Depository and its business partners

Depository and its Business Partners (Part 1)

Depository Participants (DPs): DPs are agents of the depository, registered with SEBI under the SEBI (Depositories & Participants) Regulations, 2018.
Eligibility Criteria: To become a DP, an entity must meet the eligibility criteria prescribed by SEBI, including net worth requirements, and comply with the Bye-Laws of the depository.
Net Worth Requirements: The net worth requirements for DPs vary depending on the type of applicant, with stockbrokers requiring a minimum net worth of Rs. 3 crores and NBFCs requiring a minimum net worth of Rs. 50 lakh.
Application Process: An entity desirous of becoming a DP must submit an application to SEBI through the depository, along with the required fees and documents.
Conditions for Grant of Registration: SEBI grants a registration certificate to a DP after verifying its eligibility, infrastructure, and systems, and ensuring that it is a fit and proper person.
Validity of Registration Certificate: A registration certificate is valid unless suspended or cancelled by SEBI, and the DP must pay a registration fee every five years to keep the registration in force.
Commencement of Operations: A DP can commence operations after complying with the prescribed procedures of the depository, including making an application, obtaining approval, and entering into an agreement with the depository.
Rights and Obligations: A DP must provide a copy of the Rights and Obligations document to the client and keep an acknowledgement of the same on record before acting as a Participant on their behalf.

Depository and its Business Partners

Depository Participant (DP) Account: A DP should open a separate account in the depository system for its own securities.
Client/Beneficial Owner Instructions: Securities should be transferred to or from a Beneficial Owner's (BO's) account only on receipt of instructions from the BO.
Transaction Statements: SEBI has notified the requirement to issue a Consolidated Account Statement (CAS) to enable a single consolidated view of all investments of an investor in mutual funds and securities held in demat form with the Depositories.

Key Concepts

Frequency of Sending CAS:
- If there is any transaction in any of the demat accounts of the investor or in any of his mutual fund folios, then CAS shall be sent to those investors who have opted for delivery via electronic mode (e-CAS) by the twelfth (12th) day from the month end and to investors that have opted for delivery via physical mode by the fifteenth (15th) day from the month end.
- In case there is no transaction in any of the mutual fund folios and demat accounts then CAS with holding details shall be sent to the investor on half yearly basis.
Multilingual CAS: CDSL has introduced a Multilingual Consolidated Account Statement (CAS) to enhance investor experience and accessibility.
Digital Signature: SEBI permits the DP's to provide transaction statements and other documents to the BOs under Digital Signature, as governed under Information Technology Act, 2000.

Depository Participant Requirements

Connectivity: Every depository shall maintain continuous electronic means of communication with all its participants, issuers or issuers’ agents, as the case may be, clearing corporations of the stock exchanges and with other depositories.
Designated Website: DP’s are required to maintain a designated website which brings in transparency and helps the investors to keep themselves well informed about the various activities of the DP.
Monitoring, Reviewing and Evaluating Internal Systems and Controls: The DP should have an adequate mechanism for the purposes of reviewing, monitoring and evaluating its internal systems and accounting controls.
Surveillance Policy: The DP should put in place a Surveillance Policy based on the nature of their Depository business, type of clients, number of transactions etc.
Reconciliation: The DP should reconcile its records with its depository on a daily basis.
Returns: The DP should submit periodic returns to SEBI and to every depository in which it is a Participant in the format specified by SEBI or the Bye-Laws of the depository.

Depository Participant Obligations

Indemnity: A DP has to indemnify the depository, its officers and employees for all costs, fees, expenses, liabilities, taxes, actual losses and damages of any nature whatsoever suffered or incurred by any of them.
Prohibition of Assignment: No DP can assign or delegate its functions as a depository participant to any other person without prior approval of the depository in which it is a participant.

