The depository system performs its function through a network of depository participants (DPs) who interact with the clearing members and investors. Therefore, the depository system works as an Interacting system because it directly interacts with the investors.
There are four parties in a Demat transaction the customers, the depository participants, the depository, and the share registrar and transfer agent (R&T).
Depository System Operations or Process
The steps of the depository system process are as follows:
Step 1: Opening an Account
An investor who wants to avail of the services will have to open an account with a depository through a DP, who could either be a custodian, a bank, a broker, or an individual.
The investor has to enter into an agreement with DP after which he is issued a client account number or client ID number.
PAN card is now mandatory in India to operate a Demat account.
Step 2: Dematerialization
To convert his physical holdings of securities into the dematerialized form, the investor makes an application to the DP in a dematerialization request form (DRF).
Within seven days, the DP forwards the form, along with the security certificates to the issuer or its registrar and transfer agent after electronically registering the request with the depository.
The depository electronically forwards the Demat request to the respective issuer or its registrar and transfer agent, who verifies the validity of the security certificates as well as the fact that the DRF has been made by a person recorded as a member in its register of members.
After verification, the issuer or its registrar and transfer agent authorize an electronic credit for the security o favor of the client.
Thereafter, the depository causes the credit entries to be made in the account of the client.
Step 3: Rematerialization
To withdraw his security balance with the depository, the investor makes an application to the depository through its DP.
He requests for the withdrawal of balance in his account in a rematerialization request form (RRF).
On receipt of the RRF, the participant checks whether sufficient free relevant security balance is available in the client’s account. If there is, the participant accepts the RRF and blocks the balance of the client to the extent of the rematerialization quantity and electronically forwards the request to the depository.
On receipt of the request, the depository blocks the balance of the participant to the extent of the rematerialization quantity n the depository system.
The depository electronically forwards the accepted rematerialization application to the issuer or its registrar agent, which is done on a daily basis.
The registrar and transfer agent confirm electronically to the depository that the RRF has been accepted.
Thereafter, the issuer or registrar and transfer agent dispatches the share certificates arising out of the rematerialization request within 30 days.
Step 4: Distributing Dividend
A company (issuer) or its registrar and transfer agent shall make known the depository of the corporate actions such as dates for book closures, redemption or maturity of a security, conversion of warrants, and call money from time to time.
The depository will then electronically provide a list of the holding of the clients as on the cut off date. the company can then distribute dividends, interest, and other monetary benefits directly to the client on the basis of the list.
If the benefits are the form of securities, the company or its registrar and transfer agent may distribute these, provided the newly created security is eligible security and the client consented to receive the benefits through the depository.
Step 5: Closing an Account
A client wanting to close an account shall make an application in the formal specified to that effect to the participant.
The client may close his account if no balances are outstanding to his credit in the account.
If any balance exists, the account may be closed in the following manner:
- By rematerialization of all its existing balances in his account, and or
- By transferring his security balances to his other account held either with the same participant or with a different participant.
The participant shall ensure that all pending transactions have been adjusted before closing such an account.
After ensuring that there are no balances in the client’s account, the participant shall executive the request for closure of the client’s account.
Objectives of the Depository System
The objectives of the depository system are as follows:
- To reduce the time transfer of securities.
- To avoids the risk of the settlement of securities.
- To enhances the liquidity of securities.
- To reduce the cost of transactions for the investor.
- To create a system for the central handling of all securities.
- To promote the country’s competitiveness by complying with global standards.
- To provide service infrastructure in the capital market.
Activities of the Depository System
The activities of the depository system are as follows:
- Accepting deposit of executives for custody.
- Making computerized book-entry deliveries of securities which are immobilized in its custody.
- Creating computerized book-entry pledges of securities in its custody.
- Providing for withdrawals of securities.
- Undertaking corporate actions like distribution of dividend and interest.
- Redemption of securities on maturity.
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