I-11 CONTENTS PAGE Foreword I-3 Acknowledgement I-5 About NISM Certifications I-7 About the Certification Examination for Depository Operations I-9 CHAPTER 1 INTRODUCTION TO THE INDIAN CAPITAL MARKET 1.1 Introduction 1 1.2 Capital Market 1 1.3 Regulatory Environment 2 1.4 Regulators 4 CHAPTER 2 INTRODUCTION TO DEPOSITORY 2.1 Need for a Depository System 7 2.2 What is a Depository? 9 2.3 Legal Framework 10 2.4 Functions of a Depository 17
I-12 CONTENTS PAGE CHAPTER 3 DEPOSITORY AND ITS BUSINESS PARTNERS 3.1 Depository Participants 21 3.2 Clearing Corporation (CC) 38 3.3 Issuers and Registrar and Transfer Agents 40 CHAPTER 4 FUNCTIONS OF DEPOSITORY PARTICIPANT-ACCOUNT OPENING 4.1 Introduction 51 4.2 Types of Account 52 4.3 Beneficial Owner Account 52 4.4 Clearing Member Account 96 4.5 Closure of Account 100 4.6 Freezing of Accounts 106 4.7 Changes in Client Details 107 4.8 Implementation of the framework for Accreditation of Investors 113 4.9 Mapping of Unique Client Code (UCC) with demat account of the clients 114 CHAPTER 5 FUNCTIONS OF DEPOSITORY PARTICIPANT-ACCOUNT OPERATIONS 5.1 Introduction to Basic Services Demat Account (BSDA) 117 5.2 Operations of a Joint Account 120 5.3 Internet Based Depository Operations of NSDL 122 5.4 Internet Based Depository Operations of CDSL 126
I-13 CONTENTS PAGE CHAPTER 6 FUNCTIONS OF DEPOSITORY PARTICIPANT-TRANSMISSION AND NOMINATION 6.1 Transmission of Securities 129 6.2 Nomination for Securities 130 6.3 Transmission of Securities 131 CHAPTER 7 FUNCTIONS OF DEPOSITORY PARTICIPANT-DEMATERIALISATION 7.1 Introduction 139 7.2 International Securities Identification Number (ISIN) 140 7.3 Dematerialisation Process 142 7.4 Rematerialisation 156 7.5 Conversion of Mutual Fund units represented by Statement of Account (SOA) into dematerialized form through a DP/De-statementization 159 7.6 Reconversion of Mutual Fund Units into Statement of Account Form (SOA Form)/Restatementization 162 CHAPTER 8 FUNCTIONS OF DEPOSITORY PARTICIPANT-TRADING AND SETTLEMENT 8.1 Introduction 165 8.2 Settlement of Off-Market Transactions 166 8.3 Settlement of Market Transactions 169 8.4 Interoperability 178 8.5 Procedure for Subscription and Redemption of Mutual Fund Units 179 8.6 Handling of Clients’ Securities by Trading Members/Clearing Members 181 8.7 Government of India notification regarding the Indian Stamp (Collection of Stamp-Duty through Stock Exchanges, Clearing Corporations and Depositories) Rules, 2019 183
I-14 CONTENTS PAGE CHAPTER 9 SPECIAL SERVICES – PLEDGE & HYPOTHECATION 9.1 Introduction 187 9.2 Procedure for Pledge/Hypothecation 188 9.3 Recording of Non-Disposal Undertaking (NDU) in the Depository System 198 9.4 Margin obligations to be given by way of Pledge/Re-pledge in the Depository System 199 CHAPTER 10 SPECIAL SERVICES – PUBLIC OFFERING / CORPORATE ACTIONS 10.1 Concept of Corporate Actions 203 10.2 Important Terms 204 10.3 Procedure for Corporate Actions 204 10.4 Public Issue 209 CHAPTER 11 SPECIAL SERVICES - DEBT INSTRUMENTS & GOVERNMENT SECURITIES 11.1 Introduction 217 11.2 Certificate of Deposit (CD) 220 11.3 Commercial Paper (CP) 221 11.4 Government Securities 222
I-15 CONTENTS PAGE CHAPTER
FOREIGN PORTFOLIO INVESTORS (FPI) 12.1 Introduction 235 12.2 Eligibility criteria of FPI applying for FPI Registration to a Designated Depository Participant 236
INVESTOR SERVICES 13.1 Introduction to Redressal of complaints through (SCORES) 243 13.2 Transfer of Shares to Demat Account of IEPF Authority 246 Annexure 1: Process of Aadhaar e-KYC of Resident Investors in the Securities Markets under section 11A of the PMLA, 2002 249 Annexure 2: Use of Technology for KYC 253 Annexure 3: Operational Mechanism for Margin Pledge 259 Annexure 4: Framework for Utilization of Client’s Pledged Securities for Exposure and Margin 263
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CHAPTER 13
CHAPTER 1 INTRODUCTION TO THE INDIAN CAPITAL MARKET
LEARNING OBJECTIVES:
After studying this chapter, you should know about: Capital market and its role in the economy Structure and participants of capital market Regulators and regulations related to capital market
1.1 Introduction
Transfer of resources from those with idle resources to others who have a productive need for them is perhaps most efficiently achieved through the securities markets. To state formally, securities markets provide channels for allocation of savings to investments and thereby decouple these two activities. As a result, the savers and investors are not constrained by their individual abilities, but by the economy’s abilities to invest and save respectively, which inevitably enhances savings and investment in the economy.
