The Need For Depository Systems In India

The Need For sedimentation Systems In IndiaWith the existence of 23 recognized wrinkle supervene upons, Indian majuscule merchandise has been witnessing rapid process in recent past. However, this harvesting has not matched with supporting infrastructure to handle the growe volume of report card that has flooded the food commercialize choking and existing corpse. This has ca utilize problems like delay in transfer, long block periods, adult deliveries etc. With the view to globalize Indian capital market in a real sense, the g all overnment of India has initiated a obligation of financial reforms that were initiated in 1991 as part of the structured reforms comprising industrial de-regulation, privatization and globalization. A second joint committee on financial frame with Sh. Narsihma Rao as the chairman has establish up in 1991, which make for reaching recommendations for banking sector and non-banking financial sector to improve the flexibility and operational e fficiency of the markets. Securities Exchange gore of India, Reserve Bank of India, Department of Company Affairs and Ministry of pay be the important regulatory bodies of the capital market measuring the effective and efficient functioning of the market.SEBI withal constituted a number of committees such as G.S. Patel military commission to look backward the system of carry forward minutes in the beginning exchanges, Malegram Committee to review the disclosure practices of companies in primary market, B lose committee to examine problems pertaining to transport shargons. The earlier system, a theme based mode, entails cumbersome legal formalities for the purpose of transfer of securities and settlement of transaction theorem. The earlier system suffered from the following shortcomings, at that placeby arising the collect for depositary system, these be pretermit of supporting infrastructure, Problems in transactions, Delayed settlements, coast be of transaction, Transactions end up as bad deliveries due to faulty compliance of physical composition work, mismatch of signatures on transfer deeds with specimen record of the bangr, Theft, mutilation of certificates and some other irregularities. The modern system i.e. deposit system is the system whereby the transfer and settlement of scrips take place not done transfer deeds and physical delivery of scrips which atomic number 18 traditional precisely through the modern system of effecting transfer of monomania of securities by means of book entry on the ledgers of the depositary with out(a) physical movement of scrips.History of crease exchangesThe Indian stock markets are nearly 128 years ageing, with the Bombay stock exchange, the oldest of them functioning since 1875. At present in that location are 23 recognized stock exchanges. Stock exchanges are the most perfect type of market for securities whether of government and semi-government bodies or other public bodies as excessi vely for appoints purchases and sales of shares are made in the conditions of the competitions. The bargains that are struck in the trading ring by the members of the stock exchanges are at the fairest prices find out by the basic laws of supply and demand.Development in the capital marketThe reforms for Indian capital market is mainly focused on market regulation, primary market functioning, secondary markets trading, development of a worthy debt securities trading market, development of a derivatives market ( earlys and wefts), development of an combine national market system, technological enthronization in exchanges, adornor protection and more foreign portfolio investment in exchanges. SEBI, the regulatory body of the capital market, has been winning respective(a) steps and has introduced various guidelines for the efficient functioning of the market and has also constituted various committees to review the existing system and suggestions for further reforms.Deficienc ies in the existing system of Scrips TransferThe existing system, a reputation based mode, entails cumbersome legal formalities as per section 108 of Indian Companies Act, 1956, for the purpose for transfer of securities and settlement of transaction there on. The present system suffers from the following shortcomings, thereby arising the need for deposit system, these areLack of supporting InfrastructureProblem in transactionsGlobal ImperativesProblems in dealing with SecuritiesGreater mobility of Securities fumbling legal systemNeed for deposition systemIndian capital market has been witnessing rapid growth in recent past. However, this growth has not watched with supporting infrastructure to handle the growing volume of theme that has flooded the market, choking our existing system. This has caused problems like delay in transfers, long settlement period, high takes of failed business deal and bad deliveries, high- attempt exposure etc. These characteristics were normally th e attributes of an under verit equal to(p) market. As the market grows, there is need for better system to batten down that such impediment to growth is removed. The foreign investors seeking to invest in India are also apprehensive about the reliability of the post trade settlement instrument used in India.The biggest deterrent or bottleneck in Indian capital market was more often than not manual and paper based settlement system that was obsolete for a rapidly growing market. Since 1992, old trading system in Indian stock exchanges has been under constant review. The main deficiencies have been place in 2 broad areas The clearing and settlement system in stock exchanges whereby delivery of shares by the trafficker and payment by the vendee is made andProcedure for transfer of shares in the crap of the purchaser by the