VI

Depository
Operation
 Workbook
for
NISM-Series-VI: Depository Operations
Certification Examination

National Institute of Securities Markets

www.nism.ac.in

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This workbook has been developed to assist candidates in preparing for the National Institute of
Securities Markets (NISM) Certification Examination for Depository Operations.

Workbook Version: May 2021

Published by:
National Institute of Securities Markets
© National Institute of Securities Markets, 2021
Plot 82, Sector 17, Vashi
Navi Mumbai – 400 703, India

National Institute of Securities Markets

Patalganga Campus
Plot IS-1 & IS-2, Patalganga Industrial Area
Village Mohopada (Wasambe)
Taluka-Khalapur
District Raigad-410222

All rights reserved. Reproduction of this publication in any form without prior permission of the
publishers is strictly prohibited.

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Foreword
NISM is a leading provider of high end professional education, certifications, training and
research in financial markets. NISM engages in capacity building among stakeholders in the
securities markets through professional education, financial literacy, enhancing governance
standards and fostering policy research. NISM works closely with all financial sector regulators in
the area of financial education.
NISM Certification programs aim to enhance the quality and standards of professionals employed
in various segments of the financial services sector. NISM’s School for Certification of
Intermediaries (SCI) develops and conducts certification examinations and Continuing
Professional Education (CPE) programs that aim to ensure that professionals meet the defined
minimum common knowledge benchmark for various critical market functions.
NISM certification examinations and educational programs cater to different segments of
intermediaries focusing on varied product lines and functional areas. NISM Certifications have
established knowledge benchmarks for various market products and functions such as Equities,
Mutual Funds, Derivatives, Compliance, Operations, Advisory and Research.
NISM certification examinations and training programs provide a structured learning plan and
career path to students and job aspirants who wish to make a professional career in the Securities
markets. Till March 2020, NISM has certified nearly 11 lakh individuals through its Certification
Examinations and CPE Programs.
NISM supports candidates by providing lucid and focused workbooks that assist them in
understanding the subject and preparing for NISM Examinations. This book covers all the aspects
related to the depository operations in India. Candidates will be able to understand the
institutional structure of the depository system in India; processes related to dematerialisation,
trading and settlement, pledging and hypothecation. This book will be beneficial to all the
candidates who want to learn about the functions of Depositories and Depository Participants

S K Mohanty
Director

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Disclaimer

The contents of this publication do not necessarily constitute or imply its endorsement,
recommendation, or favoring by the National Institute of Securities Market (NISM) or the
Securities and Exchange Board of India (SEBI). This publication is meant for general reading and
educational purpose only.

The statements/explanations/concepts are of general nature and may not have taken into
account the particular objective/ move/ aim/ need/ circumstances of individual user/ reader/
organization/ institute. Thus, NISM and SEBI do not assume any responsibility for any wrong
move or action taken based on the information available in this publication.

Therefore, before acting on or following the steps suggested on any theme or before following
any recommendation given in this publication user/reader should consider/seek professional
advice.

The publication contains information, statements, opinions, statistics, and materials that have
been obtained from sources believed to be reliable and the publishers of this title have made
best efforts to avoid any errors. However, publishers of this material offer no guarantees and
warranties of any kind to the readers/users of the information contained in this publication.

Since the work and research is still going on in all these knowledge streams, NISM and SEBI do
not warrant the totality and absolute accuracy, adequacy or completeness of this information
and material and expressly disclaim any liability for errors or omissions in this information and
material herein. NISM and SEBI do not accept any legal liability what so ever based on any
information contained herein.

While the NISM Certification examination will be largely based on material in this workbook,
NISM does not guarantee that all questions in the examination will be from material covered
herein.

Acknowledgement

This workbook has been developed by NISM in consultation with the Examination Committee for
NISM-Series-VI: Depository Operations Certification Examination consisting of representatives
from National Securities Depository Limited (NSDL) and Central Depository Services Limited
(CDSL). NISM gratefully acknowledges the contribution of all the committee members.

About the Author

This workbook has been developed by the certification team of NISM.

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About NISM Certifications

The School for Certification of Intermediaries (SCI) at NISM is engaged in developing and
administering Certification Examinations and CPE Programs for professionals employed in various
segments of the Indian securities markets. These Certifications and CPE Programs are being
developed and administered by NISM as mandated under Securities and Exchange Board of India
(Certification of Associated Persons in the Securities Markets) Regulations, 2007.

The skills, expertise and ethics of professionals in the securities markets are crucial in providing
effective intermediation to investors and in increasing the investor confidence in market systems
and processes. The School for Certification of Intermediaries (SCI) seeks to ensure that market
intermediaries meet defined minimum common benchmark of required functional knowledge
through Certification Examinations and Continuing Professional Education Programmes on
Mutual Funds, Equities, Derivatives Securities Operations, Compliance, Research Analysis,
Investment Advice and many more.

Certification creates quality market professionals and catalyzes greater investor participation in
the markets. Certification also provides structured career paths to students and job aspirants in
the securities markets.

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About the Certification Examination for Depository Participants

The examination seeks to create a common minimum knowledge benchmark for associated
persons engaged or employed by a registered depository participant in:
(a) dealing or interacting with clients;
(b) dealing with securities of clients;
(c) handling redressal of investor grievances;
(d) internal control or risk management;
(e) activities having a bearing on operational risk; or
(f) maintenance of books and records pertaining to the above activities
The certification aims to enhance the quality of services as rendered by the Depository
Participants.

Examination Objectives
On successful completion of the examination, the candidate should:
 Know the basics of the Indian securities market and the depository system, the need for
depository and the key features of the depository system in India.
 Understand the institutional structure of the depository system in India and the business
partners of a depository.
 Understand the regulatory framework in which the depositories and its DPs function,
their eligibility criteria, registration procedure, rights and obligations etc.
 Know the various functions of the Depository and its Depository Participants (DPs) such
as dematerialisation, trading and settlement, pledging and hypothecation.
Understand how a demat account is opened, documents required to open an account and
significance of Power of Attorney (POA).

Assessment Structure
The examination consists of 100 questions of 1 mark each and should be completed in 2 hours.
The passing score on the examination is 60percent. There shall be negative marking of 25 percent
of the marks assigned to a question.

Examination Structure
The exam covers knowledge competencies related to the basics of depository operations,
services provided by the depository participants, account opening formalities and maintenance
of the account, and the regulatory framework in which the depositories function and the
different business partners of a Depository.

How to register and take the examination

To find out more and register for the examination please visit www.nism.ac.in

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CONTENTS

Chapter 1: Introduction to the Indian Capital Market ................................................ 10

1.1 Introduction ....................................................................................................... 10
1.2 Capital Market............................................................................................................. 10
1.3 Regulatory Environment ............................................................................................. 11
1.4 Regulators ................................................................................................................... 12
Chapter 2: Introduction to Depository ...................................................................... 15
2.1 Need for a Depository System .................................................................................... 15
2.2 What is a Depository? ................................................................................................. 17
2.3 Legal Framework ......................................................................................................... 17
2.4 Functions of a Depository ........................................................................................... 23
Chapter 3: Depository and its Business Partners ....................................................... 26
3.1 Depository Participants............................................................................................... 26
3.2 Clearing Corporation (CC) ........................................................................................... 42
3.3 Issuers and Registrar and Transfer Agents ................................................................. 43
Chapter 4: Functions of Depository Participant-Account Opening.............................. 52
4.1 Introduction ................................................................................................................ 52
4.2 Types of Account......................................................................................................... 52
4.3 Beneficial Owner Account........................................................................................... 53
4.4 Clearing Member Account .......................................................................................... 84
4.5 Closure of Account ...................................................................................................... 87
4.6 Freezing of Accounts ................................................................................................... 92
4.7Changes in Client Details.............................................................................................. 93
4.8 Accreditation of Investors for the purpose of Innovators Growth Platform.............. 98
4.9 Mapping of Unique Client Code (UCC) with demat account of the clients ............. 101
Chapter 5: Functions of Depository Participant-Account Operations ....................... 103
5.1 Introduction to Basic Services Demat Account (BSDA) ............................................ 103
5.2 Operations of a Joint Account .................................................................................. 105
5.3 Internet Based Depository Operations of NSDL ....................................................... 107
5.4 Internet Based Depository Operations of CDSL ........................................................ 109
Chapter 6: Functions of Depository Participant-Transmission and Nomination ........ 112
6.1 Transmission of Securities ........................................................................................ 112

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6.2 Nomination for Securities ......................................................................................... 113
6.3 Transmission of Securities ........................................................................................ 114
Chapter 7: Functions of Depository Participant-Dematerialisation .......................... 120
7.1 Introduction .............................................................................................................. 120
7.2 International Securities Identification Number (ISIN) .............................................. 120
7.3 Dematerialisation Process ........................................................................................ 122
7.4 Rematerialisation ...................................................................................................... 135
7.5 De-statementization ................................................................................................. 137
7.6 Restatementization ................................................................................................... 140
Chapter 8: Functions of Depository Participant-Trading and Settlement .................. 143
8.1 Introduction .............................................................................................................. 143
8.2 Settlement of Off-Market Transactions .................................................................... 144
8.3 Settlement of Market Transactions .......................................................................... 147
8.4 Interoperability ......................................................................................................... 154
8.5 Procedure for Subscription and Redemption of Mutual Fund Units ........................ 155
8.6 Handling of Clients’ Securities by Trading Members/Clearing Members ................ 157
8.7 GOI notification regarding the Collection of Stamp-Duty . ...................................... 159
Chapter 9: Special Services – Pledge & Hypothecation ............................................ 161
9.1 Introduction .............................................................................................................. 161
9.2 Procedure for Pledge/Hypothecation ....................................................................... 161
9.3 Recording of Non Disposal Undertaking (NDU) in the Depository System .............. 171
9.4 Margin obligations to be given by way of Pledge/ Re-pledge in Depository System172
Chapter 10: Special Services – Public Offering / Corporate Actions .......................... 174
10.1 Concept of Corporate Actions ................................................................................ 174
10.2 Important Terms ..................................................................................................... 175
10.3 Procedure for Corporate Actions ............................................................................ 175
10.4 Public Issue.............................................................................................................. 180
CHAPTER 11: Special Services - Debt Instruments & Government Securities ............ 186
11.1 Introduction ............................................................................................................ 186
11.2 Certificate of Deposit (CD) ...................................................................................... 189
11.3 Commercial Paper (CP) ........................................................................................... 190
11.4 Government Securities ........................................................................................... 191
CHAPTER 12: Foreign Portfolio Investors (FPI) ......................................................... 202

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12.1 Introduction ............................................................................................................ 202
12.2 Eligibility criteria of FPI applying for a Depository Participant .............................. 202
Chapter 13: Investor services .................................................................................. 207
13.1 Introduction to Redressal of complaints through (SCORES) .................................. 207
13.2 Introduction to Transfer of Shares to Demat Account of IEPF Authority ............... 210
ANNEXURES ........................................................................................................... 212
Annexure 1: Process of Aadhar e-KYC of Resident Investors in the Securities Markets under
section 11A of the PMLA, 2002 ................................................................................ 212
Annexure 2: Use of Technology for KYC .................................................................... 214
Annexure 3: Operational Mechanism for Margin Pledge ........................................... 218
Annexure 4: Framework for Utilization of Client’s Pledged Securities For Exposure And Margin
.............................................................................................................................. 221

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Chapter 1: Introduction to the Indian Capital Market

Learning Objectives:

After studying this chapter, you should know about:

 Capital market and its role in the economy

 Structure and participants of capital market
 Regulators and regulations related to capital market

1.1 Introduction

Transfer of resources from those with idle resources to others who have a productive need for
them is perhaps most efficiently achieved through the securities markets. To state formally,
securities markets provide channels for allocation of savings to investments and thereby
decouple these two activities. As a result, the savers and investors are not constrained by their
individual abilities, but by the economy’s abilities to invest and save respectively, which inevitably
enhances savings and investment in the economy.

A financial market consists of investors (buyers of securities), borrowers (sellers of securities),

intermediaries and regulatory bodies.

1.2 Capital Market

The capital market has two interdependent and inseparable segments, the primary market (new
issuers) and secondary market (stock market). The primary market is used by issuers for raising
fresh capital from the investors by making initial public offers or rights issues or offers for sale of
equity or debt; on the other hand the secondary market provides liquidity to these instruments,
through trading and settlement on the stock exchanges. An active secondary market promotes
the growth of the primary market and capital formation, since the investors in the primary market
are assured of a continuous market where they have an option to liquidate their investments.

There are several major players in the primary market. These include the merchant bankers,
mutual funds, financial institutions, foreign portfolio investors (FPIs) and individual investors. In
the secondary market, there are the stock exchanges, stock brokers (who are members of the
stock exchanges), the mutual funds, financial institutions, foreign portfolio investors (FPIs), and
individual investors. The Registrars and Transfer Agents, Custodians and Depositories are capital

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market intermediaries which provide important infrastructure services to both the primary and
secondary markets.
1.3 Regulatory Environment
The securities market transactions are subject to regulations under the four main
legislations viz.,
 the Securities and Exchange Board of India Act, 1992;
 the Securities Contracts (Regulation) Act, 1956;
 the Depositories Act, 1996; and
 certain provisions of the Companies Act, 2013;
 Prevention of Money Laundering Act.
1.3.1 Securities and Exchange Board of India Act, 1992
The SEBI Act, 1992 vests SEBI with statutory powers for,
(a) protecting the interests of investors in securities market,
(b) promoting the development of the securities market, and
(c) regulating the securities market.

Its regulatory jurisdiction extends over corporates in the issuance of capital and transfer of
securities and all intermediaries and persons associated with securities market. It can conduct
enquiries, audits and inspection of all concerned and adjudicate offences under the Act. It has
powers to register and regulate all market intermediaries and also to penalise them in case of
violations of the provisions of the SEBI Act, Rules and Regulations. SEBI has full autonomy and
authority to regulate and develop an orderly securities market.

1.3.2 Securities Contracts (Regulation) Act, 1956

The SC(R)A, 1956 provides for direct and indirect control of virtually all aspects of securities
trading and the running of stock exchanges and aims at preventing undesirable transactions in
securities. It gives the central government and SEBI the regulatory jurisdiction over (a) stock
exchanges through a process of recognition and continued supervision, (b) contracts in securities,
and (c) listing of securities on stock exchanges. As a condition of recognition, a stock exchange
complies with prescribed conditions from the central government. Organised trading activity in
securities takes place on a specified recognised stock exchange. The stock exchanges determine
their own listing regulations which have to conform to the minimum listing criteria set out in the
Securities Contracts Rules.

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1.3.3 Depositories Act, 1996
The Depositories Act, 1996 provides for the establishment of depositories in securities market
with the objective of ensuring free transferability of securities with speed, accuracy and security
by (a) making securities freely transferable subject to certain exceptions; (b) dematerialisation of
the securities in the depository mode; and (c) providing for maintenance of ownership records in
a book entry form. In order to streamline the settlement process, the Act envisages transfer of
ownership of securities electronically by book entry. The Act has made the securities of all
companies freely transferable in the depository mode, restricting the company’s right to use its
discretion in effecting the transfer of securities. The other procedural and the transfer deed
requirements stated in the Companies Act have also been dispensed with.

1.3.4 Companies Act, 2013

The Companies Act 2013deals with issue, allotment and transfer of securities and various aspects
relating to company management. The Act provides for standard disclosures in public issues of
capital, particularly in the fields of company management and projects, information about other
listed companies under the same management, and management perception of risk factors. It
also regulates underwriting, the use of premium and discounts on issues, rights and bonus issues,
payment of interest and dividends, supply of annual report and other information. Act also
provides for Insolvency and NCLT/NCLAT provisions.

1.4 Regulators
The responsibility for regulating the securities market is shared by the Securities and Exchange
Board of India (SEBI), the Reserve Bank of India (RBI), the Department of Economic Affairs (DEA)
of the Ministry of Finance, Ministry of Corporate Affairs (MCA).

In 2010, the Financial Stability and Development Council (FSDC) replaced the High Level
Coordination Committee on Financial Markets (HLCCFM) which was earlier facilitating regulatory
coordination among the above agencies, though informally. The secretariat of HLCCFM was in
Ministry of Finance (Capital Market Division, Department of Economic Affairs).
The orders of SEBI under the securities laws are appealable before a Securities Appellate Tribunal.
Most of the powers under the SCRA are exercisable by DEA while a few others by SEBI. The
powers of the DEA under the SCRA are also con-currently exercised by SEBI. The powers in
respect of the contracts for sale and purchase of securities, gold related securities, money market
securities and securities derived from these securities and ready forward contracts in debt
securities are exercised concurrently by RBI.

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The SEBI Act and the Depositories Act are mostly administered by SEBI. The rules under the
securities laws are framed by the government and regulations by SEBI, and all these are
administered by SEBI. The powers under the Companies Act relating to issue and transfer of
securities and non-payment of dividend are administered by SEBI in case of listed public
companies and public companies proposing to get their securities listed. The SROs ensure
compliance with their own rules as well as with the rules relevant for them under the securities
laws.

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Review Questions

Questions to assess your learning:

1. Which of the following is NOT directly a part of the Primary Market?

(a) Merchant Bankers
(b) Mutual Funds
(c) Exchanges
(d) Registrars and Transfer Agents

2. An active ________ promotes the growth of the primary market and capital formation.
(a) secondary market
(b) bullion market
(c) money market
(d) forex market

3. ______________ aims at streamlining settlement process by transfer of ownership of

securities electronically by book entry without making the securities move from person to
person.
(a) Companies Act, 2013
(b) Depositories Act, 1996
(c) SEBI Act, 1992
(d) SCRA, 1956

4. _______ has powers to register and regulate all market intermediaries in the securities market
and also to penalise them.
(a) RBI
(b) Depositories
(c) SEBI
(d) IRDA

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Chapter 2: Introduction to Depository

Learning Objectives

After studying this chapter, you should know about the:

 Need for a depository system in India
 Key features of depository system in India
 Indian legal framework which governs the functioning of a depository
 Functions of a depository

2.1 Need for a Depository System

The earlier settlement system on Indian stock exchanges was highly inefficient and risky. It was
characterized by an increased number of bad deliveries, mutilation of share certificates, slow
transfer of securities, theft, forgery, and other irregularities.

There are primarily two legs to the settlement of securities—one is the transfer of securities and
funds and second is the transfer of ownership. Both these legs in the earlier settlement system
were plagued with irregularities. The transfer of securities was done through physical movement
of securities which resulted in delays. The second aspect of the settlement related to the transfer
of shares in name of the purchaser in the books of record of the company. However, the system
of transfer of ownership was grossly inefficient as every transfer involved physical movement of
paper securities to the issuer for registration and endorsement of change in ownership on the
security certificate. In most of the cases, this process of transfer took more than the stipulated
time in the Companies Act. A significant proportion of transactions were recorded as bad
deliveries due to faulty compliance of paper work. All these added to costs and delays in
settlement, restricted liquidity and made investor grievance redress procedure quite time
consuming and in some cases even intractable.

To obviate these problems, the Depositories Act, 1996 was passed. It provided for the
establishment of depositories in securities market with the objective of ensuring free
transferability of securities with speed, accuracy and security. It does so by -
a. making securities of public limited companies freely transferable, subject to certain
exceptions;
b. dematerialisation of the securities for holding and transfer in the depository mode; and
c. maintaining the ownership records in a book entry form.

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2.1.1 Key Features of the Depository System in India
Multi-Depository System: The Depositories Act, 1996 provides for a multi-depository system.
There can be various entities providing depository services.

Dematerialisation: The model adopted in India provides only for dematerialisation of securities.
This was a significant step towards achieving a completely paper-free securities market.
Dematerialisation of securities occurs when securities issued in physical form are destroyed and
an equivalent number of securities are credited into the security holder(s) beneficial owner's
account. India has adopted dematerialisation route through a depository. In a depository system,
the investors stand to gain by way of an efficient settlement, lower costs and lower risks of theft
or forgery, etc. But the implementation of the system has to be secure and well governed. All the
players have to be conversant with the rules and regulations as well as with the technology for
processing. The intermediaries in this system have to play strictly by the rules.

Depository services through depository participants: The Depositories Act, 1996 provides that
the depositories provide their services to the security holder(s) through their agents called
Depository Participants (DPs). The appointment of DPs is subject to the conditions prescribed
under SEBI (Depositories and Participants) Regulations, 2018 and other applicable conditions.

Fungibility: In the depository system, the securities in dematerialised form are not identified by
distinctive numbers and certificate numbers as in the physical environment. Thus all securities in
the same class are identical with each other and are interchangeable. For example, all equity
shares in the class of fully paid up shares are interchangeable.

Registered Owner/ Beneficial Owner: In the depository system, the ownership of securities
dematerialised is vested in the security holder. The depository is recorded in the books of the
issuer as a Registered Owner and in the records of the depository the security holder is recorded
as the Beneficial Owner. However, the ownership rights and liabilities rests with the Beneficial
Owner. All the rights, duties and liabilities underlying the security belong to the beneficial owner.

Free Transferability of shares: Transfer of shares held in dematerialised form takes place freely
through an electronic book-entry system.

2.1.2 Institutional Structure of the Depository System in India

There are several institutions, which facilitate the smooth functioning of the depository system.
They enable the issuers of securities to interact with the investors in the primary as well as the
secondary market. These institutions are:

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a) Depositories
b) Stock Exchanges,
c) Clearing Corporations,
d) Depository Participants (DPs),
e) Issuers, and
f) Registrars and Transfer Agents (RT&As)

The role of each institution mentioned here and the inter-linkages would be discussed in depth
in the subsequent chapters of this workbook to have a correct and holistic perspective about
functioning of the depository system.

2.2 What is a Depository?

The Depositories Act defines a depository to mean "a company formed and registered under the
Companies Act, 1956 and which has been granted a certificate of registration under sub-section
(IA) of section 12 of the Securities and Exchange Board of India Act, 1992." The principal function
of a depository is to provide a facility for investors to hold and transfer securities in
dematerialised form and in book-entry form. The securities are transferred by debiting the
transferor’s depository account and crediting the transferee’s depository account.
As per the Bank for International Settlements (BIS), depository is “a facility for holding securities
which enables securities transactions to be processed by book entry. Physical securities may be
immobilised by the depository or securities may be dematerialised (so that they exist only as
electronic records)”.
In simple terms, depository is an organisation where securities of an investor are held and
transferred in electronic form.
2.3 Legal Framework
The operations of depositories in India are regulated primarily under the following legal
framework:
• The Depositories Act, 1996
• SEBI (Depositories and Participants) Regulations, 2018
• Bye-laws of Depository approved by SEBI,
• Operating Instructions of the depository, and
 Prevention of Money Laundering Act, 2002

2.3.1 Depositories Act, 1996

The Depositories Act enables the setting up of multiple depositories in the country. This was to
ensure that there is competition in the depository services and more than one depository is in

17
operation. The Depositories Act facilitated the establishment of the two depositories in India viz.,
National Securities Depository Limited (NSDL)1 and Central Depository Services (India) Limited
(CDSL)2.
The Depositories Act, 1996, ushered in an era of efficient capital market infrastructure, improved
investor protection, reduced risks and increased transparency of transactions in the securities
market. It also immensely benefitted the issuer companies, in terms of reduced costs and the
effort used in managing their shareholder populace. Due to the introduction of the depository
system, the investors are able to enjoy many benefits like free and instant transferability in a
secured manner at lower costs, free from the problems like bad deliveries, odd-lots etc. Today
the tradable lot is reduced to “one unit” which has enables even a common man is to invest
money in one equity share or bond or debenture. Investors are also spared from the problems
of preserving the securities held in physical form.
Only a company is registered under the Companies Act 2013 and sponsored by the specified
category of institutions, they can set up a depository in India. Before commencing operations,
depositories should obtain a certificate of registration and a certificate of commencement of
business from SEBI. A depository established under the Depositories Act can provide any service
connected with recording of allotment of securities or transfer of ownership of securities in the
record of a depository. A depository however, cannot directly open accounts and provide services
to clients. Any person willing to avail of the services of the depository can do so by opening a
demat account through any Depository Participant of a Depository and need to acknowledge the
‘Rights and Obligation Document’ provided by the Depository Participant 3. The rights and
obligations of depositories, depository participants, issuers and beneficial owners are spelt out
clearly in this Act, SEBI (Depositories and Participants) Regulations, 2018 and the Bye-laws of the
Depository.

Who is a Depository Participant?

A Depository Participant (DP) is described as an agent of the depository. They are the
intermediaries between the depository and the investors. The relationship between the DPs and
the depository is governed by an agreement made between the two under the Depositories Act,
1996, SEBI [Depositories and Participants] Regulations, 2018 and the Bye laws of the Depository.
In a strictly legal sense, a DP is an entity who is registered as such with SEBI under the provisions

1NSDL is the first depository to be set up in India by well-known financial institutions such as IDBI, UTI and the National Stock
Exchange of India Limited. Incorporated in December 12, 1995, it commenced operations on November 8, 1996.

2CDSL promoted by leading Indian banks and Bombay Stock Exchange (erstwhile The Stock Exchange, Mumbai) was registered in
February 1999. It commenced operation on March 22, 1999.

3The term Beneficial Owner-Depository Participant Agreements has been replaced with a common document “Rights and
Obligations of the Beneficial Owner and Depository Participant” vide SEBI Circular Ref. No. MIRSD/12/2013, dated 4-12-2013.

18
of the SEBI Act. As per the provisions of this Act, a DP can offer depository related services only
after obtaining a certificate of registration from SEBI.
2.3.2 Eligibility Criteria for a Depository
A Depository company must have a minimum net worth of Rs. 100 crore. The sponsor(s) of the
depository have to hold at least 51 percent of the equity capital of the depository company.
Participants of that depository, if any, can hold the balance of the equity capital. However, if a
stock exchange is a sponsor of any depository then it cannot hold more than 24 percent of the
paid up equity share capital of the depository.
However, no single depository participant can hold, at any point of time, more than 15 percent
of the equity capital of that depository.
Also, no person other than a sponsor can hold more than 15 percent of the equity share capital
in the depository. The combined holding of all persons resident outside India in the equity share
capital cannot exceed 49 percent of its equity share capital. No FPI can have any representation
in the Board of Directors of the depository. No FPI can acquire shares of the depository otherwise
than through the secondary market.
2.3.3 Registration of a Depository
As per the provisions of the SEBI Act, a depository can deal in securities only after getting a
certificate of registration from SEBI. The sponsors of the proposed depository should apply to
SEBI for a certificate of registration in the prescribed form. On being satisfied with the eligibility
parameters of a company to act as a depository, SEBI may grant a certificate of registration
subject to certain conditions.

For grant of certificate of registration, the sponsor of a Depository should belong to one of the
following categories:
1. A public financial Institution as defined in section 4A of the Companies Act, 1956;
2. A bank included in the Second Schedule to the Reserve Bank of India Act, 1934;
3. A foreign bank operating in India with the approval of the Reserve Bank of India;
4. A recognised stock exchange within the meaning of the Securities Contracts (Regulation)
Act, 1956;
5. A body corporate engaged in providing financial services where not less than 75 percent
of the equity capital is held jointly or severally by these institutions;
6. A body corporate constituted or recognised under any law for the time being in force in a
foreign country for providing custodial, clearing or settlement services in the securities
market and approved by the Central Government; and
7. A foreign financial services institution approved by Government of India

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2.3.4 Commencement of Business
A depository that has obtained registration can function only if it obtains a certificate of
commencement of business from SEBI. A depository must apply for and obtain a certificate of
commencement of business from SEBI within one year from the date of receiving the certificate
of registration from SEBI. SEBI grants a certificate of commencement of business if it is satisfied
that the depository has adequate systems and safeguards to prevent manipulation of records
and transactions. SEBI takes into account all matters relevant to the efficient and orderly
functioning of the depository, particularly in examining, that the:
1. Depository has a net worth of not less than Rs. 100 crore;
2. Bye-Laws of the depository have been approved by SEBI;
3. Automatic data processing systems of the depository have been protected against
unauthorised access, alteration, destruction, disclosure or dissemination of records and
data;
4. Network through which continuous electronic means of communication are established
between the depository, participants, issuers and issuers' agents, is secure against
unauthorised entry or access;
5. Depository has established standard transmission and encryption formats for electronic
communication of data between the depository, participants, issuers and issuers' agents;
6. Physical or electronic access to the premises, facilities, automatic data processing
systems, data storage sites and facilities including back-up sites, and to the electronic data
communication network connecting the DPs, issuers and issuers' agents is controlled,
monitored and recorded;
7. Depository has a detailed operational manual explaining all aspects of its functioning,
including the interface and method of transmission of information between the
depository, issuers, issuers' agents, DPs and beneficial owners;
8. Depository has established adequate procedures and facilities to ensure that its records
are protected against loss or destruction and arrangements have been made for
maintaining back-up facilities at a location different from that of the depository;
9. Depository has made adequate arrangements including insurance for indemnifying the
beneficial owners for any loss that may be caused to such beneficial owners by the
wrongful act, negligence or default of the depository or its participants or of any
employee of the depository or participant; and
10. Granting of certificate of commencement of business is in the interest of investors in
securities market.

20
2.3.5 Rights and Obligations of Depositories
Depositories have the rights and obligations conferred upon them under the Depositories Act,
the regulations made under the Depositories Act, Bye-Laws approved by SEBI, and the
agreements made with the participants, issuers and their R&T agents.

 Every depository must have adequate mechanisms for reviewing, monitoring and evaluating
the depository's controls, systems, procedures and safeguards. It should conduct an annual
inspection of these procedures and forward a copy of the inspection report to SEBI.
 The depository is also required to ensure that the integrity of the automatic data processing
systems is maintained at all times and take all precautions necessary to ensure that the
records are not lost, destroyed or tampered with. In the event of loss or destruction, sufficient
back up of records should be available at a different place.
 Adequate measures should be taken, including insurance, to protect the interests of the
beneficial owners against any risks.
 Every depository is required to extend all such co-operation to the beneficial owners, issuers
and issuer’s agents, custodians of securities, other depositories and clearing organisations, as
necessary for an effective, prompt and accurate clearance and settlement of securities
transactions and conduct of business.
 The depository should indemnify beneficial owners of securities for any loss caused to them
due to the negligence of the DP. Where the loss however, is caused due to the negligence of
a DP, the depository shall have the right to recover it from such DPs.
2.3.6 Bye-Laws
A depository is required to make Bye-Laws governing its operations. The Bye-Laws have to be in
conformity with the Depositories Act and the regulations made thereunder, and need to be
approved by SEBI before becoming effective.
2.3.7 Records to be maintained by Depository
Every depository is required by SEBI regulations to maintain the below mentioned records and
documents for a minimum period of eight years. The PMLA, 2002 also requires the documents
to be maintained for a period of 5 years.4

 Records of securities dematerialised and rematerialised.

 The names of the transferor, transferee, and the dates of transfer of securities.
 A register and an index of beneficial owners.

4The period of maintaining the documents as per the PMLA have been reduced from 10 years to 5 years vide Gazette
notification dated January 04, 2013.

21
 Details of the holdings of the securities of beneficial owners as at the end of each day.
 Records of instructions received from, and sent to, participants, issuers, issuers' agents and
beneficial owners.
 Records of approval, notice, entry and cancellation of pledge or hypothecation.
 Details of participants.
 Details of securities declared to be eligible for dematerialisation in the depository.
 Such other records as may be specified by SEBI for carrying on the activities as a depository.

In addition to the above, a depository being a company incorporated under the provisions of the
Companies Act, whether listed or unlisted shall also comply with the provisions of Companies Act
for maintaining certain registers as indicated here in below:

Sr. No. Relevant Section & Rules Register

1. Section 88 (1) and Rule 3 (1) of the MGT-1: Register of Members

Companies (Management and
Administration) Rules, 2014

2. Section 88 (1) and Rule 4 of the Companies MGT-2: Register of Debenture holders
(Management and Administration) Rules,
2014

3. Section 88 (2) and Rule 6 of the Companies Index of Members

(Management and Administration) Rules,
2014

4. Section 88 (2) Index of Debenture Holders

5. Section 88(3) Register and Index of Beneficial Owner

6. Section 88(4) and Rule 7 of the Companies MGT-3: Foreign Register of Members,
(Management and Administration) Rules, Debenture holders, other security holders or
2014 beneficial owners residing outside India

7. Rule 6 of the Companies (Share Capital and Form SH-2: Register of Renewed and Duplicate
Debentures) Rules, 2014 Share Certificate

8. Section 54 and Rule 8 (14) of the Companies Form SH-3: Register of Sweat Equity Shares
(Share Capital and Debentures) Rules, 2014

9. Section 62 and Rule 12 (10) Form SH-6: Register of Employee Stock Options

10. Section 68 and Rule 17 (12) of the Form SH-10: Register of Shares or Securities
Companies (Share Capital and Debentures) Bought Back
Rules, 2014

22
 11. Section 170(1) and Rule 17 of the Register of Directors and KMPs
Companies (Appointment and Qualification
of Directors) Rules, 2014

12. Section 73 and Rule 14 of the Companies Register of Deposits

(Acceptance of Deposits) Rules, 2014

13. Section 85 and Rule 7 of the Companies Form CH-7: Register of Charges
(Registration of Charges) Rules, 2014

14. Section 186 and Rule 12 of the Companies Form MBP-2: Register of
(Meeting of Board and its Powers) Rules, Loans/Guarantee/Security and Acquisition by
2014 Company

15. Section 187 and Rule 14 of the Companies Form MBP-3: Register of Investments not held
(Meeting of Board and its Powers) Rules, in its own name
2014

16. Section 189 and Rule 16 of the Companies Form MBP-4: Register of Contracts or
(Meeting of Board and its Powers) Rules, Arrangements in which Directors are interested
2014

2.4 Functions of a Depository

a. Account Opening / Modification /Closure: An investor wishing to avail depository
services must first open an account with a depository participant registered with a
depository. The process of opening a demat account is very similar to that of a bank
account. An investor has the option of opening an account with several DPs or opening
several accounts with a single DP. The investor while opening the account has to sign and
submit an account opening form and acknowledgement of the receipt of the copy of the
Rights and Obligation document to the DP. The form and contents of the Rights and
Obligation document are specified by SEBI.
b. Dematerialisation: One of the primary functions of a depository is to eliminate or
minimise the movement of physical securities in the market. This is achieved through
dematerialisation of securities. Dematerialisation is the process of converting securities
held in physical form into holdings in book entry form.
c. Account Transfer: The depository gives effects to all transfers resulting from the
settlement of trades and other transactions between various beneficial owners by
recording entries in the accounts of such beneficial owners.
d. Transfer and Registration: A transfer is the legal change of ownership of a security in the
records of the issuer. For effecting a transfer, certain legal steps have to be taken like
endorsement, execution of a transfer instrument and payment of stamp duty. The
depository accelerates the transfer process by registering the ownership of shares in the
name of the depository. Under a depository system, transfer of security occurs merely by
23
 passing book entries in the records of the depositories, on the instructions of the
beneficial owners.
e. Corporate Actions: A depository may handle corporate actions in two ways. In the first
case, it merely provides information to the issuer about the persons entitled to receive
the corporate benefits. In the other case, depository itself takes the responsibility of
distribution of corporate benefits.
f. Pledge and Hypothecation: The securities held with the depository may be used as
collateral to secure loans and other credits by the clients. In a manual environment,
borrowers are required to deliver pledged securities in physical form to the lender or its
custodian. These securities are verified for authenticity and often need to be transferred
in the name of lender. This has a time and money cost by way of transfer fees or stamp
duty. If the borrower wants to substitute the pledged securities, these steps have to be
repeated. Use of depository services for pledging/ hypothecating the securities makes the
process very simple and cost effective. The securities pledged/hypothecated are
transferred to a segregated or collateral account through book entries in the records of
NSDL. In case of CDSL, the securities pledged/hypothecated are not transferred to a
segregated or collateral account through book entries in their records.
g. Linkages with Clearing System: The clearing system performs the functions of
ascertaining the pay-in (sell) or pay-out (buy) of brokers who have traded on the stock
exchange. Actual delivery of securities to the clearing system from the selling brokers and
delivery of securities from the clearing system to the buying broker is done by the
depository. To achieve this, depositories and the clearing system should be electronically
linked.