Depository and its Business Partners (Part 3)

Depository Services: Depository participants (DPs) provide depository services to clients, including setup, maintenance, and updates of the depository system.
Insurance: DPs should take insurance cover to protect against business risks and system failures. The depository also takes insurance for itself and on behalf of all DPs.
Record of Services: DPs must maintain and preserve records of all transactions, securities dematerialized or rematerialized, instructions from beneficial owners, and other relevant documents for a minimum of 8 years.

Key Responsibilities of Depository Participants

Anti-Money Laundering (AML) Measures: DPs must comply with the Prevention of Money Laundering Act, 2002 (PMLA) and maintain records of all transactions, including cash transactions above Rs 10 lakhs or its equivalent in foreign currency.
Client Due Diligence: DPs must evolve their own guidelines to comply with PMLA and put in place a policy framework on AML measures, including client acceptance, identification, and transaction monitoring.
Principal Officer and Designated Director: DPs must appoint a Principal Officer and a Designated Director to monitor and report suspicious transactions and ensure compliance with AML obligations.

Maintenance and Preservation of Records

Record Keeping: DPs must maintain and preserve records of all transactions, client identification, and other relevant documents for a period of 8 years.
Internal Mechanism: DPs must evolve an internal mechanism for proper maintenance and preservation of records, allowing for easy and quick retrieval of data.
Certification and Compliance: DPs must obtain certification from internal auditors that they have drawn up a policy on AML measures and comply with relevant laws and instructions.

Compliance with Companies Act and SEBI Regulations

Companies Act, 2013: DPs must comply with relevant provisions of the Companies Act, including preservation of records and archiving.
SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015: DPs must comply with policies for record maintenance and archiving as a listed entity.
Record Preservation Period: DPs must preserve records for the specified period, including permanent preservation for certain records such as Memorandum and Articles of Association, and 8 financial years for others like Resolutions passed by circulation.

Depository and its Business Partners (Part 4)

Depository Records: Depositories are required to maintain various records, including:
- Annual Audited and Financial Statements: Permanent preservation
- Books of Accounts, Ledgers & Vouchers: 8 Financial Years
- Investment Records: 8 Financial Years from the date of redemption
- Engagement letters from Auditors: 8 Financial Years
Tax Records: Depositories are required to maintain tax records, including:
- Excise Returns, Income Tax Returns, Sales Tax/VAT Returns, Service Tax Return: 8 Financial Years
- Documents, Challans and other details/correspondence related to Excise, Income Tax, Sales Tax/VAT, Service tax: 8 Financial Years
Data Integrity and Back-up: Depositories are required to ensure the integrity of data processing systems and maintain back-up records, including:
- Daily back-ups
- Two copies of back-ups, one at a remote site and one on-site
- Back-up on external memory devices to be preserved safely
Uniform Penalty Structure: Depositories may impose penalties on participants for non-compliance with SEBI regulations and/or NSDL/CDSL instructions and byelaws
Suspension and Cancellation of Certificate: SEBI may suspend or cancel a DP's certificate of registration for non-compliance with regulations, including:
- Contravention of Depositories Act, Bye-Laws, Agreements, and SEBI (D&P) Regulations, 2018
- Failure to furnish information or furnishing false information
- Non-cooperation in inspections or investigations
- Failure to comply with SEBI directions
- Failure to pay annual fees
Termination by Depository: Depositories may terminate a DP's participation for non-compliance with regulations
Termination by DP: A DP may terminate its participation by giving 30 days' notice to the depository
Clearing Corporation (CC): A CC is an entity responsible for clearing and settlement of trades on a recognized stock exchange
Admission Criteria for CC: A CC can be admitted as a user on the depository if it:
- Has adequate hardware and software systems
- Ensures payment against delivery or guarantees settlement
- Cooperates with the depository to redress client grievances
- Has operational capability to provide clearing and settlement services
Issuers and Registrar and Transfer Agents: Issuers can offer demat facilities to investors by entering into an agreement with the depository
Eligibility Criteria for Dematerialization: Securities eligible for dematerialization include:
- Shares, bonds, debentures, and other marketable securities
- Units of mutual funds, InvITs, CISs, and VCFs
- Commercial paper, certificates of deposit, securitized debt, and government securities
Rights and Obligations of Issuers and R&T Agents: Issuers and R&T agents are required to:
- Represent and warrant the existence and validity of securities
- Provide timely information to the depository about corporate actions
- Reconcile records with the depository and confirm security balances
- Issue certificates of securities against rematerialization requests

