examples of corporate action.

3.When was Depository Act passed in India?

SOLUTION

The depository Act was passed in 1996 in India.

4.What is a DP?

SOLUTION

Depository Participant (DP) is the agent of the depository. It is an intermediary appointed by the depository.

5.What is Dematerialisation?

SOLUTION

The process of conversion of physical certificates into electronic mode is called dematerialisation.

6.What is Rematerialisation?

SOLUTION

The process of conversion of electronic holdings of securities into physical certificates is called rematerialisation.

7.What is ISIN?

SOLUTION

ISIN is a standard numbering system or code that uniquely identifies a specific securities issue.

8.Name the depositories in India?

SOLUTION

The two depositories in India are National Security Depository Limited (NSDL) and Central Depository Services Limited (CDSL).

Correct the underlined word and rewrite the following sentence.

1.Electronic mode of holding securities is risky.

SOLUTION

Physical mode of holding securities is risky.

2.Allotment and Transfer of securities are time consuming in electronic mode.

SOLUTION

Allotment and transfer of securities are time consuming in physical mode.

3.Banking system leads to a scrip less capital market.

SOLUTION

Depository system leads to a scrip less capital market

4.Storage of Certificates is not required in Physical mode of holding.

SOLUTION

Storage of certificates is not required in electronic/depository mode of holding.

5.India has a single Depository system.

SOLUTION

India has a multi depository system.

6.Depository Participant in India has to register under the partnership act.

SOLUTION

Depository participant in India has to register under the SEBI Act.

7.Demat accounts are opened and maintained by the Depository.

SOLUTION

Demat accounts are opened and maintained by the Depository Participant.

8.Securities are fungible in Physical mode.

SOLUTION

Securities are fungible in demat/electronic mode.

9.SIN is a code given to a company.

SOLUTION

ISIN is a code given to securities.

10.ISIN of Indian Government securities is issued by NSDL.

SOLUTION

ISIN of Indian Government securities is issued by RBI.

1.Arrange in proper order.

  1. Gets Statement of Accounts
  2. Open Demat Account
  3. Submit DRF

SOLUTION

  1. Open Demat account
  2. Submit DRF
  3. Gets statement of accounts

2.Arrange in proper order.

  1. Investor (BO) submits an application for securities to the issuer company.
  2. Depository intimates the DP about crediting BO’s Account.
  3. Issuer company gives details of allotment to Depository.

SOLUTION

  1. Investor (BO) submits an application for securities to the issuer company
  2. Issuer company gives details of allotment to depository
  3. Depositor intimates DP about crediting BO’s account

Explain the following term/concept.

1.Depository system

SOLUTION

The system under which shares are held, transferred, and settled in electronic form is called a depository system. The depository system maintains accounts of the shareholder, enables transfer, collects dividends, bonus shares, etc. on behalf of the shareholder. This system is also called as scripless trading system.

2.Dematerialisation

SOLUTION

The process of conversion of physical certificates into electronic mode is called dematerialisation. The client has to surrender the physical shares certificates along with the Demat Request Form (DRF) to the DP. The DP forwards these to the depository who in turn forwards it to the issuer. After confirmation from issuer, the depository will credit the securities in the Demat A/c with DP.

3.Rematerialisation

SOLUTION

The process of conversion of electronic holding of securities into physical certificates is called as rematerialisation. The client has to submit the Remat Request Form (RRF) to the DP. The DP forwards the RRF to the issuer and the depository. The issuer prints the certificates and sends them to the client and simultaneously confirms the acceptance of remat request to the depository. The depository via the DP debits accounts of the client with those securities.

4.Fungibility

SOLUTION

In financial terms, fungibility means the state of being interchangeable. The securities held in Demat/electronic forms are fungible. They are interchangeable, substitutable, and cannot be distinguished from each other. Securities bear no notable features like a distinctive number, certificate number, or folio number.

