PROCESSES RELATED TO DEPOSITORIES

PROCESSES RELATED TO DEPOSITORIES (Part 1)

Key Concepts

Dematerialisation of Securities: The process of converting physical securities into electronic form, involving the investor, DP, issuer/R&T Agent, and Depository.
Rematerialisation of Securities: The process of converting securities in electronic holding to physical form.
Trading and Settlement: The process of facilitating the movement of securities necessitated by trading activities, involving market trades and off-market trades.

Dematerialisation of Securities

Definition: Dematerialisation is the process of converting physical securities into electronic form.
Steps:
- Investor hands over securities to be dematerialised along with the Dematerialisation Request Form (DRF) to the DP.
- The DP sends the request through the electronic system to the issuer/R&T Agent via the Depository interface system.
- The R&T Agent verifies the DRF and physical certificates, then mutilates the certificates upon completion of the demat process.
Important Terms:
- Dematerialisation Request Form (DRF): A form submitted by the investor to the DP for dematerialisation of securities.
- Dematerialisation Request Number (DRN): A unique number generated by the system for each dematerialisation request.

Rematerialisation of Securities

Definition: Rematerialisation is the process of converting securities in electronic holding to physical form.
Steps:
- Investor submits a Rematerialisation Request Form (RRF) to the DP.
- The DP validates the signature and availability of shares in the investor's account.
- The request is electronically forwarded to the Depository, and the RRF is sent to the Issuer/R&T Agent for processing.
Important Terms:
- Rematerialisation Request Form (RRF): A form submitted by the investor to the DP for rematerialisation of securities.

Trading and Settlement

Definition: Trading and settlement involve the movement of securities necessitated by trading activities.
Types of Trades:
- Market Trades: Trades done through the trading, clearing, and settlement mechanism of the stock exchange.
- Off-Market Trades: Trades done outside the purview of the stock exchange, involving direct transfer of securities between the buyer and seller.
Important Terms:
- Delivery Instruction Slip (DIS): A form used by the account holder to instruct the DP to debit their account for market trades.
- Standing Instructions (SI): Instructions given by the account holder to the DP for automatic credits to their account.

Processes Related to Depositories (Part 2)

Movement of Securities

The seller gives instructions to his DP (Depository Participant) to move securities to the clearing member account of the broker.
The broker transfers the securities to the clearing corporation by the pay-in date specified in the settlement schedule of the exchange.
The clearing corporation transfers the securities to the clearing member account ID of the receiving broker.
The buyer’s broker gives instructions to transfer the securities to the beneficiary account of the buyer.

Settlement Cycle

Secondary market trades in India have moved into the T+1 (Trade + 1) settlement cycle from 27 January 2023.
This change aims to bring operational efficiency, quicker fund remittances, share delivery, and easy trading for stock market investors.

Inter-Depository Delivery

Inter-depository delivery of securities is possible only if the security is available for dematerialization in both depositories.
Instructions have to be given in the inter-depository delivery or receipt forms to the DPs of the seller and the buyer.

Beneficial Owner Reporting

An investor holding dematerialized shares can conduct transactions such as transfer of shares without having to resort to the Issuer/R&T agent.
The depository provides information about the change in the holding of beneficial owners of the shares of the company, including:
- ISIN
- Name(s) of the holder(s)
- Address
- Minor Indicator/Date of Birth
- PAN details
- Bank account details
- Nominee details, if any
- Details of the DP
- Client account number of the beneficial owner
- Number of shares

Corporate Actions

The depository, issuer, R&T agent, DP, and the investor are involved in giving effect to corporate actions such as:
- Bonus/Split/Consolidation
- Rights
- Mergers/Acquisitions

Bonus Issue/Split/Consolidation

The company informs the depository and R&T agents about the record date for the bonus issue.
The depository generates a beneficial owner’s report as on this date, based on which the R&T agent updates the beneficial owner master and calculates the entitlements for each beneficial owner.

Rights Issue

The company obtains the beneficial owner download from the depository by giving details of the ISIN for which they want the report and the book closure period/record date.
The R&T agent calculates the rights allotment of each beneficial owner and sends the composite application form to them.

Mergers and Amalgamations

In a merger of two companies or a takeover of a company by another, a scheme of amalgamation or takeover is decided, which defines the number of shares of one company that will be exchanged for the other or issued in the other company.
The R&T agent of the transferee company is responsible for undertaking all activities related to the merger/takeover.

