DEPOSITORY SYSTEM

BACKGROUND
One of the biggest problem faced by the Indian capital market has been the manual and paper based settlement system. Under this system, the clearing and settlement of transaction take place only with the use of paper work. The system of physical delivery of scrips poses many problems for the purchaser as well as the seller in the form of delayed settlements, long settlement periods, high level of failed trade, high cost of transaction, bad deliveries, mismatch of signatures, theft, forgery and multination of certificates.

 In many cases transfer process takes much longer time then two month

as stipulated in section 113 of companies Act, 1956 or section 22 A of

the securities Contracts (Regulations) Act, 1956. Thus, to eliminate paperwork, facilitate scrip less trading and electronic book entry of the transfer of securities, shorten settlement periods, and to improve liquidity in the stock market, it was found necessary to replace the old system of transfer and settlement with the new and modern system of depositories.

DEPOSITORY

A depository is an organisation like a central bank where the securities of a shareholder are held in the electronic form at the request of the shareholder through the medium of a Depository Participant. To utilise the services offered by a Depository, the investor has to open an account with

the Depository through a Depository Participant. According to section 2(e)

of the Depositories Act, 1996. A depository cannot act as a depository unless it obtains a certificate of registration and certificate of commencement of business from SEBI under sub-section (1A) of section 12 of the Securities and Exchange Board of India Act, 1992. .

 Under Section 68 B of the Companies Act, inserted by the Companies (Amendment) Act, 2000, it is mandated that every Initial Public Offer (IPO) made by a listed company in the excess of Rs. 10 Crores has to be issued in dematerialized form by complying with the requisite provisions of the Depositories Act, 1996.

Concluding Notes
Dematerialization is an important function of depository basically it is conversion of physical shares into electronic form which provides safety, reliability and reduces the paper work and risk in trading of securities. It is much improved method over the scrip- based system. This system is more flexible in the sense that it may be reconverted into rematerialisation from electronic process to ordinary certificates at the option of the security holders. Dematerialization has increased investment in securities because it provides safety to the investors. There should be a close watch on the trading in dematerialized securities and see to it that trading does not act as a detriment to investors.

 SEBI should make provisions to overcome the defaults and delays made by the companies regarding dematerialization of securities.

THANK YOU