A financial market consists of investors (buyers of securities), borrowers (sellers of securities), intermediaries and regulatory bodies.
1.2 Capital Market
The capital market has two interdependent segments, the primary market (new issuers) and secondary market (stock market). The primary market is used by issuers for raising fresh capital from the investors by making initial public offers or rights
1
issues or offers for sale of equity or debt; on the other hand the secondary market provides liquidity to these instruments, through trading and settlement on the stock exchanges. An active secondary market promotes the growth of the primary market and capital formation, since the investors in the primary market are assured of a continuous market where they have an option to liquidate their investments. There are several major players in the primary market. These include the merchant bankers, mutual funds, financial institutions, foreign portfolio investors (FPIs) and individual investors. In the secondary market, there are the stock exchanges, stock brokers (who are members of the stock exchanges), the mutual funds, financial institutions, foreign portfolio investors (FPIs), and individual investors. The Registrars and Transfer Agents, Custodians and Depositories are capital market intermediaries which provide important infrastructure services to both the primary and secondary markets.
1.3 Regulatory Environment
The securities market transactions are subject to regulations under the four main legislations viz., the Securities and Exchange Board of India Act, 1992; the Securities Contracts (Regulation) Act, 1956; the Depositories Act, 1996; certain provisions of the Companies Act, 2013; and Prevention of Money Laundering Act, 2002.
1.3.1 Securities and Exchange Board of India Act, 1992
The SEBI Act, 1992 vests SEBI with statutory powers for,
(
a) protecting the interests of investors in securities market,
(
b) promoting the development of the securities market, and
(
c) regulating the securities market.
Its regulatory jurisdiction extends over corporates in the issuance of capital and transfer of securities and all intermediaries and persons associated with securities market. It can conduct enquiries, audits and inspection of all concerned and
2 INTRODUCTION TO THE INDIAN
CAPITAL MARKET
adjudicate offences under the Act. It has powers to register and regulate all market intermediaries and also to penalise them in case of violations of the provisions of the SEBI Act, Rules and Regulations. SEBI has full autonomy and authority to regulate and develop an orderly securities market.
1.3.2 Securities Contracts (Regulation) Act, 1956
The SC(R)A, 1956 provides for direct and indirect control of virtually all aspects of securities trading and the running of stock exchanges and aims at preventing undesirable transactions in securities. It gives the central government and SEBI the regulatory jurisdiction over (a) stock exchanges through a process of recognition and continued supervision, (b) contracts in securities, and (c) listing of securities on stock exchanges. As a condition of recognition, a stock exchange complies with prescribed conditions from the central government. Organised trading activity in securities takes place on a specified recognised stock exchange. The stock exchanges determine their own listing regulations which have to conform to the minimum listing criteria set out in the Securities Contracts Rules.
1.3.3 Depositories Act, 1996
The Depositories Act, 1996 provides for the establishment of depositories in securities market with the objective of ensuring free transferability of securities with speed, accuracy and security by (a) making securities freely transferable subject to certain exceptions; (b) dematerialisation of the securities in the depository mode; and (c) providing for maintenance of ownership records in a book entry form. In order to streamline the settlement process, the Act envisages transfer of ownership of securities electronically by book entry. The Act has made the securities of all companies freely transferable in the depository mode, restricting the company’s right to use its discretion in effecting the transfer of securities. The other procedural and the transfer deed requirements stated in the Companies Act have also been dispensed with.
1.3.4 Companies Act, 2013
The Companies Act, 2013 deals with issue, allotment and transfer of securities and various aspects relating to company management. The Act provides for standard
3 INTRODUCTION TO THE INDIAN CAPITAL MARKET
disclosures in public issues of capital, particularly in the fields of company management and projects, information about other listed companies under the same management, and management perception of risk factors. It also regulates underwriting, the use of premium and discounts on issues, rights and bonus issues, payment of interest and dividends, supply of annual report and other information. Act also provides for Insolvency and NCLT/NCL AT provisions.