Apart from the above listed functions the existing two depositories in India perform a variety of
other functions such as providing nomination and transmission facility to the investors, IPO
related facility, etc.

24
Review Questions

Questions to assess your learning:

1. With the introduction of depository system in India theft, forgery, mutilation of certificates
became more prominent.
(a) True
(b) False

2. During the time when there was no demat of securities, for transfer of securities, __________
was evidence of change of ownership.
(a) Endorsement of physical security
(b) Proof of Delivery
(c) Letter of acknowledgement from the transferee

3. Depositories merely provide information to the issuer about the persons entitled to receive
the corporate benefits and does not in any case take up the responsibility of distribution of
corporate benefits. State True or False?
(a) True
(b) False

4. A Depository Participant has to be registered with

(a) Depository
(b) Exchanges
(c) SEBI
(d) None of the above

25
Chapter 3: Depository and its Business Partners

Learning Objectives:

After studying this chapter, you should know about the following business partners of a
depository and their roles and responsibilities:
 Depository Participants
 Clearing Corporation / Clearing House
 Issuers and RTAs

3.1 Depository Participants

Under the Depositories Act, 1996, a Depository Participant (DP) is described as an agent of the
depository. A DP is an entity who is registered as such with SEBI under the provisions of the SEBI
(Depositories & Participants) Regulations, 2018. As per the provisions of these regulations, an
entity can offer depository-related services only after obtaining a certificate of registration from
SEBI as a depository participant. These regulations also define the eligibility criteria for
registration with SEBI as a depository participant.

The relationship between the DPs and the depositories is governed by an agreement made
between the two under the Depositories Act. The form of the agreement is specified in the Bye-
Laws of the depository.

3.1.1 Eligibility Criteria for becoming Depository Participants

The eligibility criteria to become DPs have been prescribed by the SEBI (Depository &
Participants) Regulations, 2018 and the Bye-Laws of depositories. The DPs have to comply with
the bye laws of the respective depositories, for which membership is sought.

Basic Eligibility: Persons belonging to one of the following categories are eligible to become a
DP:

1. A public financial institution as defined in section 2(72) of the Companies Act 2013.
2. A bank included for the time being in the Second Schedule to the Reserve Bank of India Act,
1934.
3. A foreign bank operating in India with approval of the Reserve Bank of India.
4. A State Financial Corporation established under the provisions of section 3 of the State
Financial Corporations Act, 1951.

26
5. An institution engaged in providing financial services, promoted jointly or severally by any of
the institutions mentioned in the four above-mentioned clauses.
6. A custodian of securities who has been granted a certificate of registration by SEBI.
7. A clearing corporation or a clearing house of a stock exchange.
8. A stockbroker who has been granted a certificate of registration by SEBI.
9. A non-banking finance company.
10. An R&T Agent who has been granted a certificate of registration by SEBI.

Net Worth: SEBI (Depositories & Participants) Regulations, 2018 prescribe a minimum net worth
criteria for different kind of applicants:
 For applicants who are stock brokers or non-banking finance companies (NBFC), the networth
should be Rs. 50 lakh, for granting a certificate of registration to act as a DP.
 For R & T Agents a minimum net worth of Rs. 10 crore is prescribed in addition to a grant of
certificate of registration by SEBI.
 If a stockbroker seeks to act as a DP in more than one depository, he should comply with the
specified net worth criterion separately for each such depository.
 If an NBFC seeks to act as a DP on behalf of any other person, it needs to have a networth of
Rs. 50 crore in addition to the networth specified by any other authority.

No minimum net worth criterion has been prescribed for other categories of DPs. Depositories
however, can fix a higher net worth criterion for their DPs. As per the Bye-laws of the two
depositories, an applicant has to submit a net worth certificate certified by a chartered
accountant (which includes the computation of networth). It may happen that different
depositories have different methodology for calculation of the net worth. In that case the DP may
have different net worth figures for different depositories. The certificate, based on the audited
books of account, should be in the format as specified by the depository in its Bye-Laws/Business
Rules.

3.1.2 Business Restrictions

As per the SEBI (Depositories & Participants) Regulations, 1996 the aggregate value of the
securities of the beneficial owners, held in dematerialised form through a stockbroker DP, cannot
be more than 100 times the net worth of the stockbroker. Where the stock broker, however, has
a minimum net worth of Rs.10 crore, the limits on the aggregate value of the portfolio of
securities of the beneficial owners held in dematerialised form in a depository through him, shall
not be applicable. NBFCs, having a net worth of less than Rs. 50 crore, may act as DPs only on
their own behalf. Only NBFCs having a minimum net worth of more than Rs. 50 crore, in addition

27
to the net worth specified by any other authority, may provide depository related services to
other persons also.

3.1.3 Application for becoming a DP

An entity desirous of becoming a DP of a depository should make an application to SEBI. The
application complete in all respects should be submitted to the depository in which membership
is sought for. The depository evaluates the application and if it finds that the applicant has the
potential to be admitted as a DP, then it forwards that application to SEBI within 30 days from
the date of receipt of the application. Along with the application, the depository also submits its
recommendations regarding the applicant.

The applicant at this stage is required to pay SEBI application fees. The depository may reject the
application, if it is found to be incomplete or not as per the given instructions. SEBI may require
the applicant or the depository to furnish additional information or clarification, appropriate for
considering the application. If the application form is found incomplete, SEBI may also reject the
application after giving an opportunity to the applicant for addressing the objection(s).

3.1.4 Conditions for Grant of Registration

On being satisfied that the applicant is eligible and has complied with the conditions stipulated
in the SEBI (D&P) Regulations, SEBI grants a registration certificate to the applicant. Before
granting a certificate of registration to a DP, SEBI considers, inter alia, whether the applicant has
adequate infrastructure and systems. It also takes into account whether it has in place the
safeguards and trained staff to carry on activity as a DP and the applicant is a fit and proper
person. Grant of registration is also subject to the condition that the Participant shall redress the
grievance of beneficial owners within thirty days of the date of receipt of the complaint and keep
the depository informed about the number and nature of redress. Finally, SEBI also examines
whether the grant of certificate of registration to such a person is in the interests of investors in
the securities market.

The depositories in its Bye-laws have also prescribed the following additional conditions for
admission of DPs to its system.

1. The applicant should furnish information and details of its business history for a minimum
period of three years or from the date of its inception, if less than three years.
2. The applicant should not have been convicted in any of the five years immediately preceding
the filing of the application in any matter involving misappropriation of funds and securities,
theft, embezzlement of funds, fraudulent conversion or forgery.

28
3. The applicant should not have been expelled, barred or suspended by SEBI, self-regulatory
organisation or any recognised stock exchange. However, if three years or more have elapsed
since the punishment, the depository may, at its discretion, consider such an application.
4. The applicant should have a minimum net worth of rupees three crore (for NSDL). The net
worth is to be calculated as per the method of computation prescribed by the respective
depository. The stock broker DP should have a minimum networth of Rs. two crores (for
CDSL).
5. The applicant should furnish details of its Board of Directors/ authorised officials, who would
be responsible for the conduct of the business of the applicant as a participant.
6. The depository may conduct entrance examinations and/or interviews, to examine the
knowledge of the DP (and its staff) related to the operational, functional and technical aspects
of the depository. The applicant shall be mandated to appoint a Compliance Officer, who
would interact with the depository and on the DP's behalf for compliance with the Bye-Laws
and Business Rules and resolving investors/clients' grievances.
7. The applicant should have adequate office space exclusively for depository operations. The
applicant should also furnish details of his main office, including address, fax and phone
number(s). The depository has the sole discretion to decide whether the applicant has
adequate infrastructure facilities at the time of granting admission. For the purpose of
satisfying itself regarding the applicants' eligibility, the depository may carry out an inspection
of their office and facilities.
8. The applicant should make adequate arrangements for conducting effective and safe
depository operations. These should include security measures, risk containment and
insurance requirements, as specified by the depository.

3.1.5 Validity of Registration Certificate

A certificate of registration is valid unless it is suspended or cancelled by the Board. The SEBI
(Depositories and Participants) Regulations, 2018 were amended as per notification dated
December 08, 2016. Accordingly, Participants who had been granted certificate of registration by
the Board, prior to the commencement of the regulations, shall be deemed to have been granted
a certificate of registration as per the Regulations. The DP, to keep the registration in force, shall
pay registration fee as specified in the SEBI (Depositories and Participants) Regulations, for every
five years from the sixth year of the date of grant of certificate of registration or of the date of
grant of certificate of initial registration granted prior to the commencement of the SEBI (Change
in Conditions of Registration of Certain Intermediaries) (Amendment) Regulations, 2016 as the
case may be i.e. w.e.f. December 08, 2016. The specified fee shall be paid three months prior to
the expiry of the block for which the fee has been paid.

29
3.1.6 Commencement of Operations
A DP can commence its operations after complying with the prescribed procedures of the
depository for commencing business operations. Depositories have specified following pre-
requisites for DPs for commencing operations:
1. Make an application to the depository through prescribed form. Furnish all clarifications and
additional documents as may be required by the depository. The depository shall intimate
the DP about the application status.
2. On receiving the approval, an application for connectivity with the depository should be
made. Primary connectivity can be by way of V-sat, leased line or internet. Full-scale
connectivity by way of PSTN line, dial up lines also has to be arranged as a fall back if the
primary connectivity fails.
3. At least one officer of the applicant has to successfully complete the in-depth training
conducted by depository.
4. Procure the prescribed hardware and communicate to the depository about the details of the
hardware installed. The depository then conducts a pilot test to train the staff on the
functions of the depository and to check the systems. The DP also has to participate in the
pilot test.
5. The applicant has to enter into an agreement (format prescribed by Bye Laws of depositories)
with the depository.
6. The application system of the depository has to be activated in the live environment in the
office of the DP. A DP - ID is issued to the DP.
7. The DP can start functioning.

3.1.7 Rights and Obligations

The 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 his behalf. A DP, while
conducting any business with a client, acts as an agent of the depository and is liable to the clients
for all the acts and deeds performed by it. The Rights and Obligations document has to be made
in the form and manner specified by SEBI and the DP Operating Instructions. A copy of the same
should be given to the beneficial owner. However, no Rights and Obligations document is
required in respect of the following:
a. A Foreign Portfolio Investor (FPI) registered with SEBI enters into an agreement with the DP
either directly or through its power of attorney. Such agreement gives the DP an authority to
act on behalf of the foreign portfolio investors for availing the services of the depository and
such agreement has already been filed with SEBI.
b. International Multilateral Agency, who has entered into an agreement with the DP under
Regulation 17 of the SEBI (Custodian of Securities) Regulations 1996, and such agreement

30
 states that the Custodian will also act as a DP and all provisions pertaining to DP shall be
applicable.

Separate Accounts: The DP should open a separate account in the name of each beneficial owner.
The securities of each BO should be segregated from the securities of other beneficial owners or
from the DP's own securities. For DP's own securities, he should open a separate account in the
depository system.

Client/Beneficial Owner Instructions: Securities should be transferred to or from a BO’s account

only on receipt of instructions from the beneficial owner. No entry in the beneficial owner's
account should be made unless it is supported by instructions received from the beneficial owner
as per the agreement made with him.

Transaction Statements – SEBI has vide its Circular No. CIR/MRD/DP/31/2014 dated November
12, 2014 notified the requirement to issue a Consolidated Account Statement (CAS) to enable a
single consolidated view of all the investments of an investor in mutual funds and securities held
in demat form with the Depositories. The Depository may directly send statement of account
including transaction statement and holdings statement to Clients and in such cases Participants
are not required to send such statement of account as per Rule 14.3.1, 14.3.2, 14.3.3 and Rights
and Obligations Document. Provided that whenever the Client requests for such a statement, the
Participant shall be duty bound to provide the same. However, the statements in respect of
Clearing Member (CM) accounts will not be sent by the NSDL and the Participant may continue
sending such statements to CMs.

The frequency of sending the CAS is as follows:

1. 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 that investor on monthly basis.
2. 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. However, in case
of demat accounts with nil balance and no transactions in securities and in mutual fund
folios, the requirement to send physical statement shall be applicable as specified in SEBI
circular no. CIR/MRD/DP/21/2014 issued on July 01, 2014.
3. Further, the holding statement dispatched by the DPs to their BOs with respect to the
dormant demat accounts with balances shall also be dispatched half-yearly in partial
modification of clauses 5(b) and 6(c) of the circular no. CIR/MRD/DP/22/2012 dated
August 27, 2012.

31
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, subject to entering into
legally enforceable arrangement with the BOs for the said purpose. Providing of transaction
statements and other documents in the aforesaid manner would be deemed to be in compliance
with the SEBI (Depositories & Participants) Regulations, 2018.

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.

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. As per the Bye-Laws, a DP has to get an internal audit done of
the depository operations on a half-yearly basis by a practicing chartered accountant or a
company secretary or a cost accountant.

Reconciliation: The DP should reconcile its records with its depository on a daily basis. The
depository system is designed to do this reconciliation automatically every day at the end of the
day (EOD).

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. The following
returns are required to be submitted by its DPs:

Sr. No Particulars NSDL Deadline

1 Investor Grievance Report (Monthly) By 10th of the following

month.
2 Compliance Certificate (July - January) January & July 31st every
year
3 Charge Structure April 30th every year
4 Internal/ Concurrent Audit Report (April - May & November 15th
October) every year
6 Networth Certificate and Audited Financial September 30th every
Statements year.
7 Risk Assessment (April –October) October 31 st & April 30th
every year

32
8 Artificial Intelligence /Machine Learning Quarterly - By 15th of the
Reporting Form (if offering or using such following month
technologies as defined)
9 Cyber Security & Cyber Resilience framework Quarterly - By 15th of the
of Depository Participants following month

Sr. No Particulars CDSL Deadline

1 Investor Grievance Report (Monthly) By 10 th of the following
month
2 Charge Structure Yearly - On or before 30th
April every year or as and
when tariff structure is
revised
3 Internal/ Concurrent Audit Report (October - May 15 every year
March)
4 Networth Certificate and Audited Financial September 30th every
Statements year
5 Internal/ Concurrent Audit Report (April - November 15th every
September) year
6 Compliance report for Internal audit/ Within 30 days
Inspection

7 Change in Compliance officer details Immediately

8 Change in registered office / operational Immediately

address
9 Proposed change in constitution / status of Immediately
DP

10 Proposed change in control of DP Immediately

11 Change in name of DP Immediately

12 Compliance certificate Before 31st July for the
half year period from
January to June & 31st
January for the half year
period from July to
December

33
 13 Risk Assessment Template Within 30 days from the
end of the half year i.e.
31st March and 30th
September
14 Change in Directors Immediately

15 Change in shareholding pattern Immediately

16 Uploading of Scanned DIS in CDAS The DP should scan DIS

and store in a file by the
end of next working day
after it is entered in the
depository system by the
Main DP/Live connected
Branch DP.
17 Placing of CDSL Inspection report / SEBI DP should place the
Inspection report /Internal audit report with reports along with action
the rectification before the Board of taken report before the
Board of Directors in the
Directors of the Company
Board meeting of the
company

DP to Indemnify Depository: 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 for:
1. The failure by the DP to comply with the provision of the Bye-Laws or the DP agreement
or to comply with any directions or procedures of the depository.
2. The acts by the depository or its officers and employees placing reliance upon instructions
or communications by the DP. These include giving effect to instructions or
communications by any of them or the failure of the DP to give instructions to the
depository as contemplated in the Bye-Laws.
3. The acceptance by the depository of eligible securities deposited by the DP and effecting
transactions by the depository according to the Bye-Laws and withdrawal of eligible
securities by the DP.
4. The failure of the DP to deliver eligible securities or to perform other duties or obligations
set out in the Bye-Laws.

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. All the
34
DPs are required to provide the details of all places from where they are offering any of the
depository services to their Clients whether it is about the depository system set-up, head office,
main office, branch, franchisee, service centre, collection centre, drop box centre or by any other
name and any further updates (addition/ deletion/modification) in the information to the
depository within seven days of the change.

Insurance: DPs should take appropriate insurance cover to insure against the losses arising from
any possible business risk and system failure. The depository, however takes insurance for itself
and on behalf of all DPs. The insurance covers business risk and system failure risk. DPs may
additionally take for themselves insurance to cover risks like theft, fire, etc.

Record of Services: The DP should maintain and preserve the following records and documents
for a minimum period of 8 years as per provisions given in the SEBI (Depositories and Participants)
Regulation, 2018 and PMLA and the Rules made thereunder. They should also make them
available for inspection by the depository whenever required.
1. Records of all the transactions entered into with a depository and with a beneficial owner;
2. Details of securities dematerialised, rematerialised on behalf of beneficial owners with whom
it has entered into an agreement;
3. Records of instructions received from beneficial owners and statements of account provided
to beneficial owners;
4. Records of approval, notice, entry and cancellation of pledge or hypothecation, as the case
may be;
5. Records of all the actions taken on the exception reports generated by the system;
6. Details of grievances/arbitration proceedings received from the clients, action taken and status
of the same;
If a DP has entered into an agreement with more than one depository, the records specified
above should be maintained separately for each such depository.

DP’s to ensure adherence to guidelines on Anti Money Laundering Measures-The Prevention of

Money Laundering Act 2002 (PMLA) has come into effect from 1st July, 2005. As per the
provisions of the Act, every banking company, financial institution (which includes chit fund
company, a co-operative bank, a housing finance institution and a non-banking financial
company) and intermediary (which includes a stock-broker, share transfer agent, banker to an
issue, trustee to a trust deed, registrar to an issue, merchant banker, underwriter, portfolio
manager, investment adviser and any other intermediary associated with securities market and
registered under section 12 of the SEBI Act, 1992) shall have to maintain a record of all the
transactions; the nature and value of which has been prescribed in the Rules under the PMLA.
Such transactions include-

35
 All cash transactions of the value of more than Rs 10 lakhs or its equivalent in foreign
currency.
 All series of cash transactions integrally connected to each other which have been valued
below Rs 10 lakhs or its equivalent in foreign currency where such series of transactions take
place within one calendar month.
 All suspicious transactions whether or not made in cash.

Broadly, the guidelines on Anti Money Laundering (AML) measures are as given below-
1. Participants are to evolve their own guidelines (if not already evolved) so as to comply
with the provisions of the PMLA and the rules, guidelines thereof issued by Government
of India (GOI)/SEBI, from time to time.
2. Participants to put in place proper policy framework on AML measures in compliance with
relevant laws, rules and instructions.
3. AML procedures should include inter alia, the following three specific parameters which
are related to the overall ‘Client Due Diligence Process’:
a. Policy for acceptance of clients
b. Procedure for identifying the clients
c. Transaction monitoring and reporting especially Suspicious Transactions
Reporting (STR).
4. Each Participant should appoint a senior management executive to be designated as the
Principal Officer, if it has not already done so. The Principal Officer shall be located at the
head/corporate office of the Participant and shall be responsible for monitoring and
reporting of all transactions and sharing of information as required under the law. He will
maintain close liaison with the other divisions / departments of the Participant, the other
Participant, the enforcement agencies and other institutions which are involved in similar
activities. In addition to the existing requirement of designation of a Principal Officer, the
registered intermediaries shall also designate a person as a 'Designated Director'. In terms
of Rule 2 (ba) of the PML Rules, the definition of a Designated Director reads as under:

“Designated Director means a person designated by the reporting entity to ensure overall
compliance with the obligations imposed under chapter IV of the Act and the Rules and
includes -

o the Managing Director or a Whole-time Director duly authorized by the Board of

Directors if the reporting entity is a company,
o the managing partner if the reporting entity is a partnership firm,
o the proprietor if the reporting entity is a proprietorship concern,
o the managing trustee if the reporting entity is a trust,

36
 o a person or individual, as the case may be, who controls and manages the affairs
of the reporting entity if the reporting entity is an unincorporated association or
a body of individuals, and
o such other person or class of persons as may be notified by the Government if the
reporting entity does not fall in any of the categories above."

In terms of Section 13 (2) of the PML Act (as amended by the Prevention of Money-
laundering (Amendment) Act, 2012), the Director, FIU-IND can take appropriate action,
including levying monetary penalty, on the Designated Director for failure of the
intermediary to comply with any of its AML/CFT obligations. Registered intermediaries
shall communicate the details of the Designated Director, such as, name, designation
and address to the Office of the Director, FIU-IND.
5. Monitoring and Reporting to Financial Intelligence Unit-India
6. Participants are required to report information relating to suspicious transactions, in the
prescribed format, within seven working days of establishment of suspicion, to the
Director, Financial Intelligence Unit-India (FIU-IND) at the following address:
Director, FIU-IND,
Financial Intelligence Unit-India,
6th Floor, Hotel Samrat,
Chanakyapuri, New Delhi-110021.
Participants are required to report to the depository number of suspicious transaction
reports, if any, filed directly with FIU-IND during a given month by 7 th of the following month.

Maintenance and Preservation of records

a. Participants should take appropriate steps to evolve an internal mechanism for proper
maintenance and preservation of relevant records and information in a manner that
allows easy and quick retrieval of data as and when requested by the competent
authorities. Further, the records have to be maintained and preserved for a period eight
years from the date of cessation of the transactions between the Client and Participant.
b. Participants should formulate and implement the client identification program containing
the requirements as laid down and such other additional requirements that it considers
appropriate. The records of the identity of clients have to be maintained and preserved
for a period of eight years from the date of cessation of the transactions between the
Client and Participant.
c. Participants should obtain a certification from their internal auditors that the concerned
Participant has drawn up a policy on Anti Money Laundering Measures in compliance with
the relevant laws, rules and instructions. In addition, in every quarterly report, the

37
 internal auditor must check and certify whether the Participant has complied with the
Policy so drawn up. Any deficiencies should be specifically pointed out in the report.
d. The Compliance Officer of the Participant is required to submit a ‘Compliance Certificate’
in the prescribed format, at half-yearly intervals either separately or through Internal
Audit Report as specified by the depository.
e. Participants should educate the Clients about the objectives of the KYC programme. The
front desk staff needs to be specially trained to handle such situations while dealing with
Clients.
Being a company incorporated under the provisions of the Companies Act, a depository
Participant shall also comply with the relevant provisions of the Companies Act with respect to
preservation of records and archiving of records. In addition to the above, as a listed entity a
Depository participant shall also comply with the policies for such record maintenance and
archiving under SEBI ((Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘’ SEBI
LODR”). Few of the compliances in this regard are indicated here in below for the ready
reference:

38
39
40
DP to Ensure Integrity and Back-up of Data: DPs who maintain electronic records should ensure
the integrity of the data processing systems. All necessary precautions should be taken to ensure
that the records are not lost, destroyed or tampered with. In the event of loss or destruction,
sufficient back-up of records should be taken and made available at all times at a different place.
In order to ensure this, the depositories have prescribed the following back-up policy for its DPs:
1. Business partners have to take back-ups every day without fail.
2. Two copies of back-ups have to be taken; one copy has to be preserved at a remote site
away from the operations and another on the site itself.
3. The back-up on external memory devices should be preserved safely, well protected
against fire, theft and manipulation.
4. If the DPs have large business volumes, they may install an additional back-up machine
which helps them in continuing the business operation even if the main machine fails.

3.1.8 Suspension and Cancellation of Certificate

Suspension of Certificate

The certificate of registration granted to a DP may be suspended by SEBI if it is found that the DP
has:
 contravened any of the provisions of the Depositories Act, the Bye-Laws, Agreements and
SEBI (D&P) Regulations, 2018;
 failed to furnish any information relating to its activity as a DP required under the regulations;
 not furnished the information called for by SEBI under the provisions of the Depositories Act,
1996 or has furnished information which is false or misleading;
 not co-operated in any inspection or investigation or enquiry conducted by SEBI;
 has failed to comply with any direction of SEBI; or
 has failed to pay the annual fee as specified under the SEBI (D&P) Regulations, 2018.

41
Cancellation of Certificate

The certificate of registration granted to a DP may be cancelled by SEBI if it is found that:

 the DP is guilty of fraud, or has been convicted of an offence involving moral turpitude; or
 the DP has been guilty of repeated defaults specified for suspension of the registration.

3.1.9 Termination by Depository

Besides these regulatory provisions, each depository may have its own Bye-Laws for termination
or suspension of its DPs.
Termination by DP
A DP may also choose to terminate its participation in the depository by giving a notice of not
less than 30 days. On receipt of such notice, the depository may cease to provide any service or
act for the DP. The depository should notify the DP, other participants, clients of the
surrendering DP and SEBI within seven days of this action.

3.2 Clearing Corporation (CC)

Clearing Corporation is an entity responsible for clearing and settlement of trades done by
clearing members on a recognised stock exchange. A Clearing Corporation of a stock exchange
are admitted to the depository system for clearing and settlement of securities traded on their
respective stock exchanges. For electronic settlement of securities in demat form, the concerned
CC/CH of the stock exchange needs to have electronic connectivity with the depository.

A Clearing Corporation of a stock exchange may be admitted as a user on the depository after
entering into an agreement with the depository as per the Bye-Laws of depository. A different
agreement has to be drawn up if a clearing house of a stock exchange is not a legal counterparty
to the trades on the exchange and the trade/settlement guarantee fund is held and managed by
the exchange. A third type of agreement has to be entered into if the members/dealers of the
exchange are not the clearing members of the Clearing House. A stock exchange may be admitted
as a user on the depository, if it conducts the activity of clearing and settlement of trades and if
it is not a legal counterparty to the trades thereon and holds and manages the trade/settlement
guarantee fund. In that case, an agreement as laid down in Bye-Laws of has to be entered into.
The provisions of these agreements govern the rights and obligations of the depository, the
clearing corporation or the clearing house of a stock exchange and the exchange, in respect of
transactions entered into in pursuance of such agreements.

42
3.2.1 Admission Criteria
A clearing corporation of stock exchange can be admitted as a user on the depository, only if it
fulfills the conditions laid down. These criteria are listed below:
1. The clearing corporation or a clearing house of a stock exchange has adequate hardware
and software systems to interact with the depository as specified in the Business Rules;
2. The depository should be satisfied that the clearing corporation or a clearing house of a
stock exchange operates in such a manner that it ensures payment against delivery or
guarantees settlement;
3. The clearing corporation or a clearing house of a stock exchange undertakes to co-operate
at all times to redress the grievances of clients and DPs in respect of its operation in
relation to the depository;
4. The depository should be in the opinion that the clearing corporation or a clearing house
of a stock exchange has the operational capability to provide the services relating to
clearing and settlement of transactions pertaining to the securities admitted to the
Depository to be held in dematerialised form.

A Clearing Corporation of a stock exchange shall not be permitted to open beneficiary accounts
for clients, except where it has been permitted by RBI to offer Constituent SGL account facility to
the investors.
3.3 Issuers and Registrar and Transfer Agents
The Depositories Act, 1996 gives option to investors to hold their securities either in physical
form or in book entry form with the depository. Issuer of the security i.e. company may offer a
facility to hold the securities issued by it in demat form by entering into an agreement with the
depository. The issuers who intend to offer demat facility will have to first establish connectivity
with the depository either directly or through a Registrar & Transfer Agent which in turn have
connectivity with the depositories.

The following categories of securities are eligible for dematerialisation as per SEBI (Depositories
& Participants) Regulations, 1996:
 shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of
a like nature in or of any incorporated company or other body corporate;
 units of mutual funds (MFs), units of InvITs, rights under collective investment schemes (CISs)
and venture capital funds (VCFs), commercial paper (CP), certificates of deposit (CD),
securitised debt, money market instruments and government securities, unlisted securities
shall also be similarly eligible for being held in dematerialised form in a depository.

43
3.3.1 Eligibility Criteria

All issuers of the aforementioned securities may make their securities available for
dematerialisation upon fulfillment of certain criteria. The Executive Committee /Securities
Committee (as it may be called by the depositories) of the depository determines the securities
that are eligible for dematerialisation. Before dematerialisation commences, the Issuer or its R&T
Agent, if any, has to comply with the following conditions:
 The Issuer and/or its R&T Agent undertake to co-operate at all times to redress the grievances
of the client and the DP.
 The Issuer and/or its R&T Agent shall have adequate hardware and software systems to
interact with Depository as specified from time to time in the Business Rules.
 The Issuer and its R&T Agent if any, have signed the tripartite agreement as per the Bye-Laws
of the depository.

The above conditions are not applicable to securities issued by Central or State Government. The
depositories may even refuse to accept the admission of securities of an issue as an eligible
security or may remove the same from the list of eligible securities if –
 in the opinion of the depository, the Issuer or its R&T Agent does not have or has ceased to
have the operational capability to provide services in respect of an issue of securities;
 the Issuer or its R&T Agent commits any breach to any terms and/or conditions of the
agreement entered into with the depository;
 the Board of Directors of the depository or the Securities Committee (in case of CDSL), in its
absolute discretion, is satisfied that circumstances exist which render it necessary in the
interest of the investors to do so.

3.3.2 Rights and Obligations of Issuers and their R&T Agents

a. Each Issuer whose securities are admitted to the depository are required to represent and
warrant in favour of the depository that such securities exist at the time of transfer of
securities into the depository and thereafter. The Issuer also has to warrant that these
securities are validly issued and that it is entitled or has full authority to transfer such
securities into the Depository.
b. Every issuer has to provide timely information to the depository about various corporate
actions. These include - book closure, record dates, dates for payment of interest or
dividend, dates for the annual general meeting, dates of redemption of securities, dates
of conversion, dates of exercising warrants and such other information as may be
specified by the Executive Committee of the depository from time to time.

44
 c. The issuer and its R&T Agents have to reconcile with the records of the depository, the
records in respect of balances of eligible securities with clients and confirm to all the
Depositories, the total security balances both in physical as well as in electronic holdings
in the books.
In case where a State or the Central Government is the issuer, the depository reconciles
the records of the dematerialised securities with the statement provided by the RBI on a
daily basis. Every issuer or its R&T Agent shall issue the certificate of securities against
receipt of the Rematerialisation Request Form (RRF) from the Client through the DP and
on receipt of confirmed instructions from the Depository. The Issuer or its R&T Agent are
required to furnish to the depository allotment details of all clients (allottees) who have
opted for securities to be credited to their account in the electronic form. The depository
electronically provides the details of the Clients (allottees) to the Issuer/R&T Agent as per
the requirement of the Issuer. This clause however, does not apply for government
securities.
d. The depository is responsible for the accuracy/correctness of all such information related
to eligible securities intimated by it to the Issuer/R&T Agent. The Issuer/R&T Agent is
responsible for the accuracy and correctness of all information furnished by it in the
prescribed format to the depository.

3.3.3 The Main Features of the Tripartite Agreement

When the issuer (the company which has issued securities) or the investor opts to hold the
securities in a demat form, the issuer enters into an agreement with the depository to enable the
investors to dematerialise their securities. This kind of agreement is not necessary in cases, where
the:
 Depository, is the issuer of securities, or;
 State or central government is the issuer (in case of government securities).
Where the issuer appoints a registrar to the issue or share transfer agent, the depository enters
into a tripartite agreement with the Issuer and Registrar & Transfer (R&T) Agent, as the case may
be, for the securities declared eligible for dematerialisation.