5.ISIN

SOLUTION

ISIN is a code that uniquely identifies a specific securities issue. It is a standard numbering system which is accepted globally. In India, ISINs are assigned by SEBI to NSDL (for demated shares). For Government securities, allotment of ISIN is done by the RBI. ISIN consists of a 12 (Twelve) digit alpha-numeric code which is divided into three parts. The company has to apply for ISIN for its securities with documents like a prospectus.

1.Study the following case/situation and express your opinion.

Mr. Z holds 100 shares of Peculiar Co. Ltd. in Physical mode and wishes to convert the same in electronic mode :

  1. Mr. Z holds a Saving Bank Account with CFDH Bank Ltd. Can he deposit his shares in this account for Demat?
  2. What type of account is needed for the same?
  3. Is it the RBI which will be the custodian of shares of Mr. Z after demating?

SOLUTION

  1. No, Mr. Z cannot deposit his shares in his bank account for demat.
  2. A demat account is required for converting physical shares into electronic holding.
  3. No, RBI will not be the custodian of the shares of Mr. Z. The depository i.e. NSDL or CDSL will be the custodian of shares of Mr. Z after demating.

2.Study the following case/situation and express your opinion.

Mr. R holds 100 shares of Peculiar Co. Ltd. in Demat mode :

  1. He wants to transfer one share each to his wife, daughter, and son. Can he do so?
  2. Does he need to submit DRF or DIS if he wants to transfer his shares?
  3. Can he nominate his wife in his Demat account?

SOLUTION

  1. He can transfer one share each to his wife, daughter, and son if they also have a Demat account.
  2. A DRF is a Demat requisition form. The shares held by Mr. R are already in Demat form. So, he has to submit DIS i.e. delivery instruction slip to transfer his shares to his family.
  3. Every depositor at any time has the right to nominate any person as a nominee in the event of his/her death. So, Mr. R can nominate his wife.

3.Study the following case/situation and express your opinion.

Mrs. Z wishes to open a Demat account in her name :

  1. Can she open the account by going to the Mumbai office of NSDL?
  2. Is she required to pay for the opening of the account and its maintenance?
  3. Does she have to send the shares to the respective company for demating?

SOLUTION

  1. No, Mrs. Z cannot open a demat account by going to the Mumbai office of NSDL. NSDL is a depository which is like a central bank. She has to open a demat account with a depository participant (DP).
  2. Yes, Mrs. Z has to pay for the opening of the account and its maintenance for availing services of DP.
  3. No, she doesn’t have to send the shares to the respective company for demating. She has to send the physical share certificates and Demat requisition form (DRF) in triplicate to the DP.

4.Study the following case/situation and express your opinion.

Mr. L wants to demat his 25 shares of Peculiar Co. Ltd. bearing certificate No. 100 and distinctive No. 76-100.

  1. Which form is he required to fill as a written request to the DP?
  2. Does he have to fill the instrument of transfer if he wishes to transfer the same after demat?
  3. Does he have to quote certificate no. and distinctive no. if he wishes to transfer his shares after it is in demat form?

SOLUTION

  1. Mr. L has to fill the ‘Demat Requisition Form’ (DRF) as a written request to the DP.
  2. After demat, if he wishes to transfer the shares, he does not have to fill the instrument of transfer. However, he will have to submit a delivery instruction slip (DIS) to the DP.
  3. The securities in demat form are fungible. They do not have any certificate no. or distinctive no. So, Mr. L does not have to quote any such number after the shares are converted in demat form.

5.Study the following case/situation and express your opinion.

Mr. S holds 50 shares of Peculiar Co. Ltd. in demat form. The company has declared a dividend of ₹ 5/- per share and a Bonus of 1:1 to its shareholders.