federation.The new system has eliminated paper work, facilitated electronic book entry of the transfer of securities, permitted automatic and lucid screen based trading in securities, shorter settlement periods and improved fluidityity in investment in securities. All this has given impetus to the growth of the capital market in India. The transactions in a stock exchange, earlier complex physical movement of paper (the share certificate) which scratch line changed hand from the seller to buyer on payment of price and subsequently was sent to the company (issuer of the share) for the change of the ownership of the shares to be incorporated in the books of the company. The process of verification of the ownership of the seller and hence validity of the sale took a long time, disabling the purchaser from the selling the shares further while the shares were being transferred in his or her name. though section 113 of the Companies Act, 1956, stipulates that the company effects the transfer within 2 months. In reality transferring shares in ones name took longer. This delay reduced the liquidity of the investor, as during these times, h e/she cannot sell the shares. This has proved particularly inconvenient for super investors for whom fast transfers were essential to maintain the liquidity. Apart from this, physical movement of shares also meant the possibility of theft and exit of shares in transit.The magnitude of the problem has increased manifold as the daily turnover in stock exchange has increased considerably. The honest daily turnover of BSE itself amounts to Rs. 500 crores with shares of more than 7500 companies, being traded by more than 650 brokers for more than 30 million investors in the acres. This has necessitated the use of better and faster transfer system like computerized records as compared to the physical paper (security)Emergence of DepositoriesThere are two depositories that have emerged in India National Securities Depositories LimitedThe Honourable Union Finance Minister, Shri. P. Chidambram inaugurated NSDL as the first depositary in the country on Nov 8, 1996. It has been promoted b y three premier institutions in India the largest mutual fund UTI, the largest stock exchange NSE of India Ltd. Subsequently, the situate Bank of India, the largest commercial bank in India has also taken up a stake in NSDL.NSDL provides for electronic ownership, holding and transfer of securities trading in electronic securities on the NSE commenced in Dec, 96 and the first settlement of transactions in electronic securities was successfully completed at NSDL on Jan 7, 1997. The stock exchange Mumbai BSE also extended the facility of trading in electronic securities from December 27, 1997.NSDL is responsible to either individual to every individual investor who holds electronic balances with the sedimentation. The deposit histrion acts as an agent of NSDL for providing its services to the investors.NSDL has knowing the software for the ope rating systems in such a way that the software systems at the depository participant office are connected. Thus, a highly integrated set u p for maintenance of investor accounts through the DPs has been developed and implemented. NSDL has access to all the accounts of individual maintained by the DPs to ensure adequate control.The run system of NSDL also maintains continuous electronic connectivity with the vertical flute and transfer departments/agents of the companies whose securities can be dematerialized in NSDL. To all the investors both sell and institutional, NSDL offers the following servicesMaintain beneficial holdings through depository participants.Provide for dematerialization and Rematerialisation of securitiesDematerializationRematerialisationEffect account transfers for settlement of tradesAllow for receipt of allotment in the electric formProviding pledging, hypothecation facilities for stocks held with it.Receive and disburse corporate actions (only securities) key Depositories Services LimitedThis is the second depository after NSDL. This inter connectivity pull up stakes be established front to the commencement of business by CDSL. This will facilitate settlement and movement of assets and custody from one depository to another. CDSL has been promoted by the Stock Exchange, Mumbai (BSE), in association with Bank of India, Bank of Baroda, HDFC Bank and Stare Bank of India. It has been able to tie up with as many as 35 brokers till now.CDSL and NSDL both have sign(a) a MoU for inter-depository connectivity on 23rd April 1999. The MoU covers the understanding between the depositories for inter-depository transfers arising out of transactions not settled through the CH/CC (off market). The procedure for inter-depository transfers between CDSL and NSDL arising out of transactions settled through a CH/CH (on market) are anticipate to be finalized separately.The Depositories Act, 1996The Depositories Act makes a provision for the setting up of multiple depositories in India. The investor has been granted the option of holding securities in a physical or dematerialized from. Thu s it is a matter of choice for the investor as to whether he wants to avail of depository services. The depository has been entrusted with the responsibility of indemnifying beneficial owners for any loss caused due to neglect of the depository or its participants.For holding securities in the depository, the two routes that are adopted by depositories world over asImmobilizationIn this the depository holds the securities in the physical form in its own vaults, buttransfer of securities takes place through book entries.DematerializationIn this the securities in physical form are rupture and corresponding credit is made in the form of electronic balances that are