The rights and obligations of the depository, the issuer and R&T Agent are embodied in the
Tripartite Agreement between them. This agreement has to be signed before the Issuer/R&T
Agent can be admitted in the depository system. Some of the main terms of the Agreement are
quoted below:
1. The Issuer/R&T Agent shall furnish a list of authorised officials who shall represent and
interact on behalf of the Issuer and/or R&T Agent with the depository within 15 days of the

45
 execution of this agreement and any changes including additions/deletions thereof shall be
communicated to the depository within 15 days of such change.
2. The depository shall allocate unique identity codes to the securities issued by an issuer. Such
code is called ISIN (International Securities Identification Number).
3. The Issuer/R&T Agent shall establish continuous electronic means of communication with the
depository and the depository in turn shall provide necessary manuals and procedural
guidelines to the Issuer/ R&T Agent as is necessary for effective and prompt conduct of the
business of the Depository. The Issuer/R&T Agent shall maintain such systems, procedures,
means of communication, adequate infrastructure, hardware, software security devices and
backup facilities as may be prescribed by the depository.
4. The Issuer/R&T Agent shall strictly follow the back-up procedure recommended by the
depository. A copy of the latest back-up of database and subsequently incremental back-up
shall be maintained at a designated remote site.
5. The Issuer/R&T Agent shall comply with all the systems and procedures recommended by the
depository and shall allow access to their systems to an Audit Team, designated by the
depository for periodic assessment of compliance with systems and procedures.
6. The Issuer/R&T Agent agree that the depository shall not be liable to the Issuer/R&T Agent
for any loss arising out of any failure of the Issuer/R&T Agent to keep full and up-to-date
security copies (back-up) of computer programme and data it uses in accordance with the
best computing practice.
7. The Issuer shall inform the depository on the next day on which the information is being sent
to the stock exchanges in which the eligible securities are listed, about the dates from which
new shares arising out of conversions, further issues, final call payments, etc. become pari
passu with its existing shares.
8. The Issuer shall furnish information to the depository of any further issues such as rights,
bonus, public offerings with details viz., opening and closing dates, issue size, issue price,
record date, book closure, proportion, along with a copy of the offer document.
9. The Issuer shall give information to the depository about book closures, record dates, dates
for the payment of interest or dividend, dates for annual general meetings and other
meetings, dates for redemption of debentures, dates for conversion of debentures and
warrants, call money dates, amalgamation, merger, reduction of capital, reconstruction
scheme of arrangement, sub-division, consolidation, and conversion of debentures/loans and
such other information relating to any corporate action, on the next day it is being
communicated to the relevant stock exchanges, where the eligible security is listed.
10. The Issuer and its R&T Agent undertakes that the dematerialisation and rematerialisation
requests are processed within 15 and 30 days respectively. However, the period may be
relaxed by the depositories in case of bulk dematerialisation requests.

46
11. The Issuer and its R&T Agent undertakes that no dematerialisation requests shall be accepted
when there is any prohibitory order, stop transfer, attachment order, or disputed title, on the
day of such request. It is agreed that where a court order has been received by the Issuer
and/ or its R&T Agent or where there are court orders against any transfer request if such a
request is entertained, the Issuer/R&T Agent shall be entirely responsible. The Issuer/R&T
Agent agrees to be fully responsible for destruction, mutilation and cancellation of
certificates received and accepted by it for dematerialisation.
12. It is agreed that the Issuer/R&T Agent will continue to be responsible for corporate actions.
The depository undertakes to provide the list of beneficial owners with suitable details to the
Issuer/ R&T Agent as of the record date. The list shall be provided by the depository within
such time as specified by the depository from time to time after such request has been
received by them. In the event of any loss caused to the Issuer/R&T Agent, in respect of any
incorrect information relating to the Client, furnished by the depository or its Participant, the
depository shall indemnify such losses.
13. The Issuer/R&T Agent shall indemnify the depository in respect of any loss or liability
incurred, or any claim arising in respect of any incorrect information furnished by the
Issuer/R&T Agent in respect of the operations of the Depository.
14. Any claims, disputes or liabilities arising in respect of any securities which have been
rematerialised under intimation from the Issuer/R&T Agent to the depository after the
despatch of such securities' certificates in the manner laid down under the Bye-Laws shall be
settled between the Issuer/R&T Agent and the owner of such securities.
15. In the case of securities that have been dematerialised and electronically credited to the
accounts of the Clients under intimation from the Issuer/R&T Agent in the manner laid down
under the Bye-Laws, any claims, disputes or liabilities or cause of action from a third party
arising in respect of such securities pertaining to any fake or forged securities shall be settled
between the Issuer/R&T Agent and such third party.
16. The depository may authorize persons who shall have the right to enter during the regular
business hours, on any working day, the premises of such Issuer/R&T Agent where the
records relating to the depository operations are being maintained and inspect, and take
copies thereof. It shall also provide reports updating details of BOs on a fortnightly basis to
the Issuer/R&T Agent.
17. The depository shall provide the details of the list of BO’s as well as the pending requests for
Dematerialisation and Rematerialisation that may be required by the Issuer/R&T Agent from
time to time on the payment of such charges as may be provided in the Business Rules.
18. Such information shall be provided within a stipulated period from the date of making such
request. Where the list of Beneficial Owners is required as on a particular date, the same shall
be provided within a stipulated period after such date or as decided by the depository from

47
 the date of receipt of such request by the depository whichever is later. NSDL has specified
the period as 15 days.
19. The depository shall in its discretion provide any other details that may be required by the
Issuer and/ or its R & T Agent from time to time on the payment of such charges as it may
deem fit.
20. The Issuer and/or R & T Agent shall inform the depository of any proposed changes in the
address of the Registered Offices, Corporate Office or of the location where the equipment
for communication with the depository is situated not less than thirty days before the date
of such change.
21. The depository shall inform the Issuer and/or its R & T Agent of any proposed changes in the
address of its Registered Office or Corporate Office not less than thirty days before the date
of such change.
22. The Issuer shall not change, discontinue or substitute its R & T Agent unless the alternative
arrangement has been agreed to by the depository.
23. The Issuer and/or its R & T Agent shall not assign to any other person/ entity its functions &
obligations, relating to transactions with the Depository, without the approval of the
depository.
24. All parties to this agreement shall resolve the grievances of the BOs within a period of 21 days
for NSDL and 30 days as per CDSL agreement, from the date of receipt of the complaint,
concerning the depository, the Issuer and/ or its R & T Agents.

3.3.4 Role of Issuer/ R&T Agent in Dematerialisation of Securities

The Depository electronically intimates, on a daily basis, all dematerialisation requests to the
respective Issuer or its R&T Agent. The Issuer or its R&T Agent have to verify the validity of the
security certificates as well as the fact that the demat request has been made by the person
recorded as a member in its Register of Members. After such verification, the Issuer or its R&T
Agent intimates the depository and authorizes an electronic credit for that security in favour of
the Client. On receipt of such intimation, the depository makes the credit entries in the account
of the Client concerned. No credit of any securities to the accounts of any client can be made
unless the depository has received intimation from the Issuer or its R&T Agent. Where the Issuer
or its R&T Agent rejects any dematerialisation request, it has to electronically intimate the
depository regarding such rejection within a period of 15 days. After intimating such rejection to
the depository, the Issuer or its R&T Agent returns the DRF along with the rejection reason and
relevant security certificates, unless the reasons for rejection are any of the following:
o the security certificates are stolen or;
o the security certificates are fake or;
o in the event of an order from a court or a competent statutory authority prohibiting the
transfer of such securities or;
48
 o in case duplicate certificates have been issued in respect of the securities with the same
distinctive numbers.

The Issuer or its R&T Agent, after giving intimation as set out in the Bye-Laws, represents and
warrants to the depository, that such securities exist and are validly issued and it is entitled or
has full authority to transfer such securities with the Depository in the name of the Client 5.

3.3.5 Role of Issuer/ R&T Agent in Rematerialisation of Securities

A Client may withdraw its security balances with the Depository at any point of time by making
an application for rematerialisation to the Depository through its DP. When the investor submits
the Remat Request Form (RRF), the Issuer and/or its R&T Agent and the depository have to take
the following steps:
 The depository intimates electronically about the details of all accepted rematerialisation
applications to the Issuer or its R&T Agent on a daily basis.
 The DP forwards the RRF to the Issuer or its R&T Agent within 7 days of accepting such request
from the client. The Issuer/R&T Agent, after validating the RRF, confirms to the depository
electronically that the RRF has been accepted. Thereafter, the Issuer/R&T Agent 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. On receipt of such acceptance from the Issuer/
R&T Agent, depository debits the balances from the respective client's account held with the
DP's.

3.3.6 Role of Issuer/R&T Agent in Corporate Benefits

It is the function of the Issuer/R&T Agent to inform 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 action
from time to time and submit necessary approval documents for the corporate actions. On
receiving such intimation, the depository provides the details of the holdings of the clients
electronically to the Issuer/R&T Agent (as of relevant cut- off date) for the purpose of corporate
actions and 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. The corporate
benefits can be distributed through the depository also with its concurrence. The Issuer/R&T

5CDSL has a provision of opening an account for unclaimed securities by an Issuer, but it is applicable for securities being issued
in IPO and is not to be used for dematerialisation process.

49
Agent may, if the benefits are in the form of securities, distribute such benefits to the clients
through the depositories in the following cases:
• The newly created security is an eligible security.
• The concerned client has consented to receive the benefits through the depository.
In such a case, the Issuer/R&T Agent provides allotment details of all clients to the depository.
On receipt of these details, the depository makes the necessary credit entries in the account of
the client concerned. 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. This feature is called "Auto
Corporate Action".

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Review Questions

Questions to assess your learning:

1. For registering as a DP, the application should be submitted __________.

(a) separately to Depository and SEBI
(b) to Depository, who will in turn forward it to SEBI after evaluation
(c) to Depository who will in evaluate and register the DP
(d) directly to SEBI and a copy should be sent to Depository for information only

2. After Depository receives an application for registering as a DP, it evaluates and forwards the
application to SEBI within _______.
(a) 30 days
(b) 15 days
(c) 45 days
(d) 90 days

3. As per PMLA, records of services need to be preserved for _______ years.

(a) 1
(b) 5
(c) 7
(d) 10

4. Are Certificates of deposits eligible for dematerialisation as per SEBI (Depositories &
Participants) Regulations, 1996?
(a) Yes
(b) No

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Chapter 4: Functions of Depository Participant-Account Opening

Learning Objectives:

After studying this chapter, you should know about:

 Two types of depository accounts—Beneficiary account and Clearing

member account
 Opening and closing procedures of depository accounts
 Freezing of depository accounts
 Procedure for changes in client details of accounts

4.1 Introduction

An investor wishing to avail depository services must first open accounts with a DP registered
with a depository. The process of opening a demat account is very similar to that of a bank
account. An investor has the option of opening an account with several DPs or opening several
accounts with a single DP. There are several DPs offering various depository-related services.
Each DP is free to frame its own fee structure. Investors have the freedom to choose a DP based
on certain criteria such as convenience, comfort, service levels, safety, reputation and charges.
The investor while opening an account has to submit an acknowledgement of receipt of the copy
of the Rights and Obligations document the DP. The form and contents of the Rights and
Obligations document are specified by SEBI and DP Operating Instructions of the depository in
which the DP is registered.

In this chapter we will understand the different types of accounts and the procedure for account
opening under the depository system.

4.2 Types of Account

There are mainly two types of demat accounts which can be opened with a depository participant
viz., (a) Beneficial Owners Account, and (b) Clearing Member Account. The type of depository
account depends on the operations to be performed.

Beneficiary Account: A beneficial owner’s account is an ownership account. The holder/(s) of

securities in this type of account owns the securities. For example, Mr. Ram who is a retail
investor trades in the securities market. The securities which he buys or sells will be kept in his
beneficial owner account which he would have to open with a DP.

52
Clearing Member Account: This account is opened by a broker or by a clearing member for the
purpose of settlement of trades executed on a recognised stock exchange.

The clearing member account is a transitory account. The securities in this account are held for a
commercial purpose only. The securities in this account will be eligible for any corporate action
benefit declared.

4.3 Beneficial Owner Account

This account is opened by investors to hold their securities in dematerialised form with a
depository and to carry out the transactions of sale and purchase of such securities in book entry
form through the depository system. A beneficiary account holder is legally entitled for all rights
and liabilities attached to the securities held in that account. Therefore, the account is called
“beneficial owner account”. A beneficiary account can be in the name of an individual, corporate,
HUF entity, minor, bank, financial institution, registered (incorporated) trust, etc. or the broker
himself for the purpose of his personal investments in demat form. These accounts are opened
with a DP.

DPs are required to open separate accounts, for their own investments, thereby keeping the
`beneficial owner’ accounts separate. This is to ensure that there is no co-mingling of their assets
with that of their clients.

SEBI constituted a committee on “Enhanced Supervision of Stock Brokers”, which included

representatives from Stock Exchanges, Depositories and Brokers, with a view to implement the
recommendations; the guidelines cover uniform nomenclature to be followed by stock brokers
for Naming/Tagging of Bank and Demat Accounts and the reporting of such accounts to the Stock
Exchanges/Depositories.

1. Bank accounts and Demat accounts maintained by all stock brokers shall have appropriate
nomenclature to reflect the purpose for which those bank/demat accounts are being maintained.
2. The nomenclature for bank accounts and demat accounts to be followed is given as under:
a. Bank account(s) which hold client’s funds shall be named as "Name of Stock Broker - Client
Account".
b. Demat account(s) which hold clients' securities shall be named as "Name of Stock Broker-
Client Account".
c. Demat account(s), maintained by the stock broker for depositing securities collateral with
the clearing corporation, shall be named as "Name of Stock Broker-Collateral Account".

53
 d. Demat account(s) held for the purpose of settlement would be named as "Name of Stock
Broker - Pool account".
e. Bank account(s) held for the purpose of settlement would be named as "Name of Stock
Broker - Settlement Account"

General guidelines for Account Opening

a) Self-attested copy of PAN card is mandatory for all Clients including Promoters / Partners
/ Karta / Trustees / Whole Time Directors and persons authorised to deal in securities on
behalf of company / firm / others.
b) Copies of all documents submitted by the applicant should be self-attested and
accompanied by originals for verification. In case the original of any documents are not
produced for verification, then the copies should be properly attested by the entities
authorised for attesting the documents.
c) If any proof of identity or address is in a foreign language, then translation into English is
required.
d) Name & address of the applicant mentioned on the KYC form, should match with the
documentary proof submitted.
e) In case of PAN, Participants may verify the PAN of their Clients online at the Income Tax
website without insisting on the original PAN card, provided that the Client has presented
a document for Proof of Identity other than the PAN card.
f) If correspondence & permanent address is different, then proofs for both have to be
submitted.
g) Sole proprietor must make the application in his individual name & capacity.
h) For non-residents and foreign nationals, (allowed to trade subject to RBI and FEMA
guidelines), copy of passport/PIO Card/OCI Card and overseas address proof is
mandatory.
i) For foreign entities, CIN is optional; and in the absence of DIN no. for the directors, their
passport copy should be given.
j) In case of Merchant Navy NRI’s, Mariner’s declaration or certified copy of CDC
(Continuous Discharge Certificate) is to be submitted.
k) For opening an account with Depository participant or Mutual Fund, for a minor,
photocopy of the School Leaving Certificate/Mark sheet issued by Higher Secondary
Board/Passport of Minor/Birth Certificate must be provided.
l) Politically Exposed Persons (PEP) are defined as individuals who are or have been
entrusted with prominent public functions in a foreign country, e.g., Heads of States or of
Governments, senior politicians, senior Government/judicial/ military officers, senior
executives of state owned corporations, important political party officials, etc.

54
List of people authorised to attest the documents
a) Notary Public, Gazetted Officer, Manager of a Scheduled Commercial/ Co-operative Bank
or Multinational Foreign Banks (Name, Designation & Seal should be affixed on the copy).
b) In case of NRIs, authorised officials of overseas branches of Scheduled Commercial Banks
registered in India, Notary Public, Court Magistrate, Judge, Indian Embassy /Consulate
General in the country where the client resides are permitted to attest the documents.
With a view to bring about uniformity in securities markets, common KYC form and supporting
documents are required to be used by SEBI registered intermediaries. The KYC form shall be filled
by an investor at the account opening stage while dealing with any of the above intermediaries.
Additional details specific to the area of activity of the intermediary shall be obtained from the
investors in Part II of the account opening form.

The additional information (Part II) is prescribed by Depositories for their depository participants
and by Association of Mutual Funds in India (AMFI) for all mutual funds. The Portfolio Managers,
Venture Capital Funds, and Collective Investment Schemes shall capture the additional
information specific to their area of activities, as considered appropriate by them. The
intermediaries shall also continue to abide by Circulars issued by SEBI from time to time for
prevention of money laundering.

4.3.1 Documents for Verification

I. Non-body Corporate / Individuals Investors: All non-body corporate investors have to submit
any one of the following documents as given below prescribed by SEBI, along with the stipulated
KYC Application Form (Part I) and Account Opening Form (Part II) as per the format and submit
the same to the DP alongwith acknowledgement of receipt of Rights and Obligation document.
The schedule of fees to be charged by the DP to the Client should form a part of the Rights and
Obligation document. A beneficiary account can only be opened after obtaining a proof of
identity and address of the applicant. An authorised official of the DP should verify the
photocopies of any of following documents submitted with their corresponding originals and
after putting his/her signature on them with remarks "verified with original" before proceeding
to open the account.

It is mandatory for all DPs to carry out ‘in-person’ verification (IPV) of their Clients. At the time of
opening demat accounts, the DP should establish the identity of the applicant(s) (including
guardian in case of minor account) by verifying the photograph(s) affixed in the KYC Application
Form as well as proof of identity document(s), with the person concerned. Further, in case of
joint accounts, IPV needs to be carried out for all the holders of the account. DP may use ‘web-
camera’ for carrying out IPV for opening of depository accounts subject to compliance with other

55
SEBI guidelines/circulars relating to opening of depository accounts including verification of
documents.

Upon the applicant(s) submitting the KYC Application Form and the account opening form, proof
of identity & address documents and PAN details, the DP should follow the procedure as given
below:
I. Verify the identity of the applicant(s) as clarified above.
II. After due verification, the DP shall ensure that the following details are recorded on the
KYC Application Form at the time of IPV:
1. name of the person doing IPV,
2. his designation,
3. organisation
4. his signature and
5. date
III. Manner of recording IPV details on KYC Application Form: DP may either affix a stamp or
print the IPV details or write the same on the KYC Application Form. If IPV is done through
web camera, then mention “IPV through webcam” as well.
IV. Place where IPV details are to be recorded on the KYC Application Form: DPs may record
the same at any appropriate place on the KYC Application Form as may be deemed fit by
the DP without making illegible the other details mentioned in the KYC Application Form.
For non-individuals such as unregistered trust, etc. where the KYC Application Form for
non-individuals is filled up and the depository account would be opened in the name of
the individual (such as trustee, etc.), the IPV details may, if DPs find it appropriate, be
recorded at the Annexure to KYC Application Form where the details of the karta, trustee,
etc. are mentioned.
V. Attachment of separate sheet to the KYC Application Form or affixing stickers on the KYC
Application Form for recording of IPV details will not be permitted.

The IPV carried out by one SEBI registered intermediary can be relied upon by another
intermediary. In case of stock brokers, their sub-brokers or Authorised Persons (appointed by the
stock brokers after getting approval from the concerned Stock Exchanges in terms of SEBI Circular
No. MIRSD/DR-1/Cir-16/09 dated November 06, 2009) can perform the IPV. In case of Mutual
Funds, their Asset Management Companies (AMCs) and the distributors who comply with the
certification process of National Institute of Securities Market (NISM) or Association of Mutual
Funds (AMFI) and have undergone the process of ‘Know Your Distributor (KYD)’, can perform the
IPV. However, in case of applications received by the mutual funds directly from the clients (i.e.
not through any distributor), they may also rely upon the IPV performed by the scheduled
commercial banks. In the case of NRIs/foreign nationals, considering the infeasibility of carrying

56
out IPV, in such a situation photocopies of the KYC documents should be attested by any of the
entities viz., Notary Public, any Court, Magistrate, Judge, Local Banker, Indian Embassy/
Consulate General of the country where NRI/FN is residing [outside India] to the effect that it has
been verified with the originals. DP must use separate KYC Application Form to collect
information for each holder for joint accounts (i.e. for first holder, second holder and third
holder) as well as for guardian in case the sole holder is a minor.

A demat account can have maximum three holders. Proof of identity is to be obtained for all the
holders. For First holder proof of correspondence address as well as permanent address is to be
obtained in case the correspondence address is not the same as the permanent address. For joint
holder’s proof of only permanent address is to be obtained. In addition, obtaining PAN Card
details of all the holders is compulsory for all categories of demat account holder(s). In some
cases, the PAN is not required to be entered. Such cases have to be handled by entering the
appropriate exemption codes. The exemption codes are provided by way of communiqués from
time to time.

(a) Proof of Identity (POI):

I. Passport
II. Voter ID card
III. Driving license
IV. PAN card with photograph
V. Unique Identification Number (UID) (Aadhaar)
VI. Identity card/document with applicant's photo, issued by
a) Central/State Government and its Departments,
b) Statutory/Regulatory Authorities,
c) Public Sector Undertakings,
d) Scheduled Commercial Banks,
e) Public Financial Institutions,
f) Colleges affiliated to Universities (this can be treated as valid only till the time the
applicant is a student),
g) Professional Bodies such as ICAI, ICWAI, ICSI, Bar Council etc., to their Members; and
h) Credit cards/Debit cards issued by Banks.

(b) Proof of address (POA) - Following is the list of documents admissible as Proof of Address:
(Documents having an expiry date should be valid on the date of submission.)
a. Passport/ Voters Identity Card/ Ration Card/ Registered Lease or Sale Agreement of
Residence/ Driving License/ Flat Maintenance bill/ Insurance Copy /Aadhaar Letter issued by
Unique Identification Authority of India.

57
b. Utility bills like – (Not more than 3 months old– as on date of receipt for documents).
i. Telephone Bill (only land line)
ii. Electricity bill or
iii. Gas bill
c. Bank Account Statement/Passbook – (Not more than 3 months old – as on date of receipt for
documents): Depending on the type of bank statement issued the following checks must be
done:

i. Original bank statement: The original bank statement is printed on the stationery of
the bank, carries logo & name of the bank, displays the name and address of the
Client.
ii. Copy of bank statement: In addition, the authorised official of the DP should verify the
photocopy of the bank statement submitted with the corresponding original.
iii. Original Bank statement on plain paper (Computer generated):
 The bank statement clearly mentions the name and address of the Client.
 The bank statement is duly attested (signed and stamped) by the authorised
official of the bank mentioning the name and designation of such authorised
official.
 Obtain a cancelled cheque leaf in original OR a photocopy of cheque and the
authorised official of DP should verify the same with the original cheque.
d. Bank statement issued in electronic form:
a. Print out of the bank statement clearly mentions the name and address of the
Client.
b. Obtain a cancelled cheque leaf in original OR a photocopy of cheque with the
name of the Client pre-printed on it. However, in case of a photocopy of cheque
it can be accepted provided the authorised official of DP verifies the same with
the original cheque.
e. Self-declaration by High Court and Supreme Court judges, giving the new address in respect
of their own accounts.
f. Proof of address issued by any of the following: Bank Managers of Scheduled Commercial
Banks/Scheduled Co-Operative Bank/Multinational Foreign Banks/Gazetted Officer/Notary
public/Elected representatives to the Legislative Assembly/Parliament/Documents issued by
any Govt. or Statutory Authority.
g. Identity card/document with address, issued by any of the following: Central/State
Government and its Departments, Statutory/Regulatory Authorities, Public Sector
Undertakings, Scheduled Commercial Banks, Public Financial Institutions, Colleges affiliated
to Universities and Professional Bodies such as ICAI, ICWAI, ICSI, Bar Council etc., to their
Members.

58
h. For FPI Power of Attorney given by FPI to the Custodians (which are duly notarised and/or
apostiled or consularised) that gives the registered address should be taken.
i. The proof of address in the name of the spouse may be accepted.
j. Acceptance of third party address as correspondence address in depository account 6
a. Client can also provide third party address as correspondence address in depository
account provided Participant ensures that all prescribed ‘Know Your Client’ norms are
fulfilled for the third party also. The DP shall obtain proof of identity and proof of
address for the third party. The DP shall also ensure that customer due diligence
norms as specified in Rule 9 of Prevention of Money Laundering Rules, 2005 are
complied with in respect of the third party.
b. However, the above provision shall not apply in case of PMS (Portfolio Management
Services) clients7.
Where the account is to be jointly held, the POI and POA documents must be collected in respect
of all the account holders. The aforesaid documents are the minimum requirement for opening
a BO Account. Participants are advised to exercise due diligence while establishing the identity
of the person to ensure the safety and integrity of the depository system. Participants can apply
stricter criteria and accordingly, decide to accept, select documents out of the list of documents
prescribed by SEBI, as proof of identity/address.

II. For Corporate Investors: All corporate investors have to submit the following documents as
prescribed by SEBI along-with the stipulated KYC Application Form (Part I) and Account Opening
Form (Part II) as per the format. DPs shall ensure that in case of foreign entities, all transactions
in the account are in compliance with FEMA Regulations. Accordingly, DPs are required to obtain
from such foreign entities necessary documents evidencing general/specific approvals as may be
required under FEMA Regulations. Further, DPs are required to obtain a declaration from the
foreign entity that it has complied and will continue to comply with FEMA Regulations. DPs are
required to use separate KYC Application Form to collect information for each holder for joint
accounts (i.e. for first holder, second holder and third holder).
1. Memorandum & Articles of Association (MOA & AOA) & Certificate of Incorporation.
2. Board resolution authorizing opening of demat account and specifying the names of the
persons authorised by Board to operate the said demat account. The Board Resolution must
specify the manner of operation of the account and authority given to the authorised
signatories to open and operate the account.
3. Names of authorised signatories, designation along-with their specimen signatures and
photographs, duly verified by the Managing Director or Company Secretary.

6SEBI Circular No. CIR/MRD/DP/ 37 /2010 dated December 14, 2010

7Reference letter no. IMD/ MT/165502/ 2009 dated June 05, 2009

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4. Proof of address of the corporate, evidenced by the document registered with Registrar of
Companies or acknowledged copy of Income Tax Return or Bank Statement or Leave and
License Agreement/Agreement for sale or Landline telephone bill / electricity bill /Pan card
of the corporate entity.
5. Copy of the balance sheets for the last 2 financial years (to be submitted every year).
6. Copy of latest share holding pattern including list of all those holding control, either directly
or indirectly, in the company in terms of SEBI takeover Regulations, duly certified by the
company secretary/Whole time director/MD (to be submitted every year).
7. Photograph, POI, POA, PAN and DIN numbers of whole time directors/two directors in charge
of day to day operations.
8. Photograph, POI, POA, PAN of individual promoters holding control - either directly or
indirectly.
9. Copy of the Board Resolution for investment in securities market.
An authorised official of the DP shall verify the copies of the proof of address / identity documents
with the original documents and write or put a stamp with the words: “verified with original” and
affix his/her signature on the documents submitted by the Client, while exercising such due
diligence.

e-KYC service:

SEBI has already permitted use of e-KYC service launched by UIDAI. The Aadhaar e-KYC service
provides an instant, electronic, non-repudiable proof of identity and proof of address along with
date of birth and gender (digitally signed and encrypted). In addition, it also provides the
resident’s mobile number and email address (if available) to the service provider, which helps to
further streamline the process of service delivery. e-KYC may be performed at the service centre
of Participant using biometric authentication, as well as remotely using an OTP on a website or
mobile connection. Considering the benefits and convenience of e-KYC, Participants may
consider using the e-KYC services.

In-person verification of the client is not required to be carried out, if:

a. Verification of the client with UIDAI is carried out through biometric authentication
(fingerprint or iris scanning).
b. Verification of the client with UIDAI is carried out through one-time password (OTP) received
on client’s mobile number or on e-mail address registered with UIDAI provided, the amount
invested by the client does not exceed Rs. 50,000 per financial year per Mutual Fund and
payment for the same is made through electronic transfer from the client’s bank account
registered with that Mutual Fund.

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If KYC verification of the client is carried out through Aadhaar based e-KYC service offered by
UIDAI as per the aforementioned SEBI Circular and PAN of the client is verified from the income
tax website, the information downloaded from UIDAI shall be considered as sufficient
information for the purpose of KYC verification and the client is not required fill up the KYC form
and put his / her signature on the same.

SEBI Registered intermediaries for reasons such as online on-boarding of clients, customer
convenience, increased efficiency and reduced time for client on- boarding would prefer to use
Aadhaar based e-KYC facility to complete the KYC of the client. This Aadhar authentication is
permitted under section 11A of the PMLA and nine entities8 shall undertake Aadhaar
Authentication service of UIDAI subject to compliance of the conditions as laid down in this
regard. These entities shall get registered with UIDAI as KYC user agency (“KUA”) and shall allow
SEBI registered intermediaries / mutual fund distributors to undertake Aadhaar Authentication
of their clients for the purpose of KYC through them. The KUAs and sub-KUAs shall adopt the
process as laid down by UIDAI for Aadhaar e-KYC of investors (resident) in the securities market.
The entire process is given in Annexure 1.

In April 2020, SEBI issued guidelines regarding the use of technology for KYC process and also
stated that the SEBI registered intermediary shall continue to ensure to obtain the express
consent of the investor before undertaking online KYC. 9

SEBI registered intermediary may implement their own Application (App) for undertaking online
KYC of investors. The App shall facilitate taking photograph, scanning, acceptance of officially
valid document (OVD) through Digilocker, video capturing in live environment, usage of the App
only by authorized person of the RI.

The App shall also have features of random action initiation for investor response to establish
that the interactions are not pre-recorded, time stamping, geo-location tagging to ensure
physical location in India etc is also implemented. RI shall ensure that the process is a seamless,
real-time, secured, end-to-end encrypted audiovisual interaction with the customer and the
quality of the communication is adequate to allow identification of the customer beyond doubt.
RI shall carry out the liveliness check in order to guard against spoofing and such other fraudulent

8
Bombay Stock Exchange Limited, National Securities Depository Limited, Central Depository Services (India)
Limited, CDSL Ventures Limited, NSDL Database Management Limited, NSE Data and Analytics Limited, CAMS
Investor Services Private Limited, Computer Age Management Services Private Limited and National Stock Exchange
of India Limited,
9
SEBI Circular Ref. No. SEBI/HO/MIRSD/DOP/CIR/P/2020/73 Dated April 24, 2020

61
manipulations. The RI shall carry out period software and security audit and validation of their
App.

Feature for Video in Person Verification (VIPV) for Individuals – To enable ease of completing IPV
of an investor, intermediary may undertake the VIPV of an individual investor through their App.
The following process shall be adopted in this regard:
i. Intermediary through their authorised official, specifically trained for this purpose, may
undertake live VIPV of an individual customer, after obtaining his/her informed consent. The
activity log along with the credentials of the person performing the VIPV shall be stored for easy
retrieval.
ii. The VIPV shall be in a live environment.
iii. The VIPV shall be clear and still, the investor in the video shall be easily recognisable and
shall not be covering their face in any manner.
iv. The VIPV process shall include random question and response from the investor including
displaying the OVD, KYC form and signature or could also be confirmed by an OTP.
v. The RI shall ensure that photograph of the customer downloaded through the Aadhaar
authentication / verification process matches with the investor in the VIPV.
vi. The VIPV shall be digitally saved in a safe, secure and tamper-proof, easily retrievable manner
and shall bear date and time stamping.
vii. The RI may have additional safety and security features other than as prescribed above.
The detailed SEBI circular on the use of technology in e-KYC is given in Annexure 2.

Operationalization of Central KYC Records Registry (CKYCR):

The Government of India vide their Notification dated November 26, 2015 authorised the Central
Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI), set up
under sub-section (1) of Section 20 of the Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002 (54 of 2002), to act as and to perform the
functions of the Central KYC Records Registry under the said rules, including receiving, storing,
safeguarding and retrieving the KYC records in digital form of a “client”, as defined in clause (ha)
of sub-section (1) of Section 2 of the Prevention of Money-Laundering Act, 2002. The Central
Government have also amended the Prevention of Money-laundering (Maintenance of Records)
Rules, 2005 vide Notification dated 7th July, 2015 for the purpose of establishment of Central
KYC Registry. As per Prevention of Money-laundering (Maintenance of Records) Amendment
Rules, 2015, Rule 9 (1A), every reporting entity shall within three days after the commencement
of an account-based relationship with a client, file the electronic copy of the client’s KYC records
with the Central KYC Registry.

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4.3.2 Common Information
There are some common details which are required for any type of account opening with the DP
which is stated below.
o Name of the holder
o Date of birth (for individual accounts)
o Occupation and financial details
o Address & phone/fax number
o Bank details like name of bank, type of account (current/savings), account number,
branch address, MICR, IFSC etc.
o PAN number
o Details of nomination (for individual accounts only)
o Specimen signatures
o e-mail address
o Mobile number
o Address for communication
The procedure involved in opening of an account, the nature of such an account, and the various
factors to be considered for opening a depository account are explained in the subsequent
sections.
4.3.3 Beneficial Owner Account - Procedure for Opening an Account
Investors wishing to open account with the depository have the following benefits/choices:
 Can select the DP based on the investors convenience, comfort, service levels, safety,
reputation, charges etc.
 Have the flexibility to open more than one account with the same DP or any other DPs
 No requirement of minimum balance
 Can close an account anytime with one DP and open another one with any other DP.

The type of the account opening form to be filled by an investor and the list of documents
required depend on the type of beneficiary account to be opened - whether it is for NRIs or
Corporate or individual. Further, a demat account can be in a single name or joint names. Clearing
Members and brokers have to open a beneficiary account if they have to deal with their own
holdings.