  1. How will Mr. S get his dividend?
  2. Will he get a Bonus share in Physical or demat?
  3. Who is entitled to dividend and Bonus: Mr. S or the depository? (NSDL in this case)

SOLUTION

  1. Under the depository system, the account of the investor is automatically credited in case of corporate action. So, Mr. S will get his divided through the depository in his bank account which is linked with the depository.
  2. Since Mr. S holds the shares in demat form, the bonus shares also will be received in demat form and will be directly credited to this demat A/c.
  3. Mr. S is the beneficial owner and hence, he is entitled to the dividend and bonus.

Distinguish between the following.

Dematerlization and Rematerlization

SOLUTION

PointsDematerializationRematerialization
1. MeaningProcess of converting Physical certificates of securities into electronic form.It is the process of conversion of electronic form of securities into physical form.
2. ConversionHere, the paper form of securities is converted into digitally/ electronically held securities.Here, the electronic records are converted into physical/paper form securities.
3. Use of FormIt uses ‘DRF’: Viz. ‘Dematerialization Request Form’ from Investor to the DP.It uses ‘RRF’: viz Rematerialization Request Form’ from Investor to the DP.
4. SequenceThis is an initial process. It is a primary and Principal function of the depositoryThis is a reverse process. It is a secondary and supporting function of the depository. Already demated securities are remated.
5. Identification of SecuritiesDemated securities have no distinctive numbers. They are fungible.Remated securities will have certificates and distinctive numbers as issued by the company.
6. Securities Maintenance AuthorityThe depository is the custodian of securities and records.The issuing company is the record-keeping authority. Securities are maintained by the investor.
7. Difficulty of ProcessDemat is an easy process. Also, it’s not a time-consuming process.Remat is not only a time consuming but also a complex process.

1.Explain disadvantages of physical mode of holding securities.

SOLUTION

Securities can be held in two modes – physical mode and electronic or dematerialised mode. Physical mode means securities are held in the form of paper certificates. The following are the disadvantages of the physical mode of holding securities.

  1. DELAY IN ALLOTMENT OF SECURITIES
    Allotment of new securities takes a longer time.
  2. RISK
    Certificates of papers can be lost, damaged, torn, stolen, misplaced during transit, etc.
  3. RISK OF BAD DELIVERY
    Delivering certificates which are torn, fake, etc. creates problems in buying and selling of securities.
  4. EFFORTS IN DUPLICATING
    Obtaining duplicate certificates (if the original certificate is lost) involves time, effort, and money.
  5. DELAY IN TRANSFER AND TRANSMISSION OF SECURITIES
    More time is involved in the transfer and transmission of securities as it involves the actual handling of physical certificates.

2.Explain any four advantages of Depository system to Investor.

SOLUTION

  1. Elimination of Risk: All risks associated with physical certificates like delays, loss, theft, mutilation, bad deliveries, etc. are totally eliminated.
  2. Safety: It is the safest and secure way of holding securities. The entire system functions under the Depository Act and is monitored by SEBI. e.g. The Investor can keep his account in a ‘Freeze/Lock’ mode to avoid/prevent unexpected debit or credit or both by giving instructions to the DP.
  3. Easy Transfer of shares:
    (a) Efforts in filling transfer forms and lodging the documents is eliminated.
    (b) Also the stamp duty levied on the transfer of physical shares is not applicable.
    (c) Processing time in the transfer of securities is reduced and neither the securities nor the cash is tied/held up for an unnecessarily long time.
  4. Updates and Intimation: The investor is provided with the status of the holdings and transactions by DP and occasionally by the Depository too.
  5. Security against Loan: Dematerialised securities are preferred by banks and financial institutions as security against loans.
  6. No concept of ‘Lots’: The system of odd and even lot stands abolished. The market lot is one share for dematerialised securities.
  7. Nomination Facility: Individual Investors can avail of the nomination facility. This simplifies the process in the event of the death of the investor.
  8. Automatic Credit: The account of investor is automatically credited/debited in case of a change initiated by the company which impacts the securities. This is called ‘Corporate Action’. Few examples which can be termed as Corporate Action are Payment of Dividend, Issue of Bonus Shares, Offering of Rights Shares, Early Redemption of Debentures, Mergers and Acquisitions, etc.

