National Securities Depository Limited

There are two central depositories in India –

• National Security Depository Limited (NSDL) and
• Central Depository Services Limited (CDSL)

NSDL is the first & largest depository in India established on November 8, 1996 which is basically formed for the purpose of handling the securities held in dematerialized form in the Indian capital market. NSDL opens 3602 accounts on an average each day.

NSDL is promoted by Industrial Development Bank of India (IDBI), Unit Trust of India (UTI), and National Stock Exchange (NSE). The principal shareholders of NSDL are as follows –

• Axis Bank Limited
• Citibank
• Deutsche Bank
• HSBC
• State Bank of India (SBI)
• HDFC Bank
• Standard Chartered Bank
• Dena Bank
• Canara Bank
• Oriental Bank of Commerce

NSDL was created to address issues arising because of ownership of securities held in physical form and its transfer.  Some of the benefits of the subscription from the organisation are as follows:

1. No bad deliveries: In case of paper based transaction, the buyer did not have the facility of examining quality of asset before buying it, hence there was a risk involved. The risk has been eliminated by NSDL as securities are held in dematerialized form and hence there are no chances of bad deliveries.
2. Elimination of risks related to physical certificates: – There is a lot of risk involved with physical certificates such as risk of theft, damage due to wear and tear, mutilation, destruction, etc. In depository system, since these certificates are now held in demat form, there is no such risk involved. It also saves the cost incurred for issuing duplicate certificates.
3.  Stamp duty: Stamp duty was essential in the traditional method, now there is no need of paying stamp duty in case securities are transferred through depositories. This rule is also applicable in case of transfer of equity shares, debt instruments and mutual funds.
4. Immediate transfer and registration of securities: In depository system, once the security has been credited to the investor account he becomes the owner of that security legally. This is unlike physical system, where he/she was required to send them to company registrar for changing the ownership which used to take a lot of time. It also exposed the investor to the risk of them being lost in transit and opportunity cost in case there is a delay in transfer.
5. Faster settlement and more liquidity: In case of NSDL, settlement is done on 2^nd working day from the trade day, i.e. T+2 rolling settlement. This enables faster turnover of transaction and the liquidity with investor improves.
6. Faster disbursal of non-cash corporate benefits: NSDL facilitates direct credit of corporate benefits in non-monetary forms such as bonus shares, right shares, etc. to the account of the investor. It offers the facility of quick and safe transfer of securities, thus the risk of certificates being lost in transit is eliminated.
7. Reduction in brokerage: Transfer of securities through depositories helps in reducing the back office paper work, efforts required at the end of brokers and risk faced by them being an introducer. As a result, the brokerage charged by brokers is also reduced. It is beneficial to both investors as well as brokers, thus this is a win–win situation for both.
8. Reduction in handling huge paper work: Online transaction of securities leads to reduction in paper work as everything is available online and at a click of few buttons. This doesn’t require maintaining a number of trail documents for the transaction.
9. Status Reports: Periodic statement of accounts containing the details of transactions executed and status of holding are provided to the investors; thus facilitating better controls.
10. Ease in change of investor details: In traditional system, if there was any change in the details of the investor such as communication address, the investor had to go through the cumbersome process of getting it changed in every company in which he has invested. This process has been simplified as now the investor needs to inform his Depository Participants (DPs) about the change and submit relevant documents. The data is updated everywhere immediately and there is no need to inform every company separately.
11. Simplified process of transmission: The transmission of shares held in demat form can be done by simply providing required documents to DPs and transmission is reflected in the database of all the companies wherein the investor is listed as a registered owner of securities. Thus, eliminating the traditional practice in which the nominee or joint holder had to individually communicate to all the companies in which he holds shares.
12. Simplified process for sale of securities held on behalf of minor: The guardian who has been designated as being responsible for minor is not required to take prior approval of court for selling the securities held in demat form purchased on behalf of the minor.