There are several client types in the depository system and different codes are allotted to them.
However, the NSDL and CDSL codes may not be exactly same. Some of the codes are listed below:

1. Resident (Individual in case of CDSL)

o Ordinary (Resident Individual in CDSL)

63
 o Hindu Undivided Family (HUF)
o Stock Broker - Client (Margin Account)
o Promoter
o HUF-Promoter
o Ordinary-DR
o Stock Broker - Proprietary
o Stock Broker - Collateral
2. Financial Institutions (FI)
o Government-sponsored FI
o State Financial Corporation
o Others
o Govt. sponsored FI - Promoter
o SFC-Promoter
o Others-Promoter
3. Foreign Institutional Investors (FIIs)
o Mauritius-based
o Others
o DR
4. Non-resident Indian (NRI)
o Repatriable
o Non-Repatriable
o DR
o NRI-Repatriable-Promoter
o NRI NonRepatriable -Promoter
5. Body Corporate
o Domestic Company
o Government Company
o Central Government
o State Government
o Co-operative Body
o Non-Banking Finance Companies (NBFC)
o Non-NBFC
o Broker
o Foreign Bodies
o Group Companies
o Foreign Venture Capital
o Limited Liability Partnership
o Others

64
 o OCB-Repatriable
o OCB-Non Repatriable
o OCB-DR
o Foreign Bodies - DR
o Stock Broker - Client (Margin Account)
o Domestic-Promoter
o Government Companies - Promoter
o Central Government - Promoter
o State Government - Promoter
o NBFC-Promoter
o Non-NBFC-Promoter
o Group Company - Promoter
o Foreign Body-Promoter
o Others-Promoter
o Co-operative Body – Promoter
o Domestic-DR
o Limited Liability Partnership-DR
o Limited Liability Partnership (Foreign)
o Limited Liability Partnership (Foreign) -DR
o Stock Broker - Proprietary
o Stock Broker – Collateral
o Foreign Government
o Overseas Depository – Underlying DR
6. Clearing Member (CM)
7. Foreign National
o DR
o FN
o FN-Promoter
8. Mutual Fund
o DR
o MF
9. Trust

o Employee Stock Option

o Employee Stock Purchase
o Stock Appreciation Right
o General Employee Benefit Scheme
o Retirement Benefit Scheme

65
 o Other - Employee Benefit Trust (Old Scheme)
o Other

10. Bank
o Foreign Bank
o Co-operative Bank
o Nationalised Bank
o Others
o Others-Promoter
o Nationalised Bank -Promoter
o Foreign Bank - Promoter
o Co-operative Bank - Promoter
o Foreign - Scheduled Commercial Bank
o Scheduled Co-operative Bank
o Other - Scheduled Commercial Bank
11. Qualified Foreign Investor – Individual
12. Qualified Foreign Investor Corporate
13. Foreign Portfolio Investor Individual- Category III & Category III – DR
14. Foreign Portfolio Investor Corporate - Category I, II & III &Category I, II & III – DR
15. Alternate Investment Fund – Corporate - Category I, II & III
16. Hindu Undivided Family (HUF)
17. Investor Education and Protection Fund (IEPF)
18. Qualified Institutional Buyers (QIBs)

o Public Financial Institution – Sec.2(72) of Companies Act 2013

o Venture Capital Fund Registered with SEBI
o Multilateral Development Financial Institution
o Bilateral Development Financial Institution
o State Industrial Development Corporation
o Insurance Company Registered with IRDA
o Provident Fund - Corpus Rs. 25 crore & more
o Pension Fund - Corpus Rs. 25 crore & more
o National Investment Fund – Govt. of India
o Insurance Funds – Armed Forces – Govt. of India
o Insurance Funds – Department of Post India
o Systemically Important NBFCs

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4.3.4 Opening of pool account for Portfolio Management Services (PMS)
DPs were advised to facilitate the opening of a Pool Account for the Portfolio Management
Service (PMS) Provider similar to Clearing Member Pool Account after which transfers from/to
the PMS Pool Account would be considered as Market Transfers instead of “Off Market”
transfers.

Opening of PMS Pool Account:

For opening of PMS Pool account, the PMS provider will be required to make an application to
their Participants. PMS provider is required to open Pool account(s) per Clearing Corporation (CC)
viz., NCL, ICCL, MCCIL. Further, if PMS provider require, they can open scheme wise PMS pool
account per CC.
PMS Provider will be required to make an application to Participant for opening of PMS pool
account(s) by submitting the application form. If PMS provider is opening the PMS pool
account(s) with the existing Participant, then no additional documents will be required to be
enclosed along with the application form. However, if PMS Provider opts to open PMS pool
account(s) with any other Participant, then PMS Provider will be required to follow the process
of Clearing Member Pool account opening prescribed by the depositories.

In case of NSDL, PMS provider will submit request letter to Participants for obtaining PMS BP ID
for opening PMS pool account(s). Single request letter from PMS provider is sufficient for opening
multiple Pool accounts, if the authorized signatories are same for all the PMS pool accounts. On
request of Portfolio manager for PMS BP ID(s), NSDL shall use the details viz., demographic,
financial, authorized signatories etc. of existing Portfolio Manager account(s) (i.e, demat
account(s) of PMS provider) maintained in NSDL depository system and create the PMS BP ID(s)
in NSDL depository system. If the existing PMS account holder is registered on SPEED-e facility
and the new PMS pool account holder wish to opt for SPEED-e facility for operating the PMS pool
account, then the PMS provider will provide the confirmation to Participant. Based on the
aforesaid request received from PMS provider, Participant will send consolidated excel sheet
containing the PMS provider details for opening of PMS pool account to NSDL. As per the
confirmation received from the Participant through aforesaid email, the PMS BP ID(s) for PMS
pool account would be activated in NSDL depository system using the details of existing PMS
demat account(s) maintained in NSDL depository system. The details of PMS pool account(s)
would be forwarded to the Participant for opening of PMS pool account(s).

In case of CDSL, the PMS registration number provided by SEBI needs to be mandatorily be
recorded when making the application. Easiest registration procedure for PMS Pool Account, will
be similar to the registration procedure of a CM Account. Further the details of market types and
the transfers allowed from/to PMS Pool Account through the easiest login will be similar to the
CDAS functionality. PMS Manager will be allowed to group its multiple PMS Manager Pool
Accounts opened for different CCs/Schemes from its Easiest PMS Pool Account (i.e. from primary
login) provided that the multiple PMS Pool Accounts are having the same PAN and SEBI
Registration Number recorded in the said demat accounts. After grouping through the PMS Pool

67
Account the PMS Managers are required to submit the duly signed grouping form to their
respective DPs where such PMS Pool accounts are maintained for authentication. PMS Manager
can debit the securities from its PMS BO Account/s to its grouped PMS Pool Account/s and can
also transfer the securities from such grouped accounts to its PMS BO Accounts.

4.3.5 Rights and Obligations of Beneficial Owner and Depository Participant

Anyone who wants to avail the depository services should submit the acknowledgement of
receipt of the copy of the Rights and Obligation document (of having read) to the DP. The
standard format of the Rights and Obligation document is provided by SEBI and forms a part of
the depository participant operating instructions. The Rights and Obligation document sets out
in contractual form the nature of services to be provided, rights and obligations of the DP as well
as the client, and the fees/charges payable for the services. The Rights and Obligation document
and the acknowledgement needs to be made on a plain paper and has to be signed by:
(a) Sole holder in case of single holding; or
(b) All joint holders in case of joint holding, or
(c) Constituted attorney (authorised signatories) in the case of corporate/registered
trust accounts.
FPI clients registered with SEBI and who have entered into an agreement with the DP directly or
through their constituted attorney, are not required to submit acknowledgement of Rights and
Obligations document. The FPI-DP agreement authorizes the DP to act on behalf of the FPI for
availing depository services and it should have been filed with SEBI.
In NSDL, subsequent to opening of a depository account, certain information such as Client
Master Report alongwith including charge structure is required to be provided to the Client.
a) The Client Master Report and the scanned copy of the charge structure is provided to the
Client at the e-mail address recorded in the DP system. In case the DP is not able to provide
the same to its Clients by e-mail due to any reason (including bounced e-mails), the DP should
ensure that the same is provided to the Client in paper form.
b) Maintain the records of delivery/non-delivery of e-mails to Clients.
c) When the Client provides e-mail address at the time of account opening, inform the Client
that such information will be sent by e-mail to the Client.
d) In case the Client has opted for DIS booklet alongwith account opening or in case of BSDA,
the DIS booklet must be separately issued to the Client.
In CDSL, subsequent to opening of a depository account:
 The DP shall send the BO a system-generated confirmation letter for having opened the
account mentioning the account number along with the formats of necessary forms and
instruction slips. This letter shall be given to the BO and the DP shall maintain proof of
such despatch. The letter along with other documents mentioned earlier may also be

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 given to the BO if the BO wants to collect the same in person. Proof of such delivery shall
be maintained by the DP.
 Alternatively, the client master report may be provided by the DP to the BO at the e-mail
address recorded in the CDSL system or through its website, provided the same can be
accessed by the BO through secured access, e.g. Login ID-Password / three factor
authentication. In case the DP is not able to provide the same by e-mail/ the BO cannot
access the same through its website due to any reason (including bounced e-mail), the DP
should ensure that the same is provided to the BO either physical copy or digitally signed
in case of electronic copy. The DP should maintain record of delivery/ non-delivery of the
e-mail to the BO or accessing of the information by the BO through its website.
 The BO should be informed at the time of account opening that such information will be
made available through e-mail /website, as the case may be. In case DIS booklet is
required to be sent to BO, it must be separately issued to the BO.
 A BO may have an on-line trading account and give /execute a power of attorney (POA)
in favour of the CM for executing delivery instructions for settling stock exchange trades
effected through such CM or a BO may be a PMS client of a PMS manager and give /
execute a power of attorney (POA) in favour of the PMS manager or execute a PMS
agreement with an authority to PMS manager to manage the portfolio of securities. In
such a case, the BO may be given option to receive the Delivery Instruction Slip Booklet
(DIS) on the DP completing the account opening procedure or at any later date on request
by the BO. The BO can exercise such option by submitting an 'Option Form for issue of DIS
booklet', as specified in DP Operating Instructions, which shall be given to the intending-
BO along with the Account Opening Form. A written consent shall be obtained from BO
in case BO agrees to waive off the right to receive DIS at the time of account opening and
opts to receive it at a later date.

Simplification of demat account opening process10

In consultation with market participants, with a view to simplify the account opening kit, it has
been decided that, stock broker/ depository participant shall make available the standard
documents 11 to the clients, either in electronic or physical form, depending upon the preference
of the client as part of account opening kit. The preference of the client shall be sought as part
of the account opening form. In case the documents are made available in electronic form, stock
broker/ depository participant shall maintain logs of the same.

10
SEBI Circular Ref. No.: CIR/MIRSD/64/2016 dated July 12, 2016
11
(a) Rights & Obligations of stock broker, and client for trading on exchanges (including additional rights &
obligations in case of internet/ wireless technology based trading); (b) Rights and Obligations of beneficial owner
and depository participant as prescribed by SEBI and depositories; (c) Uniform Risk Disclosure Documents (for all
segments/ exchanges); and (d) Guidance Note detailing Do’s and Don’ts for trading on stock exchanges

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4.3.6 Types of Application Forms

Different application form needs to be filled for each kind of accounts. A DP must understand
clearly the differences in the application forms, to facilitate efficient and error-free service to
investors. Separate forms are prescribed for individuals and corporate clients/clearing member
accounts.
The forms prescribed by the Depository’s require the applicants to give the following details:
(a) Name(s) of account holder(s): DP should ensure name & address of the applicant
mentioned on the KYC form, should match with the documentary proof submitted. If an
application is received from a married lady, along with a PAN card in her maiden name
along with her marriage certificate, the BO account can be opened in the married name
of the lady. In CDSL, by filling up transposition form, the share certificates with same
holders but in different order can be dematerialised. Investors are advised to open their
account in their fully expanded name, i.e., to spell to the first name as well as the middle
name. This would obviate any doubts about the veracity of the information. Investors
can dematerialise all physical securities held in his full name, abridged name, name with
initials or any other fashion in this account. By opening the account in the
fullest/expanded name, chances of wrong credits/debits and rejection of demat requests
are minimised. For example, there may be two investors with the same initials and same
last name - A K Khanna may be either Arun Kumar Khanna or Ashok Kishore Khanna. If
the name is fully spelt out there is no ambiguity and there is no need then for the DP to
take steps to verify the identity. Similarly, investor can dematerialize shares held in any
form of name like A.K. Khanna, Arun K. Khanna, A. Kumar Khanna, Arun Kumar K., etc.,
into one account
(b) Mailing and communication address(es) - Client has the facility to mention two
addresses in the KYC application form (Part I) i.e., correspondence and permanent
address. For both, permanent and correspondence addresses of a Client, DPs should
ensure that they collect and verify the KYC documents. The correspondence address
would be the default address that would be forwarded to the Registrar & Transfer Agent
(RTA) as well as used for printing Transaction Statement (SOT) from Depository System.
For corporate accounts, a copy of Memorandum of Association, Articles of Association,
Certificate of Incorporation Board resolution permitting opening of account, the
registered address of the Company as well as addresses of the person(s) authorised to
operate the account on behalf of the Company have to be furnished. PAN card of
authorised signatories to be “verified with original” and taken on record. In case of CDSL,
addresses of the person(s) authorised to operate the account on behalf of the company
need not be furnished. Also in case of CDSL, PAN card of authorised signatories need not
be verified with the originals or maintained for record purpose.

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 (c) Details of guardian in case account holder is a minor - The guardian holds and operates
the beneficial owner account held on behalf of the minor till he/she becomes a major.
The guardian is required to sign the application form and details of his name and address
need to be given in addition to the details of the minor.
(d) Foreign address and RBI approval details for NRI, FPI or OCB accounts - For foreign
based clients like NRIs, FPls, etc., the DP must obtain original or attested copies of the
power of attorney as the case may be and the approval letter from RBI permitting them
to invest (this is not required in CDSL). If the account holder is an FPI or an OCB, SEBI/RBI
registration details along with attested copy of registration certificate issued by SEBI and
authorisation letter is required.
(e) Clearing member details for a clearing account - A broker account as a clearing account
can be opened only after the depository approves it and allots clearing-member business
partner identification number (CM-BP-ID). However, the concept of a separate CM-BP-
ID is not followed by CDSL. A broker member can have only one clearing account per
stock exchange of which he is a member12. The DP should obtain, with the account
opening form, the necessary details from the clearing member along with a letter from
the Clearing Corporation allotting a CC-CM-ID. In case the clearing member account is
being transferred from any other DP, a no-objection certificate from the earlier DP may
be obtained. A Clearing Member may open only one CM Account. However, a Clearing
Member may open additional CM Account(s) with the Participant for the purpose of
Futures & Options (F&O) and / or Securities Lending and Borrowing Mechanism (SLBM)
transactions and the Clearing Corporation shall allot additional CC-CM-IDs to the Clearing
Member for this purpose. This is not applicable in NSDL, as Clearing Members
maintaining CM Accounts with DPs of NSDL can open and maintain only one CM Account
per stock exchange.
(f) Escrow Account - An Escrow Account can be opened by the DP based on receipt of the
following document from the BO.

 DP has to obtain the KYC form / KRA details of entity that is opening the account (RTA
/ Clearing Member / Manager to the Issue).
 The photographs of the authorized signatory (ies) who would be operating the
account.
 PAN card of both parties’ i.e. ‘Corporate Entity & Escrow Agent’. The PAN details of
the Corporate entity would have to be captured in the CDSL system.

12InCDSL system a broker / clearing member of BSE is required to open following accounts with any DP of CDSL viz., CM Principal
Account, CM USA (Pool) account, Clearing Members of NSE and other stock exchanges are required to open, with any DP of CDSL,
a CM Clearing account or Pool account. Additionally, the CM has to open an Early Pay-in account with CH /CC of the respective
stock exchange. All of the above mentioned account type will be referred to as CDSL CM accounts in this workbook.

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  Copy of the Escrow Agreement duly signed by the parties.
Procedure for opening Escrow account:
The escrow account shall be opened in the name and form of < Issuer name> - <Reason
for opening the escrow account>-operated by-<Operator Name> for e.g. Infosys
Technologies Ltd. – Buyback Account - Operated by – Karvy Consultants Ltd.

The photographs of authorized signatories who will be opening the account as well as
who will be operating the account along with name, designation shall also be obtained.

The escrow account shall be active for the limited period of the activity for which it has
been opened. Such period shall be as specified by SEBI / CDSL or any such regulating
authority from time to time. After the specified period is over the account shall be closed
by the DP irrespective of whether the closure instruction is received from the account
holder or not.

(g) Details of bank account: Details of bank account of the account holder, including the 9-
digit code number of the bank and branch appearing on the MICR cheques issued by the
bank have to be filled in the application form. Companies use this information for printing
them on dividend/interest warrants, etc. DPs can accept any one or more of the
documents given below can be accepted as proof of bank details:
a) Specimen copy of cheque/cancelled cheque
b) Copy of Bank Statement
c) Copy of Bank Passbook
d) Letter from Bank

The aforesaid documents must contain the following information to be acceptable as

proof for bank details:
a) Bank Name
b) Branch Address
c) IFSC/MICR code
d) Name of account holder
e) Account Number

Participant need not seek from their Clients the proof of the bank details for capturing
the bank details in the depository account, if they have direct access to the bank records
for verification of the bank details provided by their Clients.

Verification of bank account details through Bank Account Verification services

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 Participant need not seek from their Clients the proof of the bank details for capturing
those details in the depository account, provided they have direct access to the bank
records for verification of the bank details provided by their Clients.

This Bank Account Verification service typically involves transferring ₹1 via IMPS to the
bank account of the client and upon successful transfer, name of the client in the target
bank account is received as response. Participant shall match the name of the Client with
the name and other details received from the bank.

In this context, Participants shall use the services of banks in this regard for verification of
bank details of client, subject to following conditions:
1. Participant will be responsible for identifying the client & updating the bank details.
2. Participant will maintain the records of the verification done through bank API platform
and the same are made available for audit/inspection, as and when called for.

(h) Details of Income Tax Permanent Account Number (PAN): SEBI has made the
requirement of PAN as a mandatory requirement for demat account opening. It was
decided that the Depositories will issue directions to DPs making Permanent Account
Number (PAN) compulsory for all categories of demat account-holders including minor,
trust, foreign corporate body, banks, corporates, FPIs and NRIs. This is applicable for
existing accounts as well as new accounts to be opened. In cases where the existing
demat account holder(s) have failed to submit the PAN details to the DPs by December
31, 2006 or there are discrepancies in the PAN details that have not been resolved by
December 31, 2006, such accounts have been 'Suspended for Debit' until PAN details are
verified and updated at the depository system application software. It was also decided
that the staff of DPs should personally verify the identity and address while opening
demat accounts and the record of the person who carried out such verification should be
available.
(i) Further SEBI has issued Circular dated July 29, 2010 which stipulates that with effect from
Monday, August 16, 2010, PAN non-compliant demat accounts shall also be “suspended
for credit” other than the credits arising out of automatic corporate actions. The circular
also clarifies that other credits including credits from IPO / FPO / Rights Issue / Off-market
transactions or any secondary market transactions shall not be allowed into such
accounts.

(j) In view of the aforesaid SEBI decision, DPs are required to follow below mentioned
procedure for PAN Compliance:
a. In respect of accounts that are to be opened:

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 i. DPs should obtain a photocopy of the PAN card of the person(s) seeking to
open the account and verify the same with the original PAN card.
ii. The DP official should personally verify the identity and address of each of
the applicant while opening demat accounts and the record of the person
who carried out such verification should be maintained.
iii. Further, the name of demat account holder(s) should be compared to the
name appearing on the website of the Income Tax Department (ITD).
iv. In case the name(s) do not match or the PAN is not present in the Income
Tax database, DP should seek necessary clarification from the account
holder(s) and activate such accounts in the depository system only after
the discrepancy is resolved.
v. In case of joint accounts, the PAN of each of the joint holder should be
captured in the depository system after making verification as explained
above.
vi. After verifying the details of PAN as mentioned above, the DP officials
should affix a stamp as 'PAN verified', on the photo copy of the PAN card(s).
b. In respect of existing accounts that are frozen due to non-compliance of PAN
requirement upon the Client submitting the PAN card, DPs should follow the
procedure in the below given sequence:
i. Verify the PAN details as per the laid down procedure mentioned in points
(iii) to (vi) above,
ii. Update the PAN field and enable the PAN flag provided in the depository
system application software
iii. Remove the suspension by initiating unfreeze instruction and ensure that
the status of the unfreeze instruction is 'Closed, Settled' prior to executing
any other instruction in the system.

Operating guidelines on SEBI circular providing clarifications on PAN

Further to the clarifications issued by SEBI (given in italics below), DPs have to follow below
mentioned additional operating guidelines /clarifications with respect to capturing of PAN
details:
a. As regards proof of address of FIIs/sub-accounts, a copy of the Power of Attorney(POA) given
by the FIIs/FII sub-accounts to the Custodians (which are duly notarised and/or apostiled or
consularised) that gives the registered address of the FIIs/sub-accounts can be accepted as
proof of address.

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b. The NRIs/PIOs13 would be required to comply with the mandatory requirement of producing
PAN Card at the time of opening a BO account. However, in case of account opened/ to be
opened under category NRI/FII in respect of clients not residing in India, the DPs can accept
the photocopy of the PAN card of NRI and Foreign national client and follow the procedure
laid down for verification of PAN above, provided the copy of the PAN card is duly signed by
the account holder and attested by any one of the following entities of the country where
NRI and FN is residing:
 The Indian Embassy / Consulate General
 Notary Public
 Any Court / Magistrate / Judge
 Local Banker,
The attestation is to the effect that it has been verified with the originals.
Further, a NRI/foreign national is exempted from obtaining attestation in the photocopy of
the PAN card as mentioned above, provided, if he/she personally visits the office of the DP to
submit the PAN card to comply with the PAN requirements. In such a situation, the DPs will
accept the photocopy of the PAN card and verify the PAN details as per the procedure laid
down for verification of PAN.
c. U.N. entities/multilateral agencies which are exempt from paying taxes/filing tax returns in
India are exempted from the mandatory requirement of PAN. The exemption, however,
would be subject to the DPs associated with NSDL collecting documentary evidence in
support of such claim of the investors. After these DPs are satisfied that such entities are
exempt from paying taxes/filing tax returns in India, DPs are advised to capture the
appropriate PAN exemption codes provided by the depository systems.
d. In case of Association of Persons (AoP), Partnership Firm, Unregistered Trust, etc. though the
BO account would be in the name of natural persons, PAN of the respective AoP, Partnership
Firm, Unregistered Trust, etc shall be obtained.
e. As regards Registered Trust, Corporate Bodies and minors, PAN of the respective entities shall
be obtained when accounts are opened in their respective names.
f. In case where there is difference in the maiden name and current name of the investor
(predominantly in the case of married women), DPs can collect the PAN card proof as
submitted by the account holder. However, this would be subject to the DPs verifying the
veracity of the claim of such investors by collecting sufficient documentary evidence in
support of the identity of the investor (reference to prescribed documents by SEBI, to be
made as on page 2, under head - Documents for Verification - (a) Proof of Identity).
g. In case of change of residential status of BO, the DP can modify the status and sub-status of
the existing demat account from Individual status to NRI non- Repatriable vice versa or NRI

13 In case of CDSL, PIOs falls under the category of Foreign Nationals.

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 Repatriable to Individual account / NRI non- Repatriable but the change of status/sub- status
from Resident Individual, NRI-non Repatriable to NRI Repatriable is not allowed.
In all above cases appropriate documentation has to be provided by the account holder.

Operating guidelines for the same are given below:

a) This guidance given by SEBI may also be used whenever there is a minor difference in the
name mentioned in the PAN Card and the name in which the account is opened / sought to
be opened.
b) Photograph of person appearing on the PAN card can be compared to the account holder
and/or the photograph submitted by the account holder along with the application form.
Father's name if available on the application form can be compared to the father's name
appearing on the PAN card of the account holder.
c) DPs should call for any additional documents and / or clarification to ascertain and satisfy
itself about the identity of the entity, as clarified in the SEBI circular.

Linking of Demat Accounts of Individuals with their Aadhaar

The Union Budget 2017-18, proposed the linking of individual demat accounts with Aadhaar.
Accordingly, SEBI instructed depositories to advise their Participants to take necessary steps for
linking of demat accounts held by individual clients with their Aadhaar numbers. In view of this,
in respect of all new accounts opened, Participants may advise clients to mention their Aadhaar
in the Know Your Client (KYC) Application Form submitted at the time of account opening,
especially by highlighting the advantages such as registration in the demat account of unique
identity provided by Aadhaar, Government’s initiative of linking of PAN with Aadhaar, Aadhaar
being a single document serving as proof of identity and address, etc. A self-certified copy of the
Aadhaar Card may be obtained as part of the KYC process.

Participants shall encourage all their existing individual clients to provide their Aadhaar number
to link with their demat account. Participants may send regular communications to their clients
for updating their Aadhaar number in the demat accounts.

NSDL provided an online facility for demat account holders to update their Aadhaar number
directly in their demat accounts at NSDL, which would be authenticated directly with UIDAI. The
said facility can be accessed from https://aadhaar.nsdl.com/AdhaarSeeding/

The law regarding submitting / linking of Aadhaar for availing the services / benefits applies to
the resident as per the Aadhaar Act, 2016. In view of the foregoing, most of the NRIs/PIOs/OCIs
may not be eligible for Aadhaar enrolment as per the Aadhaar Act, 2016. However, the

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implementing agency may devise a mechanism to ascertain the genuineness of status of such
NRIs/PIOs/OCIs.
In order to enhance privacy and security of Aadhaar Holders, Unique Identification Authority of
India (UIDAI) had introduced VID which is 16 digit numeric field which can be used by Aadhaar
holder in lieu of his/her Aadhaar number to avoid need of sharing of the Aadhaar at the time of
authentication. In this context, NSDL has introduced new field viz., VID as against Aadhaar
number under the client maintenance module in system.

FATCA Compliance:

‘The Inter-Governmental Agreement (IGA) with USA for implementation of FATCA entered into
force on 31st August 2015. Under the alternative procedure provided in Rule 114H(8) of the
Income Tax Rules, 1962, the financial institutions need to obtain self-certification and carry out
due diligence in respect of all individual and entity accounts opened from 1st July 2014 to 31st
August 2015. Such self-certification and documentation was required to be obtained by the
financial institutions by 31st August 2016, otherwise they were required to close the accounts
and report the same if found to be a "reportable account" as per the prescribed due diligence
procedure for pre-existing account.
In view of the difficulties highlighted by stakeholders in following the provision for "closure" of
financial accounts, it was informed vide Press Release dated 31st August 2016 that the financial
institutions may not close the accounts by 31st August 2016 in respect of which self-certifications
have not been obtained under the alternative procedure and a revised time line shall be notified
in due course. The financial institutions were also advised to continue to work on completing the
required due diligence, including obtaining self-certifications. Queries are being received from
the financial institutions regarding the revised time lines for completion of due diligence. The
financial institutions are advised that all efforts should be made by the financial institutions to
obtain the self-certification. The account holders whose self-certifications were not provided till
30 April 2017, those accounts would be blocked, which meant that the financial institution would
prohibit the account holder from effecting any transaction with respect to such accounts. The
transactions by the account holder in such blocked accounts would be permitted once the self-
certification is obtained and due diligence completed.

Nomination declaration - A beneficial owner can make a nomination of his account in favour of
any person by filing the nomination form with his DP. Such nomination is considered to be
conclusive evidence of the account holder(s) disposition in respect of all the securities in the
account for which the nomination is made. The nomination form submitted should be in the
format prescribed by the Depository in its Bye-Laws and Business Rules / Operating Instructions.

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4.3.7 Forms for Hindu Undivided Family (HUF)
SEBI’s Master Circular No. CIR/MRD/DP/13/2013 dated April 15, 2013, point no. 4.6 stated that
in case of HUF, shares can be held in the name of Existing Karta on behalf of HUF. Therefore, HUF
demat accounts can be opened in the name of Existing Karta but not in the name of Deceased
Karta and HUF entity.

The depository account of an HUF will be opened in the name of HUF entity as it appears on the
PAN card of the HUF entity. DPs should clearly designate the account in the name of the HUF
entity as such. Pan card details of both the HUF entity and Karta of the HUF shall be obtained
from the Beneficial Owner and bank account proof of HUF should be obtained. The form for
opening a HUF accounts is the same as the individual account. While opening such accounts the
DP should select the 'HUF' sub-type in the 'Individual' category of account opening. HUF accounts
cannot be opened with joint holders.

4.3.8 Forms for Companies

A company, being an artificial person, can open a demat account, provided its memorandum
authorizes it to make investment in the securities of other companies. A demat account in the
name of a company should be operated by the person(s) authorised by a resolution passed by its
board of directors. The DP should obtain an attested copy of the memorandum and board
resolution, authorizing the opening and mode of operation of the demat account.

4.3.9 Forms for Minors

A minor may hold shares through his guardian. Accordingly, a minor may open a depository
account only through his guardian. Procedure for opening minor account is as follows:

I. Procedure to be followed by DPs for opening demat account of minors:

a. Obtain photocopy of the School Leaving Certificate/Mark sheet issued by Higher
Secondary Board/Passport of Minor/Birth Certificate.
b. Obtain Proof of Identity, Proof of Address, PAN and the photograph of the Guardian as
per the procedure stated in the bye-laws and circulars. Carry out ‘in-person’ verification
of the Guardian.
c. Account opened in the name of minor should not have joint holdings.
d. Two KYC Application Forms must be filled i.e. one for the guardian and another for the
minor (to be signed by guardian).
e. In case minor account, PAN details of the minor should be captured by the DP in the
Depository System after due verification.

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II. The procedure to be followed by DPs in cases where Minor Clients have attained
Majority (i.e. 21 years of age in case of Minor whose Guardian is court-appointed or 18
years where Minor's account is represented by a natural guardian) is as under:
1. Ascertain the cases where Minors have attained Majority.
2. Communicate to the Client (Minor attained Majority) immediately advising him/her
to submit a fresh account opening form alongwith necessary KYC documents and PAN
card alongwith photograph of the Client.
3. In case of NSDL, suspend the account for debit and disable the standing instruction
for credit pertaining to the account of Minor. In case of CDSL, such account is
automatically suspended for debits.
4. Verify the account opening form along with necessary KYC documents and PAN as
mentioned under point no.2 herein above.
5. Capture the new demographic details in the depository system after due verification
of same
6. Capture the signature of the Client (Minor turned Major) in the system in place of the
signature of the Guardian (captured earlier).
7. Obtain a fresh acknowledgement copy of the Rights and Obligation document from
the BO.
8. Select "None" or "Nominee" as the case may be in the field 'Nominee/Guardian' in
the depository system to disable the entire Guardian details in the said account. If
"Nominee" is selected enter the nomination details. This procedure is not applicable
in CDSL. If the minor turned major intends to continue with the same account, then
the guardian details are to be deleted and Nomination, if given by the client is to be
recorded in the system.
9. Any request or instruction from the guardian, which are to be processed or is having
execution date falling on or after the date the Minor has turned Major, shall be
processed/executed only after receipt of confirmation from the Client (Minor turned
Major).
10. Client (Minor turned major) but account is suspended for debit for non-compliance
with PAN requirement: The procedure mentioned in point nos. 1 to 8 above needs to
be followed. The PAN details need to be captured in the depository system and the
Pan flag should be enabled
11. In case of accounts already suspended in where Clients have not responded- The
procedure as mentioned under point 2 to point no. 8 is to be followed.

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4.3.10 Partnership Firms

Partnership firm cannot be a member of a company under the provisions of Companies Act. Thus
a depository account cannot be opened in the name of a partnership firm. All the partners of the
firm, however, can sign as joint holders, and a joint account may be opened in the name of the
proprietor or partners [Maximum 3 partners]. An exception to this is given for opening a CM
Account. The CM account can be opened for broker firms since partnership firms are allowed to
become members of a stock exchange.

Procedure for opening an account in the name(s) of Partners for holding securities that belong
to the Partnership firm:
a. Copy of the balance sheets for the last 2 financial years (to be submitted every year).
b. Certificate of registration (for registered partnership firms only).
c. Copy of partnership deed.
d. Authorised signatories list with specimen signatures and photograph.
e. Photograph, POI, POA, PAN of Partners.
f. The account should be opened only in the names of Partners, operated by the partners
and the securities that belong to the Partnership Firm can be held in this account.
g. Obtain an undertaking in the prescribed format from the Partners to the effect that the
Partners would comply with the provisions of the Companies Act and other applicable
statutes in respect of securities of the Partnership firm held in the account opened in the
names of the Partners.
h. Where the depository account would be opened in the name of individuals, carry out the
‘in-person’ verification of such individuals and record the details of IPV as per the current
procedure.
i. As per CDSL operating instructions, partnership deed is to be taken on record.

4.3.11 Signatures/Thumb Impression

The account opening form should be:

 signed by the sole holder, in case of single holding;
 all joint holders, in case of joint holding;
 authorised signatories, in the case of corporate accounts;
 by guardian, in case of a minor; or
 Both CDSL and NSDL require that the account opening form be signed by the NRI. This account
can be operated under signature of account holder(s) or a Power of Attorney Holder.
However, according to the CDSL operating instructions, accounts cannot be opened / closed
under signature of power of attorney holder.

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Mode of capturing of signature in the depository system for DPs of NSDL:
a. The DP should capture the Client’s signature(s) as given in the KYC Application Form
and/or Account Opening Form in the Depository System. For non-individuals alongwith
signature of authorised signatory(ies), capture the mode of operation in the depository
system.
b. In case the trustee(s)/ partner(s) etc. are individuals, capture the signature(s) of the
individuals. In case the trustee(s)/ partner(s) etc. of the unregistered trust/ partnership
firm are corporations, companies or entities registered under The Indian Societies
Registration Act, 1860, or under the provisions of a state Act such as Bombay Public Trusts
Act, 1950 or the relevant State Public Trust Act, capture the signature(s) of the authorised
signatories in the depository System. For trust which is an incorporated body, if client
informs about the non-applicability of the relevant Public Trusts Act or the Indian
Societies Registration Act, in its specific case, then the applicant may be facilitated to hold
the beneficial owner account, as proposed, on submission of a certificate obtained by the
client as per Section 12AA of income tax, 1961. In addition to the above, Participants are
advised as follows:
(i) Open the depository account under the category and in the name of trust.
(ii) Obtain copy of Registration Certificate issued by the Income Tax Authorities as per
Section 12AA of income tax, 1961.
(iii) Obtain certified copy of the resolution passed by the Board of Trustees giving the
names of trustee(s) authorised by the Board of Trustees to open and operate the
depository account,
(iv) Obtain certified copy of the latest income tax returns filled by the trust.
c. Illiterate Person: A remark should be put in the depository System (under the authorised
signatory details under "Signatories" screen) at the time of opening the account that the
account holder is illiterate or disabled.
d. Visually Challenged Person: Any visually challenged person can open and operate the
demat account including online facility like any other investor, subject to compliance with
requirements as applicable to any investor. The additional steps required to be taken by
the Participants in case of visually challenged persons are:

1. If so requested by the client, the Participant should read out and explain to the Client,
the contents of the account opening form and rights and obligations document.
2. A remark should be put in the system (under the authorised signatory details in
'signatories' screen) that the Client is "Visually Challenged".
3. Delivery Instruction Slip issued to such Clients should be pre-stamped as "Visually
Challenged"

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In NSDL, if the signature is in any language other than those specified in the Schedule VIII to the
Constitution of India or English, it should be attested by a Magistrate or a Notary Public or a
Special Executive Magistrate.

