Depository A brief highlight

Securities and Exchange Board of India

Index

Introduction Physical Vs. Dematerialization Definitions Analogy of Bank and Depository Charges Transfer of Securities Pan requirement Obligations of DP
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Introduction
Till 1996, securities were in physical form
Holding of securities, Issue of shares, Transfer of shares, trading, settlement, etc. were in physical form

Depositories resolved the biggest market risks, i.e. bad deliveries, delayed transfers, fake certificates, loss/theft of certificates.

The Depositories Act defines a depository to mean "a

company formed and registered under the Companies Act, 1956 and which has been granted a certificate of registration under sub-section of section 12 of the Securities and Exchange Board of India Act, 1992. The principal function of a depository is to provide a facility for investors to hold and transfer securities in dematerialised form and in book-entry form. The securities are transferred by debiting the transferors depository account and crediting the transferees depository account.

Physical vs. Dematerialization

1. 2.

3.

Paper based trading Manual transfer of securities which was a time consuming factor Possibilities of bad delivery, fake certificates, signature differences, etc. Burden of filling of transfer form, affixing share transfer stamps Threat of loss of securities and fraudulent interception of certificates in transit

1. 2.

Paperless trading Immediate transfer of securities No problem of bad delivery, fake certificates, signature differences, etc. No requirement of filling of transfer form and affixing share transfer stamps No threat of loss of securities and fraudulent interception of certificates in transit

3.

4.

4.

5.

5.

Definitions

Dematerialization- A process of converting physical shares into dematerialized shares. Rematerialization- A process of converting dematerialized shares into physical shares. Depository- An organization which holds securities of investors in electronic form. Depository Participant- An agent of depository to act as an interface between the investor and the depository. Beneficial Owner The investor who enjoys the benefits of owning the securities. Registered Owner- A depository in whose name the securities are registered

Key Features of the Depository System in India

Multi-Depository System: Depository services through depository participants: Registered Owner/ Beneficial Owner Free Transferability of shares: The securities in dematerialised form are not identified by distinctive numbers and certificate numbers as in the physical environment

Institutional Structure of the Depository System in India

a) Depositories b) Stock Exchanges, c) Clearing Corporations /Clearing Houses, d) Depository Participants (DPs), e) Issuers, and f) Registrars and Transfer Agents (RT&As)

Analogy of Bank and Depository

Bank holds funds in the account Transfer funds between accounts on the instruction of account holder Facilitates transfer without having to handle money Facilitates safekeeping of money

Depository holds securities in the account Transfer securities between accounts on the instruction of Beneficial owner Facilitates transfer of ownership without having to handle securities Facilitates safekeeping of securities

Charges

An investor is required to pay charges towards:

Dematerialization Rematerialization Account Maintenance sell transactions.

An investor need not pay charges towards:

Account opening Custody of securities Buy transactions Closure/Transfer of account

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Legal Framework
The Depositories Act, 1996 SEBI (Depositories and Participants) Regulations, 1996 Bye-laws approved by SEBI, and Operating Instructions of the depository Prevention of Money Laundering Act, 2002
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The Depositories Act, 1996, ushered in an era of efficient capital market infrastructure, improved investor protection, reduced risks and increased transparency of transactions in the securities market Only a company registered under the Companies Act, 1956 and sponsored by the specified category of institutions can set up a depository in India. Before commencing operations, depositories should obtain a certificate of registration and a certificate of commencement of business from SEBI.

