WHAT A DEPOSITORY IS:
A “Depository” is an institution that receives deposits and holds them in trust for the public, with the condition that it exercises reasonable care and restores it to the person on demand. It holds securities of investors in an electronic form, and it is of paramount importance in the current market scenario where is has been held mandatory to hold securities in demat form. Demat (Dematerialized) format of securities means that these are held in electronic form, and without any actual paper document involved, and the details of trading are all entered on the electronic document. The Depositories Act was passed by the SEBI in 1996, and it deals with the regulation of d\Depositories and incidental matters.
KEY FEATURES OF THE ACT:
- The Depository must be a company registered under the Companies Act, and a Certificate of Registration by SEBI.
- Commencement of business only after obtaining Certificate from SEBI
- Requires “Participants” registered under the SEBI Act
- Depository and Participant must enter into an Agreement, and a person wising to avail Depository services must enter into the necessary agreement through a Participant
- Certificate of Security to be surrendered to Issuer, and the same to be cancelled; and the Depository to be substituted as the registered owner, in records; the person will become Beneficial Owner in the Depository’s records
- Transfer of securities to be registered with the Depository
- Every subscriber to a security has an option to receive the Certificate or maintain it with Depository
- Rights and liabilities of demat securities also lie with the Beneficial Owner
- Securities held in Depository can be pledged or hypothecated
- Information of transfer of securities, to be communicated between the Depository and Issuer
- Beneficial Owner has option to opt out of depository
- Liability to indemnify loss to Beneficial Owner, by negligence of Depository
- SEBI has power of enquiry over securities held in Depositories, to give directions.
- Specifies Penalties to persons or companies contravening provisions of the Act
- Central Govt has the power to grant immunity from prosecution to any person, for violation of provisions of the Act
- Provision to appeal to the Central Govt and the Securities Appellate Tribunal, and to the Supreme Court
- Depositories can make their own bye-laws with the previous approval of the Board
BENEFITS OF DEPOSITORIES
- Less risk of loss or wear and tear
- Easier for safekeeping
- Easier transfer
- Better monitoring by SEBI
- Reduced transaction costs, etc.
MAJOR CASE LAWS (INDIAN KANOON)
- Probir Kumar Misra v. Ramani Ramaswamy
- Northern Projects Ltd. v. Blue Coast Hotels and Resorts Ltd