Process of Opening an account of an Illiterate Person:

Illiterate person(s), at the time of opening an account with a Participant, must affix the thumb
impression (left hand thumb in case of a male and right hand thumb in case of a female) on the
Rights and Obligations document as well as on the account opening form. All accounts opened
by illiterate person(s) with NSDL DPs must be either introduced by an existing account holder or
must be attested by applicant's bank. CDSL however does not need an introducer for accounts to
be opened by an illiterate person(s). The Client(s) must come in-person to open the account and
submit instruction forms and affix his/her thumb impression in the presence of the official of the
DP. The DP should identify the Client(s) by verifying the photograph submitted by the Client(s)
and read out/explain the contents of the account opening form, Rights and Obligations document
and delivery instruction form to the Client(s). In case of CDSL, the DP is not required to read out
the delivery instruction form to the client. The official of the DP should then put his signature and
remarks "Details explained to the Client(s)", on the account opening form, copy of the Rights and
Obligations document and delivery instruction form. In case such Client(s) is/are temporarily or
permanently disabled due to which he/she cannot come in person to submit the instruction form
as mentioned above, the thumb impression of the Client(s) on the instruction forms must be
attested by a Magistrate or a Notary Public or a manager of the account holder's bank.
Additionally, for NSDL DPs attestation by Special Executive Magistrate or a similar authority
holding a Public Office and authorised to use the Seal of his office is also accepted. The Client
should also produce a medical certificate about his/her disability. Further, the instruction forms
issued to such Client(s) should be pre-stamped as "Thumb Impression". At the time of opening
of account, the aforesaid rules should be explained to the Client(s) in the presence of a witness,
who will have to sign the Rights and Obligations document and the account opening form, as a
witness.

4.3.12 Client Account Number

On receipt of a valid application form which is complete in all respects and duly signed by the
applicant, the DP should verify its contents to his satisfaction. If, after verification, the DP accepts
the application and the Rights and Obligations document is signed, the DP has to enter the
information on the application form into the depository participant system. The system then
generates a client account number which should be referenced by the client for all its
transactions in the depository system. The system also generates a report containing the details
of client captured from the account opening form. The DP should provide a copy of account
opening confirmation report to the client for his reference and verification about the correctness
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of details. The account number styles are different for different purpose. In case of CDSL, the
account number has two parts, i.e., 8-digit DP-ID (identification number of Depository
Participant) and 8-digit client account number. In the illustration below, the first 8 digit is the DP
–ID and the last 8 digit the Client ID. Together this number is unique across depositories. After
opening the demat account, the client master report should be sent to the client at the address
given in the account opening form. As per CDSL operating instructions, a system generated
confirmation letter for having opened the account should be sent to the BO along with other
forms and instruction slips.

1 3 0 1 5 6 0 0 0 0 0 0 0 0 8 2

Similarly, an account with the NSDL will have 16 digit number with the first 8 digits indicating the
DP-ID starting with IN300100 and the last 8 digits giving the client id i.e. 10005678.

I N 3 0 0 1 0 0 1 0 0 0 5 6 7 8

4.3.13 Standing Instructions / Purchase confirmation waiver

A DP may register the transfer of securities to or from a beneficial owner's account only on receipt
of instructions from the beneficial owner. No debit or credit can be given to the account of a
beneficial owner without a due authorisation from such beneficial owner. However, for ease of
operation and elimination of redundancies, a clause has been included in the standard format of
Rights and Obligations document. This clause enables clients to give standing instructions to DPs,
at the time of opening the account itself, for receiving securities to the credit of their accounts
without any further instruction from them. These instructions are given as a part of the account
opening form itself. Though not mandatory, it would be better to ask clients to specifically sign
in the standing instruction column, to avoid any confusion at a later stage.

Box 4.2: Operation of demat accounts based on Power of Attorney

A demat account can also be operated by a Power of Attorney holder. In this regard, it may be
noted that –
(i) A Power of Attorney executed prior to the promulgation of The Depositories Act is valid and
enforceable.
(ii) It is the responsibility of the DP to verify whether the Power of Attorney is adequate and
sufficiently authorizing the holder of the Power of Attorney i.e., the done to operate the account
of the beneficial owner.

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However, it may be mentioned that a DP shall not obtain Power of Attorney (POA) from its
client(s) as a requirement for opening a demat account. Further the following needs to be taken
care of when executing a POA:
(i) POA Holder does not have the sole authority to operate the account;
(ii) Account holders who have executed a POA cannot be denied Delivery Instruction Slip (DIS)
books;
(iii) DPs are not authorised to merge the securities kept under various accounts of the clients;

DPs must inform all the clients who have executed POA about any changes and obtain a written
confirmation from the clients that they have taken note of the changes in the POA. It may also
be mentioned that where a client has executed a POA, such depository accounts can be operated
both by the client(s) as well as by the POA holder. Therefore, DPs should ensure that the
signatures of the account holder(s) and the POA holder are captured in the depository participant
system and DPs are required to provide DIS books to the clients who have executed a POA and
allow the clients to operate their accounts as well. Further, DPs are required to maintain separate
accounts of the clients, in conformity with Regulation 42 of Securities and Exchange Board of
India (Depositories and Participants) Regulations, 2018. Lien on the securities can be created only
as per Regulation 58 of SEBI Regulations and as per the procedure laid down in the Bye Laws and
Business Rules of the Depository.

4.4 Clearing Member Account

The entities which are authorised to do pay-in and receive the pay-out from a Clearing
Corporation (CC)/ Clearing House against trades done by them or their clients are known as
clearing members (CM). All pay-in and pay-out transactions are carried out through their
accounts. There are two types of clearing members:
 All the members of a stock exchange are clearing members; and
 Custodians who have been permitted by the stock exchange to act as a clearing member.

4.4.1 Procedure to Open a Clearing Member Account

The steps undertaken to open the CM account are same as those of individuals. The difference
lies in the type of form and details to be filled in and documents to be submitted. In NSDL, the
major difference is that the clearing member has to first register itself with the clearing
corporation and obtain a clearing corporation clearing member identification number (CC-CM-
ID). The clearing account is identified by the combination of CC-CM-ID given by the clearing
corporation, CM-BP-ID given by the depository and the Client-ID given by the DP. Before opening
a clearing account, the DP should send to the depository the clearing member's account opening
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form, letter issued Clearing Corporation providing CC CM ID and copy of SEBI registration
certificate. The Depository then allots the CM-BP-ID. Based on the CM-BP-ID so allotted, the
account is then activated by the DP and Client-ID is generated. The date of opening of the account
in depository participant system to the depository is electronically communicated. However,
w.r.t CDSL, the concept of CM-BP-Id is not there and the system generates a 16 digit ID similar to
the BO ID. The Clearing member accounts with CDSL can be opened by a DP just like any other
demat account after the formalities as mentioned in the CDSL DP Operating instructions are
fulfilled.

Details to be filled in the form are:

1. Name of the Clearing Member

2. Company's short name, if any
3. Address of the registered office, telephone number, fax number, e-mail, if any
4. Name and address of the authorised signatories, their designations and telephone numbers,
status code, sub-status code
5. Bank account particulars, bank name and its branch, current account number
6. RBI reference number, RBI approval date (Not required in CDSL)
7. PAN/ GIR number
8. Signatures of Authorised signatories)

A separate enclosure has to be attached to the account opening form specifying the following
details:
1. Name and address of the clearing member
2. Name and address of the clearing corporation
3. Clearing Corporation Id (CC-ID)
4. Clearing Member Id (CM-ID)
5. Stock Exchange clearing code
6. SEBI Registration number
7. Trade name
8. Copy of Board Resolution for authorised signatories should also be submitted.

Generally, there will be only one CM account per broker for a stock exchange. In CDSL a CM is
required to open multiple accounts. The clearing account should only be used for clearing and
settlement purposes and not for any other purpose, e.g., holding of securities. All the securities
received in a settlement account should be transferred to respective beneficial accounts as soon
as possible, but in no case later than the time prescribed by the depository/ stock exchange/SEBI
in this regard. The opening of clearing member account constitutes a "standing instruction" to

85
receive credits from the clearing corporation when there is a pay-out (not applicable in case of
NSDL).

4.4.2 Handling of Clients Securities by Trading Members/Clearing Members by opening Client

Unpaid Securities Account (CUSA)
In order to provide clarity with respect to a TM/CM maintaining a running account for client
securities and pledging the client securities with Banks/NBFCs, SEBI issued the following
guidelines:

The securities received in pay-out against which payment has been made by clients, shall be
transferred to the demat account of the respective clients within one working day of the pay-out.
Such securities shall be transferred directly from the pool account of the TM/CM to the demat
account of the respective client.

With regard to securities that have not been paid for in full by the clients (unpaid securities), a
separate client account titled – “client unpaid securities account” shall be opened by the TM/CM.
Unpaid securities shall be transferred to such “client unpaid securities account” from the pool
account of the concerned TM/CM.

The securities kept in the ‘client unpaid securities account’ shall either be transferred to the
demat account of the respective client upon fulfilment of client’s funds obligation or shall be
disposed off in the market by TM/CM within five trading days after the pay-out. The unpaid
securities shall be sold from the Unique Client Code (UCC) of the respective client. Profit/loss on
the sale transaction of the unpaid securities, if any, shall be transferred to/adjusted from the
respective client account.

In case the clients’ securities are kept in the ‘client unpaid securities account’ beyond seven
trading days after the pay-out, the depositories shall under their bye-laws levy appropriate
penalties upon such TM/CM which shall not be permitted to be recovered from the client. 14

For the CDSL participants, in case the TM/CM’s existing pool account is maintained with a DP and
the CUSA is being opened with the same DP then fresh account opening form would not be
required to be submitted by the TM/CM to the DP for opening the CUSA. DP shall obtain a
consent from TM/CM in the prescribed format along with a copy of the board resolution for the
same. However, if the CUSA is being opened with another DP where the pool accounts are not
maintained then the documents as applicable for opening of demat accounts would have to be
furnished. The TM/CM should mention the type of Account as CUSA in the account opening form.

There are certain restrictions regarding transfer of securities from /to CUSA in CDSL which are
listed below:
a) Transfer of securities from clients’ demat account to the CUSA will not be permitted.

14
SEBI Reference No. CIR/HO/MIRSD/DOP/CIR/P/2019/75 Dated June 20, 2019.

86
 b) Inter settlement transfer within CUSA will not be permitted.
c) Securities from TM/CM Unified Settlement Account (Pool Account of BSE TM/CM) and
Clearing Member Account (Pool Account of other than BSE TM/CM) would be permitted
to be transferred to the CUSA of the corresponding TM/CM or from the Clearing
Corporation as direct payout.
d) The transfer of securities from CUSA to clients’ demat account would be permitted with
the appropriate reason code.
e) Transfer from CUSA to respective clearing member’s account for pay-in (CM Principal for
BSE CM and Clearing Member Account Pool Account of other than BSE CM) is permitted.

For the NSDL participants, the Clearing Member is required to make an application to the NSDL
Participant. CMs shall be required to open separate CM account for CUSA in respect of each
Clearing Corporation and NSDL will provide separate CC wise CM-BP-ID to CMs. NSDL shall use
the existing CM Code/ID (assigned to CMs by Clearing Corporations) for opening of CUSA pool
account. The CM will submit request letter to Participant for obtaining new CM-BP-ID for opening
CUSA account. If the existing CM is registered on SPEED-e and the CM wish to opt for SPEED-e
facility for operating the CUSA, then the CM will provide the confirmation to Participant. Based
on the request received from CM, Participant will send consolidated excel sheet containing the
CM details for opening of CUSA to NSDL and on confirmation the new CM-BP-ID for CUSA would
be activated in NSDL DPM system using the details of existing CM Pool account maintained in
NSDL depository system. The details of CUSA pool account would be forwarded to the Participant
for opening of CUSA.

CM will be required to make an application to Participant for opening of CUSA by submitting the
application form. If CM is opening the CUSA with the existing Participant, then no additional
documents will be required to be enclosed along with the application form. However, if CM opts
to open CUSA with any other Participant, then CM will be required to follow the process of CM
account opening prescribed by NSDL. If the CM is opening the CUSA with the existing Participant,
based on the aforesaid submission by CM the Participant shall open CUSA in Local DPM system
using the CM BP ID provided by NSDL. The Participant shall use the Client details viz. PAN, address
etc, financial details and signatory details of the existing CM while opening of CUSA in Local DPM
system.

4.5 Closure of Account

4.5.1 Closure on Client’s Request

DP can close a depository account on receipt of an application in the prescribed format. The
application should be made by the account holder or by all the joint holders. An account can be
closed only when there is no balance in the account. In case, there is any balance in the account
which needs to be closed, the following steps are followed:

87
(a) Rematerialisation15 of all securities standing to the credit of the account at the time of making
the application for closure; or
(b) Transferring the balance to the credit of another account opened by the same account
holder(s) either with the same participant or with a different participant. This is applicable only
if the client wants to avail of free transfer facility. Else to reduce the balance to zero, the client
may transfer the securities to any other account or deliver the securities for pay in of his market
transactions.

However, where demat request(s) are pending for disposal for a long time in a demat account
and the client desires to close such an account, the following procedure may be adopted by the
client:
 Write a letter in the prescribed format to the Issuer (with a copy marked to its Participant
and respective RTA), requesting for rejection of the pending dematerialisation request(s)
and send fresh physical security certificate(s) to the Client directly.
 Enclose a copy of the dematerialisation request generated from depository participant
system, duly signed & stamped by the Participant, alongwith the aforesaid letter to the
Issuer.

On receipt of copy of the letter from the Client, the Participant may also take up the matter with
the concerned Issuer and/or its RTA for rejecting the instruction expeditiously. After the pending
dematerialisation request(s) is/are rejected by the Issuer and/or its RTA, the Participant can close
the account of such Client.

Before closing the account, the DP should ensure that all pending transactions have been settled.
The request for closure should be processed only after ensuring that there is no balance lying in
the account. In case Participant is unable to close the account due to pending demat/ remat
requests, ISIN in suspended status or due to open pledges, etc., the Participant should freeze the
account i.e. “suspended for debit and credit”. In CDSL, account closure can be initiated even if
balances are present in the account. CDSL system will change status of such an account to ‘TO BE
CLOSED’ and close the account when all balances are reduced to zero. If a client makes a request
for closure of accounts, DPs should provide the Statement of Transaction (SOT) to the Client for
the period from the beginning of the quarter in which the account is closed till the date of closure.
Further, the SOT should bear the words "Account Closed" and should be prominent. For this
purpose, DPs can affix a rubber stamp or create a suitable system that will clearly show on the
SOT that the account has been closed.

15Rematerialisation is theprocess of issuing physical securities in place of the securities held electronically in the book-entry form
with the depository. This concept would be dealt in with detail in the later section of this workbook.

88
Facility for cancellation of long pending demat requests
In cases, where the clients have pending demat requests, Participants are not in a position to
process the requests received from their clients for closure of accounts as certain Issuer
companies are not confirming the requests for dematerialisation for a long time a facility for
cancellation of pending demat request is introduced. The procedure in this regard is given below:
1. Client must submit a letter in prescribed format requesting to cancel the pending demat
request in respect of those demat requests which are pending for more than 60 days.
2. Participant must submit a letter to the depository requesting it to facilitate cancellation
of pending demat requests in prescribed format.

After the pending dematerialisation request(s) is/are rejected/ canceled, the Participant can
close the account of such Clients.

4.5.2 Consolidation of Accounts

Some clients could have opened multiple accounts to dematerialize their shares held in multiple
combination and sequence of names. However, they may not need so many accounts after they
have dematerialised their shares and may want to bring all their share holdings into one or fewer
accounts. This can be achieved by using normal off market transfer instruction.

4.5.3 Closure by DP

The DP may also initiate closure of a client's account if the client has defaulted in performing its
obligations laid out in the Rights and Obligations document. The DP should give sufficient notice
to the client before initiating closure of his account. In CDSL, a 30 days’ notice is required. The
notice should clearly state the reasons for closure of account. The process of closing account in
such a case is the same as that of client-initiated closure.

4.5.4 Closure/Shifting of Clearing Account

A clearing member may transfer its clearing account from one DP to another DP. For this,
simultaneously applications have to be made for closure of account to the earlier DP and for
opening of new clearing member account to the new DP. On receipt of the application, the new
DP forwards the application to the depository for approval. Once the application is approved, the
new DP opens a new clearing account and intimates the depository about the new Client-ID. On
receipt of intimation from the new participant, the depository advises the old DP to close the
account. The old DP then closes the account and intimates the clearing member. All pay-out of
securities, subsequent to closure of old clearing account takes place in the new account. The

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above procedure is specific to NSDL DPs. In CDSL, there is no requirement of approval of
depository in this category. In CDSL the CM can close his clearing accounts with one DP and open
the same with any other DP without any need of approval from CDSL.

4.5.5 Mass Shifting of Accounts

DPs may set up new centres as their business expands or to provide direct connectivity from
different geographical locations. However, there may be several accounts from that location but
the account may already have been opened in another DP module machine. For example, a DP
may start operation from Delhi and may be servicing clients of Faridabad, Agra, Mathura, etc.
When the DP finds enough business at Mathura, he may set up a direct connectivity machine at
Mathura also. Depositories have provided a facility to shift in mass, all the Mathura accounts
from Delhi in the above example to the machine at Mathura. This facility is called mass shifting
facility.

SEBI with effect from January 09, 2006 had decided that charges shall not be levied by a
depository on DP and consequently, by a DP on a Beneficiary Owner (BO) when a BO transfers all
the securities lying in his account to another branch of the same DP or to another DP of the same
depository or another depository, provided the BO Account/s at transferee DP and at transferor
DP are one and the same, i.e. identical in all respects. In case, the BO Account at transferor DP is
a joint account, the BO Account at transferee DP should also be a joint account in the same
sequence of ownership.

Further, DPs are required to follow the following procedure in this regard:

The client submits an account closure request in the format as specified by the depository, duly
filled & signed by the account holder(s) along with duly certified (signed and stamped) Client
Master Report (CMR) in case of physical copy or digitally signed in case of electronic copy
obtained from the target DP with whom the client has opened a new account or maintains an
account. In case of inter-depository transfers, apart from what has been stated above, the client
should submit the CMR in a crystal format duly certified (signed and stamped) by the target DP
or if CMR in crystal report format is not available, the target details should be certified (signed
and stamped) by the other depository.

1. DPs should verify the documents submitted by the client and if found in order, the DP
shall effect the transfer of securities.
2. After transferring the securities, the serial number(s) pertaining to unused DIS should be
permanently blocked in the back office system of the Participant and the account of the
client should be closed. In case, the DP is unable to close the account due to pending
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 demat/remat requests, ISIN in suspended status, fractional position or due to open
pledges etc., the Participant shall freeze the account i.e. 'suspended for debit and credit'
in case of NSDL and for CDSL it gets converted `To be closed‘ status.
3. DPs should make a request to the depository, seeking credit for the transaction fees
pertaining to account closure cases, with supporting documents as detailed above. In case
of CDSL if the transfer is effected through the Transfer module, no charges are levied. At
NSDL the processing of Account Closure request should be processed through ‘Transfer
of Holding’ module only where the target account is in NSDL. Application needs to be
made for waiver only in case of shifting of accounts through inter depository and transfers
to legal heirs and nominees in case of NSDL. ‘Transfer of Holding’ module facilitates DPs
to execute “Account Closure” instruction through Transfer of Holdings (Account Closure)
module wherein securities held under free balances as well as Locked-in balances lying
under source depository account can be transferred to target depository account in NSDL
depository system. It also facilitates DPs to transfer securities for which maturity date has
expired from the source depository account to the target depository account where both
source and target depository accounts within NSDL depository system are of the same
person.

The features of the same are given below:

1. Upon execution of Account Closure instructions through transfer of holdings module, in
case there are any securities wherein maturity date has expired in the source depository
account, such securities will be moved to the target account provided:
a. PAN flag is enabled in both source and target depository accounts.
b. PAN in the source depository account and target depository account are matching
across holders and are in the same pattern of holding.
c. The ISIN is either in “Active‟ or “Suspended” status.
d. Standing Instruction (SI) indicator to receive credits is enabled in the target depository
account. (If Standing Instruction (SI) indicator to receive credits is disabled in the
target depository account, the instruction status will be updated as “Counter Party
Instruction awaited” and such instruction will be cancelled at EOD.)
2. Upon successful validation, the status of the Account Closure instructions will be updated
as “Accepted‟. In case PAN validation fails, then the transfer of such securities (i.e. securities
wherein maturity date has expired) will be rejected.

3. Securities (if any) those are lying under below status will continue to remain in the Source
Client depository account and the Account Closure instructions in respect of below securities
will be updated as “Rejected”.

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 i. Pending Demat
ii. Pending Remat
iii. Pledge balance / unconfirmed pledge
iv. Blocked Inter Depository Transfer
v. Quantity level freeze
4. In case the source depository account is not closed due to non-transfer of securities as per any
of the above reasons, DPs are requested to ensure to freeze the account i.e. “Suspended for Debit
and Credit”.
4.6 Freezing of Accounts
Account freezing means suspending any further transaction from a depository account till the
account is unfrozen. ISIN16/specific number of securities in a demat account may be frozen in
certain cases.
1. If a written instruction is received from the client by the DP, requesting freezing of account;
2. If an electronic request is made by a client to his DP or to the Depository, in the form and
manner as may be prescribed by the Depository. However, this is not necessarily followed by
both the depositories.
3. If orders are received by the DP or the depository from the Central or State Government,
SEBI, or any order by the court, tribunal, or any statutory authority.
4. If a request is received by the Depository from a DP or client, in case of NSDL.
5. If orders are passed by Disciplinary Action Committee (DAC) or if DP becomes insolvent,
bankrupt or if a DP is being wound up, Depository can freeze accounts and /or ISIN and/or
specific number of securities held in DP's name.
By freezing an account for debits only (preventing transfer of securities in / out of the account),
the client can receive securities in his account. An account can also be frozen for debits as well
as credits (preventing any movement of balances out of the account). No transaction can take
place in such an account until it is reactivated. A frozen account may be unfrozen or reactivated,
by taking the reverse step. This would be done on:
 The valid written request of the account holder where he had requested freezing,
 Directions of depository made in pursuance of the order of the appropriate authority.
The DP should immediately inform the client about change in status of the account from 'active'
to 'suspended' and vice versa.

16International Securities Identification Number (ISIN) is a unique identification number for each security issued in accordance
with the ISIN standard (ISO 6166).

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4.7Changes in Client Details
A client may change any of the following particulars in the depository system provided the
depository has provision for change in client details. All the changes have to be indicated in
writing to the DP.
 Change of name in case of individual BO on submission of prescribed documents like marriage
certificate, publication of name change in official gazette etc.
 Father's/Husband's Name (change from father's name to husband's name may be necessary
on account of marriage).
 Standing instruction facility (an investor can activate/deactivate it).
 Address (both local as well as correspondence), telephone number, mobile number (clients
may make this change at any time depending on their need). Clients have to provide proof of
new address while submitting application for change of address.
 Occupation details.
 Nominee details (the DP has to obtain the required form from the client duly filled and effect
the changes).
 Bank details (clients may revise the bank details given by him before record date to ensure
that the dividend/interest warrants bear the correct bank details).
 PAN Number details.
 In case of NRIs, the Reserve Bank of India reference number and approval date for NSDL.
 E-mail addresses.

Change of Address
1. While processing requests for change of address received from Clients, Participants should
obtain the following documents:
a) a written application for change of address from the Client (In case of joint holdings,
all holders must sign the application and in case of non-individual, authorised
signatory(ies) must sign);
b) Proof of new address alongwith the original document of the new address for
verification.
2. The Participant should verify the signature of the Client on the application with the signature
of the Client available with the Participant. Further, the document pertaining to new address
should be verified and attested and thereafter record the change of address in the System.
3. In case of change (addition/ deletion/ modification) in the landmark details for the address
which is already captured in the System, Participants may limit the changes to the landmark
details, after obtaining a request from the Clients on a plain paper, which is signed by all the
holder(s) (in case of joint holdings). Participants are advised to note that the address of the

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 Client captured in the System, as mentioned in the proof of address, should not change and
only limit the change in the landmark details.
4. After effecting the change of address in the System, the Participant should send a
communication to the Client, confirming the change of address, to the old and the new
addresses.
5. The Participant shall upload the updated information of the Client on the system of KRA/CKYC
(CENTRAL KYC RECORDS REGISTRY).

Change of name in Corporate Accounts

The facility for change of name in corporate accounts is available for Client type’s viz., Body
Corporate, Bank, Financial Institution (FI), Foreign Investors, Mutual Fund (MF) and Trust. The
documents required at the time of change of name of Corporate are given below:
(i) In case the entity is registered under the Companies Act, 1956, the following documents should
be obtained from the Client:
 Letter requesting for change of name signed by the authorised signatories.
 Certified true copy of fresh certificate of incorporation consequent upon change of name
issued by the Registrar of Companies.
 Certified true copy of Board Resolution where the change in name was approved
 List of authorised signatories along with the specimen signature duly verified by MD/Co.
Secretary.
(ii) In case of other corporate entities, the following documents should be obtained from the
Client:
 Letter requesting for change of name signed by the authorised signatories.
 Certified true copy of Board Resolution for change of name.
 Certificate of registration issued by SEBI / relevant Statutory Authorities, as applicable.
While carrying out the modifications, the name of any existing account holder of an account can
neither be deleted nor can any new name can be added. DPs can only make changes to the
name(s) of existing account holder(s) of the account on submission of following documents as
specified by SEBI.
i. In case of change in name on account of marriage following documents shall be submitted:
a. Marriage Certificate or copy of Passport showing husband’s name or publication of
name change in official gazette.
ii. In case of change in name on account of reasons other than marriage
a. Publication of name change in official gazette.
iii. In case of change in father’s name
a. Publication of name change in official gazette.

Change of name of Beneficial Account Holder

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For effecting change in name in the depository account of an individual BO, a request letter duly
signed by the holder whose name is changing alongwith self-attested copies of the following
document(s) are required:

Sr. No. Reason for name change Documents required

1 On account of marriage/ on (i) Marriage Certificate/Divorce Certificate or
account of Divorce (ii) Copy of Passport showing husband’s name /
Fathers Name or
(iii) Publication of name change in official gazette.
2 On account of reasons other (i) Publication of name change in official gazette.
than marriage
3 Change in father’s name (i) Publication of name change in official gazette.

After the name change is carried out, the DP is required to send a communication via letter / e-
mail/ Client Master Report / Client Modification Letter generated from the DP System or its back
office or any other mode which the DP may deem fit to the Clients informing about changes
carried out in their name.
Some of the investors who reside in the State of Karnataka and Punjab, the name change is
published by the State Government in the Official Gazette only for Government employees and
not for private persons in case of change in name of an individual. In view of the same, SEBI vide
Circular No. CIR/MRD/DP/158/2018 dated December 27, 2018 had issued guidelines to facilitate
name change for reasons other than marriage for individuals in the State of Karnataka and
Punjab.
The below procedure is followed by DPs in case of change of name of an individual in the State
of Karnataka and Punjab for reasons other than marriage:
1. Documents to be collected:
a. Request letter for change of name;
b. Sworn affidavit executed before the Notary Public/ Magistrate of First Class/ Executive
Magistrate mentioning the reason for change of name and his complete address;
c. Paper publication in one local newspaper and one national newspaper; and
d. KYC in changed name.

2. DPs shall collect the self-attested copies of above documents and maintain the same in their
records after verifying with the original documents and must write the remarks “verified with the
originals” on the copies of the document(s).

3. While capturing the name change in the demat account in the system, DPs may select the
reason for change in name as “Other than marriage”.

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Procedure for minor correction of name of an individual in a demat account
An ink-signed written request shall be submitted by the client (In case of joint account, request
must be signed by the Client in whose name, minor correction is required) to the DP along with
one of the following documents as proof of identity, which carries the correct name.
 PAN card
 AADHAAR card
 Passport
 Driving Licence
 Voter’s identity card issued by the Election Commission of India
 Job card issued by NREGA
Minor correction in name (which looks obvious, easily explainable and raises no doubt) would
include the following types of cases:
 Correction of spelling mistakes, if any.
 Expansion of the name by incorporating the fully expanded name and/or inclusion of
the middle name.
 Abbreviation of name.
A confirmation is obtained from the client that it is not a change in name of the individual for any
reason including due to marriage, divorce, court order, etc. In case, an individual changes the
spelling of its name for any reason including for numerology, etc., it will be considered as a
change in name, and not a correction in name.

Some examples of where correction of name may be facilitated and may not be facilitated are as
mentioned below:
Where minor correction of name may be facilitated

Sr. No. Name in demat account Name to be updated in demat account

1 R. S. Shah Ramesh Sunder Shah
2 Ram Sevak Sharma R. S. Sharma
3 Paresh Patil Paresh Dashrath Patil
4 Sridhr Srinivasarao Sridhar Srinivasarao

Where correction of name may not be facilitated

Sr. No. Name in demat account Name to be updated in demat account

1 Paresh Patil Paresh Patel
2 Sunita Mukesh Gaikwad Sunita More
3 P. S. Shah S. P. Shah
4 Shekhar Rajan M Rajan Shekhar P
5 Ram Kumar Sheth Ram Kumar

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DP must exercise due diligence while processing such requests and satisfy itself that the desired
name indeed belongs to same person and there is no change in name. Concurrent auditor must
conduct 100 percent audit of all cases involving minor correction in name as mentioned above.

CDSL allows change in name due to typographical errors at DP end subject to maintenance of
prescribed documents.

Modification in name of the account holder in the system – error by Participant

In case a Participant commits a typographical error while entering name of the Client in the
system (which is noticed after activation of the account) or while processing the request for
change in the name, it may be corrected by the Participant as prescribed below:
a) Participant should examine the Account Opening Form, KYC Form, request for change of
name and other documents submitted by the Clients/ authorized signatory (ies) and ascertain
that a data entry error was indeed made while entering name of the Client in the system.
b) Once Participant has satisfied itself about the data entry error, it may modify the name of the
Client suitably in the system. The reason should be mentioned as ‘Participant error’ while
making this rectification in the system.
c) Correction in such cases may be undertaken when error is brought to the notice of Participant
by client or by auditor of Participant or is detected by Participant staff. After making required
correction, intimation should be sent to the client along-with updated Client Master Report .

Change of Signature
1. The Client should make a request in writing specifying reasons for change in signature.
2. New signature should be duly attested by Client's banker, only in case where the beneficiary
owner cannot come personally.
3. Client should visit DP's office personally and produce valid proof of identity. Clients opening
account with NSDL/CDSL DPs, needs to bring the latest transaction statement of its account.
4. In the presence of officials of DP, Client should affix his/her new signature.
5. If the client cannot come in person, the request in writing should contain the old and the new
signature and the same should be attested by the BO’s banker.
An authorised official of the DP shall, under his signature, verify the identity proof with the proof
and photograph that were furnished at the time of opening of account and thereafter, if found
satisfactory, make necessary changes in its records.

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4.8 Accreditation of Investors for the purpose of Innovators Growth Platform

1. Accredited Investors (AIs) for the limited purpose of Innovators Growth Platform (“IGP”), are
investors whose holding in the Issuer Company, is eligible for the computation of at least 25
percent of the pre-issue capital in accordance with the SEBI (Issue of Capital & Disclosure
Requirements) Regulations, 2018. 17
2. Accordingly, the framework for the process of accreditation of investors is detailed below:
A. Eligibility:
The following entities shall be eligible to be considered as Accredited Investors (AIs):
i. Any individual with total gross income of ₹50 lakhs annually and who has minimum
liquid net worth of ₹5 crores; or
ii. Any body corporate with net worth of ₹25 crores.
B. Procedure for accreditation:
i. Responsibility of Stock Exchanges/Depositories
The investor, having a demat account with a Depository, will make an application to the
Stock Exchanges/Depositories in the manner prescribed by them for recognition as an AI.
The Stock Exchanges /Depositories may use the services of Brokers/Depository
participants respectively for such purpose. However, Stock Exchanges/Depositories shall
be responsible for verification and maintenance of the AI data.
C. Documentation
I. In case of Individual / HUF
i) Copy of PAN Card.
ii) Copy of Aadhaar Card or Copy of Valid Passport.
iii) Income tax return of last 3 financial years
iv) Certificate from practicing chartered accountant stating total gross income (annually)
and liquid net worth as on date of application. Working of Liquid Net worth shall be given
as an Annexure to the certificate. The same shall be calculated as follows:
Capital + Free Reserves
Less: non-allowable assets
(a) Fixed assets
(b) Pledged Securities
(c) Non-allowable securities (unlisted securities)

17 Regulation 283(1) of SEBI ICDR Regulations.

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 (d) Doubtful debts and advances18
(e) Prepaid expenses, losses
(f) Intangible assets
(g) 30 percent value of marketable securities
v) Where the individual has been debarred or disciplinary action has been taken against
investor by SEBI, RBI or any other regulatory body, then the debarment period or
disciplinary action should be over. In case of a Non Resident Indian, he or she shall confirm
that he or she has not been.
vi) Declaration from investor which will state that:
 he/she/it, is not a wilful defaulter as defined under SEBI (ICDR) Regulations, 2018.
 he/she/it, is not a fugitive economic offender as defined under SEBI (ICDR)
Regulations, 2018.
 he/she/it, is not in violation of Regulation 24 of SEBI (Delisting of Equity Shares)
Regulation, 2009.
 he/she/it, is not in violation of the restrictions imposed by SEBI under SEBI circular
no. SEBI/HO/ MRD/DSA/CIR/P/2017/92 dated August 01, 2017.
 he/she/it, is in compliance with RBI regulations, if applicable.
 that the investment in the Companies are in compliance with RBI norms, if
applicable.
 that the submissions made to the Exchange/Depository are true and correct and
if found incorrect, the Exchange/Depository reserves the right to reject the
application and take necessary action.
 that in case of ineligibility due to change in the financial status of the Accredited
Investor, he/she/it shall inform the Stock Exchange/Depository of such
ineligibility.
II. In case of body corporate (including LLP)
i) Certificate of Incorporation.
ii) If the body corporate is registered with any regulatory body such as RBI, IRDA, etc.,
then certificate of such valid registration from such regulatory body.
iii) Copy of PAN card of body corporate.
iv) Copies of Financial Statements of last 3 financial years.
v) Copies of Income tax return of last 3 financial years.