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Eligibility Criteria for a Depository

The promoters of a depository are also known as its sponsors. A depository company must have a minimum net worth of Rs. 100 crore. The sponsor(s) of the depository have to hold at least 51% of the equity capital of the depository company. Participants of that depository, if any, can hold the balance of the equity capital. However, no single participant can hold, at any point of time, more than 5% of the equity capital. No foreign entity, individually or collectively either as a sponsor or as a DP, or as a sponsor and DP together, can hold more than 20% of the equity capital of the depository:

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A public financial Institution as defined in section 4A of the Companies Act, 1956; A bank included in the Second Schedule to the Reserve Bank of India Act, 1934; A foreign bank operating in India with the approval of the Reserve Bank of India; A recognised stock exchange; An institution engaged in providing financial services where not less than 75% of the equity is held jointly or severally by these institutions; A custodian of securities approved by Government of India, and A foreign financial services institution approved by Government of India.
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Depository

Account Opening Charges

Account Maintenance Charges Rs. 400/per year (Rs.350/if you choose email statement)

BUY Charges

SELL Charges

SBI Demat Account Charges

NIL

NIL

NIL for trade on' SBICAP Securities, else 0.03% (Min. Rs.30/-)

HDFC Demat Account Charges CITI Bank Demat Account Charges Sharekhan Demat Account Charges ICICI Demat Account Charges

NIL

Rs. 500/per year

NIL

0.04% Min. Rs. 20/-

NIL

Rs. 250/per year

NIL

0.06% Min. Rs.18/-

NIL

Rs. 75/- per quarter

0.02% Min. Rs. 15/-

0.04% Min. Rs. 15/-

NIL

Rs. 500/per year (Rs. 450 if you choose email statement)

NIL

NIL for trade on ICICIDirect.com, else 0.04%* 15

Transfer of Securities
Transfer Instruction

DEPOSITORY
Transfer Instruction

Transfer Instruction

DP
Transfer Instruction 2

CC/ CH
3 Transfer Instruction

DP

CM
1 4

CM

Receipt Instruction

Securities movement

SELLER

BUYER
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Instruction

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Registration of a Depository

As per the provisions of the SEBI Act, a depository can deal in securities only after getting a certificate of registration from SEBI. The sponsors of the proposed depository should apply to SEBI for a certificate of registration in the prescribed form.

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Commencement of Business

A depository that has obtained registration can function only if it obtains a certificate of commencement of business from SEBI. A depository must apply for and obtain a certificate of commencement of business from SEBI within one year from the date of receiving the certificate of registration from SEBI.

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SEBI takes into account all matters relevant to the efficient and orderly functioning of the depository, particularly in examining,
Depository has a net worth of not less than Rs. 100 crore; Bye-Laws of the depository have been approved by SEBI; Automatic data processing systems of the depository have been protected against unauthorised access, alteration, destruction, disclosure or dissemination of records and data; Network through which continuous electronic means of communication are established between the depository, participants, issuers and issuers' agents, is secure against unauthorised entry or access; Depository has established standard transmission and encryption formats for electronic communication of data between the depository, participants, issuers and issuers' agents;

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Physical or electronic access to the premises, facilities, automatic data processing systems, data storage sites and facilities including back-up sites, and to the electronic data communication network connecting the DPs, issuers and issuers' agents is controlled, monitored and recorded; . Depository has a detailed operational manual explaining all aspects of its functioning, including the interface and method of transmission of information between the depository, issuers, issuers' agents, DPs and beneficial owners; Depository has established adequate procedures and facilities to ensure that its records are protected against loss or destruction and arrangements have been made for maintaining back-up facilities at a location different from that of the depository;
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Depository has made adequate arrangements including insurance for indemnifying the beneficial owners for any loss that may be caused to such beneficial owners by the wrongful act, negligence or default of the depository or its participants or of any employee of the depository or participant; and Granting of certificate of commencement of business is in the interest of investors in securities market.

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Rights and Obligations of Depositories

Adequate mechanisms for reviewing, monitoring and evaluating the depository's controls, systems, procedures and safeguards. Annual inspection of these procedures and forward a copy of the inspection report to SEBI. Ensure adequate measures to maintain the data Adequate measures should be taken, including insurance, to protect the interests of the beneficial owners against any risks. Every depository is required to extend all such co-operation to the beneficial owners, issuers and issuers agents, custodians of securities, other depositories and clearing organizations The depository should indemnify beneficial owners of securities for any loss caused to them due to the negligence of the DP
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Records to be maintained by Depository

Records of securities dematerialised and rematerialised. The names of the transferor, transferee, and the dates of transfer of securities. A register and an index of beneficial owners. Details of the holdings of the securities of beneficial owners as at the end of each day. Records of instructions received from, and sent to, participants, issuers, issuers' agents and beneficial owners.