Since huge amount of money is involved in execution of transactions at NSDL, it is important to take necessary steps or measures to ensure safety. Various safety measures are carried in depository system for investors holding such as:

1. Selection criteria decided by SEBI for DP: SEBI, ensures that only credible entities are selected as depository participants
2. Recording of transactions at central NSDL server: Every transaction executed through NSDL is duly recorded on its central server and is also reflected in the database maintained by business partners.
3. Periodic Statement: DPs are required to provide periodic account statements to investors for better controlling.
4. Periodic checking/inspection: Depository participants and Registrar & Transfer (R&T) Agents are subject to regular audits by NSDL.
5. Random counter checks: Random checks are done by NSDL by forwarding statement to random list of investors so that they can match the statement issued by DP & find out the discrepancy, if any.
6. Control on account entries: Only after the verified instruction of client, DPs are allowed to execute any debit or credit entries in the concerned account.
7. Protection of data: Data exchange between NSDL & its business partners are protected by encryption in accordance with latest technologies.
8. Freeze Facility: A Depository account holder can avail freeze options for freezing the securities lying in the account as long as the account holder wants. An account holder can activate any of the following freeze options –
   • Debits only
   • Debits & Credits
   • Freezing just an individual ISIN in the account
   • Freezing a specified number of securities that exist as part of an ISIN in an account
9. Investor Grievance: All the concerns and grievances of investors have to be resolved by the concerned business partner. If the same cannot be resolved by the business partner, then one can directly approach to NSDL.
10. Insurance Cover by NSDL: To protect the investors from the loss due to omissions, errors, negligence of DPs, etc., NSDL covers and compensates for any such loss.
11. Computer & Communication Infrastructure: It is ensured that the computer hardware and software used by NSDL & its business partner are high end and in conformation to the industry standards.
12. Certification in Depository Operations: NSDL has introduced a certificate programme (NCFM certification) in depository operations for DPs. This course must be cleared by at least 1 individual from each DP. This is done so as to ensure that every branch of DP has at least one individual who is an expert when it comes to depository systems and can explain the same to the local investors as and when required.
13. Disaster Back-Up: NSDL maintains a disaster back-up site to ensure 24×7 availability of the data even after natural or man-made disaster. This site is identical to the mainframe computer and operates when main computer becomes in-operational.
14. Periodic Review: Entire hardware, software and communication network is periodically reviewed to ensure its effectiveness and security.

Services Offered by NSDL

The services offered by NSDL can be grouped under 3 categories:

• Basic Services: As per the provisions of the Depositories Act, NSDL provides various services to investors, brokers, banks and other security issuers participating in the Indian financial market. Any investor, broker or intermediary who wants to avail services of NSDL, is required to open a depository account with DPs.

Depository account can be of 3 types:

• Beneficiary account,
• Clearing member account and
• Intermediary account.

Services provided on the above-mentioned accounts are:

1. Dematerialization: It is a process by which an investor can convert physical certificates into electronic balances.
   • For dematerialization, the investor needs to deface the certificates and surrender them to the Depository Participant.
   • DP intimates NSDL and sends the certificates to the concerned Issuer/ R&T agent.
   • If the Issuer/ R&T agent is satisfied with the certificates, confirmation request is communicated to NSDL.
   • Once the confirmation is received, securities are credited in the depository account of investor by NSDL.
2. Rematerialzation: It is the process through which an investor can convert his securities held in electronic form into physical certificates. For rematerialzation,
   • The investor is required to submit a rematerialzation request to the DP who has the investor’s account.
   • The DP blocks the holding of the investor by entering the rematerialzation request in the system.
   • The securities are blocked only to the extent to which rematerialzation request is received.
   • The DP sends the request to NSDL along with request form to Issuer/ R&T agent.
   • On receiving the request form, the Issuer/ R&T agent prints the certificates and dispatches them to the client.
   • NSDL is also intimated about the acceptance of the request.
   • Thereafter, the client’s blocked balances are debited.
3. Market Transfer: The investor can buy or sell the securities held by them in the dematerialized form.
4. Off-Market Transfer: Trades which are not settled through the Clearing Corporation/ Clearing House of an exchange are classified as “Off-Market Trades”. Delivery of securities to or from sub brokers and delivery for trade-for-trade transactions are some of the examples of off-market trades.
5. Inter-depository transfer: Transfer of securities from an account in one depository to an account in another depository is known as inter-depository transfer.
6. Transmission: Transmission is devolution of title to shares other than by transfer i.e. devolution by death, succession, inheritance, bankruptcy, marriage, etc. This is operational by law.
7. Corporate Actions: Corporate actions are benefits given by companies to the investors. These benefits can be monetary such as dividend, interest, etc. or non-monetary such as bonus, rights, etc.