18 Includes debts/advances overdue for more than three months or given to associates and to related parties.

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 vi) Certificate from statutory auditor of the body corporate stating net worth as on
date of application. Working of Net worth shall be given as Annexure to the certificate.
vii) Certified copy of Board Resolution to make application for Accredited Investor as
per IGP norms.
viii) Declaration from Managing Director/Designated Partner/authorized person that:
(i) the body corporate or its promoters/partners or directors are not wilful
defaulter as defined under the SEBI (ICDR) Regulations, 2018.
(ii) the promoters/partners or directors of the body corporate are not a fugitive
economic offender under the SEBI (ICDR) Regulations, 2018.
(iii) the body corporate or its promoters/partners or whole-time directors should
not be in violation of the provisions of Regulation 24 of the SEBI Delisting
Regulations, 2009.
(iv) the body corporate or its promoters/partners, its directors should not be in
violation of the restrictions imposed by SEBI under SEBI circular no. SEBI/HO/
MRD/DSA/CIR/P/2017/92 dated August 01, 2017.
(v) the body corporate is in compliance with RBI Regulations, if applicable.
(vi) that the investment made in the Companies are within the limit prescribed by
the RBI and if investments exceed the prescribed limit, then approval of RBI for
the same has been obtained, in case the same is applicable.
(vii) that the submissions made to the Exchange/Depository are true and correct
and if found incorrect, the Exchange/Depository reserves the right to reject the
application and take necessary action.
(viii) that in case of ineligibility due to change in the financial status of the
Accredited Investor, it shall inform the Stock Exchange/Depository of such
ineligibility.
3. Validity of Accreditation
The accreditation granted by the Stock Exchange/Depository shall be valid for a period of three
years from the date of issue of such accreditation unless the AI becomes ineligible due to change
in his/her/its financial status in which case such AI shall inform the Stock Exchange/Depository of
such ineligibility.
4. Responsibility of Merchant Bankers at the time of listing on IGP with regard to AIs
At the time of application by a Company for listing on IGP, the merchant bankers shall ensure due
diligence with regard to eligibility of AIs and that their holding in the Company desirous of listing
on IGP is in accordance with the Regulation 283(1) of the ICDR Regulations.
Investors having a demat account with NSDL, will make an application to its depository
participant for recognition as an Accredited Investor (AI). Accordingly, participants are requested

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to take note that the applications shall be submitted by the investors to the participants, where
they hold the demat account.

4.9 Mapping of Unique Client Code (UCC) with demat account of the clients 19
As a part of its investor protection measure, in 2018, SEBI had directed the Market Infrastructure
Institutions (MIIs)20 to put in place an “Early Warning Mechanism” to detect the diversion of
client’s securities by the stock broker at an early stage to take appropriate preventive measures.
The MIIs were required to devise a mechanism to detect diversion of clients’ securities and to
share information among themselves in respect of (a) Diversion of pay-out of securities to non-
client/other client accounts.; and (b) Mis-matches between gross (client-wise) securities pay-in
and pay-out files of a stock brokers generated by the Clearing Corporation which shall be
compared with actual transfer of securities to/from the client’s depository accounts by the
Depository. The cases of any mismatch found out by the Depositories would be informed to the
concerned Stock Exchange / Clearing Corporation.

In order to detect malpractice and ease of reconciliation, it has been decided and advised to the
Depository Participants to Map the Unique Client Code (UCC) with demat account of the clients.
To map the UCC with the demat account of the clients, following mechanism has been
implemented by the Depositories and the DPs:
• UCC allotted by the trading member (TM) to the client shall be mapped with the demat
account of the client.
• A client may trade through multiple TMs in which case each such UCC shall be mapped with
one or more demat account(s).
• Stock Exchanges shall share the UCC data with the Depositories which shall include the PAN,
segment, TM/CM code and UCC allotted. Such UCC data shared with the Depositories on a
one-time basis i.e. from November 30, 2019, and subsequently incremental data in respect
of new UCCs created, shall be shared on a daily basis. Depositories shall map the UCC data in
the demat account based on the PAN provided in the UCC database.
• Clients may make a request to their DP to de-link or add UCC details which shall be processed
by the Depository through DPs. Before any addition of UCC in the demat account, the
Depositories shall validate the same with the Stock Exchanges / client.
• Stock Exchanges and Depositories shall have a mechanism in place to address clients’
complaints with regard to UCC mapping with their demat accounts.
• Stock Exchanges and Depositories shall have a mechanism in place to ensure that inactive,
non-operational UCCs are not mis-used and also a mechanism to ensure that inactive, non-
operational UCCs are weeded out in the process of mapping clients’ UCC with their demat
account.

19
SEBI circular no. SEBI/HO/MIRSD/DOP/CIR/P/2019/136 dated November 15, 2019. The provisions of the circular were to be
implemented by December 31, 2019.
20
Stock exchanges, Clearing Corporations and Depositories are known as Market Infrastructure Institutions (MIIs)

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Review Questions

Questions to assess your learning:

1. The Rights and Obligation Document is a standard document approved by

(a) SEBI
(b) RBI
(c) DCA
(d) Depositories

2. Only a guardian can open a depository account for a minor.

(a) True
(b) False

3. In the event of the death of a joint holder, the balance lying in the account can be
transmitted, on request of the surviving holders, to a new account to be opened by the
surviving holders
(a) True
(b) False

4. The beneficial owners name in the account can even be changed after the account has been
opened. State whether True or False?
(a) True
(b) False

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Chapter 5: Functions of Depository Participant-Account Operations

Learning Objectives:

After studying this chapter, you should know about:

 The Basic Services Demat Account

 Internet Based Depository Services offered by the Depositories

5.1 Introduction to Basic Services Demat Account (BSDA)

With a view to achieve wider financial inclusion, encourage holding of demat accounts and to
reduce the cost of maintaining securities in demat accounts for retail individual investors,
depository participants (DPs) are required to make available a "Basic Services Demat Account"
(BSDA) with limited services as per terms specified herein. In order to facilitate the eligible
individuals to avail the benefits of BSDA, DPs are advised to convert all such eligible demat
accounts into BSDA unless such Beneficial Owners (BOs) specifically opt to continue to avail the
facility of a regular demat account.21

5.1.1 Eligibility Conditions for Opening BSDA

Individuals shall be eligible to opt for BSDA subject to the following conditions:

a. Demat accounts shall be under individual category;

b. No annual maintenance charges (AMC) shall be levied in case the value of holdings of debt
securities is up to Rs. 1 lakh. A maximum AMC of Rs. 100 shall be levied if the value of
holdings of debt securities is between Rs. 1,00,001 and Rs.2,00,000;
c. No AMC shall be levied in case the value of holdings other than debt securities is below
Rs. 50,000. A maximum AMC of Rs. 100 shall be levied if the value of holdings other than
debt securities is between Rs. 50,001 and Rs.2,00,000;
d. Demat accounts shall be registered for SMART facility;
e. One demat account of first holder across depository where verified PAN of the first holder
is available. This criteria has not been applied in case of PAN exempt entities.

Option to open BSDA: The DP shall give option:

21 SEBI Circular Ref No. CIR/MRD/DP/ 20 /2015 Dated December 11, 2015.

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 a. To open BSDA to all eligible individuals who open a demat account after the date of
applicability of SEBI circular CIR/MRD/DP/22/2012 dated August 27, 2012;
b. To all the eligible individuals to avail the benefits of BSDA, and convert all such eligible
demat accounts into BSDA unless such Beneficial Owners (BOs) specifically opt to
continue to avail the facility of a regular demat account.

5.1.2 Annual Maintenance Charges:

a. The charge structure may be on a slab basis as indicated below:

Slabs Charges
For Debt Securities
Upto Rs. 1,00,000 No AMC
1,00,001 to 2,00,000 Maximum Rs. 100
For other than Debt Securities
Upto Rs. 50,000 No AMC
50,001 to 2,00,000 Maximum Rs. 100

b. The value of holding shall be determined by the DPs on the basis of the daily closing price
or NAV of the securities or units of mutual funds, as the case may be. Where such price is
not available the last traded price may be taken into account and for unlisted securities
other than units of mutual funds, face value may be taken in to account. For the purpose
of valuation of holdings in an account, it is clarified that the value of suspended securities
may not be considered for the purpose of determining eligibility of demat account as
BSDA.
c. If the value of holding in such BSDA exceeds the prescribed criteria at any date, the DPs
may levy charges as applicable to regular accounts (non- BSDA) from that date onwards.
d. The DPs shall reassess the eligibility of the BOs at the end of every billing cycle and give
option to the BOs who are eligible to opt for BSDA.

5.1.3 Services offered to Basic Services Demat Account Holders:

a. Transaction statements:
a. Transaction statements shall be sent to the BO at the end of each quarter. If there are
no transactions in any quarter, no transaction statement may be sent for that quarter.
b. If there are no transactions and no security balance in an account, then no further
transaction statement needs to be provided.
c. Transaction statement shall be required to be provided for the quarter in which the
account became a zero balance account.

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 b. Holding Statement:
a. One annual physical statement of holding shall be sent to the stated address of the
BO in respect of accounts with no transaction and nil balance even after the account
has remained in such a state for one year. The DP shall inform the BO that the
despatch of physical statement may be discontinued if the account balance remains
zero balance even after one year.
b. One annual statement of holding shall be sent in respect of remaining accounts in
physical or electronic form as opted for by the BO.

c. Charges for statements:

Electronic statements shall be provided free of cost. In case of physical statements, the
DP shall provide at least two statements free of cost during the billing cycle. Additional
physical statement may be charged at a fee not exceeding Rs.25/- per statement.

d. SMS Alert facility:

All BOs opting for the facility of BSDA, shall register their mobile number for availing the
SMS alert facility for debit transactions.

e. Delivery Instruction slip:

At least Two Delivery Instruction Slips (DIS) shall be issued at the time of account opening.

f. All other conditions as applicable to regular demat accounts, other than the ones
mentioned above shall continue to apply to basic services demat account.

5.2 Operations of a Joint Account

A depository account may be opened and maintained in the names of more than one person. All
the joint-holders have to sign the application form and acknowledge receipt of copy of the Rights
and Obligations document. The supporting documents and photograph should also be provided
for all joint holders. The account opening module presently provides only for (up to) three joint

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names.22 Though the beneficial ownership of jointly held securities vests in all joint holders,
communications about the joint depository account are provided only to the first holder. The
dividend and interest warrants, annual reports and notices for meetings are also issued to the
first-named joint holder only.

In the event of the death of a joint holder, the balance lying in the account can be transmitted,
on request of the surviving holders, to a new account to be opened by the surviving holders. The
earlier account having the deceased holder's name is closed after such transmission. The chapter
on Transmission gives the detailed procedure to give effect to this type of request.

In addition to the existing option of opening new account, the surviving account holders continue
the existing account by deleting the name of deceased account holder(s) from the account, the
surviving account holders shall make an application to the DP in the form specified for deletion
of deceased account holder(s) alongwith a copy of death certificate duly attested by a Notary
Public or by a Gazetted Officer. The DP shall verify the documents submitted and the signature
of surviving Client(s). The DP after being fully satisfied on all aspects, shall then effect the deletion
of name.

5.2.1 Opening of depository account in joint names with an individual and a body corporate

Section 187 of the Companies Act, 2013 requires companies to hold all investments made or held
by it in any property, security or other asset in its own name. However, the proviso to sub-section
(1) grants exemption to holding companies in case of holding shares of its subsidiary companies.
The exemption allows holding companies to appoint nominees for itself to hold shares in the

22Separate set of rule has been prescribed for handling of cases of four or more joint holders:
(a) A separate account could be opened in the name of the joint holders with four or more names.
(b) No standing instructions to receive credits, receipt instructions, new issue applications and any other instruction which has
the effect of crediting this account should be accepted in respect of such account.
(c) Appropriate annexure should be attached to the account opening form to include various details, viz., name, address,
signatures, etc. of more than three holders.
(d) An undertaking should be obtained from the client that he will not use this account for the purpose of allotments in the
primary market or for purchases from the secondary market. Hence the client will give no instructions (other than for
dematerialisation, bonus, rights and preferential offer) to any person which has the effect of crediting this account.
(e) While opening the account, the DP should capture the names of the four or more joint holders by numbering them in his
system and entering the first holder's name in the first holder's field. The rest of the names have to be accommodated in the
fields for second and third holder.
(f) The DP should process the dematerialisation request as per the usual procedure while ensuring that the pattern of holding for
each certificate tallies with the pattern of holding of the account.
(g) After all shares have been demateralised, the BO shall open a anew demat account in the name of three holders (max) and
transfer all securities from the previous account to the new account. After all the balances in such a joint account become nil, the
account should be closed.
(h) For holdings of a Trust in the joint names of four or more trustees, this procedure for opening the account can be adopted
without any restrictions on receiving credits into that account.

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subsidiary/wholly-owned subsidiary companies in order to meet the statutory minimum limit of
members in a company. Share certificates in such cases are usually issued in the name of
registered holder (nominee), but the name of the holding company is also mentioned along with
the name of the nominee.

DPs can facilitate opening of depository account of the nominee shareholders as follows:

1. An individual and body corporate can open a depository account in joint names. In case the
first holder is an individual, the account needs to be opened in individual category whereas, if
the first holder is a body corporate then the account type will be “Body Corporate”. The KYC
documents alongwith PAN of both these entities will have to be obtained by the DP. Further,
Board Resolution to open a joint depository account along with the list of persons authorised to
open and operate the accounts is required for the corporate entity. DPs are requested to ensure
compliance with the procedure mentioned in various circulars issued by NSDL/CDSL with regards
to account opening and KYC norms of both individual and corporates, for the respective holders.

2. It may be mentioned that since a body corporate would be a joint holder, nomination facility
cannot be availed in these cases.

Further, DPs may facilitate capturing the bank account of the joint holder in the demat account
for such nominee holdings after obtaining an undertaking from the client in the enclosed format.

5.3 Internet Based Depository Operations of NSDL

5.3.1 Internet –Based Demat Account Statement (IDeAS)

IDeAS is the facility for viewing balances and transactions in the demat account updated on an
online basis with a delay of maximum 30 minutes. This facility is available to the users of SPEED-
e, clearing members who have subscribed to IDeAS and to those clients whose DPs are registered
for IDeAS. A demat account holder or a clearing member will have the option to access IDeAS
either as a Password or a Smart Card / e-Token User.

NSDL has launched a facility called IDeAS from January 1, 2004 for investors to view balances and
transactions in demat accounts updated on an online but not real time basis. This facility is
available to all the clients including Clearing Members (CMs) who have opened an account with
any of the Participants under NSDL system.

5.3.2 SPEED-e

NSDL launched SPEED-e (pronounced as speedy) in September, 2001. Any DP of NSDL can
subscribe to SPEED-e, the common infrastructure of NSDL. SPEED-e enables demat account

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holders (including Clearing Members) to submit delivery instructions directly on the Internet
through SPEED-e website https://eservices.nsdl.com. SPEED-e is available only to those DPs who
have subscribed to it and the Users sign an agreement with the DP.

A demat account holder will have the option of accessing SPEED-e either as a Password User or
as a Smart Card / e-Token User. A Clearing Member must be a Smart Card / e-Token User to be
able to access SPEED-e. Password Users can debit their demat accounts only in favour of specified
Pre-Notified Clearing Member accounts (upto six), while Smart Card / e-Token User can submit
instructions in favour of any number of accounts.

5.3.3 SPICE (Submission of Power of attorney based Instructions for Clients Electronically)

Clearing Members (Clients who have given Power of Attorney (POA) in favour of the Clearing
Member) can submit auto pay-in instructions to DPs (where Clients maintain demat accounts) on
SPEED-e facility to debit the demat accounts of the Clients and credit their Clearing Member (CM)
Pool Accounts. Thus, eliminating the need to give paper based delivery instructions to the DPs.

5.3.4 NSDL/CDSL Mobile App

NSDL has developed a Mobile App for esteemed investors, where an investor can download and
use the Mobile App to view balances in the demat account on the mobile anytime, anywhere.
NSDL Mobile App is available on Google Playstore and Apple App Store and it is absolutely free
for all demat account holders.

5.3.5 Submission of Instruction through Mobile Phone Login Easily (SIMPLE)

SIMPLE, a facility that enables the password based users of SPEED-e facility to submit Client to
Clearing Member Pool Account transfer instructions, on SPEED-e website through their mobile
phones (enabled with GPRS).

5.3.6 SMS Alert Facility for NSDL/CDSL demat account holders

NSDL/CDSL provides SMS alert facility for demat account holders whereby they can receive SMS
alerts directly from NSDL/CDSL for following:

1) All Debit Transfers

2) Credits for IPO, sub-division and bonus
3) Failed instructions
4) Overdue instructions
5) Change of mobile number
6) Change of address
7) Debit of Mutual Fund units
8) Invocation of pledged securities
9) Registration and De-registration of Power of Attorney

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10) Modification / Cancellation of nominee name
11) Initiation/Confirmation of pledge instructions
12) Mutual fund redemption request submission by client and acceptance/rejection of the same
by RTA.
13) Blocking/Debit of shares in demat account in respect of Tender Offer instruction (option
available only with NDSL).

Charges

NSDL/CDSL does not levy any charges on the DPs for providing this facility to investors.

Registration

(i) This facility is available to the investors provided the investors have given their mobile
numbers to their DPs and the DPs have captured the numbers in the NSDL/CDSL System and have
also enabled (ticked) the SMS flag in NSDL and/or CDSL system.

(ii) Those investors who have provided their mobile numbers to their DPs but do not wish to avail
this facility shall inform their DPs to disable the SMS flag. However, such accounts should not be
operated by Power of Attorney (PoA).

(iii) For change of address and registration & de-registration of Power of Attorney in NSDL
System, SMS alerts shall be sent to Client’s mobile phone (captured in NSDL System) irrespective
of Client availing SMS Alert facility.

5.4 Internet Based Depository Operations of CDSL

CDSL offers its demat account holders with two internet based facility Electronic Access to
Securities Information [easi] whereby beneficial owner can view their demat account holding,
download the transaction statements and Electronic Access to Securities Information and
Execution of Secured Transaction [easiest] which permits BOs/CMs to submit debit/credit
transaction instructions to effect off-market, on-market, inter-depository and early pay-in of
transactions, freeze/unfreeze and pledge, unpledged and confiscation.

Through the easiest facility, the BO can freeze their demat account at BO level, ISIN level as well
as can initiate partial level freeze.

Further, the BO can pledge the securities as a pledgor, and Pledgee BO can accept the pledge as
a pledgee if both the BOs are registered for CDSLs easiest facility. Further, the pledgee can
execute the confiscation if the pledgor fails to fulfill the obligation. BO also has the facility to
initiate the pledge for the purpose of Margin from their easiest login.

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CM has the facility to accept the Margin pledge from its easiest login as a pledgee and the CM
has the facility to re-pledge the securities to the CC as a pledgor.

A sole holder beneficial owner is not required to submit any registration forms to DP for
authentication nor the trusted account declaration in case of easiest trusted account user.

In case of a beneficial owner holding a joint demat account, the beneficial owner is required to
submit the duly signed registration form to the DP for authentication to his/her DP.

SMS Alert Facility is also provided for CDSL demat account holders who are registered for SMART,
wherein various types of alerts are being sent to registered mobile number of demat account
holder on the same day of transaction.

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Review Questions

1. How many Delivery Instruction Slips (DIS) are issued to the BO’s at the time of opening the
BSDA?
(a) 1
(b) 2
(c) 3
(d) 4

2. All BOs opting for the facility of BSDA, shall register their mobile number for availing the SMS
alert facility for debit transactions. State whether True or False?
(a) True
(b) False

3. NSDL/CDSL does not levy any charges on the DPs for providing this facility to investors.
State True or False?

(a) True
(b) False

4. All the joint-holders while opening a BO account, have to sign the application form and
acknowledge receipt of copy of the Rights and Obligations document. State True or False?

(a) True
(b) False

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Chapter 6: Functions of Depository Participant-Transmission and Nomination

Learning Objectives:

After studying this chapter, you should know about:

 The concept of transmission of securities

 The concept of nomination for securities
 Procedure for transmission of securities

6.1 Transmission of Securities

The word `transmission’ means devolution (transfer) of title to shares, for example, devolution
by death, lunacy, bankruptcy, winding-up (in case of corporate) etc. The person on whom the
shares devolve has to prove his entitlement by submitting appropriate documents and seek
transmission. If the securities are held in the depository system, the documents have to be
submitted to the DP.

If the securities are held in physical form, the documents have to be sent to the company for
effecting transmission. If the deceased shareholder had holdings in several companies, to effect
transmission of securities, the relevant documents must be sent to each of the companies,
alongwith the securities. Survivors have to follow-up with each of the companies in order to get
the transmission effected before the book closure, if they wish to avail of the benefits accruing
through such shares. In the depository system, such problems are mitigated as the securities are
held as account balances in the electronic form.

The process of transmission through a depository is simple as well as quicker because the
successor to the title interacts only with one entity i.e., his DP. At NSDL, processing of
Transmission request should be processed through ‘Transfer of Holding’ module only where the
target account is in NSDL.

The securities which are encumbered (i.e. Pledged, earmarked, etc.) will not be transferred out
of the account and will remain in the deceased BO account till such time as the encumbrance is
removed or the obligation (in case of earmarking) is met. Similarly, securities of ISINs that are
‘Inactive’ on account of pending corporate actions like ‘Merger, Demerger, Scheme of
Arrangement, Split, Consolidation etc. or ISINs which are ‘Frozen for debits and / or credits’ due
to regulatory restraints like pending listing of the company with the Exchanges pursuant to an
Initial Public Offer (IPO) or Scheme of arrangement etc, will not be transferred out of the account.
In such cases, the account will reflect a “TO-BE-CLOSED” status. However, at a later date, when
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the ISINs which are ‘Frozen for debits and / or credits’ are activated or the corporate actions
pertaining to the ‘Inactive’ ISINs are processed and the securities are transferred to a new /
resulting ISIN in the BO’s account, the DP may process the transfer of the said securities to the
account of the transmittee BO(s) based on a copy of the Transmission Request Form submitted
earlier. The same applies for account closure also.

6.2 Nomination for Securities

The Companies (Amendment) Act, 1999 has introduced provisions for nomination in respect of
shares, debentures, fixed deposits, etc. Under the provisions, a shareholder, a debenture-holder,
a bondholder or a deposit holder can nominate a person(s) (Maximum 3 nominees), in whom the
shares or debentures or bond or deposits would vest, in the event of original investor's death.
The facility can be availed of by any person whether resident Indian or a non-resident Indian
investor.

Investors holding securities in dematerialised form have the option of nominating a person(s)
(Maximum 3 nominees), who would be entitled to receive securities outstanding in his/her name
in the event of their death. Nomination facility can be availed at the time of opening the
depository account itself or subsequently also. There is a separate prescribed form for
nomination under depository segment. Nomination can also be changed at will by resubmitting
the nomination details in the prescribed form. The DP has to enter and update the nominee
details submitted by the account holder. In the event of death of the account holder, the
securities lying to the credit of the account holder may be transmitted to the nominee's account
after the DP verifies the identity of the nominee. Nomination can be made only by individuals
holding beneficiary owner accounts on their own behalf singly or jointly. In a demat account
which is held jointly, all the holders should sign the nomination form. Non-individuals including
society, trust, body corporate, Hindu Undivided Family (HUF), holder of power of attorney cannot
nominate. A minor can nominate through a guardian. A minor can also be appointed as a
nominee represented by a guardian. If the account is held jointly all joint holders will be required
to sign the nomination form. Nominee can be only individual. Non-individual entities such
society, trust, body corporate, HUF cannot be appointed as nominee.

The Client(s) may make a nomination of his/their account in favour of any person(s), upto three
persons by filing with the relevant Participant. In the case of joint accounts, all the Clients shall
be required to affix their signatures. Such nomination shall be conclusive evidence of the Client(s)
disposition in respect of all the securities in the account for which nomination has been made. In
case, the Client(s) appoints more than one person, maximum upto three persons, as nominees,
the Client must specify the percentage of share for each nominee which must total upto hundred

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percent. In case the percentage of share is not provided, allocation of securities amongst the
nominees shall be considered as equal.
6.3 Transmission of Securities
6.3.1 Transmission of Securities held singly in the Depository with Nomination
The Client(s) may provide nomination for his/their account in favour of any person(s) (Maximum
3 nominees), by filing with the relevant Participant.

A nomination, substitution shall be valid only if:

 it is submitted to the Participant by the rightful Client(s). The nomination form has to be
signed by all holders. A POA holder cannot nominate.
 it is in the prescribed format (format is given by the depository to the participant).
 it is duly signed by Client(s).
 it is properly signed and witnessed.
 signature of the Client(s) tally with the specimen signature records.
 the details of the securities entered in the nomination forms match those in the records of
the Participant. CDSL Nomination form does not have provision for mentioning securities.
Nomination is applicable to entire holding. Recording of the share of securities for each such
nominee in terms of percentage which must total to 100 percent. At the time of transmission
in favor of such nominees, the DP shall divide all the securities at ISIN level in the same
proportion as recorded at the time of nomination.
 the photograph of the Nominee is annexed to the nomination form in case of NSDL.
 the Nominee has signed the nomination form and guardian in case of the nominee being a
minor in case of NSDL.

As per CDSL Operating instructions, nominee’s photograph, signature, or in case of minor, the
guardian’s signature is not required.

Upon the death of the sole holder or the death of all the joint holders, as the case may be, the
nominee shall request the DP in writing alongwith an original death certificate or a copy of the
same duly notarised/attested by Public Notary or by a Gazetted Officer for transmitting the
securities covered by the nomination to the account of the Nominee, held with any Depository,
as per the Client Master Report, submitted by the nominee, if the nominee has a demat account
in individual capacity with another DP. If the Nominee does not have an account with the
Depository, the Nominee shall be required to open an account with any Depository.

In case of multiple nominees in the account, the Participant shall divide the securities at an ISIN
level in the proportion of share indicated at the time of nomination. In case the number of
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securities are not exactly divisible in the specified proportion in respect of particular ISIN, the
Participant shall divide the securities at the ISIN level to the extent, the securities are divisible
and remaining indivisible securities, if any, shall be transmitted to the nominee whose name is
recorded first.
6.3.2Transmission of Securities held singly in the Depository without nomination

The legal heir(s) or legal representative(s) of the deceased account holder have to make a
request, in the prescribed form to the DP for transmitting the balances lying in the account of the
deceased to their account. The following documents have to be submitted with the request for
transmission:
1. Original or a copy of the death certificate, duly notarised/ attested by a Gazetted officer or
Notary Public can also be accepted;
2. A copy of the succession certificate or probate of will or will or letter of administration or court
decree, as may be applicable in terms of Indian Succession Act, 1925 has been prescribed as
documentary requirement for transmission of securities.;

In case the successors express their inability to produce either of the documents mentioned
above and if the market value of the securities held in each of the accounts of the deceased BO
as on the date of application for transmission is not more than Rs. 5 lakh, or such other amount
as may be specified by the depository or SEBI from time to time, DP may admit the request for
transmission. The following documents are required for admitting the request of transmission:
a. Request for transmission in the prescribed format;
b. Original or copy of the death certificate duly attested by a Notary Public or by a
Gazetted Officer;
c. Any one or more of the following:
i) Letter of Indemnity made on appropriate non judicial stamp paper;
ii) An Affidavit made on appropriate non judicial stamp paper; and
iii) No Objection Certificate(s) from all the legal heir(s) who are not applicants,
conveying no objection to such transmission.
iv) As an alternate a No Objection Certificate from all legal heir(s) who are not
applicants, a copy of Family Settlement Deed duly notarised by a Notary
Public or attested by a Gazetted Officer and executed by all the legal heirs
of the deceased BO, provided that the Family Settlement Deed clearly vest
the securities in favour of the person seeking transmission in his/her name
and vesting of securities in his/her name is not contingent upon any other
onerous conditions in such Family Settlement Deed.

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Before effecting the transmission of securities, the DP shall ensure the validity of the documents
submitted by the legal heir(s) or the legal representatives of the deceased. After effecting the
transmission, the DP shall close the account of the deceased23 BO.
6.3.3Transmission of Securities held jointly in the Depository

In case of death of one of the Clients in a joint account, the surviving Client(s) shall request the
DP to transmit the balances lying in the Client account to the account of the surviving Client(s).
The surviving Client(s) shall make an application to the DP in the specified form given by the
Depository, alongwith original or a copy of the death certificate duly notarised / attested by a
gazette officer. The surviving joint holder(s) will have to open a new account with the DP in their
name(s). If the surviving client(s) wish to open a new account with the same DP, then the DP will
open the new account in the name(s) of the surviving member(s), in the same order as in the
original account, on the basis of the existing documents already in the possession of the DP,
provided that the said documents meet the prevailing requirements for opening an account. In
case of securities held jointly:
 The surviving holder(s) to have a separate account with any DP, Client Master Report
of such accounts.
 Ensure all surviving holder(s) sign the transmission form.
 Ensure that transmission form is accompanied with an original or copy of notarised /
attested death certificate by a Gazetted officer or Notary Public.
 Verify signature of the surviving Client(s).

In addition to the existing option of opening new account, the surviving account holders continue
the existing account by deleting the name of deceased account holder(s) from the account, the
surviving account holders shall make an application to the DP in the form specified for deletion
of deceased account holder(s) alongwith a copy of death certificate duly attested by a Notary
Public or by a Gazetted Officer. The DP shall verify the documents submitted and the signature
of surviving Client(s). The DP after being fully satisfied on all aspects, shall then effect the deletion
of name.
6.3.4 Transmission of Securities held by Karta of Hindu Undivided Family (HUF) in the
Depository
Upon death of the Karta of a Hindu Undivided Family (HUF), the surviving member(s) of the HUF
may appoint the eldest surviving member of the HUF as the new Karta of the HUF.

23If the division of shares as per the family Settlement Deed is among more than one person, then the Family Settlement Deed
can be considered as an NOC for transmission of shares to each legal heir applying for transmission.

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For change of name of Karta in the account of HUF to the new Karta in place of the deceased
Karta, the surviving members through the new Karta shall make a joint application to the
Depository Participant in the format specified along with the following documents 24:
i) Original copy of the death certificate or true Copy of the death certificate of the deceased
Karta, duly certified by a notary public or by a Gazetted Officer.
ii) Copy of PAN, Proof of Identity, Proof of Address and a photograph of new Karta of HUF
along with his original ink signed specimen signature.
iii) A declaration of the list of surviving members of HUF in the prescribed form (FORM 40),
not objecting the appointment of the new Karta along with name, date of birth, gender
and relationship with Karta of all members of HUF.
In case partial partition of the HUF, if desired by one or more members, the Karta shall transfer
the securities to the said members who seek partition and HUF account shall continue. The
accounts of such members shall be treated as their individual accounts.

In case HUF goes into partition, the securities shall be divided amongst all the members in the
manner specified by the applicant. The surviving members shall furnish to the Participant the
details of the beneficial owner accounts of the individual members in order to have the securities
distributed to their respective accounts.

The surviving members shall furnish to the Participant the intimation of partial or total partition
accompanied by a signed letter mentioning the names of the members and their confirmation of
partial or total partition having taken place.

The Participant shall ensure that the documents submitted by the surviving members of the HUF
or the new Karta are in order and shall then effect change in name of Karta or transfer of
securities to the account of surviving members in the event the HUF goes into partial or total
partition.

If a transfer of securities is effected to the surviving members due to total partition, the
Participant shall close the account held in the name of the HUF.

It may be noted that in CDSL the previous account need not be closed and the same account can
continue. In the event of death of the Karta of HUF, the name of the deceased Karta in the
Beneficial Owner (BO) account shall be replaced by the new Karta appointed by the members of
the HUF who in such a case shall be the senior most member of the family. The new karta shall
submit the new list of members, original or a copy of the death certificate of the deceased Karta

24Asper CDSL Operating Instructions, HUF does not come to an end in the event of death of the Karta, only new karta will be
appointed.

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duly notarized / attested by Gazetted Officer and a no objection from the surviving members of
the HUF for him/her to act as a karta of the HUF. The new karta shall record change in signature
to operate the account. DP will make necessary modifications in the name of Karta after verifying
all the documents and record change in signature of the new Karta to operate the account.

In CDSL, a total or partial partition shall be recognized only if a claim to that effect is made by one
or more coparceners. An intimation of a total or partial partition shall be accompanied by a
signed letter mentioning the names of the other members and their confirmation of a partition
having taken place. In case of a partial partition, the others can still continue the HUF in the
existing name. In case of full partition, if desired by one or more coparceners the new Karta shall
transfer shares to the said coparceners who seek partition and the BO account of the HUF shall
continue. The account of such coparceners shall be treated as their individual accounts, the entire
HUF is dissolved and the shares shall be divided amongst all the coparceners in the manner
specified by the applicant subject to fulfillment of clause. In both the above cases, the karta can
transfer shares to the members who seek partition. If the transfer cannot be amicably settled,
the family members can go to a court and transfer of shares can then be based on the court
direction.