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Records of approval, notice, entry and cancellation of pledge or hypothecation. Details of participants. Details of securities declared to be eligible for dematerialisation in the depository. Such other records as may be specified by SEBI for carrying on the activities as a depository
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Major entities involved in the capital market:

SEBI (REGULATOR) STOCK EXCHANGES CLEARING CORPORATIONS (CC)/ CLEARING HOUSES (CH) DEPOSITORIES AND DEPOSITORY PARTICIPANTS CUSTODIANS STOCK-BROKERS AND THEIR SUB-BROKERS MUTUAL FUNDS MERCHANT BANKERS CREDIT RATING AGENCIES FINANCIAL INSTITUTUIONS FOREIGN INSTITUTIONAL INVESTORS NON-BANKING INSTITUTIONS ISSUERS/ REGISTRAR AND TRANSFER AGENTS INVESTORS
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Roles and responsibilities of Registrar and transfer agent

Arranging for the payment of all dividends and other distributions Issuing redemption payments Tax declarations Assisting with the annual audit Preparation and filing of local statutory filings Reporting (as required) to stock exchanges Compliance monitoring

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Maintaining the principal corporate books and records Maintaining the funds shareholder register Issuing share certificates (if applicable) Liaising with shareholders with regards to subscriptions, redemptions and stock transfers Ensuring proper compilation of subscription forms, with reference to requisite qualification requirements Processing redemptions, exchanges and transfers

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Functions of a Depository

Account Opening / Modification /Closure:

Dematerialisation Account Transfer: Transfer and Registration: Corporate Actions: Pledge and Hypothecation: Linkages with Clearing System:

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Depository and its Business Partners

Depository Participants , The relationship between the DPs and the depositories is governed by an agreement made between the two under the Depositories Act. The form of the agreement is specified in the Bye-Laws of the depository. agent of the depository.

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Eligibility Criteria for becoming Depository Participants

1. A public financial institution as defined in section 4A of the Companies Act. 2. A bank included for the time being in the Second Schedule to the Reserve Bank of India Act, 1934. 3. A foreign bank operating in India with approval of the Reserve Bank of India. 4. A State Financial Corporation established under the provisions of section 3 of the State Financial Corporations Act, 1951. 5. An institution engaged in providing financial services, promoted jointly or severally by any of the institutions mentioned in the four above-mentioned clauses.
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6. A custodian of securities who has been granted a certificate of registration by SEBI. 7. A clearing corporation or a clearing house of a stock exchange. 8. A stockbroker who has been granted a certificate of registration by SEBI. 9. A non-banking finance company. 10. An R&T Agent who has been granted a certificate of registration by SEBI.

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Net Worth requirement to Act as Depository

For applicants who are stock brokers or non banking finance companies, the networth should be Rs. 50 lakh, for granting a certificate of registration to act as a DP. For R & T Agents a minimum net worth of Rs. 10 crore is prescribed in addition to a grant of certificate of registration by SEBI. If a stockbroker seeks to act as a DP in more than one depository, he should comply with the specified net worth criterion separately for each such depository. If an NBFC seeks to act as a DP on behalf of any other person, it needs to have a networth of Rs. 50 crore in addition to the networth specified by any other authority.
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PAN requirement

PAN is required primarily in the following cases:

Demat account opening All securities market and off-market transactions involving demat and physical form of transfers.

