CHAPTER 9

Question 1

What is the Physical Mode of Holding Securities:

Answer 1

It means securities are held in physical form of paper certificates.

Question 2

Disadvantages of Holding Securities in Physical Form:

Answer 2

1. Risk
2. Risk of Bad Delivery
3. Efforts in Duplicating
4. Delay in Allotment of Securities
5. Delay in Transfer and Transmission of Securities

Question 3

Electronic / Dematerialized mode of holding securities:

Answer 3

It means securities are held in electronic or dematerialised form.

Question 4

Meaning of Depository System:

Answer 4

Under Depository System, Securities are held in Electronic Form. The Depository System maintains accounts of Shareholder, enables transfer, collects dividends, bonus shares, etc. on behalf of the shareholder. This system is also called as Scripless Trading system.

Question 5

When and where was the World’s First Depository established?

Answer 5

Germany, 1947

Question 6

Importance of Depository System:

Answer 6

1) It aims at eliminating huge volume of paperwork involved in paper or scrip based system.
2) It offers scope for paperless trading by using the state-of-art technology.
3) It leads to elimination of storage and handling of certificates.
4) It reduces the cost and efforts involved in storage and handling of physical certificates.

Question 7

Benefits/ Advantages of the Depository System to the Investors:

Answer 7

1. Elimination of Risk
2. Safety
3. Easy Transfer of Shares
4. Security Against Loan
5. Updates on Intimation
6. No Concept of ‘Lots’
7. Nomination Facility
8. Automatic Credit

Question 8

Benefits/ Advantages of the Depository System to the Companies:

Answer 8

1. Better Investor - Company Relationships
2. Up - to - date Information
3. Reduction in Costs and Efforts
4. International Investments

Question 9

Meaning of Depository Participant:

Answer 9

A Depository Participant (DP) is an intermediary that acts as a link between the Depository and Investors, facilitating transactions and maintaining securities accounts.

Question 10

Depository as a Constituent of the Depository System:

Answer 10

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

Question 11

Depository Participant as a Constituent of the Depository System:

Answer 11

1. SEBI Registration
2. Agent
3. Intermediary
4. Link between Depository and Investors
5. Customer Interaction
6. Account Maintenance
7. Securities Bank
8. Eligible DPs(FBCNRCAS)
9. Dematerialisation
10. Instant Transfers
11. Credits Securities
12. Electronic Settlement
13. Unique Identification Number

Question 12

Meaning of Depository Participant:

Answer 12

A depository participant (DP) is an intermediary registered under SEBI who acts as a link between Depository and Investors, facilitating transactions and maintaing securities accounts.

Question 13

Eligible DPs:

Answer 13

1. Financial Isntitutions
2. Banks
3. Custodians: Responsible for overseeing operations of assets/funds
4. NBFC - Non Banking Financial Corporation
5. Registrat to an Issue/ Share Transfer Agents
6. Clearing Corporations
7. Approved Foreign Banks
8. Stock Brokers

Question 14

Meaning of Dematerialisation:

Answer 14

1. It/(Demat) is a process whereby a client can get physical certificates converted into electronic mode.
2. The client has to surrender the certificates along with the Demat Request Form (DRF).
   3.The DP will forward it to the Depository who then forwards it to the Issuer Company.
   4.After confirmation from the Issuer, the depository will credit the securities in the Demat Account with DP.

Question 15

Meaning of Rematerialisation:

Answer 15

Remat is the process whereby a client can get his electronic holdings of seccurities converted into physical certificates.
2. The Client has to give written request in the form of RRF(Remat Request Form) to the DP.
3. The DP forwards the RRF to the Issuer and Depository.
4. The Issuer prints the Certificates and sends them to the Client while simultaneously confirming the the acceptance of Remat Request to the Depository.
5. The Depository via the DP debits Client’s account of those securities.

Question 16

Meaning of Fungibility:

Answer 16

1. In financial terms, Fungibility means the state of being interchangeable. Some financial assets are fungible while others are not.
2. E.g. Land, is not very fungible as every unit of land has its unique quality which adds to or reduces it’s value.
3. E.g. Currency Note is fungible as there is no difference between two currency notes of the same value.
4. Similarly, securities issued by the Same company of the same class have same value, no matter who owns them. The securities held in Demat / electronic form are fungible.
5. Securities bear no notable features like distinctive number, certificate number, or folio number. Hence they are interchangeable, substitutable and cannot be distinguished from each other.

Question 17

(International Securities Identification Number) ISIN:

Answer 17

1. ISIN is a code that uniquely identifies a specific securities issue. It is a standard numbering system which is accepted globally.
2. The International Organisation of Standardization (ISO) currently defines ISIN’s structure. ISIN consists of a 12 (Twelve) digit alpha-numeric code which is divided into 3 parts.
3. ISINs in any country are allotted by that country’s NNA (National Numbering Agency). In India, issuing ISIN to securities is assigned by SEBI to NSDL (For Demated Shares). SEBI works as NNA in India.
4. For Government securities, allotment of ISIN is done by the RBI. A company has to apply for ISIN for its securities with documents like prospectus.

Question 18

Funtioning of Depository System:

In case of conversion of physical certificates into electronic/ Dematerialisation Process :

Answer 18

1) Investor submits DRF in triplicate and certificates to DP.
2) DP enters the Demat request in its system and sends it to Depository.
3) DP dispatches the physical certificates and copy of DRF to the Issuer.
4) The Issuer verifies and confirms to Depository about demating of the securities.
5) Depository records the request in the system and forwards it to the Issuer.
6) Depository credits the demated securities to beneficiary account (Demat A/c) of Investor. Depository intimates the DP.
7) DP issues a statement of account to the Investor.

Question 19

Functioning of the Depository System:

In case of IPO (Initial Public Offering)

Answer 19

1) The investor (BO) submits his application for securities to the Issuer Company.
2) The Issuer Company verifies details of BO with the Depository.
3) After verification of BO’s details, the Depository gives its report to the Issuer Company.
4) Issuer Company gives details of allotment of securities to Depository.
5) Depository credits the account of the BO.
6) Depository intimates the DP about crediting BO’s account.
7) DP issues statement of account to BO.