Question

Explain the constituents of Depository system.

Answer 1

Under the depository system, securities are held in electronic form. The transfer and settlement of securities are done electronically. The depository system maintains accounts of the shareholder, enables transfer, collects dividends, bonus shares, etc. on behalf of the shareholder. All operations under the depository system are performed by the depository with the help of its constituents as follows:

1) Depository:

1. It is an organisation like the Central Bank where securities are held in electronic form at the investor’s request.
2. It also provides different services related to different transactions in such securities.
3. It is responsible for the safe-keeping of the investor's securities.
4. There is no direct access to investors with the depository.
5. It works as a link between the company and investors.

2) Depository Participant (DP):

1. It is the agent of the depository.
2. DP is registered under the SEBI Act. It enjoys rights and obligations as specified under SEBI (Depository and Participants) Regulations of 1996.
3. It is an intermediary appointed by the depository.
4. DP acts as a link between the depository and the investor.
5. It directly deals with customers. It sends a statement of accounts periodically
6. It functions like a securities bank. The DP maintains an account of securities of each investor.
7. It facilitates dematerialisation.
8. It credits securities in the event of rights issues, bonus issues, etc.
9. It handles instant transfers of pay-outs like dividends, interest, etc.
10. It settles trade electronically.
11. Financial institutions, banks, approved foreign banks, custodians, stockbrokers, clearing corporation, nonbanking financial corporations (NBFCs), Registrar, and Share Transfer Agents can work as DPs.
12. The DP has a unique number for identification.

3) Beneficial Owner (BO):

1. The BO is the investor of securities who has availed the services of depository participants.
2. BO is entitled to all rights and benefits and is subject to all liabilities with respect to securities held by the depository. In simple words, the BO is entitled to bonuses, dividends, etc. on the shares held by the depository on his behalf. Similarly, he is also liable for any unpaid amount on shares held by the depository on his behalf.
3. The BO can also be called as a client of depository and DP.
4. BO client is required to open a demat account with the DP for the electronic holding of securities.
5. BO has to pay charges to the DP for availing the services of DP.
6. BO is given a unique account number in which securities are held.

4) Issuer Company:

• It is the company that has issued the securities which are dematerialised. It must register with the depository.