Instead of signing the transfer deed as seller and delivering share certificates to a broker, you shall give your DP debit instruction when you sell your shares in the electronic form. You can trade through any broker of your choice registered with the stock exchanges connected with NSDL but will have to provide the details of your account with the DP. The money would be received from the broker/ paid to the broker in the same fashion as done in case of buying/ selling of physical shares. The DP will provide you a statement updated every fortnight giving details of your holdings.
Shares bought in the electronic form can be pledged/ hypothecated by making application to the DP in the prescribed form. For the purpose of calculation of capital gains tax, the cost of acquisition of shares would be determined on the principle of first in first out. The process of opening an account with a DP is similar to the opening of bank account. Photograph, Introduction and signing the prescribed agreement form are some of the requirements.
If there are any discrepancies in your holdings statement or pass book entries, you can contact your DP. If the problem cannot be resolved at DP end, you can approach NSDL. There is absolutely no restriction to the number od DPs you can open accounts with. Just as you can have savings or current accounts with more than one bank, you can open accounts with more than one DP.
There is no minimum balance required for your account with DP. In fact you could have nil sesurity in your account.
What's the security that a person have with respect to proof of his holdings? Upon opening an account with DP, you sign an agreement where the DP indemnifies you for any misuse of your holdings.
When any company announces right, bonus or dividend for a particular security, the DP will give details of the clients having electronic holdings of that security as of record date/ book closure to the registrar. The registrar will then calculate the benefits due to all shareholders. The disbursement of cash benefits like dividend or interest will be done by the registrar whereas distribution of securities entitlements will be done by the DP based on information provided by the registrar.
The investor retains the choice of receiving the corporate benefits in physical or electronic form. For discrepancies in corporate benefits in the form of securities, you can approach your DP who will then approach the registrar. In case of discrepancies in cash benefits, you will have to contact the registrar directly.
Demat Process
A request form together with the share certificates desired to be dematerialised is given to the DP. He sends the request along with the share certificates to the company/ registrars through NSDL for confirmation of its genuineness. After checking the records, the registrar will destroy the certificates and sends confirmation of dematerialisation to NSDL. NSDL then confirms the dematerialisation of shares to your DP to credit the holding of shares in your account electronically. This takes about 15 days from the date of request. Electronic holdings can be converted back into certificates, if so desired, in a similar fashion as that for dematrialisation.
Benefits of Demat
In the depository system, the ownership and transfer of securities takes place by means of electronic book entries. At the outset, this system rids the capital market of the dangers related to handling of paper. NSDL provides numerous direct and indirect benefits, like:
· elimination of bad deliveries -
In the depository environment, once holdings of an investor are dematerialised, the question of bad delivery does not arise i.e. they cannot be held "under objection". Statistically, in the physical environment, about 20% of delivered stock constitutes bad deliveries. Of these, about 1% is ultimately absorbed by the system as bad delivery cost. Rectification of objection usually involves extensive follow up by the investor. Also, the investor cannot sell the securities till they are registered. This means that in the physical environment, every fifth person taking delivery of stock gets securities, the genuineness to which there is a doubt whereas he parts with genuine funds.
· elimination of all risks associated with physical certificates -
Dealing in physical securities have associated security risks of theft of stocks, mutilation of certificates, loss of certificates during movements through and from the registrars, thus exposing the investor to the cost of obtaining duplicate certificates and advertisements, etc. This problem does not arise in the depository environment.
· no stamp duty for transfer of equity instruments & units of mutual funds in the depository
(In case of physical shares, stamp duty of 0.5% is payable on transfer of shares).
· immediate transfer and registration of securities -
In the depository environment, once the securities are credited to the investors account on pay out, he becomes the legal owner of the securities. There is no further need to send it to the company's registrar for registration. Having purchased securities in the physical environment, the investor has to send it to the company's registrar so that the change of ownership can be registered. This process usually takes around three to four months and is rarely completed within the statutory framework of two months thus exposing the investor to opportunity cost of delay in transfer and to risk of loss in transit. To overcome this, the normally accepted practice is to hold the securities in street names i.e. not to register the change of ownership. However, if the investors miss a book closure the securities are not good for delivery and the investor would also stand to loose his corporate entitlements.
· faster settlement cycle -
The exclusive demat segments follow rolling settlement cycle of T+5 i.e. the settlement of trades will be on the 5th working day from the trade day. This will enable faster turnover of stock and more liquidity with the investor.
· pay in & pay out of securities & funds is on the same day for scripless trades -
In the exclusive demat segments the settlement of trades (both securities and funds) is on the 5th working day from the trade day. This means that a buyer who parts with funds on the 5th working day, gets the securities on the same day evening and a seller who parts with securities on the 5th working day gets funds on the same day evening. This reduces the funding cost of 5-6 for a broker (in case of institutional trades) that they have to bear in the physical segment. In the physical segment, the settlement period is spread over a period of three to four days.
· faster disbursement of non cash corporate benefits like rights, bonus, etc. -
NSDL provides for direct credit of non cash corporate entitlements to an investors account, thereby ensuring faster disbursement and avoiding risk of loss of certificates in transit
· reduction in rate of interest on loans granted -
This benefit is provided by some banks against pledge of dematerialised securities as dematerialised securities eliminates the following hassles/ risks: getting securities registered in their name at the time of book closure and risk of stocks coming under objections when they are send to the company's registrar for registration if the pledgee defaults in repayment.