In case of deletion of name of deceased shareholder(s) where shares are held in the name of two or more shareholders.
Transmission of shares to the legal heir(s), where deceased shareholder was the sole holder of shares. Transposition of shares when there is a change in the order of names in which physical shares are held jointly in the names of two or more shareholders

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Obligations of DP

Separate account for each BO Segregation of securities Transfer of securities on receipt of instructions from BO and confirm the transfer to BO Dispatch of Statement of Accounts Appointment of Compliance Officer

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Functions of Depository ParticipantAccount Opening

An investor wishing to avail depository services must first open accounts with a depository participant registered with a depository. The process of opening a demat account is very similar to that of a bank account. There are mainly two types of demat accounts which can be opened with a depository participant viz., (a) Beneficial Owners

Account, and (b) Clearing Member Account. The type of depository account depends on the operations to be performed.

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Beneficiary Account: A beneficial owners account is an ownership account. The holder/(s) of securities in this type of account owns the securities Clearing Member Account: This account is opened by a broker or by a clearing member for the purpose of settlement of trades executed on a recognized stock exchange.
The clearing member account is a transitory account. The securities in this account are held for a commercial purpose only. The securities in this account will be eligible for any corporate action benefit declared
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Beneficial Owner Account

This account is opened by investors to hold their securities in dematerialised form with a depository and to carry out the transactions of sale and purchase of such securities in book entry form through the depository system. A beneficiary account holder is legally entitled for all rights and liabilities attached to the securities held in that account. Therefore, the account is called beneficial owner account. individual, corporate, Karta of Hindu Undivided Family (HUF
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Documents for Verification

Non-body Corporate / Individuals Investors:

Proof of Identity (POI)I. Passport II. Voter ID card III. Driving license IV. PAN card with photograph V. Identity card/document with applicant's photo, issued by a) Central/State Government and its Departments, b) Statutory/Regulatory Authorities, c) Public Sector Undertakings, d) Scheduled Commercial Banks, e) Public Financial Institutions, f) Colleges affiliated to Universities (this can be treated as valid only till the time the applicant is a student), g) Professional Bodies such as ICAI, ICWAI, ICSI, Bar Council etc., to their Members; and
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Proof of address (POA) I. Ration card II. Passport III. Voter ID card IV. Driving license V. Bank passbook / Bank Statement. In this regard, procedure is as follows,

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For Corporate Investors: All corporate investors have to submit the following documents as prescribed by SEBI along-with the stipulated account opening form:

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Memorandum & Articles of Association (MOA & AOA) & Certificate of Incorporation. Board resolution authorizing opening of demat account Names of authorized signatories, designation alongwith their specimen signatures and photographs, duly verified by the Managing Director or Company Secretary. Proof of address of the corporate, evidenced by the document registered with Registrar of Companies or acknowledged copy of Income Tax Return
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Investors wishing to open account with the depository have the following benefits/choices: Can select the DP based on the investors convenience, comfort, service levels, safety, reputation, charges etc Have the flexibility to open more than one account with the same DP or any other DPs No requirement of minimum balance Can close an account anytime with one DP and open another one with any other

DP.

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Client-Participant Agreement

This agreement has to be made on non-judicial stamp paper of appropriate denomination and should be signed by the: (a) Depository participant, itself or through an authorized signatory; and (b) Sole holder in case of single holding; or (c) All joint holders in case of joint holding, or (d) Constituted attorney (authorized signatories) in the case of corporate/registered trust accounts.

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Types of Application Forms

The forms prescribed by the Depositorys require the applicants to give the following details:

Name(s) of account holder(s) Mailing and communication address(es) Details of guardian in case account holder is a minor Foreign address and RBI approval details for NRI, FII or OCB accounts Clearing member details for a clearing account Details of bank account Details of Income Tax Permanent Account Number (PAN)
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Clearing Member Account

The entities that are authorised to pay in and receive the pay out from a Clearing Corporation (CC)/ Clearing House against trades done by them or their clients are known as clearing members (CM). All payin and pay-out transactions are carried out through their accounts. There are two types of clearing members: All the members of a stock exchange are clearing members; and Custodians who have been permitted by the stock exchange to act as a clearing member

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The steps undertaken to open the CM account are same as those of individuals. The difference lies in the type of form and details to be filled in and documents to be submitted. In NSDL, the major difference is that the clearing member has to first register itself with the clearing corporation and obtain a clearing corporation clearing member identification number (CC-CM-ID).
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Name of the Clearing Member 2. Company's short name, if any 3. Address of the registered office, telephone number, fax number, e-mail, if any 4. Name and address of the authorised signatories, their designations and telephone numbers, status code, sub-status code 5. Bank account particulars, bank name and its branch, current account number 6. RBI reference number, RBI approval date (Not required in CDSL) 7. PAN/ number 8. Signatures of Authorised signatories)
1.