• Value added Services: NSDL provides various other services like hypothecation of securities, pledge, automatic delivery of securities to clearing corporations, distribution of various cash and non-cash benefits, stock lending, demat of NSC/KVP, demat of warehouse receipts, etc. Some of the services provided are as under:

1. Pledge or Hypothecation of securities:  For availing loan or credit facility, securities held in a depository account can be pledged or hypothecated. Both the borrower (pledger) and the lender (pledgee) should have account in NSDL depository for pledging securities.
2. Automatic Delivery out Instructions: This facilitates Clearing Corporation to execute delivery-out instructions for moving securities from CM Pool Account to CM Delivery Account automatically based on the net delivery obligations of its Clearing Members. The Clearing Corporation can generate Auto DOs on behalf of only those Clearing Members who have authorized it in this regard.
3. Dividend Distribution: Currently, NSDL only facilitates distribution of corporate cash benefits such as dividends to shareholders.
   • Details of all beneficial owners of the security as on the record date of the concerned company are provided by NSDL to the company or its registrar
   • This data is shared with the transfer agent (R & T agent)
   • Thereafter, the company’s R & T agent dispatches dividend entitlements to the beneficial owners
   • Beneficial owners are eligible in the same manner as shareholders holding physical certificates.
4. Lending and borrowing: The transactions which involve lending and borrowing of securities can be executed through approved intermediaries duly registered under the Securities Lending Scheme, 1997 with SEBI.
   • An intermediary can deal in the depository system only through a special account (known as Intermediary Account) opened with a DP.
   • An intermediary account may be opened with the DP only after the intermediary has obtained SEBI approval and registered itself with SEBI under the Securities Lending Scheme.
   • The intermediary must also obtain the approval from NSDL.
5. Public Issue: Investors have an option to seek allotment of public issues in electronic form.
   • NSDL depository system provides facility for allotment of securities directly in to the depository account of the investors in the demat form.
   • As per SEBI guidelines, trades in shares issued through public shall be settled only in demat form.
   • It is advisable that investors seek allotment in demat form.
6. SMS Alert: NSDL offers SMS Alerts facility for demat account holders wherein they can receive alerts directly from NSDL for various transactions such as all debit transfers, failed instructions, overdue instructions, etc. No charge is levied by NSDL for providing this facility to investors.

• NSDL CAS (Consolidate Account Statement): It is a single statement of all investments held in single and joint names in the security market. This facility helps subscribers to electronically access their financial assets as a part of single account. The NSDL consolidated account statement includes details of multiple financial instruments such as mutual funds, investments in equity shares, debentures, government securities held in demat form, bonds, money market instruments such as treasury bills, etc.

The statement is provided only to the primary or sole account holder of the investment account whether held in single or joint name. NSDL CAS is a popular tool as it facilitates the investor to keep a track of his investment portfolio in a simple and reliable way thus ensuring that informed decisions are taken.

