The Depositories Act, 1996 is a key piece of legislation in India's financial system that facilitates the electronic holding and transfer of securities, such as shares, debentures, and bonds. It was enacted to modernize the Indian capital market by moving away from the traditional paper-based system.
๐ Overview: The Depositories Act, 1996
๐️ Objective:
To regulate the functioning of depositories in securities and provide for the dematerialization (demat) of securities in a secure and efficient manner.
๐ Key Features of the Act:
1. Depository Defined (Section 2)
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A Depository is a company formed and registered under the Companies Act, 2013, and granted a certificate of registration under the SEBI Act, 1992.
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It acts like a bank for securities, allowing investors to hold and transact in securities electronically.
2. Dematerialization (Demat) of Securities
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The Act provides for conversion of physical securities into electronic form.
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Investors can now hold securities in a Demat account instead of physical certificates.
3. Participants (DPs)
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Depository Participants (like banks, brokers, and financial institutions) are intermediaries between the investor and the depository.
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Investors open Demat accounts through DPs.
4. Types of Depositories in India
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NSDL (National Securities Depository Limited)
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CDSL (Central Depository Services Limited)
5. Rights & Obligations
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Investors retain all rights (e.g., voting, dividend) in dematerialized securities.
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Depositories and DPs must maintain records, ensure security and confidentiality, and provide statements to investors.
6. Beneficial Owner
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The owner of securities held in a Demat account is termed a beneficial owner.
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Their name appears in the records of the depository.
7. Pledge & Hypothecation
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Securities in Demat form can be pledged or hypothecated with the consent of the depository for securing loans.
8. Regulatory Oversight
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The Securities and Exchange Board of India (SEBI) regulates and oversees the functioning of depositories.
๐ก️ Benefits of the Act
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Eliminates risks of loss, theft, and forgery of physical certificates
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Faster and more efficient settlement of trades
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Reduces transaction costs
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Ensures transparency and accountability in securities transactions
๐ Important Sections:
| Section | Description |
|---|---|
| 3 | Registration of Depositories |
| 4 | Agreement between Depository and Participant |
| 6 | Surrender of Certificate of Security |
| 10 | Rights of Depositories and Beneficial Owners |
| 12 | Pledge or Hypothecation of Securities |
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