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Client Account Number

On receipt of a valid application form which is complete in all respects and duly signed by the applicant the DP has to enter the information on the application form into the depository participant system The system then generates a client account number which should be referenced by the client for all its transactions in the depository system The account number styles are different for different purpose. In case of CDSL, the account number has two parts, i.e., 8-digit DP-ID (identification number of Depository Participant) and 8digit client account number

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Standing Instructions / Purchase confirmation waiver Operation of demat accounts based on Power of Attorney

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Clearing Corporation / Clearing House (CC / CH)

Clearing Corporation/House is an entity responsible for clearing and settlement of trades done by clearing members on a recognised stock exchange. A Clearing Corporation / Clearing House of a stock exchange is admitted to the depository system for clearing and settlement of securities traded on their respective stock exchanges. For electronic settlement of securities in demat form, the concerned CC/CH of the stock exchange needs to have electronic connectivity with the depository.

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Admission Criteria

Adequate hardware and software systems to interact with the depository satisfied that the CC or a CH of a stock exchange operates in such a manner that it ensures payment against delivery or guarantees settlement; to co-operate at all times to redress the grievances of clients and DPs in respect of its operation in relation to the depository; the operational capability to provide the services relating to clearing and settlement of transactions pertaining to the securities admitted to the Depository to be held in dematerialised form.

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Issuers and Registrar and Transfer Agents

Issuer of the security i.e. company may offer a facility to hold the securities issued by it in demat form by entering into an agreement with the depository. The issuers who intend to offer demat facility will have to first establish connectivity with the depository either directly or through a Registrar & Transfer Agent which in turn have connectivity with the depositories.

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categories of securities are eligible for dematerialisation as per SEBI (Depositories & Participants) Regulations, 1996: shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate; units of mutual funds (MFs), rights under collective investment schemes (CISs) and venture capital funds (VCFs), commercial paper (CP), certificates of deposit (CD), securitized debt, money market instruments and government securities, unlisted securities shall also be similarly eligible for being held in dematerialized form in a depository

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Eligibility Criteria
The Issuer and/or its R&T Agent undertake to cooperate at all times to redress the grievances of the client and the DP. The Issuer and/or its R&T Agent shall have adequate hardware and software systems to interact with Depository as specified from time to time in the Business Rules. The Issuer and its R&T Agent if any, have signed the tripartite agreement as per the Bye-Laws of the depository.

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Rights and Obligations of Issuers and their R&T

Agent

Every issuer has to provide timely information to the depository about various corporate actions. These include - book closure, record dates, dates for payment of interest or dividend, dates for the annual general meeting, dates of redemption of securities The issuer and its R&T Agents have to reconcile with the records of the depository, the records in respect of balances of eligible securities with clients and confirm to all the Depositories, the total security balances both in physical as well as in electronic holdings in the books. The depository is responsible for the accuracy/correctness of all such information related to eligible securities intimated by it to the Issuer/R&T Agent. The Issuer/R&T Agent is responsible for the accuracy and correctness of all information furnished by it in 56 the prescribed format to the depository

Closure of Account

DP can close a depository account on receipt of an application in the prescribed format. The application should be made by the account holder or by all the joint holders. An account can be closed only when there is no balance in the account. In case there is any balance in the account which needs to be closed, the following steps are followed: Rematerialisation7of all securities Transferring the balance to the credit of another accoun