NSDL e-Services

As a part of value added services, NSDL also provides various online services known as e-services. These services facilitate faster and reliable execution of transaction. The various e-services provided by NSDL are:

1. SPEED-e:
   • This service was launched in September 2001.
   • It enables the investors to directly upload delivery instruction on SPEED-e website thus reducing the turnaround time.
   • This is available only to those participants who have subscribed for this service.
   • The subscribers are provided with access rights through passwords or smart card or e-token.
2. IDeAS (Internet-based Demat Account Statement): This service was launched in January 2004. It facilitates viewing balances and transactions executed in the demat account online.
3. STEADY (Securities Trading Information Easy Access and Delivery):
   • This service is basically launched for contract notes.
   • Through this service, brokers can electronically deliver/submit contract notes to custodians/ fund managers
   • Brokers have to transmit digitally signed trade information with encryption.
   • It also allows the recipient to enhance or modify contract notes.
4. Depository Account Validation (DAN):-In this service, subscribers can validate/authenticate identities such as client ID, DP ID, PAN and other basic details provided by the investor through online platform.
5. SPICE (Submission of Power of attorney based Instructions for Clients Electronically):
   • In this, Clearing Members can submit auto pay-in instructions to participants (where Clients maintain demat accounts) on SPEED-e facility to debit from the demat accounts of the Clients and credit their Clearing Member (CM) Pool Accounts.
   • Clearing Members are customers who have given Power of Attorney (POA) in favour of the Clearing Member
6. SIMPLE (Submission of Instruction through Mobile Phone Login Easily):
   • This service is for those clients who avail SPEED-e services and use password to login.
   • It facilitates the clients to issue transfer instructions using the mobile phones registered with NSDL.
   • To execute a transaction, the subscriber is required to login to the SPEED-e website using any phone which has GPRS facility.

NSDL carries out its activities through various functionaries called “Business Partners” such as:

• Depository Participants (DPs),
• Issuing companies
• Registrars and Share Transfer Agents,
• Clearing corporations/Houses of the Stock Exchanges
• Investor
• Broker

These entities should get integrated into NSDL’s depository system to provide key services to the clearing members and investors. The investor can obtain depository services through a depository participant of NSDL. It is similar to opening an account in bank. As a person opens a bank account to avail the services of a bank, an investor opens a depository account with a depository participant in order to avail depository facilities. Some salient features of NSDL’s business partners are:

• A clearing member is allowed to open a special account with the depository system for settling trades carried through stock exchanges.
• The clearing account helps the clearing member in receiving securities from clients for the purpose of delivery to the Clearing House/Corporation as pay-in
• This account allows the clearing member to distribute the pay-out to clients received from the Clearing House/Clearing Corporation.
• The clearing corporations/houses of stock exchanges also have to be electronically linked to the depository
• Once linked, these corporations can electronically receive securities delivered by clearing members towards pay-in
• Clearing corporations can give out securities to clearing members towards pay-out.
• An issuer can allow its shareholders to dematerialize by signing an agreement with NSDL.
• After the issuer signs the agreement, an electronic link is established between NSDL, issuer or its R & T Agent.
• NSDL is electronically linked to each of these business partners.
• Specific processes are defined to make an application to NSDL for becoming a business partner.

The business partners of NSDL are as follows:

Depository Participants (DP)

NSDL provides services to the investors through Depository Participants.  Bank, financial institution, custodian, broker or any entity eligible as per SEBI regulations can be appointed as a DP. Using the existing distribution channel helps NSDL reach large number of investors spread across wide geographical area. Investors are required to open a depository account with a DP to avail depository facilities. Appointment of DPs is a 2 step process:

• Evaluation and confirmation by SEBI
• Evaluation and approval by NSDL

Issuers

To become an issuer in NSDL, the entity must be able to offer dematerialization facilities to the shareholders. Security issuers, who have entered into an agreement with NSDL can dematerialize the security issued in NSDL depository. Issuers have to verify the certificates and maintain electronic connectivity. Following is the process for appointment of the issuer:

