Question

Explain any four advantages of a depository system to an investor.

Answer 1

1. Elimination of Risk: All risks associated with physical certificates like delays, loss, theft, mutilation, bad deliveries, etc., are totally eliminated.
2. Safety: It is the safest and most secure way of holding securities. The entire system functions under the Depository Act and is monitored by SEBI, e.g. The Investor can keep his account in a ‘Freeze/Lock’ mode to avoid/prevent unexpected debit or credit or both by giving instructions to the DP.
3. Easy Transfer of shares:
   1. Efforts in filling transfer forms and lodging the documents are eliminated.
   2. Also, the stamp duty levied on the transfer of physical shares is not applicable.
   3. Processing time in the transfer of securities is reduced and neither the securities nor the cash is tied/held up for an unnecessarily long time.
4. Updates and Intimation: The investor is provided with the status of the holdings and transactions by DP and occasionally by the Depository too.
5. Security against Loans: Dematerialised securities are preferred by banks and financial institutions as security against loans.
6. No concept of ‘Lots’: The system of odd and even lots stands abolished. The market lot is one share for dematerialised securities.
7. Nomination Facility: Individual Investors can avail of the nomination facility. This simplifies the process in the event of the death of the investor.
8. Automatic Credit: The account of the investor is automatically credited/debited in case of a change initiated by the company which impacts the securities. This is called ‘Corporate Action’. Few examples which can be termed as Corporate Action are Payment of Dividend, Issue of Bonus Shares, Offering of Rights Shares, Early Redemption of Debentures, Mergers and Acquisitions, etc.