Reconciliation

The records of the holdings in a security are maintained by the issuer/R&T agent through the register of members.
The records held with the R&T agent and with the depository are reconciled on a daily basis to check the integrity of the total capital issued by the company.
The holding in the register of members along with the pending dematerialisation and rematerialisation requests should be equal to the holding in the depository along with the pending dematerialisation and rematerialisation requests.

Processes Related to Depositories (Part 3)

Key Concepts

Distinctive Numbers (DN): A unique identifier assigned to each share, used to track and record share ownership.
Dematerialization: The process of converting physical shares into electronic form, held in a demat account.
Rematerialization (Remat): The process of converting dematerialized shares back into physical form.

Handling of Distinctive Numbers

Fresh Issuance: Distinctive numbers are assigned to each share when a company is incorporated and shares are allotted to promoters and subscribers.
Transfers: When shares are transferred, the distinctive numbers are carried over to the new owner, and a new folio number is assigned.
Duplicate Certificates: When a share certificate is lost, a duplicate certificate is issued with a new certificate number, but the distinctive numbers remain the same.
Split and Consolidation: When a certificate is split or consolidated, the distinctive numbers are adjusted accordingly.

Demat Mode

Dematerialization: When a company gets demat connectivity, depositories are added as shareholders, and distinctive numbers are moved to the folio of the depository.
Rematerialization: When a shareholder wants to remat their shares, a new folio and certificate number are assigned, and the distinctive numbers are moved from the depository's folio.

Key Processes

Transmission and Transposition: Similar to transfer, but with different transaction types in the records.
Certificate Split and Consolidation: Changes the certificate number, but keeps the distinctive numbers the same.
Demat and Remat: Involves moving distinctive numbers between the company's register and the depository's folio.

PROCESSES RELATED TO DEPOSITORIES (Part 4)

Crediting Shares to IEPF Account

Procedure for Transferring Shares: The procedure involves crediting shares to the demat account of the IEPF Authority within 30 days of such shares becoming due for transfer to IEPF.
Transmission of Shares: The transfer of shares by companies to IEPF shall be deemed to be transmission of shares, and the procedure for transmission of shares is to be followed.
Authorization: The Board of Directors shall authorize the Company Secretary or any other person to sign the necessary documents for effecting the transfer of shares to IEPF.
Notification: The company shall inform the shareholder concerned regarding the transfer of shares and post such details on its website.
Publication of Notice: The company shall publish a notice in a leading newspaper in English and regional language having wide circulation, informing the concerned shareholders that the names of such shareholders and their folio number or DP ID and Client ID are available on their website.

Procedure for Claiming Refund

Refund Claim Form: The refund claim is to be filed in Form IEPF-5, downloadable from the IEPF website.
Submission of Form: The claimant should submit the duly filled-in form online and follow the instructions given on the website.
Indemnity Bond: The claimant should submit an indemnity bond in original, copy of acknowledgement, and self-attested copy of e-form along with other documents to the Nodal Officer (IEPF) of the company.
Verification and Refund: Claim forms completed in all aspects will be verified by the concerned company, and on the basis of the company's verification report, the refund will be released by the IEPF Authority in favor of the claimant's Aadhaar linked bank account through electronic transfer.

Key Concepts

IEPF Authority: The authority responsible for managing the shares transferred to it.
Demat Account: A dematerialized account where shares are held in electronic form.
Transmission of Shares: The process of transferring shares from one person to another.
Aadhaar Linked Bank Account: A bank account linked to the claimant's Aadhaar number, used for electronic transfer of refunds.

Sample Questions

On dematerialisation, the name of the Depository Participant is entered in the Register of Members.
The database of distinctive numbers (DN) of equity shares of listed companies is created and maintained by the Depository.
Credits are received automatically to a beneficiary account only if standing instructions are given by the account holder: TRUE.
Every time there is a bonus or rights issue, a new ISIN is created by the depository: FALSE.
Debits to a beneficiary account can be initiated only on receipt of Delivery Instruction.
The main function of a depository in trading activities is Facilitating the movement of securities between buyer and seller.
Shares transferred to IEPF are treated as Transmission of shares.
To claim a refund from IEPF, shareholders must file Form IEPF-5.