• An issuer needs to submit the prescribed documents including the letter of intent, audited financials for last 2 years, etc. to NSDL
• NSDL forwards blank Tripartite Agreement to R & T agent.
• The R&T Agent and the issuer signs the agreement
• This agreement is sent back to the NSDL

Registrar and Transfer (R&T) Agent

In NSDL depository system, the issuer can create and extinguish securities held in the demat form. Securities in demat can be created and extinguished in 2 ways. The ways in which securities can be created are:

• By converting the physical securities into demat form, i.e. dematerialization
• The issuer releases instructions to NSDL to credit eligible beneficial owners with securities as per their entitlements

The two ways in which securities can be extinguished are:

• Rematerialisation, i.e. converting demat form securities into physical certificate form
• The issuer releases instructions to NSDL to debit eligible beneficial owners with securities as per their entitlements

To effect these actions, the issuer may utilize the computer facility (named DPM-SHR) that is built in-house or borrowed from the said R&T Agent. Thus, the R&T Agent lends the required computer facility to confirm and execute these activities. Following is the process for appointment of R&T agent:

• Submit an introduction letter to NSDL
• Procurement and installation of required hardware and software
• Submission of the fee to procure DPM-SHR software
• Provision of training to the personnel who shall be managing the operations and equipment
• Pilot testing has to be done to check the working and response of the software system configured
• When NSDL activates the respective business partner as a share registrar, R&T Agent status is confirmed

Clearing Corporation/House

Any stock exchange that desires to facilitate settlement in demat shares should have a clearing corporation/house with a fully operational settlement guarantee mechanism. The settlement guarantee mechanism should be approved by SEBI. A clearing house is a mediator between the buyers and the sellers of financial instruments. It is responsible for settling trading accounts, clearing trades, collecting and maintaining margin money, regulating delivery, and reporting trading data.

• The corporation needs to have an operational structure that guarantees settlement
• The corporation also ensures that the payment against delivery is done flawlessly and in a timely manner
• NSDL has to be satisfied that the Clearing Corporation/House possesses the operational expertise to provide services related to the settlement of transactions with respect to securities that are in demat form
• The Clearing Corporation/House must have possession of necessary hardware and software systems that are crucial for interaction with the Depository without lags/timeouts.
• A clearing house has to ensure the redressal of grievances of clients and participants with respect to its operations in relation to the depository
• The procedure for joining NSDL, systems specification and investments and expenses to be incurred by a clearing corporation/house is same as that of Depository Participant.

Investor

An investor is a person or entity that invests in the financial instruments. An investor has to just open a beneficiary account with the DP along with the required documents.

Broker

Brokers are an important link between investors and the associated Clearing Corporation/House. They must have a clearing account with any DP. Such an account can be utilized only for the purpose of receiving and transferring the shares from and to the concerned Clearing Corporation/House. The broker does not have any ownership rights on the shares that move to and fro his account.

Clearing Member Accounts

The clearing member account has three parts:

• Pool Account: Shares are received from selling clients in the pool account. Transfer to buying clients is also done from the pool account.
• Delivery Account: Shares received from selling clients are moved from the pool account to the clearing corporation/house through the delivery account.
• Receipt Account: Shares are received in the pool account from the clearing corporation/house through the receipt account.

