Chapter 16: SEBI (Depositories and Participants) Regulations, 2018

The SEBI (Depositories and Participants) Regulations, 2018 govern the establishment, governance, and operational standards of Depositories and Depository Participants (DPs).

Who Can Act as a Depository Participant? (Regulation 35)

Registration as a DP can be granted to:

1. Public financial institutions and scheduled commercial banks;
2. Foreign banks operating in India with RBI approval;
3. State financial corporations;
4. Custodians of securities;
5. Registered stock brokers with recognized stock exchanges;
6. Clearing houses or clearing corporations;
7. Registered Registrars to an Issue and Share Transfer Agents (RTAs);
8. Non-Banking Financial Companies (NBFCs).

Capital Adequacy Mandates

• Stock brokers seeking registration as a DP must maintain a minimum net worth of ₹3 Crores (for non-broker DPs, thresholds range up to ₹5 Crores).
• The applicant must possess dedicated, secure hardware connected to the depository via leased lines, continuous power backup, and trained, NISM-certified compliance and operational staff.

To prevent electronic share creation fraud, the regulations enforce strict reconciliation routines between issuers, RTAs, and depositories.

Dematerialisation Timelines (Regulation 74(5))

• Upon receiving physical share certificates along with a Demat Request Form (DRF), the DP must verify signatures and enter the request into the depository system within seven (7) days.
• The physical certificate must be defaced with the stamp "SURRENDERED FOR DEMATERIALISATION" and sent to the issuer/RTA.
• The issuer/RTA must confirm acceptance to the depository and cancel physical certificates within fifteen (15) days of receipt.

Reconciliation of Share Capital Audit (Regulation 76)

• Every listed company must submit a quarterly Reconciliation of Share Capital Audit Report to recognized stock exchanges within thirty (30) days of quarter end.
• The audit must be conducted by a qualified Chartered Accountant or Company Secretary in practice.
• The audit strictly reconciles:

$$\text{Total Issued Capital} = \text{Listed Capital} = \text{Physical Shares} + \text{NSDL Demat Shares} + \text{CDSL Demat Shares}$$

Any discrepancy between issued capital and aggregate demat/physical holdings triggers regulatory investigation.

DPs hold fiduciary responsibility for client securities portfolios.

Segregation and Operational Controls

• Client Account Isolation: A DP cannot debit or credit any client demat account without a valid, signed Delivery Instruction Slip (DIS) or verified electronic instruction (e-DIS with TPIN and OTP).
• Separate Entity Accounts: The DP's own proprietary securities must be held in designated corporate demat accounts, strictly isolated from beneficiary client accounts.

Inspection and Disciplinary Proceedings

SEBI and Depositories conduct periodic audits of DPs to verify DIS book tracking, signature verification standards, and grievance resolution times. Failure to maintain internal controls leads to monetary penalties, suspension of participant rights, or termination of DP registration.

Because depository participants execute transfers of immense monetary value, stringent operational safeguards govern transaction authorizations.

Physical Delivery Instruction Slip (DIS) Controls

• Serialized Books: DIS booklets must be serialized, watermark-protected, and issued only to the account holder with pre-printed client details.
• Loose Slip Prohibition: DPs are strictly prohibited from issuing or accepting loose, unnumbered DIS forms.
• Signature Verification: DPs must rigorously verify physical signatures against specimen signatures captured during account opening. Any deviation requires secondary telephonic confirmation with the client.

Digital Transfer Authorizations: e-DIS & TPIN

To eliminate forged physical slips, depositories deploy electronic delivery instructions:

• e-DIS Architecture: Investors authorizing broker debits for online sales authenticate through a two-factor authentication mechanism incorporating a secret Transaction PIN (TPIN) and dynamic OTP sent to their registered mobile phone.
• Pre-Trade Demat Verification: Shares remain in the client's demat account until the trade is matched and settlement debits are confirmed, eliminating the need for broad physical Power of Attorney (POA) mandates.

Depositories supervise their registered participants through continuous electronic audits and onsite inspections.

Annual DP System Audit

Every DP must submit an annual System Audit Report conducted by an independent certified Information Systems Auditor (CISA/DISA):

• Evaluates network security, database access controls, offsite backup integrity, and disaster recovery testing.
• Tracks turn-around times (TAT) for dematerialization requests, client grievance resolution, and closure requests.

Disciplinary Framework

Where a DP engages in unauthorized client debits, fails to maintain records, or defaults on reconciliation mandates, the Depository or SEBI may:

1. Issue formal warnings or administrative censures;
2. Suspend the DP from onboarding new client accounts;
3. Terminate participant agreements and transfer all constituent demat accounts to an alternate DP.