3.Explain four advantages of Depository system to the Company.

Short Note

SOLUTION

  1. Up-to-date Information: The up-to-date information about investors is provided by the depository.
  2. Reduction in costs and efforts: Costs, efforts, and time involved in printing and distribution of certificates in cases of new issues, bonuses, transfers, etc. are saved.
  3. Better Investor – Company Relationships: The complaints arising out of the loss of certificates, signature differences, long lapses of time in executing requests, etc. are substantially reduced. It leads to better communication with investors and increased goodwill for the company.
  4. International Investment: Under Depository System, better and quicker services can be provided and this attracts investments from abroad.

4.Explain Depository as constituent of Depository System.

SOLUTION

  1. It is an organization like the Central Bank where securities are held in electronic form at the investor’s request.
  2. It also provides different services related to different transactions in such securities.
  3. It is responsible for the safe-keeping of the investor’s securities.
  4. There is no direct access to investors with the Depository.
  5. It works as a link between the company and investors.

5.Explain DP as the constituent of Depository system.

SOLUTION

  1. It is the agent of Depository
  2. DP is registered under the SEBI Act. It enjoys rights and obligations as specified under SEBI (Depository and Participants) Regulations of 1996.
  3. It is an intermediary appointed by Depository.
  4. DP acts as a link between the Depository and the investor.
  5. It directly deals with customers. It sends a statement of accounts periodically.
  6. It functions like a securities bank.
  7. It facilitates Dematerialisation.
  8. It credits securities in the event of Rights Issue, Bonus Issue, etc.
  9. It handles instant transfers of pay-outs like dividends, interest, etc.
  10. It settles trade electronically.
  11. The following can work as DP’s:
    a) Financial Institutions
    b) Banks
    c) Approved Foreign Banks
    d) Custodians: Responsible for overseeing operations of assets/funds.
    e) Stock Brokers
    f) Clearing Corporation
    g) NBFC (Non-Banking Financial Company)
    h) Registrar to an Issue or Share Transfer Agents
  12. The DP maintains an account of securities of each investor.
  13. The DP has a unique number for identification.

Justify the following statement.

1.The electronic holding of securities is safer than physical holding.

SOLUTION

  1. Under the depository system, securities are held in electronic form.
  2. Physical certificates can be lost, damaged, torn, stolen, misplaced during transit, etc.
  3. Delivering certificates that are torn, fake, etc. creates problems in buying and selling of securities.
  4. Under the depository system, securities are held in electronic form.
  5. The transfer and settlement of securities are done electronically.
  6. It leads to the elimination of storage and handling of certificates.
  7. So, all risks associated with physical holding are eliminated by the electronic holding of securities.
  8. Hence, the electronic holding of securities is safer than physical holding.

2.Depository provides easy and quicker transfer of shares.

SOLUTION

  1. Under the depository system, securities are held in electronic form.
  2. The transfer and settlement of securities are done electronically.
  3. The efforts that were required in filling transfer forms and lodging the documents are eliminated in the depository system.
  4. Processing time in the transfer of securities is reduced and neither the securities nor the cash is tied/held up for an unnecessarily long time.
  5. Further, stamp duty levied on the transfer of physical shares is also not applicable.
  6. Hence, the depository provides easy and quicker transfer of shares.

3.The depository system results in reduced time, cost, and efforts.

SOLUTION

  1. Under the depository system, securities are held in electronic form.
  2. The transfer and settlement of securities are done electronically.
  3. The efforts that were required in filling transfer forms and lodging the documents are eliminated in the depository system.
  4. Processing time in the transfer of securities is reduced and neither the securities nor the cash is tied/held up for an unnecessarily long time.
  5. Further, stamp duty levied on the transfer of physical shares is also not applicable. So, the cost involved is also eliminated.
  6. Even at the company end, costs, efforts, and time involved in printing and distribution of certificates in cases of new issues, bonuses, transfers, etc. are saved.
  7. Thus, the depository system results in reduced time, cost, and efforts.