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Review Questions

Questions to assess your learning:

1. Nomination of shares is a provision under which act?

(a) Companies (Amendment) Act 1999
(b) SEBI Act
(c) Depositories Act 1996
(d) SCRA 1956

2. Can nomination be made by individuals for Beneficiary accounts held jointly or singly?
(a) Yes
(b) No

3. What kind of account is required by a nominee to give effect to the transmission of shares?
(a) Savings Account
(b) Demat Account
(c) Salary Account
(d) Current Account

4. For transmission of securities to the account of the new Karta from the account of the
deceased Karta, the surviving members through the new Karta shall make a joint application
to the DP.
(a) True
(b) False

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Chapter 7: Functions of Depository Participant-Dematerialisation

Learning Objectives:

After studying this chapter you should know about:

 The concept of International Securities Identification Number (ISIN) and its
importance
 Dematerialisation process
 Remateralisation process


7.1 Introduction

As already discussed earlier, dematerialisation is the process of holding the securities in a

fungible25 form. They do not bear any distinguishable features like distinctive number, folio
number or certificate number. Once the shares are dematerialised, they lose their identification
features in terms of share certificate number, distinctive numbers and folio numbers. Title to the
securities owned is in terms of number of securities and not in terms of distinctive numbers,
certificate numbers etc. Each security is identified in the depository system by an International
Securities Identification Number (ISIN) and a short name.

7.2 International Securities Identification Number (ISIN)

Securities dematerialised bear a distinctive ISIN. This ISIN is a unique identification number for
each security issued in any of the International Standards Organisation (ISO) member countries
in accordance with the ISIN Standard (ISO 6166). ISO 6166 was developed for use in an
international (cross-border) as well as domestic trades.

ISIN is a 12-character long identification code. It has three components (1) a pre-fix, (2) a basic
number and (3) a check digit. The pre-fix is a two-letter country code as stated under ISO 3166
(IN for India). The basic number comprises nine alphanumeric characters (letter and/or digits).
The check digit at the end of the ISIN is computed according to the modulus 10 "Double-Add-
Double". It establishes that the ISIN is valid. Securities issued by the same company, issued at
different times or carrying different rights, terms and conditions are considered different
securities for the purpose of allocating ISIN and are allotted distinct ISINs. In India, SEBI has

25Fungiblemeans “movable things that are standardised, so that one unit is essentially the same as another which may be
estimated and replaced by weight, number and measure".

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delegated the assigning of ISIN of various securities to NSDL. For securities getting admitted on
CDSL, the ISIN is allotted to those securities on receiving request from the CDSL. Allotment of ISIN
for G-sec is done by Reserve Bank of India.

To illustrate, ISIN INE 475C 01 012 has the following break up:

IN - India
E – Company Type
Last digit - check digit
First four digits 475C - Company serial number;
01 - equity (it can be mutual fund units, debt or Government securities);
01 - issue number;
2 - check digit.

The third digit (E in the above example) may be E, F, A, B or 9. Each one carries the following
meaning:

E - Company
F - Mutual fund unit
A - Central Government Security
B - State Government Security
9 - Equity shares with rights which are different from equity shares bearing INE number.

In an ISIN number, it is important to pay special attention to the third digit.

7.2.1Which securities can be dematerialised?

According to the SEBI (Depositories and Participants) Regulations, 2018, the following securities
are eligible for holding in dematerialised form.

1. Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of
similar nature of any incorporated company or other body corporate, including underlying
shares of ADRs and GDRs.

2. Units of mutual funds, rights under collective investment schemes and venture capital funds,
commercial paper, certificate of deposit, securitised debt, money market instruments,
government securities and unlisted securities.

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Physical form of securities can be converted into book entry form in the depository system only
if the company which has issued the securities, has entered into an agreement with the
depositories to offer demat facility.

7.2.2 Regulations mandating transfer of securities in dematerialised form with a depository

SEBI (Listing Obligations and Disclosure Requirements) (Fourth Amendment) Regulations,
201826, specifies that the transfer of securities shall not be processed unless the securities are
held in the dematerialized form with a depository. However, SEBI issued clarifications on the
following:
1. Any investor who is desirous of transferring shares (which are held in physical form) after
April 01, 2019 can do so only after the shares are dematerialized.
2. SEBI decision does not prohibit the investor from holding the shares in physical form; investor
has the option of holding shares in physical form even after April 01, 2019.
3. The amendment is not applicable for transmission (i.e. transfer of title of shares by way of
inheritance / succession) and transposition (i.e. re-arrangement / interchanging of the order
of name of shareholders) cases.
4. The transfer deed(s) once lodged prior to deadline and returned due to deficiency in the
document may be re-lodged for transfer even after the deadline of April 01, 2019.
However, the aforementioned is not applicable for demat of shares, transmission (i.e. transfer of
title of shares by way of inheritance/succession) and transposition (i.e. re-
arrangement/interchanging of the order of name of shareholders) cases. The investors can
demat their physical shares, transmission and transposition in physical shares even after April 1,
2019.

7.3 Dematerialisation Process

A holder of eligible securities in the depository system may get his physical holdings converted
into electronic form by making a request through the DP with whom he holds a beneficiary
account.

7.3.1 Prerequisites for Dematerialisation Request

a. The registered holder of the securities should make the request.

b. Securities to be dematerialised must be recognised by the depository, as eligible security. In
other words, only those securities whose ISIN has been activated by the depository, can be
dematerialised in the depository system.

26Notification dated June 8, 2018 was supposed to be effective from December 5, 2018. However, the date was extended and
the notification has been made effective from April 1, 2019.

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c. The company/Issuer should have established connectivity with the depository. Only after
such connectivity is established, the securities of that company/Issuer are recognised to be
"available for dematerialisation" in the depository system.
d. The holder of securities should have a beneficiary account in the same name as it appears on
the security certificates to be dematerialised.
e. The request should be made in the prescribed dematerialisation request form.

7.3.2 Procedure for Dematerialisation

1. DP provides dematerialisation request forms (DRF) to their clients

2. The client completes the DRF in all respects and submits to the DP along with the security
certificates to be dematerialised.
3. The DP checks the DRF for validity, completeness and correctness. The following points
should be checked particularly:
o The security certificates sought to be dematerialised are attached to the DRF.
o The certificates are not mutilated or defaced in a manner affecting any material
information
o The name of the holder(s) on DRF and the certificates is exactly the same as in the
BO’s account in the DP system. Minor variation however in name, is permitted such
as initials in place of first name, middle name, minor spelling mistake in name etc. The
permitted variations refer to initials not being spelt out fully or put prior to after the
surname. In such cases, if the signature on the DRF matches the specimen signature
available with the DP, the securities can be considered for demat.
o Details like security type, face value, paid-up value, pari-passu status, certificate
numbers, distinctive numbers, number of certificates, total quantity of securities and
lock-in status are filled-in correctly.
o Separate DRFs have to be submitted for:
 Free and locked-in securities;
 Each ISIN;
 Securities locked-in for different reasons;
 Securities of different paid-up value; and
 For each client account.
o DRF is signed by:
 The sole holder in case of single holding;
 All joint holders in case of joint holdings;
 Constituted signatories in the case of corporate accounts;
 Power of Attorney Holder

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  The signatures of the client as appearing on DRF should match with the
signatures in the records of the DP. If the signatures do not match, the DP
should satisfy itself about the identity of the client. If necessary, the DP may
insist on attestation of DRF from bankers of the client. DRF should be signed
by all the holders and match with specimen signatures. If the client has a
signature registered with the company which is different from the specimen
signature given to the DP, the client may be advised / allowed to affix both the
signatures on the DRF. In case the signature of the client recorded with the
Issuer varies with the signature of the client as recorded with the DP, the client
may submit to the DP a Signature Variation Form as per Form 42 alongwith the
DRF. In CDSL, DRF requires the BO to sign ‘as per the signature recorded with
the DP’ and ‘as per the signature recorded with the company’. The DP official
is required to verify the signature of the BO as per its records with the
signature on DRF under ‘signature with DP’.
4. If the DRF and the accompanying security certificates are not found in order, the DP should
return the DRF and certificates.
5. If DRF and accompanying certificates are found in order, the DP should accept the DRF and
issue an acknowledgement to the client.
6. The DP should enter the dematerialisation request in DP system after following maker-
checker concept. The DP system generates a request number (DRN), which should be
mentioned on DRF.
7. DP should ensure that the certificates are defaced and mutilated before they are sent to the
Issuer / RTA. The security certificates are marked (defaced) with the words “Surrendered for
Dematerialisation” with DP name and BO ID. DP must ensure that the security certificates
submitted for dematerialisation to the issuer or its RTA, bear the DP name, DP ID and Client
ID. This is a precautionary measure to prevent misuse of share certificates by anyone. The
certificates are mutilated by punching two holes at the top of the certificates by using normal
office perforator.
8. The DP should forward the DRF and the relevant security certificates to the Issuer or its R&T
Agent for dematerialisation. DRF and enclosures have to be sent at the "address to which
physical certificates to be sent" communicated by the Depository. The forwarding letter
should refer to the allotted DRN and should be sent within seven days of accepting it from
the client. Issuer or its R&T Agents have requested that at the time of receiving the physical
requests for dematerialisation of securities, DPs must forward additional details of the client
such as address and contact details of the client, status of the account, type and sub-type of
the account, PAN of all the holders and the bank account details captured in the demat
account so as to assist the Issuer or its R&T Agents to carry out due diligence while processing

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 the dematerialisation requests. Accordingly, DPs are requested to enclose the following
alongwith the DRF:

a. A duly certified Client Master Report (CMR) printed either from the NSDL system or from DPs
back-office system; OR
b. A covering letter generated from the NSDL system or from DPs back-office system which
incorporates the aforesaid details while forwarding the demat requests.

9. The Issuer or its R&T Agent verifies the DRF and the accompanying certificates for validity,
completeness and correctness. They also match the details with the intimation received from
the depository against the same DRN.
10. The DP informs the client accordingly and requests removal of reasons for objection. The DP
removes these or provides additional information to the Issuer or its R&T Agent within 15
days of receiving the objection memo.
11. If the DP fails to remove the objections within 15 days, the Issuer or its R&T Agent may reject
the request and return DRF and accompanying certificates to the DP. The DP informs the
client accordingly. The DP also returns the security certificates to the client and obtains an
acknowledgement.
12. The DP, if the client so requires, may generate a new dematerialisation request and send the
securities again to the Issuer or its R&T Agent.
13. If the Issuer or its R&T Agent finds the DRF to be in order, it informs the depository and
authorizes it to create the appropriate credit balance in the client's account. The DP system
automatically credits the client's accounts when DM is updated. For the purpose of income
tax calculations, the date of credit of securities by dematerialisation is taken as the date of
acquisition of shares.
14. The DP, on receiving confirmation of credit entry in DP system informs the client through
monthly transaction statement.
15. An R&T Agent is required to confirm/ reject a demat request within 15 days from the date of
receipt of physical shares.

Checklist for Investors

While filling up the DRF, investors need to:
1. Obtain the DRF from the DP with whom they have opened an account.
2. Fill- in the DRF in duplicate/triplicate as required by the DP.
3. Fill all the information asked in the DRF since it is mandatory.
4. Fill separate forms;
 for separate ISIN numbers of the company.
 for lock-in and free securities.

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5. All the holders should sign the DRF form. Signatures should match with those of the
specimens on the account opening form. However, if the signature with the company/R&T
Agent is different from the signature with the DP, the client may affix both signatures. In case
the signature of the client recorded with the Issuer varies with the signature of the client as
recorded with the DP, the client may submit to the DP a Signature Variation Form as per Form
42 alongwith the DRF.
6. The order of the holders should be same as that in the account opening form. In case of
change in order of names, Investor has to fill in transposition request form along with the
DRF.
7. After submitting the certificates, an acknowledgement slip duly signed by the DP should be
collected.
8. Demat request form for dematerializing government securities is different and is called "DRF
- GS".

Checklist for DP
Before accepting the form and share certificates for dematerialisation the DP should check:

a. Client has submitted the securities for dematerialisation along with the DRF.
b. No dematerialisation request, other than one from a registered holder of securities, has been
entertained.
c. The certificates submitted by the client for dematerialisation belong to the eligible list of
securities admitted by the Depository.
d. Verify that the DRF submitted by the client has been filled completely and duly signed.
e. Verify the signature of the client on the form and compare it with the specimen available in
its records. If the signatures are different, the DP has to ensure proper identification of the
client. In case the signature of the client recorded with the Issuer varies with the signature of
the client as recorded with the DP, the client may submit to the DP a Signature Variation Form
as per Form 42 alongwith the DRF.
f. The DP has to issue to the client an acknowledgement slip duly signed and stamped.
g. While submitting the shares they should be defaced by mentioning on it "surrendered for
dematerialisation".
h. The depositories from time to time issues circulars cautioning DPs with respect to shares
belonging to some companies. Such circulars should be referred to before accepting a demat
request. Also the list of such companies is available on websites of depositories
i. If the form is in order, the request details are entered in its DP system and the DP system
generates a Dematerialisation Request Number (DRN).
j. The DRN so generated is entered in the space provided for the purpose in the DRF. The details
given in the DRF should match with the details of reports generated by DP system.

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k. The DRF is forwarded to the Issuer or its R&T Agent only after ascertaining that the number
of certificates annexed with the DRF tallies with the number of certificates mentioned on the
DRF, within 7 days of its receipt.
l. The details of the certificates submitted for dematerialisation with the details filled up are in
consonance with the DRF.
m. The client has marked the certificates submitted for dematerialisation with the words
"Surrendered for Dematerialisation". As per CDSL Operating instructions, DP should deface
and mutilate the certificates and not the client.
n. DP must ensure that the security certificates submitted for dematerialisation to the Issuer or
its R&T Agent bear the DP name, DP Id and Client Id. The safety and security of the certificates
submitted for dematerialisation till the certificates were forwarded to the Issuer or its R & T
has to be ensured.
o. Punch two holes on the security certificates before forwarding them to the Issuer or its R&T
Agent.
p. Ensure that the client has filled in a separate DRF for securities having distinct ISINs.
q. Ensure that the client has filled in a separate DRF for locked in and free securities having the
same ISIN.
r. Ensure that the client has submitted a separate DRF for each of his/their accounts maintained
with the DP.
s. Client Master Report (CMR) or a covering letter, DRF and certificates have to be sent to the
correct address of the company where they are accepted. The depositories issues circulars
giving information about the addresses where physical documents are accepted. This data is
provided by depositories in form of a report which DPs can download and use.

7.3.3 Rejection of DRF

A demat request can be rejected in the case of the following objections. The two depositories
may have different codes (as per SEBI guidelines, both depositories have adopted common
rejection reasons), we here have attempted to cover most of the objections which may lead to
rejection of the DRF request. The table below gives the reasons for rejection and the action that
DPs need to take in case of each objection.

Sl. Description of Objection Action to be taken by DP/Client

No.
1 Physical quantity of DRN confirmed for partial/physical quantity
shares/certificates received by received from DP or treated under objection for
R&T Agent from DP is less than total/partial quantity by R&T Agent. R&T Agent
may retain documents received from DP. DP/

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 what is mentioned in Demat Client may contact R&T Agent for any further
Request Form clarification and may submit fresh Demat
2 OR Request Form to R&T Agent for excess quantity,
Physical quantity of if any, quoting reference of Objection letter and
shares/certificates received by previous DRN to enable R&T Agent to link
R&T Agent from DP is more related entries/documents.
than mentioned in Demat
Request Form.
3 All/some certificates received DRN confirmed for genuine/valid quantity
by R&T Agent from DP is/are received from DP or treated under objection
found to be fake. for total/partial quantity by R&T Agent. R&T
Agent may retain documents received from
4 All/some certificates received DP. DP/client may contact R&T Agent for any
by R&T Agent from DP is/are further clarification, quoting reference of
reported lost or stolen and a Objection letter to enable R&T Agent to link
stop instruction is recorded in related entries/documents.
computer master file(s) of R&T
Agent.
5
Duplicate certificates earlier
issued by R&T Agent in lieu of
all/some certificates received
for demat by R&T Agent from
DP.
6
All/some certificates received
by R&T Agent are found to bear
forged or fake endorsements
of Name(s) of Holders
7 Name(s) of Holder(s) on all/ DRN confirmed for valid quantity received
some certificates received by from DP or treated under objection for total/
R&T Agent differs in Demat partial quantity by R&T Agent. R&T Agent
Request Form received by R&T may retain documents received from DP.
Agent from DP. DP/Client may contact R&T Agent for any
OR further clarification, quoting reference of
8 Details of all/some Objection letter to enable R&T Agent to link
certificate(s) differ in Demat related entries. DP/Client to submit fresh
Demat Request Form to R&T Agent with

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 Request Form received by R&T correct particulars, quoting reference of
Agent from DP Objection letter and previous DRN to enable
R&T Agent to link related entries/documents.
9 All/some certificate(s) sent to R&T will not retain any of the incorrect or
incorrect R&T Agent by DP incomplete documents but will return all the
documents to the DP. DP/Client may contact
R&T Agent for any further clarification, quoting
reference of Objection letter to enable R&T
Agent to link related entries. DP/Client may
forward documents to pertinent R&T Agent with
fresh Demat Request Form.
10 Certificate(s) not received by DRN treated under objection and closed by
R&T Agent in time from DP R&T Agent. DP/Client may forward certificate(s)
for dematerialisation with Demat Request Form
to R&T Agent under a new/ fresh DRN.
11 Signature(s) of Client on Demat R&T Agent will return all the document and the
Request Form do not tally with DP will set up new DRN with the correct
specimen signatures of signature and documents. DP/Client may submit
Holder(s) recorded with R&T to R&T Agent a fresh Demat Request Form duly
Agent. signed by holder(s) in exact manner as recorded
earlier with R&T Agent. In case holder(s) is/are
unable to reproduce the signatures as required,
specimen of signature(s) of signature(s) on
Demat Request Form may be verified by a Bank
Manager, under his official stamp/seal,
giving full particulars/details of holder(s) bank
account number, etc. In case the signature of
the client recorded with the Issuer varies with
the signature of the client as recorded with the
DP, the client may submit to the DP a Signature
Variation Form as per Form 42 alongwith the
DRF.
12 Stop recorded as per Bank DRN confirmed for valid quantity received
Lien/Statutory Authority/Court from DP or treated under objection for total/
Order/etc. in computer master partial quantity by R&T Agent. R&T Agent may
file(s) of R&T Agent against retain documents received from DP. DP/Client
all/some certificates) received may contact R&T Agent for any further
for dematerialisation from DP clarification, quoting reference of Objection

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 letter to enable R&T Agent to link related
entries/documents
13 Demat request initiated under R&T Agent may reject the demat request and
wrong ISIN. forward the documents to the DP. A fresh
Demat Request to be generated under the
correct ISIN by the DP. The documents to be
sent to the concerned R&T Agent.
14 Allotment/call money payment R&T Agent may reject the demat request and
not attached forward the documents to the DP. Client to
attach the Allotment/call money payment
advice and submit the same to the DP for
generating a new DRN. In case of any
clarification, DP/Client may contact R&T Agent
quoting the reference number of the Objection
letter.
15 Security certificates not R&T Agent may reject the demat request and
available for demat forward the rejected documents to the DP. DP
to contact the client and inform the client
accordingly.
16 Rejected under Automatic R&T Agent may process the demat request of
Corporate Action the investor. If the documents are found in
order the R&T Agent may credit the account of
the client with proportionate number of shares
through Credit Corporate Action. Client to check
the Transaction Statement and if the shares
have not been credited in the demat account,
client to contact the Company/R&T Agent.

The DRFs may also be rejected on miscellaneous grounds. These could be any of the reasons as
given below (points I to V):

Sl. Description of Objection Action to be taken by DP/Client

No.
I Recovery pending from Client for R&T Agent may retain DRN and documents
double or excess payment of received from DP for DRN treated under
Dividend/Interest made by objection. DP/Client may contact R&T Agent for
R&T Agent. any further clarification, quoting reference of

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 Objection letter to enable R&T Agent to link
related entries. Client to refund of amount to
R&T Agent, quoting reference of Objection
letter and DRN to enable R&T Agent to link
related entries/documents.
II Duplicate Interest warrants R&T Agent may retain DRN and documents
issued by R&T Agent as per received from DP for DRN treated under
request of Client and bank objection. DP/Client may contact R&T Agent for
reconciliation incomplete to any further clarification, quoting reference of
determine status of payment. Objection letter to enable R&T Agent to link
related entries. DP/Client to await some time
for bank reconciliation completion by R&T
Agent, before DRN is confirmed or treated
under objection as in 13 (i).
III All/some certificates held under Refer objection codes 7 and 8 above for action
different Holding basis (i.e. taken by R&T Agent and to be taken by
Single or Joint) is/are DP/Client.
received by R&T Agent under
same DRN.
IV All/some certificates sent by DP DRN confirmed for valid quantity received from
to incorrect address or office(s) DP or treated under objection for total/ partial
of R&T Agent. [For e.g.: All quantity by R&T Agent. R&T Agent may retain
operations of Master Growth some documents and others returned to DP by
and Grand Master schemes of R&T Agent. DP/Client may contact R&T Agent
Unit Trust of India are handled for any further clarification, quoting reference
on completely decentralised of Objection letter to enable R&T Agent to link
basis and computer master file(s) related entries. DP/Client may forward
are separately maintained at documents to pertinent address or office(s) of
specific locations. DPs have to R&T Agent with fresh Demat Request Form.
therefore, forward documents
for demat to R&T Agent's
address at Mumbai, Calcutta,
Delhi and Chennai mentioned on
reverse of every certificate].
V All/some certificates received by Refer objection codes 7 and 8 above for
R&T Agent from DP do not relate action taken by R&T Agent and the steps taken
to ISIN (Scheme/ Security code) by DP/Client.

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 mentioned in Demat Request
Number or Form.

The DP has to inform his client about the rejection if and when the R&T Agent has rejected the
DRF.

Subsequent Disputes
Any dispute regarding the title of securities (in physical form) after they have been dematerialised
and credited to a client's account, has to be settled amongst the DPs, clients and Issuer or its R&T
Agent. The procedure for dispute settlement is laid down in SEBI Guidelines for Good and Bad
Delivery of documents, as is done in the case of physical securities.

7.3.4Transposition cum Dematerialisation

The depositories have amended their Bye-Laws and procedure to enable investors to transpose
names of the joint holders alongwith the process of dematerialisation through their DPs. Prior to
this amendment, investors having shares in joint names (Mr. A & Mr. B), but in different sequence
(Mr. B & Mr. A) were either required to open multiple accounts for each sequence (Mr. A & Mr.
B and Mr. B & Mr. A) or to effect the transposition directly with the Issuer/R&T Agent and then
dematerialize their securities through their DPs. In case of transposition-cum-dematerialisation,
the Client can get securities dematerialised in the same account if the names appearing on the
certificates match with the names in which the account has been opened but are in a different
order. The same may be done by submitting the security certificates along with the Transposition
Form and DRF.

7.3.5 Transmission cum Dematerialisation of Securities

In case of death of one or more of the joint holders, the surviving joint holder(s) can get the
name(s) of the deceased removed from the security certificate(s) and get them dematerialised
by submitting the security certificates along with the Transmission Form and the DRF to the
Participant. Original or copy of the death certificate of the deceased holder(s), duly notarised or
attested by a Gazetted Officer or by a notary public.
The DP should ensure that the demat account is in the name of the surviving holders only.

Procedure to be followed if Physical Securities are lost in Transit

In cases where the Issuer/RT Agent has received information, setup by the DP, about
dematerialisation electronically from the depository but physical certificates have not been
received, the procedure to be followed is as under: –

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• The DP shall provide the Issuer/RT Agent proof of dispatch and also confirm that the certificates
are not returned undelivered at their end.
• If the certificates have not been returned undelivered and are not traceable at the Issuer/RT
Agent’s office, then it will be assumed that the certificates have been lost in transit. In such a
case, the DP shall execute an Indemnity Bond in favor of the Issuer/RT Agent.
• If the Issuer/RT Agent has already rejected the original demat request, then a fresh demat
request is to be set up by the DP and the Indemnity Bond duly executed shall be submitted to the
Issuer/RT Agent, along with a new DRN. The Issuer/RT Agent shall accept the demat request and
carry out dematerialisation on the basis of the Indemnity Bond given by the DP.
• In cases where the Issuer/RT Agent has rejected the demat request (for such a reason where
the rejection can be rectified by the BO/DP), and dispatched the same to the DP, and such
certificates are lost in transit, then an Indemnity Bond is to be executed and submitted to the
Issuer/RTA along with a new DRN. In such cases, the DP is required to obtain prior consent from
the Issuer/RTA for execution of Indemnity.
• However, in cases where the Issuer/RT Agent has rejected the demat request (for such a reason
where the rejection cannot be rectified by the BO/DP), the Issuer/RT Agent will retain the
documents. Such rejections may be on account of Fake / Forged / Duplicates already issued /
Court Injunctions, etc. In such cases, the DP should obtain rejection letters from the Issuer/RT
Agent& hand over the same to the BO in order to enable the BO to take up the matter with the
Issuer/RT Agent concerned.

Procedure for Dematerialisation of Shares which are held in more than three names
In case the number of joint holders are more than three, the DP has to process the
dematerialisation request as per usual procedure ensuring that the main BO name is mentioned
as first account holder and the balance joint holders are accommodated in the two joint holders’
names but ensuring that the pattern of holding as per the certificate tallies with the pattern of
holding as per the account. In both the depositories system, , enter the first holder’s name in the
first holder’s field and accommodating the rest of the names in the fields for second and the third
holder, eg. : - In case of joint holdings in four joint names of Mr. A, Mr. B, Mr. C & Mr. D, the
account can be opened in the system as follows; First Holder’s Name: 1. Mr. A; Second Holder’s
Name 2. Mr. B; Third Holder’s Name 3. Mr. C 4. Mr. D. Further, the standing instructions to receive
credits, receipt instructions, new issue applications and any other instruction which has the effect
of crediting this account should not be accepted. Appropriate annexure should be attached to
the account opening form in order to include various details viz., name, address, signatures, etc.
of more than three holders. An undertaking should be obtained from the Client on the lines that
"the Client shall not use this account for the purpose of allotments in the primary market or
purchases from the secondary market and hence no instructions other than for

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dematerialisation, bonus, rights & preferential offer will be given by the Client to any person
which has the effect of crediting this account".
Such an account should be used only for the purpose of dematerialisation and once all certificates
have been dematerialised, such account should be closed and shares transferred to a new
account opened in the name of maximum three holders

7.3.6 Enhanced Due Diligence for Dematerialization of Physical Securities

As per the amended SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2018
(LODR), transfer of securities held in physical mode is not permitted w.e.f. April 01, 2019. SEBI
vide its circular had issued standardized norms with respect to documentation / procedure for
transfer of physical securities.27

To augment the integrity of the system in processing of dematerialization request in respect of

the remaining physical shares, the Depositories and the listed companies / RTAs were directed
to implement the following due diligence process:

All listed companies or their RTAs were advised to provide data of their members holding shares
in physical mode, viz the name of shareholders, folio numbers, certificate numbers, distinctive
numbers and PAN etc. (hereinafter, static database) as on March 31, 2019, to the Depositories,
latest by December 31, 2019. Depositories were required to capture the relevant details as given
above from the static database and put in place systems to validate any dematerialization request
received after December 31, 2019.

Accordingly, the depository system is required to retrieve the shareholder name(s) recorded
against the folio number and certificate number in Static Data for each DRN request received
after this date and validate the same against the demat account holder(s) name as available in
the records of the Depositories.

In case of mismatch of name on the share certificate(s) vis-à-vis name of the beneficial owner of
demat account, the depository system shall generate flag / alert. For cases, where such flags /
alerts are generated, the documents like copy of passport, legally recognized marriage certificate,
gazette notification regarding change in name, aadhar card explaining the difference in name,
shall be sought.

In the case of complete mismatch of name on the share certificate(s) vis-à-vis name of the
beneficial owner of demat account, the applicant may approach the Issuer company / RTA for
establishing his title / ownership.

27
SEBI circular No. SEBI/HO/MIRSD/DOS3/CIR/P/2018/139 dated November 06, 2018.

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7.4 Rematerialisation
Rematerialisation is the reverse of dematerialisation. It refers to the process of issuing physical
securities in place of the securities held electronically in book-entry form with a depository.
Under this process, the depository account of a beneficial owner is debited for the securities
sought to be rematerialised and physical certificates for the equivalent number of securities
is/are issued.

A beneficial owner holding securities with a depository has a right to get his electronic holding
converted into physical holding at any time. The beneficial owner desiring to receive physical
security certificates in place of the electronic holding should make a request to the Issuer or its
R&T Agent through his DP in the prescribed Rematerialisation Request Form (RRF).

On receipt of RRF, the DP checks whether sufficient free /lock-in balance of the securities sought
to be rematerialised is available in the account of the client. If sufficient balance is available, the
DP accepts the RRF and communicates the request to the depository through the DP system.

When the depository receives such a rematerialisation request, it intimates the Issuer or its R&T
agent about such requests. The depository sends this intimation to R&T agents on a daily basis.

DP should forward the RRF to the Issuer or its R&T Agent within seven days of accepting the RRF
from the client. The Issuer or its R&T Agent, after validating the RRF, should confirm to the
depository that the RRF has been accepted. On receipt of such acceptance from the Issuer or its
R&T Agent, the depository removes the balances from the respective client's account by debiting
the account. On rematerialisation, R&T Agent issues security certificates as per the specifications
given by the client in the RRF. Thereafter, the Issuer or its R&T Agent despatches the security
certificates for the rematerialised securities to the client and his name is entered in the Register
of Members of the company. The certificate of securities should be sent to the clients within a
period of 30 days from receipt of such RRF by the Issuer or its R&T Agent.

The new certificates may not necessarily bear the same folio or distinctive numbers as those that
investor had previously, i.e., prior to his getting them in demat form.

When a rematerialisation request is sent, the securities in the client account will not be available
for delivery/transfer immediately. The client will have to wait for physical certificates to reach
him before they can be sold. Thus the client would encounter temporary illiquidity on the
securities requested for in rematerialised form.

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7.4.1 Prerequisites for a Rematerialisation Request
 The beneficial owners of the securities should make the request.
 There should be sufficient free /lock-in balance of securities available in the beneficiary
account to honour the Rematerialisation request.

7.4.2 Rematerialisation Process

a. The DP should provide Rematerialisation request forms (RRF) to clients.
b. The client should complete RRF in all respects and submit it to the DP.
c. The DP should check RRF for validity, completeness and correctness. In particular, the
following points should be checked:
 Free / lock-in balance available in the client's account to honour the Rematerialisation
request.
• The name of client on RRF is exactly the same as that in the client account.
• In case of joint holding, the order of names appearing on RRF is the same as in the client's
account.
• Correctness of the details filled in such as the security type, face value, Issuer's name and
lock-in status.
• The clients option whether to receive the physical certificates either in jumbo lot for the
entire quantity requested or in market lot.
• Separate RRF are submitted for
o free and locked-in securities;
o securities locked-in for different reasons;
o each ISIN; and
o securities of different paid-up value;
• RRF is signed by
o the sole holder in case of single holding;
o all joint holders in case of joint holding,
o authorised signatories in the case of corporate accounts,
o constituted attorney in the case of NRI accounts;
d. If RRF is not found in order, the DP should return the RRF to the client for rectification.
e. If RRF is found in order then the DP should accept RRF and issue an acknowledgement to the
client.
f. DP should enter the Rematerialisation request in DP system. The DP system will generate a
remat request number (RRN) which should be mentioned on RRF.
g. An authorised person, other than one who entered the RRF details in DP system, should verify
the details of RRN and release the request to the depository. (Not in CDSL)

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h. The DP should complete the authorisation of RRF and forward it to the Issuer or its R&T Agent
for rematerialisation. The DP should forward RRF to the Issuer or its R&T Agent within seven
days of accepting it from the client.
i. The Issuer or its R&T Agent should verify the RRF for validity, completeness and correctness.
It should also match the details with the intimation received from the depository against the
same RRN.
j. In case the Issuer or its R&T Agent finds RRF in order, it should confirm the remat request.
The Issuer or its R&T Agent should then proceed to issue the physical security certificates and
despatch them to the beneficial owner.
k. In case RRF is not found to be in order, the Issuer or its R&T Agent should send an objection
memo to the DP, with or without RRF, depending upon the reason for rejection. RRFs are sent
back on the following grounds:
 Incomplete or incorrect RRF
 RRF details mismatch
 RRF not received by registrar
 Rejected due to Auto Corporate Action
l. The DP, on receiving confirmation of debit entry in the DP system, should inform the client
accordingly.
m. Issuer / R & T Agent should send the certificate to BO within 30 days from the date of
confirming the request in the depository system.
n. No trading is possible on the securities sent for Rematerialisation.

7.5 Conversion of Mutual Fund units represented by Statement of Account (SOA) into
dematerialized form through a DP / De-statementization
De-statementization is the process, which enables BOs to convert their mutual fund units
represented by Statement of Account (SoA) in physical form to electronic form and hold the same
in their demat account.

 BOs desirous of converting their Mutual Fund units represented by Statement of Account
(SoA) into electronic form shall approach their DP for the same.
 The DP shall hand over a Mutual Fund De-statementization Request Form (MF-DRF) to the
BO.
 The BO shall submit separate MF-DRF for each account and for each RTA. Similarly, separate
entry should be filled up for each lock-in reason/expiry date combination, ISIN- wise.