Depository and its Business Partners (Part 5)

Introduction: The depository plays a crucial role in the dematerialization and rematerialization of securities, and its business partners, including the issuer and the registrar and transfer (R&T) agent, are essential to this process.
Tripartite Agreement: A tripartite agreement is entered into between the depository, the issuer, and the R&T agent to facilitate the dematerialization and rematerialization of securities.
Key Terms of the Agreement: The agreement outlines the rights and obligations of the depository, the issuer, and the R&T agent, including:
- The issuer/R&T agent shall furnish a list of authorized officials to interact with the depository.
- The depository shall allocate a unique identity code, known as the International Securities Identification Number (ISIN), to the securities issued by the issuer.
- The issuer/R&T agent shall establish electronic means of communication with the depository and maintain adequate infrastructure and security measures.
- The issuer/R&T agent shall comply with the systems and procedures recommended by the depository and allow access to their systems for periodic audits.
Role of Issuer/R&T Agent in Dematerialization: The issuer/R&T agent verifies the validity of security certificates and authorizes electronic credits to the client's account.
Role of Issuer/R&T Agent in Rematerialization: The issuer/R&T agent takes steps to rematerialize securities, including verifying the client's account balance and issuing physical certificates.
Important Provisions:
- The depository shall not be liable for any loss arising out of the issuer/R&T agent's failure to maintain accurate records.
- The issuer/R&T agent shall indemnify the depository against any losses or liabilities incurred due to incorrect information furnished by the issuer/R&T agent.
- Any claims, disputes, or liabilities arising from dematerialized or rematerialized securities shall be settled between the issuer/R&T agent and the client or third party.

Depository and its Business Partners (Part 6)

Depository's Role in Rematerialisation: The depository intimates electronically about the details of all accepted rematerialisation applications to the Issuer or its R&T Agent on a daily basis.
DP's Role in Rematerialisation: The DP forwards the RRF (Rematerialisation Request Form) to the Issuer or its R&T Agent within 7 days of accepting such request from the client.
Issuer/R&T Agent's Role in Rematerialisation: The Issuer/R&T Agent, after validating the RRF, confirms to the depository electronically that the RRF has been accepted, and despatches the security certificates arising out of the rematerialisation request within a period of 30 days from receipt of such RRF directly to the client.

Role of Issuer/R&T Agent in Corporate Benefits

Corporate Actions: The Issuer/R&T Agent informs the depository about the corporate actions relating to prescribing dates for book closures, record dates, dates for redemption or maturity of security, dates of conversion of debentures, warrants, call money dates, and such other actions from time to time.
Distribution of Corporate Benefits: The Issuer/R&T Agent distributes dividend, interest, or other monetary benefits directly to the eligible beneficial owners on the basis of the list provided by the depository.
Auto Corporate Action: In certain cases, such as split of shares, consolidation of shares, mergers, demergers, bonus shares, etc., corporate action is executed automatically as per the fixed ratio defined by Issuer/R & T Agent, through the depository system, using the feature called "Auto Corporate Action".

Review Questions

Questions to assess your learning, including:
1. The process for registering as a DP.
2. The time frame for the depository to evaluate and forward a DP application to SEBI.
3. The conditions under which a clearing corporation of a stock exchange can open beneficiary accounts for clients.
4. The eligibility of Certificates of deposits for dematerialisation as per SEBI (Depositories & Participants) Regulations, 1996.