• A Non Resident Indian (NRI) or a Person of Indian Origin (PIO) can open a demat account with any depository participant of NSDL.
• The NRI/PIO needs to mention the type of account, i.e. resident or non-resident and sub-type of account, i.e. repatriable or non-repatriable in the account opening form.
• No permission is required from RBI to open a demat account by NRI/PIO.
• Credits and debits from demat account may require general or specific permissions as the case may be, from designated authorized dealers.
• In case a person becomes NRI after opening of the account, he can continue to hold the securities which he/she had purchased as a resident Indian, even after he/she has become a non-resident Indian, on a non-repatriable basis.
• If an NRI coverts his/her status to a resident after opening of account, he should inform the designated authorised dealer and the DP with whom the demat account has been opened.
• Once the information has been conveyed, a new demat account with the resident status will be opened
• Securities are transferred from the NRI demat account to resident account and thereafter the NRI demat account is closed.
• An investor may nominate one or more persons who shall be deemed eligible to claim the proceeds of the account, in case of death of the investor.
• Nomination can also be done by joint holders.
• In case of death of any of the joint holder(s), securities will be transmitted to the surviving holder(s).
• Only in the case of death of all the joint holders, securities will be transmitted to the nominee.
• Nominee can be appointed by filling and submitting nomination form either at the time of opening the account or at a later stage.
• The nomination form requires details of the account, details and signature of nominee, and signature of 2 witnesses.
• Only one nomination can be made for one depository account.
• Different nominations cannot be made for different securities.
• The facility of nomination is available only to individual account holders for both individual and joint accounts.
• A minor cannot nominate directly or indirectly through his guardian.
• Nomination cannot be done by non-individuals such as trusts, partnership firms, POA holders, etc.
• Only individuals can be appointed as nominee, and non-individuals such as trusts, etc. cannot be appointed as nominees.
• Minors can be appointed as a nominee.
• The guardian’s signature is required on behalf of the minor nominee. The name and photograph of the nominee and address and photograph of the guardian must be submitted to the DP.
• The account holder can change the nomination anytime by simply filling up the nomination form once again and submitting it to the DP.
• An account held with another depository can be transferred to NSDL on submission of necessary documents. Hence, inter depository transfers are permitted by NSDL.

Charges

Services provided to investors and clearing members are through DPs. NSDL charges fees from DPs for the services provided and in turn DPs charges fees from their clients.

Fee Payable by Depository Participants

1. Entry Fees: ₹ 25,000 (Non-refundable)
2. Settlement Fees: ₹ 4.50 Per Debit Instruction
3.  Pledge Fees: ₹ 25 per instruction for creation of pledge/hypothecation
4. Custody Fees: NIL
5. Fee for dematerialisation of securities: NIL
6. Fee for rematerialisation of securities: ₹ 10/hundred securities or part thereof, or flat fee of ₹ 10 per certificate (whichever is higher). No rematerialisation fee is charged for government securities.
7. Minimum Fees: ₹ 1.00 Lakhs (if fees charged is less than the minimum fees than difference will be charge thereof )
8. Security Deposit: Each participant have to pay an interest free refundable security deposit of ₹ 10 Lakhs. Clearing Corporation/House of a Stock Exchange will be exempt from payment of security deposit.

Fee Payable by Issuers

Annual Custody Fee – An Issuer of listed securities shall pay an annual custody fee at the rate of ₹ 8 per folio (ISIN position) in NSDL, subject to a minimum amount as mentioned below, plus service tax as applicable:

Value of Securities admitted (₹)	Amount (₹)
Up to 5 Crores	6,000
Above 5 Crores and up to 10 Crores	15,000
Above 10 Crores and up to 20 Crores	30,000
Above 20 Crores	50,000

The fee is applicable for all securities except govt. securities. If issuers fail to pay the applicable fees then depository may charge the interest @ 12% p.a. from the due date till payment date.

• Fee for distribution of non-cash corporate benefits: Fee for non-cash corporate benefits such as bonus, rights, public issue, preferential issue, split, merger, demerger, capital reduction, redemption, etc. is charged at ₹ 10 per debit or credit to accounts subject to minimum fees of ₹ 10,000 as per corporate benefits.
• For Commercial Papers & Short term debentures: Fee of ₹ 10,000 (Plus Taxes) for every five issues during financial year and an additional ₹ 10,000 are charged for additional five issues.
• Joining Fees: An issuer of unlisted securities is required to pay joining fees of ₹ 30,000 (plus taxes) for making its shares available for dematerialisation. However, if the issuer gets its share listed on stock exchange within one year then said fees will be adjusted from the one time custody fee.