1.3.5 The Prevention of Money Laundering Act, 2002
The PML A, 2002 is a Central Act to prevent money laundering and to provide for confiscation of property derived from money laundering. Anti-Money Laundering is a set of procedures, laws or regulations designed to stop/curb the practice of generating income through illegal actions/ criminal activity such as drug trafficking, terrorist funding and bringing the same into mainstream making it appear to have come from a legitimate source. KYC Guidelines have been introduced in the Capital Market based on this Act.
This Act requires all the Market participants, Intermediaries and other institutions connected therewith, to maintain a record of all the transactions done through them and to monitor and report suspicious transactions to Financial Intelligence Unit (FIU), Government of India.
1.4 Regulators
The responsibility for regulating the securities market is shared by the Securities and Exchange Board of India (SEBI), the Reserve Bank of India (RBI), the Department of Economic Affairs (DEA) of the Ministry of Finance, Ministry of Corporate Affairs (MCA).
In 2010, the Financial Stability and Development Council (FSDC) replaced the High Level Coordination Committee on Financial Markets (HLCCFM) which was earlier facilitating regulatory coordination among the above agencies, though informally. The secretariat of HLCCFM was in Ministry of Finance (Capital Market Division, Department of Economic Affairs).
The orders of SEBI under the securities laws are appealable before a Securities Appellate Tribunal. Most of the powers under the SCRA are exercisable by DEA while a few others by SEBI. The powers of the DEA under the SCRA are also con-
4 INTRODUCTION TO THE
INDIAN CAPITAL MARKET
INTRODUCTION TO THE INDIAN CAPITAL MARKET
currently exercised by SEBI. The powers in respect of the contracts for sale and purchase of securities, gold related securities, money market securities and securities derived from these securities and ready forward contracts in debt securities are exercised concurrently by RBI.
The SEBI Act and the Depositories Act are mostly administered by SEBI. The rules under the securities laws are framed by the government and regulations by SEBI, and all these are administered by SEBI. The powers under the Companies Act relating to issue and transfer of securities and non-payment of dividend are administered by SEBI in case of listed public companies and public companies proposing to get their securities listed. The SROs ensure compliance with their own rules as well as with the rules relevant for them under the securities laws.
5
DEPOSITORY OPERATIONS
AUTHOR : NATIONAL INSTITUTE OF SECURITIES MARKETS | AN EDUCATIONAL INITIATIVE OF SEBI
PUBLISHER : TAXMANN
DATE OF PUBLICATION : JUNE 2023
EDITION : Workbook Version - December 2022
ISBN NO : 9789357781206
NO. OF PAGES : 280
BINDING TYPE : PAPERBACK
DESCRIPTION
Rs. 420 USD 34
The examination seeks to create a common minimum knowledge benchmark for associated persons engaged or employed by a registered depository participant in:
• Dealing or interacting with clients;
• Dealing with securities of clients;
• Handling redressal of investor grievances;
• Internal control or risk management;
• Activities having a bearing on operational risk;
• Maintenance of books and records pertaining to the above activities
This book will be beneficial to all those interested to learn about the functions of Depositories and Depositories Participants
The Present Publication is the December 2022 workbook version, published exclusively by Taxmann for NISM Certification Examination VI [Depository Operations], with the following noteworthy features:
• [Know the Basics] of the Indian securities market and the following:
o Depository system
o Need for depository
o Key features of the depository system in India
• [Understand] the following in detail:
o The institutional structure of the depository system in India
o Business partners of a depository
o The regulatory framework in which the depositories & their depository participants function, their eligibility criteria, registration procedure, rights & obligations, etc.
o How Demat account is opened, documents required & significance of Power of Attorney
• [Know the Various Functions] of Depository & Depository Participants, such as:
o Dematerialisation
o Trading & Settlement
o Pledging & Hypothecation
The detailed contents of the book are as follows:
• Introduction to the Indian Capital Market
• Introduction to Depository
• Depository and its Business Partners
• Functions of Depository Participant – Account Opening
• Functions of Depository Participant – Account Operations
• Functions of Depository Participant – Transmission and Nomination
• Functions of Depository Participant – Dematerialisation
• Functions of Depository Participant – Trading and Settlement
• Special Services – Pledge & Hypothecation
• Special Services – Public Offering/Corporate Actions
• Special Services – Debt Instruments & Government Securities
• Foreign Portfolio Investors (FPI)
• Investor Services
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