maintained in the depository account.The concept of a depository has made a late entry into our country so we are fortunate to have the advantage o hindsight gained from the experience of other depositories the world over as easily as adopting the latest technology. Thus, the law in our country has preferred the demat rou te. The demat securities will be identical and symmetrical as they will not have any unique characteristics such as distinctive number of folio. The depository will facilitate dematerialization of securities. The investor has the option of holding securities in the physical form or in the depository form. He can choose not to opt for depository system by requesting issue of physical certificates. The depository will, thus provide for Rematerialisation.All rights with respect to the securities held in the depository will be with the beneficial owner (investor) and not with the depository, the depository acting as the registered owner only. When transacting through a depository, the investor will not be required to pay stamp duty on transfer of shares within the depository.The depository will interface with the investors through market intermediaries called DPs. The depository will hold beneficial owner the take in formation through its network of DPs. The depository is obliged to p rovide this tuition to the issuer company or its registrar and transfer agent at regular intervals. This will facilitate proper distribution of proceedss arising out of the investors holdings such as dividend, interest, bonus and rights as on a given record date by the issuer company or its registrar and transfer agent.The SEBI Regulations, 1996Based on the depositories ordinance, SEBI has notified regulations on 16th May 1996, which state the norms for functioning and operations of depositories. The depository system is very similar to banking environment. Thus, while a bank performs the function of holding, transferring and allowing withdrawal of funds, a depository performs the function of holding, transferring and allowing withdrawal of securities. A bank reaches out to the masses by setting up its branches. Similarly, a depository reaches out to the general investor through its agents that are the DPs. The regulations have selected various categories of market participants, who are eligible to become DPs and have a come up-established customer interface network and are therefore the ideal choice to become the agents of a depository.The categories arePublic Financial InstitutionsScheduled Banksrun batted in sanction Foreign Banks operating in India.State Financial breadbasketsCertified custodians of securitiesClearing corporations of stock exchangesRegistered stock brokersNon-Banking Financial Companies.Entities desiring to become DPs must apply to the depository and are required to be recommended to SEBI by the depository. If approved and registered by the SEBI, the DP can be admitted on to the depository. The depository has to formulate its own set of criteria for option of participants.The regulations require the depository to list out through its byelaws the securities, which are eligible to be admitted to depository for dematerialization. truth shares, debentures, warrant, bonds, units of mutual funds etc. are part of list of eligible securiti es. The depository is empowered to set its own criteria for selection of securities and make securities eligible to be maintained in the form of electronic holdings on the holdings of the depository. equipments should be entered into by the following entitiesbank deposit and every participantParticipant and every client monument, issuer company and the registrarThe drafts of these agreements are to be included in the byelaws and to be approved by SEBI. It is important that participants are connected to the depository through a continuous electronic converse system. The same is true for registrars or corporates communicating with the depository. In addition, for enabling settlements of securities, the depository is also to be connected electronically to clearing entities. This imposes the need for automatic data processing systems with necessary security features and forms one of the criteria for selecting securities for dematerialization.The depository required to ensure that qual ified safeguards are there to protect the data available with it and with the participants. To reduce risk in operations, the regulations stipulate that the depository and DPs must provide for, adequate damages cover as well.Since the depository acts as the credit of information for the registrar in terms of providing beneficial ownership details, the depository has to reconcile data internally with the participants to ensure validity of data. The regulations require this balancing to be carried out on a daily basis.Further the depositories and the registrar will also reconcile balances on a daily basis and periodic basis.SHOWING THE down payment INTERFACE WITH THE INVESTOR AND THEIR BUSINESS PARTNERSNSDLISSUER RT AGENTCLEARING HOUSECLEARING MEMBERDEPOSITORY PARTICIPANT nervous strain EXCHANGETRADING MEMBERINVESTORNSDL is electronically linked to its DPs, the RT department of the issuer co. and the clearing corporation/ clearing ingleside of the stock exchange. This is done in order to facilitate the settlement of trades and to perform a dealing reconciliation of all the accounts balances with NSDL. The entire system is called the NEST (National Electronic Settlement Transfer) system. Thus a higher integrated set up for maintenance of investor accounts has been developed and implemented.Constituents of Depository SystemDepositoryDepository Participant right OwnerIssuerBenefits/Advantages of Depository SystemBenefits of depository system areTo the NationGrowing and more liquid