What is Depository Act? Benefits of Depository Act

In order to establish depositories with a legal framework, the Indian Parliament sanctioned the Depository Act. A Depository is an organisation that is registered with the Indian Government and is helpful for investors. A depository makes it easier for the investors to buy and sell securities in the market. These securities are in electronic form and may include shares or debentures or bonds. The authority that is responsible for the regulation, registration and inspection of a Depository is the SEBI(Securities Exchange Board of India). In this blog, we will learn about the Depository Act in detail.

Depository Functions

The main work/ function of a Depository is to keep the securities of an investor in electronic form and allow the depository participants to process securities transactions. All financial institutions, banks, brokers or anyone else who qualifies the eligibility criterion set by the SEBI can be a depository participant.

Advantages of a Depository System

A depository system has a lot of benefits. Some of them are listed below:

• All the securities in a country that are listed in a particular stock exchange are held by the Depository System.
• Blank transfers are not accepted in a depository system and no shares can be kept in the benami names.
• The interest and the dividend earned on the securities is evenly distributed through the Depository System.
• It is efficient as it makes sure that there is no delay in the registration of transfers.
• While taking a loan from a bank or a financial institution, a depository will act like a collateral security.

Business Commencement Certificate

A depository has to register itself with the SEBI(Securities Exchange Board of India) before commencing their business. After registration, the depository is awarded a Certificate for Commencement of business once it qualifies the following conditions for eligibility:

• Proper systems and safeguarding measures should be maintained by a depository so that no manipulation of transactions and records can be done.
• An annual inspection of the procedures of the depository needs to be performed and the report needs to be sent to the SEBI.

The depository-participant Agreement

In order to avail all the services of the depository, the investor must form an agreement with the particular depository participant. Once the agreement is made, the investors can avail all the depository services through the depository participant.

Certificate of Security

If someone wants access to all the services of a depository, then he needs to surrender his certificate of security to the issuer(the one who makes the issue of securities) as per the regulations:

The issuer will cancel out the certificate of security on the receipt of the certificate of security and will mention the depository’s name as the registered owner for the received security and will inform about it to the depository.  Also, the names of the person will be mentioned as the beneficial owner of the security on the information receipt.

Transfer of Securities

When the depository receives the information receipt from a participant, the transfer of security will be registered in the name of the transferee by the depository. If the transfer leads to the custody of any security, then the issuer will be informed about it by the depository.

Security Certificate or hold securities

Any individual who has subscribed to securities gets two options from the issuer- he can either receive a Security Certificate or he can hold the securities via a depository.

Records and Board of a Depository

It is mandatory for every depository to maintain proper records about the transfers of securities and the names of investors.

The Board has the authority to allow a person who has submitted a report of an enquiry within the set time period. The inspection can be made for inspecting the affairs of the issuer, depository, investor or a participant.

Process of a Depository System

As per the guidelines stated by the SEBI, in order to dematerialize the transferring and holding of securities, the investor will have to open a Demat account with the depository.

The investors deposit their securities with the depository. Once the deposition has been done, the security transfers are made in accounts that are owned by the depository through book-entry transfers. Hence, it can be said that one of the main functions of a depository system is to dematerialize the deposited securities and allow their transactions in the form of book entries.b

Penalties

If any issuer who is registered with the depository could not issue the Certificate of Securities to the investors within the given time, then that issuer will have to pay a penalty of Rs. 1 lakh a day till the failure is not eradicated.

Conclusion

It is clear from the information provided in the blog that the Depository Act is quite important in order to buy or sell securities in the market and the depository system has been quite helpful ever since its enforcement.