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Dematerialization

is the process of holding the securities in a fungible form. They do not bear any distinguishable features like distinctive number, folio number or certificate number. Once the shares are dematerialised, they lose their identification features in terms of share certificate number, distinctive numbers and folio numbers. Title to the securities owned is in terms of

number of securities and not in terms of distinctive numbers, certificate numbers etc. Each security is identified in the depository system by an International Securities Identification Number (ISIN) and a short name.
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International Securities Identification Number (ISIN)

Securities dematerialised bear a distinctive ISIN. This ISIN is a unique identification number for each security in any of the International Standards Organisation (ISO) member countries in accordance with the ISIN Standard (ISO 6166). ISO 6166 was developed for use in an international (cross-border) as well as domestic trades. ISIN is a 12-character long identification mark. It has three components - a pre-fix, a basic number and a check digit.
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The pre-fix is a two-letter country code as stated under ISO 3166 (IN for India). The basic number comprises of nine alphanumeric characters (letter and/or digits). The check digit at the end of the ISIN is computed according to the modulus 10 "Double-Add-Double". It establishes that the ISIN is valid

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To illustrate, ISIN INE 475C 01 012 has the following break up: IN - India E Company Type Last digit - check digit First four digits 475C - Company serial number; 01 - equity (it can be mutual fund units, debt or Government securities); 01 - issue number; 2 - check digit.
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The third digit (E in the above example) may be E, F, A, B or 9. Each one carries the following meaning: E Company F - Mutual fund unit A - Central Government Security B - State Government Security 9 - Equity shares with rights which are different from equity shares bearing INE number. In an ISIN number, it is important to pay special attention to the third digit.

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Which Securities can be dematerialized?

According to the SEBI (Depositories and Participants) Regulations, 1996, the following securities are eligible for holding in dematerialised form. . Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of similar nature of any incorporated company or other body corporate, including underlying shares of ADRs and GDRs. . Units of mutual funds, rights under collective investment schemes and venture capital funds, commercial paper, certificate of deposit, securitised debt, money market instruments, government securities and unlisted securities.
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Dematerialization Process

A holder of eligible securities in the depository system may get his physical holdings converted into electronic form by making a request through the DP with whom he holds a beneficiary account.

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Prerequisites for Dematerialisation Request

The registered holder of the securities should make the request. securities whose ISIN has been activated by the depository, can be dematerialised in the depository system The company/Issuer should have established connectivity with the depository The holder of securities should have a beneficiary account in the same name as it appears on the security certificates to be dematerialised. The holder of securities should have a beneficiary account in the same name as it appears on the security certificates 65 to be dematerialised.

Procedure for Dematerialisation

DP provides dematerialization request forms (DRF) to their clients The client completes the DRF in all respects and submits to the DP along with the security certificates to be dematerialized. The DP checks the DRF for validity, completeness and correctness. The following points should be checked particularly:
The security certificates sought to be dematerialized are attached to the DRF. The certificates are not mutilated or defaced in a manner affecting any material information The name of the client on DRF and the certificates is exactly the same as in the clients account in the DP system Details like security type, face value, paid-up value, certificate numbers, distinctive numbers, number of certificates, total quantity of 66 securities and lock-in status are filled-in correctly.

If the DRF and the accompanying security certificates are not found in order, the DP should return the DRF and certificates. If DRF and accompanying certificates are found in order, the DP should accept the DRF and issue an acknowledgement to the client. The DP should enter the dematerialisation request in DP system after following maker-checker concept. The DP system generates a request number (DRN), which should be mentioned on DRF.
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DP should ensure that the certificates are defaced and mutilated before they are sent to the Issuer / RTA. The security certificates are marked (defaced) with the words Surrendered for Dematerialization with DP name and BO ID. DP must ensure that the security certificates submitted for dematerialization to the issuer or its RTA, bear the DP name, DP ID and Client ID. This is a precautionary measure to prevent misuse of share certificates by anyone. The certificates are mutilated by punching two holes at the top of the certificates by using normal office perforator.