capital markets to provide financing and development stemming from more efficient post trade systems with reduced transactions costs.Increase in competitiveness in the International market place and attracting investors and fund managers by complying with stipulated global standard for and efficient and risk free trading environment.Improved prospects for privatization of public sector units by creating a conducting environment.Restoration of faith in the capital market on the part icipants with system to minimize settlement risk and frauds.Considerable lessening in the delay in registration which can currently impact trading.To the drop PublicReduction of risks associated with loss, mutilations, theft and forgery or physical scrips.Elimination of financial loss owing to loss of physical scrips.Greater liquidity from speedier settlements and reduction in delays in registration.Faster receipt benefit and rights resulting from corporate action.Improved production of shareholder rights resulting from more timely communication from the issuers.Reduced transactions costs through greater efficiency.To issuerUpto date knowledge of shareholders names and addresses.Savings in costs of new issuers from reduction in printing and distribution costs.Increase in efficiency of registrars and transfer agent functionsBetter facilities for communication with shareholders conveying benefits of corporate actions and information notices.Improved ability to attract international investors without having to incur the expenditure of publication in overseas market.Objectives of the studyTo know the perception and view tailor of the investors obedienceing depository system.To know the satisfaction level of investors regarding depository services.Related questionesAlton (1994) bring the principles of converting shares into dematerialized form. He also commented that with a grand start the concept of demat of shares in Indian Market is all pervasive and set to conquer the stock market.George (1996) studied the growth and the dematerialization of products and found that the concept of dematerialization is coming at a very fast pace.Kumar (1998) studied the advantages of dematerialization and opening of Demat account. He also compared the effect on trading of shares of the companies have dematerialized their shares and who have not dematerialized their shares.Mittal (1998) presented an extensive information on dematerialization of shares, their advantages, inve stor grievances and insurance aspect related to dematerialized shares and found that a very large potential of dematerialization of shares exists in the Indian Market.Cholamandalam (1998) conducted inquiry on requirements to be fulfilled by a company to pay back its shares listed at a depository so that they can be easily dealt in dematerialized form.Hughes India Limited (1999) conducted a research to study the benefits and drawbacks, which are to be borne in mind by company that is planning to dematerialize its shares and get them registered with NSDL.Law (1999) in his hold Depository Revolution has discussed that depository is not just removing fake shares and bad deliveries from the capital market but to prove a great catalyst for reform. The depository is a reality today. The concept of depository is set to revolutionize trading practices, reduce transaction costs and increase investor safety.Kumar (1998) in his Article Demat trading simpler the better has shed light on the different fees structure charged by NSDL from depository participants and by depository participants from the investors. NSDL charges nominal fees under three heads i.e. transaction fees in case of purchases, custody fees and rematerialisation fees.Gajra (1999) in his denomination Claim your rights has provided us the useful information that the investors get the compensation or the loss due to the depository participants mistake. The investors for protecting their return should give debit instruction to their DPs for sale at least a day or two before settlement day. Then the investor has to look for an instruction carried out properly. If he failed to get it, then he should approach NSDL, for arbitration. DPs are personalizedly liable for their losses. This article was given in regard when SCHIL, one of the largest DPs failed to transmit instructions of its investor-clients to NSDL on time before settlement pay in.Saikia (1999) in his article Compulsory demat within a year has sh ed light on the views expressed by Ministry of Finance that one year has been set in adopting the full demat route for primary and secondary market shares.Research MethodologyThe study is based on descriptive research design. The primary data was collected and used for the research purpose. Primary data was collected by survey with the help of a questionnaire. The questionnaire was administered by the personal interview i.e. questions were asked from the respondents in a face-to-face meeting and the study was conducted with the help of pre-structured non-disguised questionnaire. Respondents were interviewed with the help of structured questionnaire. An investor residing and availing Depository Services in Ludhiana was taken as a audition. In the present study, non-probability sampling technique i.e. doodad sampling is used to collect the sample. Here in the study, population consists of all the investors of Ludhiana and a sample of investors have been taken from it. It is a conven ience sampling because the respondent investors are chosen from those who happened to visit the office of a particular broker and the brokers themselves. The respondents were interviewed with a structural questionnaire by the researcher. A smaller sample but well selected sample may be superior to a larger but badly selected sample. A