· increase in maximum limit of advances from Rs. 10 lakh to Rs. 20 lakh per borrower and reduction in minimum margin from 50% to 25% by banks for advances against dematerialised securities as per the Monetary and Credit Policy for the first half of 1998-99 announced by the Reserve Bank of India.
· reduction in brokerage of 0.25% to 0.5% by many brokers for trading in dematerialised securities - Brokers provide this benefit to investors as dealing in dematerialised securities reduces their back office cost of handling paper and also eliminates the risk of being the introducing broker.
· reduction in handling of huge volumes of paper
· periodic status reports to investors on their holdings and transactions, leading to better controls
Dematerialised securities can be delivered in the dematerialised or physical segment from April 1998 at those stock exchanges where trading in dematerialised securities is allowed. But physical securities are not allowed to be delivered in dematerialised segment, making dematerialised stocks held with the investors more liquid than physical stocks
The risks and cost associated with dealing in the physical form has always been very high for the NRI investors. The depository system, which allows the investor to hold securities in an account and to transfer theses securities by means of account transfers provides an efficient solution to these problems and substantially removes the inconveniences due to geographical distances.
Acquiring, holding and disposal of securities in Indian Capital Market by Non Resident Indians (NRI) and overseas corporate bodies (OCB) either on repatriable basis or on no-repatriable basis is governed by RBI guidelines and Foreign Exchange Regulation Act (FERA). As per these, approvals are required for buying and selling of securities in most of the cases. Details regarding the procedures may be available with the designated bank branch through which foreign exchange is handled or with the broking members who normally deal for these segments of investors.
Operational issues pertaining to depository operations:
Specific issues with respect to opening and operating depository accounts are as given below:
· In the depository system, with respect to the status of investments, the only difference is the form in which the securities are dealt. As it does not alter investment activities per se, there is no need for any special approvals to open or operate a depository account.
· The account can be opened by the person or by his/her power of attorney holder provided the POA has the necessary authorisations.
· At the time of dematerialisation of any securities into these accounts, the account holder should hand over to his DP, copies of RBI approvals obtained at the time of acquiring these securities. If these securities were acquired under schemes which does not require special approval from RBI by the acquirer, then no approval letter is needed. (For e.g. when shares are issued to NRI in public issues, RBI gives a general approval to the issuing companies and the investor need not take any separate approval.)
· When securities are to be debited from the account, the account holder should provide a copy of the relevant RBI approval for sale of securities to the DP.
· When securities are to be credited to the account, the account holder should provide a copy of the relevant approval for purchase of securities to the DP.
· If the same approval is applicable to multiple
What is a depository ?
A depository is an organisation where share certificates of a shareholder
are held in electronic form. This is done at the request of the shareholder
through a depository participant (DP). If an investor wants to use services
offered by a depository, he/she has to open an account with the depository
through a DP - more about him later - much like opening an account with
any branch of a bank to utilise its services. In fact, in many ways, a
depository is similar to a bank.
What is dematerialisation ?
Dematerialisation (a euphemism for shredding) is a process by which an
investor's physical share certificates are taken back by the company/registrar
and destroyed. Then an equivalent number of securities are credited in
the electronic holdings of that investor. This is done at the request
of the investor. An investor will have to first open an account with a
DP and then request for the dematerialisation of his
..credited into
that account.
Who is this DP ?
A DP is your representative in the depository system. Your DP will maintain
your securities account balances and intimate to you the status of your
holdings from time to time. According to Sebi guidelines, financial institutions,
banks, custodians, stock brokers etc., can become DP's.
Why should investor buy/sell shares in the depository mode ?
Currently, it takes an investor two and three months to get shares registered
in his name. Besides, chances of shares being lost or stolen during transit
are real. But when you buy shares which are already in the depository
mode, you become the owner of those shares in the depository within a
day of the settlement being completed. You don't have to apply to the
company to register the shares in your name. The possibility of loss or
theft when certificates are posted to the company is eliminated.
Will there be a charge for the opening of an account or for every transaction
?
There will be reasonable charges for the opening of accounts and also
for every transaction in the accounts. The depository will publish its
charges and the DPs will also have to make their charges known to the
market. Thirty three DPs (names can be got from www.nsdl.com) are offering
investors various incentives - including not charging them anything for
opening an account if they sign up before January 4, 1999.
How will I know that my DP has updated my account after each transaction
?
Just like a bank, the DP will give you a passbook or a statement of holdings.
The statement of holdings will be deposited to you periodically by the
DP. However, the statement of holdings can be sent to you as and when
you request it.
What happens if I lose my holdings-statement or depository passbook
?
Simple. Inform your DP and obtain a duplicate holdings statement or depository
passbook. Your holdings statement or passbook cannot be used by anybody
else for trading in your account.
Who will give me the benefits arising out of my holdings, say a bonus
or a dividend ?
When any company announces rights, bonus or dividend, the depository will
give all details of the clients having electronic holdings of that security
as
the corporate benefits due to all the shareholders. The disbursement
of cash benefits such as dividend/interest will be done by the registrar
whereas the distribution of securities entitlements (in case of rights
or bonus issue) will be done by the depository based on the information
provided by the registrar.
Can electronic holdings be converted back into certificates ?
Yes. If you wish to get back your securities in the physical form all
you have to do is to request your DP for the rematerialisation of the
same. Rematerialisation is the term used for converting electronic holdings
back into certificates. Your DP will forward your request to the depository
after verifying that you have the necessary security balances. The depository
will in turn intimate the registrar who will print the certificates and
dispatch them to you.