4.Depository system is very similar to the Banking system.

SOLUTION

  1. As a bank keeps the money safe. Similarly, a depository system keeps the securities safe.
  2. As in a bank, funds are held in accounts having unique numbers. Similarly, in a depository system, securities are held in accounts having unique IDs.
  3. Like a bank, there is no physical handling of securities during allotments, transfers, etc.
  4. In a bank, the transfer of funds between accounts is done. Similarly, in a depository system, the transfer of securities between accounts is done.
  5. Hence, depository system is very similar to the banking system.

5.DP is an important constituent of Depository system.

SOLUTION

  1. Depository Participant (DP) is the agent of depository. It is an intermediary appointed by depository.
  2. DP is registered under the SEBI Act. It enjoys rights and obligations as specified under SEBI (Depository and Participants) Regulations of 1996.
  3. DP acts as a link between depository and the investor.
  4. It directly deals with customers. It sends statement of accounts periodically.
  5. It functions like a securities bank. The DP maintains account of securities of each investor.
  6. It facilitates dematerialisation. It settles trade electronically.
  7. It credits securities in the event of rights issue, bonus issue, etc. It handles instant transfers of pay-outs like dividend, interest, etc.
  8. Thus, DP is an important constituent of depository system.

6.ISIN is necessary component of Demat.

SOLUTION

  1. ISIN is a code that uniquely identifies a specific securities issue.
  2. It is a standard numbering system which is accepted globally.
  3. ISINs in any country are allotted by that country’s National Numbering Agency (NNA).
  4. In India, ISINs are assigned by SEBI to NSDL (for demated shares). SEBI works as NNA in India.
  5. For Government securities, allotment of ISIN is done by the RBI.
  6. ISIN consists of a 12 (Twelve) digit alpha-numeric code which is divided in three parts.
  7. The DP will be able to transfer the securities to/from the investor’s account only on the basis of the ISIN.
  8. Thus, ISIN is a necessary component of demat.

Justify the following statement.

ISIN is necessary component of Demat

1.What is Depository System and explain its advantages.

SOLUTION

Securities can be held in two modes – physical mode and electronic or dematerialised mode. Under depository system, securities are held in electronic form. The transfer and settlement of securities are done electronically. The depository system maintains accounts of the shareholder, enables transfer, collects dividend, bonus shares etc. on behalf of the shareholder. This system is also called as scripless trading system.

In the depository system, the depository is the custodian of the securities in electronic form and the depository participant (DP) acts as a link between the depository and the investor. Depository system is advantageous to investors and companies alike.

Advantages to Investors :

  1. Safety:
    The depository system is the safest and secure way of holding securities. The entire system functions under the Depository Act and is monitored by SEBI.
    E.g.: the investor can keep his account in a ‘freeze/lock’ mode to avoid/prevent unexpected debit or credit by giving instructions to the depository participant.
  2. Updates and Intimation:
    The DP regularly sends a statement to the investor which provides the status of holdings and transactions. Depository too provides such a statement occasionally.
  3. Risk Elimination:
    All risks associated with physical certificates like delays, loss, theft, bad deliveries, etc. are totally eliminated with depository system.
  4. Easy Transfer of Shares:
    i. The efforts that we required earlier in filing transfer forms and lodging of documents are not required
    ii. Also, the stamp duty levied on transfer of physical shares is not applicable.
    iii. Processing time in transfer of securities is reduced and neither the securities nor the cash is held up for unnecessarily long time.
  5. Facility of Nomination:
    The depository system allows individual investors to avail the nomination facility. In case of death of the investor, the securities are transferred to the account of the person who has been nominated by the investor.
  6. Automatic Credit:
    The account of investor is automatically credited/debited in case of a change initiated by the company which impacts the securities. This is called ‘Corporate Action’. Payment of dividend, issue of bonus shares, offering of rights shares, early redemption of debentures, mergers and acquisitions, etc. are few examples.
  7. No Concept of ‘Lots’:
    In the physical mode, it was compulsory to buy shares in certain lots i.e. lot of 10, lot of 100 etc. This system of ‘lots’ has been abolished with the depository system. The market lot is one share for dematerialised securities.
  8. Security Against Loan:
    Banks and financial institutions also provide loans against dematerialised securities as a collateral (security).