nub of 100 respondents were selected from the city for the study.Investors class-conscious various advantages of depository. Rank was determined by computing the weighted average i.e. 4 points were attached to rank first, 3 points to rank second, 2 points to rank third and 1 point to rank fourth. Then for calculating ranks for various advantages, points allotted by investors were added and divided by 100 i.e. sample size. The advantage with the highest weighted average was ranked first and the advantage with the lowest weighted average was ranked fourth i.e. last.Similarly, the investors ranked problems faced by investors in depository system. Weight ed average order was used. For rating the satisfaction level regarding depository services and the investors view point regarding depository system, weighted average method as well as factor analysis were used. The points were given as such. For highly fulfil +2, for satisfied +1, for thoughtless 0, for dissatisfied -1 and for highly dissatisfied -2.Results of the StudyRespondents ProfileAs per the study, majority respondents were professional i.e. 33% such as C.As, MBAs and C.S., where as 22% were post-graduates and the remaining 45% were graduates. The study found that majority of the investors i.e. 46% belonged to age group 30 or less than 40. 18% of the investors were belonging to age group 20 or less than 30, 26% of the investors were belonging to the age group 40 or less than 50 and 10% of the investors belong to the age group 50 or more. As per the study majority of the respondents i.e. 44% of the investors were found operating in the capital markets for 6 years or more. W hereas 29% of the investors have been operating for 4 years of less than 6 years, 18% have been operating for 2 years or less than 4 years and the remaining 9% have been operating for less than 2 years. As per the study, majority of the respondents had opened their demat accounts in year 2000 and 1999.The diametrical Sources Of data From Where The Investors Came To Know About The Depository System.Sources of InformationNo. Of InvestorsPercentageBrokers4242Friends66Newspapers Magazines3636T.V. Programmes22Others1414Total100100As per the study, majority respondents had brokers, newspapers and magazines as the best source of information regarding depository system.The Depository Participants With Whom The Investors Had Opened Up Their Demat AccountDepository ParticipantsNo. Of InvestorsPercentageSHCIL3030Master Capital2222LSE Securities1616Karvy Consultants1818Others1414Total100100The study revealed that Majority participants had opened their accounts with Stock Holding Corporation of India Limited followed by Master Capital, Karvy Consultants, LSE Securities and other depositary participants.The Reasons For Opening Demat Account With Particular DP By The InvestorThe respondents were asked to quiver the various factors being considered for opening demat account with a particular DP.ReasonsPercentageNearness to location15Fast transaction30Infrastructure Facility25Good client dealing15Goodwill of the Organization10Others05Total100As per the study, the major factor contributing in selecting the depository was Fast Transaction followed by other factors such as Availability of Proper Infrastructure, client Dealing, Goodwill of the organization, approachability etc.The Ranking Given By The Investors To Various Advantages Of Depository SystemAdvantages flirt with lotsRankingNo scope for any risk of loss, theft or fraud regarding share certificates1.321Investment is highly liquid1.962No stamp duty3.94 no-count deliveries are almost eliminated2.823The study found th at majority of the investors were of the view that the depository system would crucify the chances of loss, theft or fraud as a first advantage followed by other such as liquid investments, elimination of bad deliveries and absence of stamp duties.The Ranks Being Given By Investors To Different Problems Of Depository Services.ProblemsMean ScoresRankingNot fully aware of the mechanism3.644 tending of enquiries from Income Tax Department2.453Increase in transactions costs2.272Difficulty in maintaining accounts2.251Increased paper work4.395As per the study the investors thought maintenance of accounts as a major problem of Depository System and ranked it at first place. The study highlighted the other problems such as increase in the cost of transaction, fear of enquiries from Income Tax Department, not full cognisance about the system and increased paper work.Satisfaction Level Of The Investors Regarding Depository ServicesAttributesMean ScoresSatisfaction LevelDealing of DPs1.6High ly SatisfiedFees structure of DPs0.94SatisfiedService time of DPs0.32 impersonalInfrastructure Facilities of DPs0.97SatisfiedDematerialization/Rematerialisation procedure1.14SatisfiedThe study found that the investors were highly satisfied with dealing of Depository participants and satisfied from other services such as fee structure, infrastructure facilties and demateralisation/rematerialisation procedures. However, many of the respondents were found indifferent from service timings of DPs.The Investors study Regarding The Different Factors Of Depository ServicesSr. No.FactorsMean ScoresView Point1More transparency in depository system2 potently meet2Fear of losing physical possession of share certificates-1.36Disagree3More cost involved in opening, maintaining and closing of demat account1.05Agree4Manipulation done by DPs and Brokers-0.02Indifferent5Burden on small investor has been increased0.21Indifferent6Cost of Depository System matches with the revenues from it1.22Agree7De mat process is a lengthy one1.14Agree8Business for brokers has been increased1.58Strongly Agree9Need of single Depository0.02Indifferent10Demat has a bright future