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The DP should forward the DRF and the relevant security certificates to the Issuer or its R&T Agent for dematerialisation. The Issuer or its R&T Agent verifies the DRF and the accompanying certificates for validity, completeness and correctness.
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Transmission

The word "transmission" means devolution of title to shares, for example, devolution by death, lunancy, bankruptcy, winding-up (in case of corporate) etc. The person on whom the shares devolve has to prove his entitlement by submitting appropriate documents and seek transmission. If the securities are held in the depository system, documents have to be submitted to the DP.

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Nomination

The Companies (Amendment) Act, 1999 has introduced provisions for nomination in respect of shares, debentures, fixed deposits, etc. Under the provisions, a shareholder, a debenture-holder, a bondholder or a deposit holder can nominate a person, in whom the shares or debentures or bond or deposits would vest, in the event of original investor's death. The facility can be availed of by any person whether resident Indian or a non-resident Indian investor.

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Functions of Depository ParticipantTrading and Settlement

Transfer of securities from one demat account to another may be done for any of the following purposes: execution of off market transaction i.e. transactions between two accounts on mutually agreeable terms, i.e. a transaction done on a person-to-person basis, without going through the stock exchange mechanism. Transfer arising out of a trade executed on a stock exchange. Transfer arising out of transmission and account closure. 72

Settlement of Off-Market Transactions

Any trade that is cleared and settled without the participation of a clearing member or clearing corporation is called off-market trade, i.e., transfer from one beneficiary account to another due to a trade between them.

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Off-Market Transactions

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Settlement of Market Transactions

A market trade is one that is settled through the participation of a Clearing Corporation/ Clearing House (CC/CH). In the depository environment, the securities move through account transfer. Once the trade is executed by the broker on the stock exchange, the seller either gives an on-market delivery instruction to his DP to transfer securities to his broker's account or on behalf of his broker gives normal pay-in or early pay-in delivery instruction to his DP
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Market Settlement Demat Shares

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Pledge & Hypothecation

The creation of pledge and hypothecation against securities which are held in demat mode is permitted under section 12 of the Depositories Act, 1996. Securities (free balances / lock-in balance) held in a depository account can be pledged or hypothecated against a loan, credit, or such other facility availed by the beneficial owner of such securities the pledgor and the pledgee must have a beneficial account with the same depository both parties need not have their depository account with the same DP
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The nature of control on the securities offered as collateral determines whether the transaction is a pledge or hypothecation. If the lender (pledgee) has unilateral right (without reference to borrower) to appropriate the securities to his account and if the borrower (pledgor) defaults or otherwise, the transaction is called a pledge. If the lender needs concurrence of the borrower (pledgor) for appropriating securities to his account, the transaction is called hypothecation
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Procedure for Pledge/Hypothecation

The pledgor initiates the creation of pledge/hypothecation through its DP and the pledgee instructs its DP to confirm the creation of the pledge The pledge/hypothecation so created can either be closed on repayment of loan or invoked if there is a default.

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Creation of Pledge/Hypothecation by Pledgor

A beneficial owner may contract a loan against the securities owned by him. He may borrow from a bank or any other person A pledge transaction needs an identification which may be an agreement number The borrower is called a pledgor and the lender is called a pledgee. The DP of the pledgor initiates a pledge/hypothecation on request received from the pledgor in the prescribed form
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The pledgor submits the request form containing all details like the details of securities to be pledged, the agreement number, closure date of the pledge/hypothecation (this date is indicative of the duration of pledge/hypothecation), pledgee's details, etc The DP verifies the form for completeness and validity and ensures that the securities to be pledged exist in the pledgor's account The DP then enters the details of the request in DP system as a pledge/hypothecation. On entering the details, a pledge sequence number for the request is generated Securities are then debited from the free or locked-in balances and credited as pledged balances of the pledgor.
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Once a pledge/hypothecation request has been created and verified, the pledgor submits the duly stamped and signed PRF to the pledgee alongwith the letter generated confirming the pledge set-up. The details of the pledge/hypothecation are also electronically communicated to DP system of pledgee's DP for confirmation. The pledge/ hypothecation request is displayed at DP system of pledgee's DP.

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