Advantages to Companies :

  1. Up-to-date Information :
    The up-to-date information about investors is provided by the depository.
  2. Reduction in Costs and Efforts :
    Costs, efforts and time involved in printing and distribution of certificates in cases of new issues, bonus, transfers, etc. is saved.
  3. Better Investor – Company Relationships :
    The complaints arising out of loss of certificates, signature differences, long lapses of time in executing requests, etc. is substantially reduced. It leads to better communication with investors and increased goodwill for the company.
  4. Internationl Investments :
    Under depository system, better and quicker services can be provided and this attracts investments from abroad.

2.Explain the constituents of Depository system.

SOLUTION

Under the depository system, securities are held in electronic form. The transfer and settlement of securities are done electronically. The depository system maintains accounts of the shareholder, enables transfer, collects dividends, bonus shares, etc. on behalf of the shareholder. All operations under the depository system are performed by the depository with the help of its constituents as follows:

1) Depository:

  1. It is an organisation like the Central Bank where securities are held in electronic form at the investor’s request.
  2. It also provides different services related to different transactions in such securities.
  3. It is responsible for the safe-keeping of the investor’s securities.
  4. There is no direct access to investors with the depository.
  5. It works as a link between the company and investors.

2) Depository Participant (DP):

  1. It is the agent of the depository.
  2. DP is registered under the SEBI Act. It enjoys rights and obligations as specified under SEBI (Depository and Participants) Regulations of 1996.
  3. It is an intermediary appointed by the depository.
  4. DP acts as a link between the depository and the investor.
  5. It directly deals with customers. It sends a statement of accounts periodically
  6. It functions like a securities bank. The DP maintains an account of securities of each investor.
  7. It facilitates dematerialisation.
  8. It credits securities in the event of rights issues, bonus issues, etc.
  9. It handles instant transfers of pay-outs like dividends, interest, etc.
  10. It settles trade electronically.
  11. Financial institutions, banks, approved foreign banks, custodians, stockbrokers, clearing corporation, nonbanking financial corporations (NBFCs), Registrar, and Share Transfer Agents can work as DPs.
  12. The DP has a unique number for identification.

3) Beneficial Owner (BO):

  1. The BO is the investor of securities who has availed the services of depository participants.
  2. BO is entitled to all rights and benefits and is subject to all liabilities with respect to securities held by the depository. In simple words, the BO is entitled to bonuses, dividends, etc. on the shares held by the depository on his behalf. Similarly, he is also liable for any unpaid amount on shares held by the depository on his behalf.
  3. The BO can also be called as a client of depository and DP.
  4. BO client is required to open a demat account with the DP for the electronic holding of securities.
  5. BO has to pay charges to the DP for availing the services of DP.
  6. BO is given a unique account number in which securities are held.

4) Issuer Company:

  • It is the company that has issued the securities which are dematerialised. It must register with the depository.

                            COMPLETED 

Related posts:

Default ThumbnailChapter 2 -Sources of Corporate Finance. Default ThumbnailChapter 9 -Depository System. Default ThumbnailChapter 3 – Issue of Shares. Default ThumbnailChapter 5 – Members of a company.
All Important Questions Papers with Solutions
CBSE
ICSE
Maharashtra Board
Tamilnadu State Board

VISITORS COUNT

027434
Users Today : 126
Total Users : 27433
Views Today : 695
Total views : 161983

Browse Categories

Archives