Secretarial Practice Answer in brife

There are two depositories established in India under the Depository Act of 1996:
(i) NSDL (National Security Depository Limited):

• NSDL is the first and the largest depository in India established in November 1996.
• It is established by IDBI (Industrial Development Bank of India), Unit Trust of India (UTI), and National Stock Exchange (NSE).
• NSDL has its headquarters in Mumbai.
• It is registered under the Companies Act as a Public Limited Company.
• Investors, Stock Exchanges, Banks, Clearing Members, etc. receive a variety of services from NSDL.
• Services provided by NSDL include account maintenance, dematerialization, rematerialization, settlement of trades through market transfers and off-market transfer, nomination, transmission, distribution of noncash corporate actions, dividend distributions, facility of freezing, or locking of investors’ accounts, Investor grievances, etc.

(ii) CDSL (Central Depository Services Limited:

• CDSL began its operations in February 1999.
• It was promoted by the Bombay Stock Exchange jointly with several banks.
• The headquarters of CDSL is in Mumbai.
• CDSL also offers Demat services like NSDL across the country and has a wide DP network.
• NSDL and CDSL have played a great role in the success of the Depository System in India.

(i) Dematerialization:
It is the process in which share certificates are converted into electronic form. The client has to open a DEMAT account with the help of DP.

(ii) Fungibility:
Fungibility means interchangeable. Financial assets may or may not be fungible. The shares in depositories are fungible. They don’t have distinctive numbers for identification.

(iii) Rematerialization:
Rematerialization is the process in which shares are reconverted into physical form.

(iv) International Securities Identification Number:
ISIN is an identification number given to a security of an issuer company at the time of issuing such security for the first time in the depository system. ISIN consists of a 12 (Twelve) digit alpha-numeric code which is divided into 3 (Three) parts. For Govt, securities allotment of ISIN is done by the RBI & for others by NSDL. It is accepted globally.

A depository system is a system, where securities are held in electronic form. The transfer and settlement of securities are done electronically. On behalf of shareholders, the Depository System maintains accounts of the shareholder, enables transfer, collects dividends, bonus shares, etc.

It is also known as, ‘Scripless trading system’. The Depository Act was passed in the year 1996 under which the depository system was introduced. NSDL and CDSL are the two depositories operating in India.

Importance of Depository System:

• Depository plays a very important role in the smooth functioning of the capital market.
• Reduced paperwork: The aim of the depository system is to reduce the paperwork. It is scriptless system.
• Use of Technology: Paperless trading is possible as it uses the technology. It facilitates electronic transfer.
• Elimination of Storage and handing: As it is a scriptless system storing and handing of certificates work gets eliminated.
• Reduces cost and efforts: Depository system the cost and efforts involved in storage and handling of physical certificates.

There are two ways of holding the securities:
(i) Physical mode:
Securities are held in physical form i.e. paper form. Holding securities in physical form is riskier as it can be torn, misplaced, stolen, damaged, etc. It also consumes a lot of time in storing and handling certificates and documents. Transfer and Transmission of shares is a time-consuming process.

(ii) Electronic/Dematerialized:
In this system, securities are held in electronic or dematerialized form. Holding securities in electronic form is a safe and secure way. It saves a lot of time in storing and handling certificates and documents. Transfer and Transmission of shares is a time-saving process. The electronic system is a much faster and easier system of holding securities.