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 The BO shall have the option to submit request either for entire holding by mentioning the
quantity as ‘ALL’ without the requirement of entering any quantity in the quantity field or for
partial or entire holding by mentioning the quantity in the quantity field.
 The BO shall submit the SoA or a photocopy of the SoA or copy of the SoA downloaded from
the internet along with the duly filled MF-DRF to the DP.
 The DP shall ensure the following:
 MF units contained in the SoA are admitted with Depository and are eligible for
conversion into electronic form.
 The name and the pattern of holding of the BO’s demat account matches with the name
and the pattern of holdings as mentioned in the SoA.
 Separate MF-DRFs are filled up for each RTA.
 MF-DRF should be completely filled and signed by all the account holders.
 The number of pages of SoA mentioned in the MF-DRF is verified with the SoA before
accepting the MF-DRF.
 If the MF-DRF is complete, then DP shall capture the details in the Depository system, using
the MF-DRF & SoA and shall generate the Destatementization Request Number (DRN) for
each ISIN. The DP shall write down the DRN against the respective ISIN on the MF-DRF or
submit to the RTA a letter containing the details of the MF-DRF-DRN and ISIN along with the
MF-DRF. The MF-DRF and the letter if submitted should be duly authorised by the DP by
putting its seal and signature. The system-generated acknowledgement of the conversion
request duly stamped and signed by the DP official shall be given to the BO.
 The MF-DRF shall be authorised by the DP official by affixing seal & signature. The original
MF-DRF and the SoA shall be sent to the AMC/RTA along with a system-generated covering
letter signed and stamped by DP official. A copy of the MF-DRF is to be maintained by the DP
for its own reference and records. Defacing and mutilation of SoA is not required to be done.
 The DP may capture the despatch details on the Depository system, such as the despatch
reference number, despatch date, name of courier, etc. The DP shall despatch the physical
documents to the AMC / RTA within 7 days from the date of receiving the same from the BO.
After receiving the physical documents, AMC/RTA shall compare the physical documents with
the electronic data.
 If the details match/ tally between the physical records submitted by the BO with the
electronic records kept by the AMC/ RTA, the BO account shall be credited with MF units.

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 In cases where the destat request is for the entire quantity (option ‘ALL’) AMC/RTA shall
confirm / reject the entire balance (which is available at the time of confirmation) / partial
balance in the respective folio with them.
 In case of mismatch of the quantity of units represented by the statement of account and the
electronic records of AMC/RTA, the AMC/RTA shall credit the BO account with such number
of units as are requested by the BO and available in the records of AMC/ RTA. Balance units,
if any, are to be rejected by the AMC/RTA.
 For other types of mismatches, AMC/ RTA may reject the DRN. The MF-DRF and SoA shall be
returned to the DP under a Rejection Memo, specifying the reason for rejection. The
AMC/RTA should complete processing of the conversion request within 15 days of receiving
the physical documents.
 If the conversion request is not processed by the AMC/RTA within 21 days after it has been
set up on the system, then the DP should follow up with the AMC/RTA. If the DP does not get
the documents within 30 days from the date of rejection by AMC/RTA, then DP should follow
up with the AMC/RTA.
 In case of rejection, the DP shall forward the rejection letter sent by the AMC/RTA to the
concerned BO within 7 days from receipt of the same.
The rules regarding reconciliation of Destat requests and maintenance records will be same as
applicable for dematerialisation of securities.
In case any objection memo has been received for such units from the Issuer or its Registrar and
Transfer Agent, the DP shall facilitate the correction of such objections on a timely basis.
Destatementization request in electronic mode
The DP may accept destat request from the BO electronically without submission of physical
document; provided that following requirements are fulfilled.
i. If the instruction is received through internet portal of the DP, approval from Depository for
the acceptance of instructions through such DP’s portal should be on record.
ii. The BO is an individual sole holder.
iii. The DP shall follow Operating Instructions for destat to the extent applicable for electronically
received instruction.

DP shall inform RTA about setup of such destat requests giving details about destat request no.
and ISIN by a letter or email or in any other mode prescribed by depository.

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7.6 Reconversion of Mutual Fund Units into Statement of Account Form (SOA Form) /
Restatementization
Restatementization is a process by which the MF units held in electronic form are converted into
physical form i.e., Statement of Account (SoA) /certificates at the request of the Beneficial
Owners. In the case of Repurchase / Redemption, the payment is made to the BOs by the
AMC/RTA in lieu of MF units held expunged.
 BO desirous to have his electronic holdings of MF units with the Depository restatementized
(SoA/ certificate form) shall fill the Restatementization Request Form, in duplicate, and
submit the same to his DP. All joint holders, if applicable, should sign the MF-RRF.
 MF-RRF can be signed by the POA holder also provided the POA is registered with the
AMC/RTA.
 Separate entry should be setup for MF units that are free and for each type of lock-in reason
code and lock-in expiry date. The BO shall have the option to submit restat request either for
entire holding by mentioning the quantity as ‘ALL’ without the requirement of entering any
quantity in the quantity field or for partial or entire holding by mentioning the quantity in the
quantity field.
 The ISIN should not be Inactive / Frozen for debits.
 The DP shall capture the details from the MF-RRF in the Depository system and shall generate
the Restat Request Number [RRN].
 The original MF-RRF will be sent to AMC/ RTA. The RRN shall be accessed by AMC/RTA
electronically.
 If investor submits the MF-RRF form for restat of the entire holding in his demat account, the
DP shall set up restat request with the quantity option as “ALL” in the system without
requirement of entering any quantity. In such case, AMC / RTA may confirm / reject the entire
balance [which is available at the time of confirmation] / partial balance in the corresponding
folio with them.
 If investor submits the MF-RRF form by mentioning the Quantity [Full or Partial] then the DP
shall set up Restat request with the quantity as mentioned in MF-RRF form. In such case, AMC
/ RTA may (a) confirm the maximum balance upto the setup quantity + allowable maximum
quantity / partial balance with respect to setup quantity in the corresponding folio with them,
(b) reject the balance upto the setup quantity / partial balance with respect to setup quantity
in the respective folio with them.
 Modification is not allowed in case of Restatementization. Deletion of RRN is allowed in case
of Restatementization, if the same is not downloaded by the AMC/RTA. If Restat is setup due
to an erroneous request from the BO then the deletion shall be authorised by the BO.

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 The DP shall note the RRN on the MF-RRF or submit to the RTA a letter containing the details
of the MF-RRF-RRN and ISIN along with the mutual fund Restatementization Request Form-
MF-RRF. The MF-RRF and the letter if submitted should be duly authorised by the DP by
putting its seal and signature.
 The DP shall follow up with the AMC/RTA if the restat request is not honoured within the
prescribed time limit i.e. within 30 days and keep on record the follow-up done.
 The AMC/RTA shall electronically intimate the rejection of MF-RRF and send the rejection
letter to DP for necessary correction / rectification.
 The DP shall carry out the necessary rectification in consultation with the BO/ RTA, and set up a fresh
restat request.

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Review Questions

Questions to assess your learning:

1. Only those securities whose ____________has been activated by the depository, can be
dematerialised in the depository system
(a) ISIN
(b) WAP
(c) IIP
2. Who can make a request for demat of the security?
(a) Company
(b) Registered holder of the security
(c) Depository
(d) Depository Participant
3. It is possible for investors to transpose names of the joint holders alongwith the process of
dematerialisation through their DPs. State whether True or False?
(a) False
(b) True
4. Within how many days of request for remat of securities should the client receive the physical
securities
(a) 45 days
(b) 30 days
(c) 7 days
(d) 15 days

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Chapter 8: Functions of Depository Participant-Trading and Settlement

Learning Objectives:

After studying this chapter, you should know about:

 The role of depository participant in facilitating the transfer of securities

from one account to another
 Process flow of settlement of securities in an off-market transaction
 Concepts and procedures related to settlement of securities

8.1 Introduction
One of the most important and basic services provided by the depositories in India is to facilitate
transfer of securities from one account to another at the instruction of the account holder. In the
depository system both transferor and transferee have to give instructions to its DPs for
delivering (transferring out) and receiving of securities. Transferee however, can give 'Standing
Instructions' [SI] to its DP for securities to be received28. If SI is not given, the transferee has to
give separate receipt instructions each time securities have to be received.

Transfer of securities from one demat account to another may be done for any of the following
purposes:
a. For execution of off-market transaction i.e. transactions between two accounts on mutually
agreeable terms, i.e. a transaction done on a person-to-person basis, without going through
the stock exchange mechanism.
b. Transfer arising out of a trade executed on a stock exchange.
c. Transfer arising out of transmission and account closure.

A beneficiary account can be debited only if the beneficial owner has given 'Delivery Instruction'
(DI) in the prescribed form i.e. the Delivery Instruction Slip (DIS).

The DI for an off-market trade or for a market trade has to be clearly indicated in the form by
marking appropriately. The form should be complete in all respects. All the holder(s) / authorised
signatory (ies) / POA holder(s) of the account have to sign the form. If the debit has to be effected
on a particular date in future, account holder may mention such date in the space provided for
'execution date' in the form.

28 ‘SI’ is also identified as ‘Purchase waiver’ or ‘Confirmation waiver’ in CDSL.

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SEBI had vide its Circular No. CIR/MRD/DP/ 01/2014 dated January 07, 2014 issued guidelines
regarding standardization, monitoring and scanning of DIS. DPs are required to scan the DIS and
tag it to correct DIS serial number while uploading the scan image of DIS in the NSDL/CDSL system
immediately but not later than two days. A report is provided to DPs giving details of those DIS
which are used for transaction but scanned image of DIS is not uploaded in NSDL/CDSL system.
In case of failure to scan & upload the DIS in NSDL/CDSL system within prescribed time, DPs are
levied penalty as per pre-defined penalty structure. These guidelines are effective from October
1, 2014.

This chapter deals with settlement of off-market trade and market transfer for instructions
received in the prescribed form as given above. Transfers arising out of transmission and account
closure have already been discussed in the previous chapters on transmission and account
opening respectively.

8.2 Settlement of Off-Market Transactions

Any trade that is cleared and settled without the participation of a clearing member or clearing
corporation is called off-market trade, i.e., transfer from one beneficiary account to another due
to a trade between them. Large deals between institution, trades among private parties, transfer
of securities between a client and a sub-broker, large trades in debt instruments are normally
settled through off-market route. Figure 8.1 shows the flow in an off-market transaction.

Figure 8.1: Off-Market Transactions

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The transferor will submit a DIS with 'off-market trade' ticked off to initiate an off-market debit.
The account holder is required to specify the date on which instruction should be executed by
mentioning the execution date on the instruction. The debit will be effected on the execution
date. DP will enter the instruction in the DP system if the instruction form is complete in all
respects and is found to be in order. DP system will generate an 'instruction ID' for each
instruction entered. DP will write the instruction ID on the instruction slip for future reference.

The instruction will be executed on the execution date. If there is adequate balance in the
account, such quantity will be debited on the execution date. If adequate balances do not exist
in the account, then instruction will wait for adequate balances till the end of the execution day.
In NSDL, the account will be debited immediately on receipt of adequate balances in the account.
In CDSL, the account will be debited after predefined intervals of time on receipt of adequate
balances in the account. In cases where adequate balances are not received till the end of the
day of the execution date, the instruction will fail, both for NSDL and CDSL.

Transferee will receive securities into the account automatically if SI were given to the DP at the
time of account opening. If SI is not given, transferee has to submit duly filled in 'Receipt-
Instruction' (RI) form for every expected receipt. Exchange of money for the off-market
transactions are handled outside the depository system.

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Consideration Details
For all off-market transfers made for the reason ‘off market sale/purchase’, in addition to
mandatorily capturing consideration, DPs must also mandate clients to provide evidence of the
consideration details. The DP’s shall be required to mandatorily obtain the following payment
details in the DIS from the client:
a) Mode of payment which can be Cash, Cheque or Electronic payment
b) Bank Account Number
c) Date of payment
d) Bank Name
e) Branch Name
f) Transferee Name
g) Date of Issue / Transfer
h) Cheque / Reference Number

In case mode of payment is Cheque or Electronic payment, the following needs to be mentioned:
a) Transferee’s name, bank account number and bank name.
b) Transaction reference number for electronic payments or cheque number for cheque
payments.
One Time Password (OTP) for off market transfers
SEBI implemented the facility of obtaining client’s consent through One Time Password (OTP) for
all off-market transfers (i.e. Transfer of securities within the depository as well as inter-
depository transfer) of securities, from source client’s Demat Account with execution date of
November 1, 2020.

All off-market transfer of securities shall be permitted by the Depositories only by execution of
Physical Delivery Instruction Slip (DIS) duly signed by the client himself or by way of electronic
DIS and client’s consent is required to be obtained through OTP for such off market transfer of
securities from client’s demat account as stated above.
For CDSL Participants, OTP authentication functionality will be implemented in similar manner,
just as Margin Pledge OTP authentication functionality.

For NSDL Participants, on the execution date of off-market transfer instruction, a link would be
generated and sent by the depository on mobile number and e-mail id as registered in the demat
account of the client. On clicking the said link, client will be redirected to a web page where after
authentication, client will be displayed the details of off-market transfer instructions for the
specific demat account which are pending for his confirmation. On OTP confirmation, Off Market

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Transfer instruction(s) as selected by the client will be processed, subject to payment of stamp
duty, as applicable. As the off-market transfer instructions have to be confirmed by the client
using OTP, Participants may guide their clients to ensure that the mobile number and / or email
ID is registered in the demat account of the clients. Transactions pending for OTP confirmation
will be reflected in the new status “Pending for OTP Confirmation” and in case OTP confirmation
is not completed till EOD of the execution date (from November 1, 2020 onwards), transactions
lying in the aforesaid status will be rejected.

However, this requirement of obtaining consent through OTP has been waived off by SEBI for off
market transfer reason code “Implementation of Government / Regulatory Direction / Orders”.
8.3 Settlement of Market Transactions
A market trade is one that is settled through the participation of a Clearing Corporation/ Clearing
House (CC/CH). In the depository environment, the securities move through account transfer.
Once the trade is executed by the broker on the stock exchange, the seller either gives an on-
market delivery instruction to his DP to transfer securities to his broker's account or on behalf of
his broker gives normal pay-in or early pay-in delivery instruction to his DP. In case of CDSL, the
seller BO can deliver the securities directly to the CC of the exchange (BO Level pay-in).

The broker has to ensure that the pay-in instruction [normal pay-in or early pay-in] is entered
using the CM ID and / or ensure that sufficient balance is there in his CM account / respective
settlement number and market type before the pay-in deadline prescribed by the stock
exchange.

The CC/CH gives pay-out and securities are transferred to the buying broker's account. The broker
then gives delivery instructions to his DP to transfer securities from its CM account to the buyer's
account. If a broker gives pay-out breakup of his clients to CC/CH then pay-out securities are
directly credited in the clients account by the CC/CH. The movement of funds takes place outside
the depository system. Figure 8.2 shows the settlement in case of market transactions.

Figure 8.2: Market Settlement –Demat Shares

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 Depository DP
DP

2
1 CC/CH

Broker 2 3 Broker

1 4 4

Sell Buy Buy

Sell
er er er
er

1. Seller gives DIs to his DPto move securities from his account to the brokers
account
2. Securities are transferred from broker’s account to CC on the basis of a
delivery out instruction.
3. On pay-out, securities are moved from CC to buying broker’s account.
4. Buying broker gives instructions and securities move to the buyer’s
account.

Transfer of securities towards settlement of transactions done on a stock exchange is called

settlement of market transaction. This type of settlement is done by transferring securities from
a beneficiary account to a clearing member account.

Brokers of stock exchanges that offer settlement through depository are required to open a
'clearing member account'. The type and number of accounts opened may vary across
depositories. In addition to the brokers, custodians registered with SEBI and approved by stock
exchanges can open a clearing member account. These accounts are popularly known as 'Broker
settlement account' or ‘Broker pool account’. A client who has sold shares will deliver securities
into the CM account of the broker through whom securities were sold.
8.3.1 Important Terms related to transaction on a Stock Exchange
The following are important descriptions of a transaction done on a stock exchange. All these
descriptions have to be written on the 'DIS'.

Market Type

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Stock exchanges offer different market segments in which trades can be done. The segmentation
is done by the type of settlement or type of trade. Each of the segments is denoted as 'market
type' in the depository system. The DIS should contain the name of the stock exchange, market
type and settlement number for which securities are being transferred to the clearing member
accounts. The contract note/trade confirmation slip given by the broker/ sub-broker will indicate
the settlement details.
Settlement Number
Trading periods of each of the market segments is identified by a settlement number. Every
settlement number has a trade beginning day, trade-ending day, settlement pay-in day and
settlement pay-out day etc. Stock exchanges divide a period of one year [financial year or
calendar year] into several settlement periods and allocate settlement number for each
settlement-period. All these days collectively are called 'settlement calendar'. The Depository
system will give complete details of settlement calendar for each stock exchange. The DIS should
contain the settlement number for which the securities are being transferred to the clearing
member account.
Clearing Member
Every broker in a stock exchange participating in settlement process through depository is
required to open clearing member account. These are identified with BOIDs / CM BP IDs and
called as 'CM accounts'. If a broker deals in more than one stock exchange, he is required to have
a separate set of CM accounts per stock exchange. The DI slip should contain the BOID / CM BP
IDs of a CM account relevant to the stock exchange in which the trade was done.
Delivery Deadline

Stock exchanges set a deadline time by which clearing member are expected to deliver securities.
Clearing member can deliver securities within the deadline time only if they have received
securities from their clients. In order to ensure that clients give securities in time to the clearing
member, SEBI has prescribed deadline time by which clients have to give securities to clearing
members. SEBI has advised DPs to instruct their clients to submit the settlement instructions on
T+1 (in physical form upto 4 p.m. and 6 p.m. in case of electronic instructions) for pay-in of
securities. For example, pay-in for trades executed on 'Monday' will be on Wednesday. Hence,
clients will have to submit instructions to their Participants (upto 4 p.m. in case of physical and
upto 6 p.m. in case of electronic instructions) on Tuesday. The client must submit the DIS to its
DP before the DPs acceptance deadline. The steps involved in the Pay-in and Pay-out of securities
are discussed in the section below.

Steps in Pay-in and Pay-out:

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The process of a broker/trading member submitting securities sold by him on behalf of his client,
to CC of a stock exchange is called 'pay-in'. All CM's are expected to complete the pay-in before
the deadline time prescribed by the stock exchange. In a depository environment, the following
steps have to be completed to execute the 'pay-in' successfully:
 The clients of the brokers who have sold securities will move the securities to the broker
settlement account before the deadline time.
 Securities that are made available for pay-in by seller clients [on behalf of CMs] and
clearing members through various settlement related instructions before the deadline
time given by the stock exchange would be informed to CC in a pay-in file. If the seller
client or CM is unable to deliver the securities within a pay-in deadline time, the short
deliveries are auctioned and are purchased by the CC in an open auction. This difference
in price is borne by the defaulter CM.
The process of a CC transferring the securities to the broker's CM -account for the quantity of
securities purchased by them on behalf of their clients is known as 'pay-out'. Payout time is also
pre-determined by the settlement calendar. The following steps are taken to distribute securities
received in pay-out to buying clients:
 The CC credits the buying CM account immediately on pay-out.
 The CM/broker will transfer securities from its CM Settlement account to the accounts of
the buyer.
 If the buying client is a sub-broker, such sub-broker will transfer securities to the final
client using the off-market route.

Direct Delivery by Clearing Corporation to Client Account

Direct delivery of securities to the clients can also be effected by the CC, subject to completion
of necessary procedures.
Inter-Settlement Transfers
In a clearing member account, the securities are always kept in a bucket of specific market type
and settlement number. The clearing member may have to move securities from one bucket with
a different market type-settlement number combination to another bucket from where pay-in is
to be effected. To effect this movement a clearing member can give an instruction to move
securities from one settlement to another settlement which is called 'inter-settlement' transfer.

Tracking of securities received for pay-in

A CM is required to track the securities, which it has received for pay-in. A CM can obtain such
information from the following sources:
(1) Its clients: CM may contact selling clients to inquire whether they have delivered
securities.

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 (2) Its DP: CM may contact its DP to find out the deliveries received into its CM settlement
account.
(3) Internet - using facilities provided by the depositories such as IDeAS of NSDL and easi29
and easiest30of CDSL

Automatic Delivery-out
(1) In NSDL, delivery-out instructions for moving securities from CM Pool Account to CM
Delivery Account can be generated automatically by the respective Clearing Corporations
based on the net delivery obligations of its Clearing Members. The Clearing Corporation can
generate auto delivery obligations (Dos) on behalf of those CMs who have authorised it in
this regard. The auto DOs will be generated around the time of download of the delivery
obligations to the Clearing Members. Such CMs will not be required to give delivery-out
instruction forms to the Participants for Pay-in to the CC in respect of the automatically
generated DOs. The Clearing Members can know the Auto DOs either by way of downloads
from the Clearing Corporation or through the Auto DO Report from the DPs or from facility
on Internet provided by the depositories.
(2) Auto DOs will not be generated in the following cases and the Clearing Members will have
to give Delivery-out Instruction forms to their Participants as usual:
a. Irreversible Delivery-out (IDO) - Auto DOs will not be generated for IDOs required to be
given for the purpose of margin payment / exemption, etc.
i. In case IDO is given before generation of Auto DO, Clearing Members will have to
ensure that an instruction is given to the Participant subsequently for
cancellation of the corresponding Auto DO alongwith Delivery-out Instruction
form for the balance quantity.
ii. In case IDO is given after generation of Auto DO, Clearing Members will have to
ensure that the Auto DO is first cancelled before execution of the IDO. Further, a
Delivery-out Instruction form for the balance quantity should also be given to the
Participant.
b. Shifting of CM Settlement Account from one Participant to another Participant Auto
DOs will be generated only in respect of one CM Settlement Account i.e., the CM
Settlement Account which is designated for receiving pay-out as of the date of

29CDSL offers Electronic Access to Securities Information (easi) which provides real time information to the CMs of their holdings
in their demat account. It also provides status of instructions, details of past transactions and enables users to take a print out of
their statement of account. It also offers a useful facility of daily valuation of the stocks held in the demat account and aggregate
value of the portfolio.

30CDSL also offers Electronic Access to Securities Information and Execution of Secured Transaction (easiest) which is an internet
facility which permits BOs/CMs to submit debit/credit transaction instructions to effect off-market, on-market, inter-depository
and early pay-in of transactions, freeze/unfreeze and pledge, unpledged and confiscation.

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 generation of Auto DOs. The Clearing Member must carefully monitor the delivery
instructions for Pay-in as the securities might be lying during the shifting process in both
the CM Settlement Accounts. However, this is applicable only with respect to NSDL.
(3) In case of CDSL, there are options of early pay-in, normal pay-in and auto pay-in.

Early pay-in facility is used to avail margin exemptions and other applicable benefits including
Buy-back and Tender Offer transfers. The CC maintains separate early pay-in accounts for each
CM where the securities for early pay-in have to be delivered. For availing margin exemption,
the CM / BO can give early pay-in instructions to DP from one day prior to the day of trading upto
the pay-in day or any such time as may be specified by the stock exchanges. On receipt of
instructions the DP verifies the same and enters the early pay-in instruction in the CDSL system
and thereafter the securities will be transferred from the concerned BO / CM account to the early
pay-in account. The execution of early pay-in will take place only if adequate balance is available
with the CM / BO account. It may be noted that in case of Buyback and Tender Offer transactions
transfers from the BO account are permitted only to the respective CMs early pay-in account
through early pay-in mechanism.

Normal pay-in facility can be used by a CM [applicable only in case of BSE CMs, set up of normal
pay-in. Instructions from non-BSE CM accounts are not allowed] or the seller BO to deliver
securities to the CC of the stock exchange by giving normal pay-in instruction to the DP. These
normal pay-in instructions can be given any time from the “T” day to the pay-in day till the pay-
in time, even if no balance is available in the account.

 In case of BSE Pay-in, at the time of pay-in, CDSL earmarks the balance in the accounts for
which the normal pay-in instructions has been entered by the DP, to the extent of
quantity specified (or part) in the normal pay-in instruction. The accounts of the CM / BO
are accordingly debited during pay-out time.
 In case of non-BSE pay-in at the time of pay-in, balance in the BO account for which the
normal pay-in instructions have been entered by the DPs will be debited, to the extent of
quantity entered in normal pay-in instructions (or part) and will be credited to the
respective CM accounts. The pay-in of the securities would then be taken from the CMs
settlement account.

Auto pay-in

 A facility is available to BSE-CMs on written request to CC (i.e. ICCL/NSCCL). By using this

option, the CM will not be required to give any pay-in instructions to his DP and the
securities will be automatically considered for pay-in. The details of auto pay-in can be

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 viewed on the CDSL system from T+1 day afternoon, after the auto pay-in instruction are
uploaded by CC. At the designated pay-in time, the securities for which auto pay-in
instructions have been generated are earmarked in the designated CM account and
considered automatically by the CC for pay-in. Debit of securities are done at the time of
pay-out.
 A facility is also available to NSE CMs on written request to CC (i.e. NSCCL). CMs who have
availed this option, securities for pay-in will be reported using following logic
 If early pay-in quantity is more than Auto DO, no quantity will be debited from
CM’s account
 If early pay-in quantity is less than Auto DO, quantity will be debited to the extent
difference between Auto DO and early pay-in
 In case of no early pay-in but Auto DO is generated, quantity will be debited to the
extent Auto DO quantity
 In case where no Auto DO is generated entire quantity available in CM’s
settlement pocket will be debited

The details of auto pay-in can be viewed on the CDSL system from T+1 afternoon, after the auto
pay-in instructions are uploaded by CC. At the designated pay-in time, the securities for which
auto pay-in instructions have been generated quantity will be debited from the CM account as
per the aforesaid logic and will be credited to the CC account

 For trades done on exchanges, other than BSE, the auto pay-in is the default option,
where auto pay-in instructions are not generated by the CC. At the designated pay-in
time, the securities that are available in CM’s account under the respective settlement
pocket are automatically considered for pay-in.
(4) Clearing Members will be required to give Inter-settlement Instructions to the Participants
for securities lying within a same CM account but in different settlement pocket.
(5) Participants can get a separate report from the DP system for Auto DOs, normal pay-in
instructions and early pay-in instructions.

CM Settlement to CM Settlement Instructions / CM Pool to CM Pool Account transfer

The CM may give instructions to its DP to debit its settlement / Pool account and credit the
settlement account of another CM in a prescribed format. The CM may give receipt instructions
to its DP for crediting its settlement/ Pool account from settlement / Pool account of another CM
in the format laid down. Alternatively, a CM may give standing instruction to its participant to
credit its settlement/ Pool account. The DP shall ensure that the instruction form is complete and

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the signature of the CM is valid. The DP shall execute the instructions of the CM to debit/credit
the settlement account of the CM.

Inter-depository Transfer

Transfer of securities from an account in one depository to an account in another depository is

termed as an inter-depository transfer.
• As per SEBI (Depositories and Participants) Regulations, 2018, both the depositories must
be inter-connected to enable inter-depository transfers.
• It can be done only for securities that are available for dematerialisation on both the
depositories.
• The account in the depository can be either a clearing member account or a beneficiary
account.
• For debiting the clearing member account or the beneficiary account with one depository,
the form for "Inter-depository delivery instruction" is required to be submitted by the clearing
member/beneficial owner to its DP.
• For crediting the clearing account or the beneficiary account, the standing instruction given
for automatically crediting the account is applicable. In case the standing instructions are not
given, then the form for "Inter-Depository Receipt Instruction" is required to be submitted by
the clearing member/beneficial owner to its DP.
• Inter-Depository Transfer instructions for the day are exchanged online between the two
depositories.
• The deadline time for DPs to verify & release Inter Depository Transfer delivery/ receipt
instructions is 9.30 p.m. on weekdays and 2.30 p.m. on Saturdays. Effective December 21,
2020 in an inter depository transfer from NSDL account to CDSL account, where receiving
CDSL account is a CM account and securities credited under appropriate settlement id can
only be considered against the CM’s settlement pay-in obligation.

8.4 Interoperability
Under Interoperability, a Clearing Member (CM) may choose to have a preferred Clearing
Corporations (CC). The trades executed on multiple exchanges can be consolidated into a single
CC and there will not be a strict one-to-one association of exchanges and CCs.

The interoperable CCs appoints a Delivery Versus Payment (DvP) agent, who will be responsible
for settlement of obligations. After completion of pay-in from CMs, interoperable CCs will provide
payout securities to the Pool Account of DvP Agent for onward transfer to the receiving CC’s
settlement account and thereafter receive securities from the other DvP agent. DvP Agent will
maintain exchange wise separate pool account with each depository.

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Settlement Process:

 Once the pay-in process is completed at CC, CCs will submit a pay-out file with the respective
Pool Accounts of DvP agent to the extent of the interoperable securities (i.e. securities
receivable by CM of other CCs).

 DVP agent will further transfer the securities that are received in DvP Agent Pool Account to
the respective settlement accounts of the CCs (depending upon the securities receivable by
a CM of the respective CC).

 At the same time CCs will also receive payout in their respective settlement accounts from
other Pool Accounts of DvP Agent.

Once the intra-settlement transfer between all the CCs is completed, CC’s will process a pay-out
to credit the securities in the client’s account or pool account of the TMs/CMs.

8.5 Procedure for Subscription and Redemption of Mutual Fund Units

The beneficial owners can use the same DIS book for Securities as well as Mutual Fund Units.

Subscription (Purchase) of Mutual Fund units through Stock Exchange

Mutual Fund units purchased by an investor through the CM is routed through the settlement
cycle of the stock exchange. Each Asset Management Company (AMC) will open (a) Principal
Account & Pool Account (for BSE), (b) Clearing Member Account (for NSE and other Stock
Exchanges), and (c) AMC Beneficiary Account for settlement of Mutual Fund Units with any CDSL
DP based on the CM ID allocated by the respective stock exchanges i.e. BSE, NSE etc.

Purchase orders for MF units is entered on the stock exchange order entry platform by the
eligible CMs on behalf of their investors. After the order entry deadline, order file shall be sent
to AMC/RTA for validation. For valid orders, AMC/RTA shall submit Corporate Action file to CDSL
for the allotment of MF units in AMC beneficiary accounts. AMC shall submit DIS in the form of
“Normal Pay-in” from AMC beneficiary account by mentioning the CM ID and Settlement ID along
with the other relevant details for pay-in processing. On Payout, MF units shall be credited to the
respective Buyer’s Clearing Member’s (CM’s) Pool account by way of a settlement cycle
mechanism. Subsequently, CM shall transfer the said MF units to the respective BO’s demat
account.

Redemption (Repurchase) of Mutual Fund units through Stock Exchange

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In case of Redemption [i.e. Repurchase] of MF units, the Investor shall place an order through
eligible Clearing Member (CM) on Stock Exchange Order Entry platform. On successful order
entry, Investor / BO shall transfer the units for pay-in by submitting the DIS to his DP by
mentioning the Settlement ID and Settlement type along with the other relevant details. Mutual
Fund units shall be debited from BO account and credited to the CC/CH house account. Early Pay-
in facility shall not be applicable for settlement of Mutual Fund units. Part balance / insufficient
balance of Mutual Fund units shall not be considered for redemption / repurchase. Mutual Fund
units shall be debited from CC/CH house account and credited to the AMC beneficiary accounts
from where the units shall be redeemed subsequently.

Repurchase / Redemption of Mutual Fund units through Depository Participant

BO can also redeem or offer for repurchase the MF units that are available in electronic form in
his demat account directly through the DP without going through the stock exchange mechanism.
SEBI stipulated AMFI /NISM certification and code of conduct prescribed by SEBI for
intermediaries of Mutual Fund will be applicable for the DPs who accept such requests directly
from the BOs. The DPs processing the Repurchase/ Redemption request shall send a copy of the
AMFI/ NISM certificate to CDSL for updation.BO shall submit a Repurchase / Redemption Request
Form directly to the DP. The DP shall ensure that the bank details are entered in the CDSL system.
If bank details are not entered, then the repurchase / redemption request may get rejected.

If BO submits the Repurchase / Redemption Request Form for the entire holding in his demat
account, the DP shall set up the Repurchase / Redemption request with the quantity option as
‘ALL’ in the system without requirement of entering any quantity in the Quantity field. In such
case, AMC / RTA shall confirm / reject the entire balance [which are available at the time of
confirmation] / partial balance in the respective folio with them.

If BO submits Repurchase / Redemption Request Form by mentioning the Quantity [Full or

Partial] then the DP shall set up the Repurchase / Redemption Request with the quantity as
mentioned in form. In such case, Issuer / RTA may confirm the maximum balance up to the setup
quantity / partial balance with respect to setup quantity in the respective folio with them reject
the balance up to the setup quantity / partial balance with respect to setup quantity in the
respective folio with them.

If BO submits Repurchase / redemption Request form by mentioning the ‘Amount’. RTA may
confirm the units upto or equivalent to the amount. In the case of Repurchase / Redemption
confirmation, the payment is made to the BO by the AMC/RTA in lieu of MF units held in
electronic form. Modification is not allowed for Repurchase / Redemption.

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8.6 Handling of Clients’ Securities by Trading Members/Clearing Members
In order to protect clients’ funds and securities, the Securities Contracts (Regulation) Act, 1956
and SEBI (Stock-Brokers) Regulations, 1992 specifies that the stock broker shall segregate
securities or moneys of the client and shall not it for self or for its other clients.

All TM/CM are required to transfer the clients securities received in pay-out to clients demat
account within one working day. In case the client does not pay for such securities received in
pay-out, then the TM/CM shall be entitled to retain those securities up to five trading days after
pay-out. In cases, where the client fails to meet its funds pay-in obligation within five trading days
from pay-out day, the TM/CM shall liquidate the securities in the market to recover its dues.

Under no circumstances, shall the securities of the clients received in pay-out be retained by the
TM/CM beyond five trading days and be used for any other purpose.
Brokers (TMs/CMs) have to adhere to the following to maintain a running account for client
securities and pledging the client securities with Banks/NBFCs:

 The securities received in pay-out against which payment has been made by clients, shall be
transferred to the demat account of the respective clients within one working day of the pay-
out. Such securities shall be transferred directly from the pool account of the TM/CM to the
demat account of the respective client.
Client Unpaid Securities Account
 With regard to securities that have not been paid for in full by the clients (unpaid securities),
a separate client account titled – “client unpaid securities account” shall be opened by the
TM/CM. Unpaid securities shall be transferred to such “client unpaid securities account” from
the pool account of the concerned TM/CM.
 The securities kept in the ‘client unpaid securities account’ shall either be transferred to
the demat account of the respective client upon fulfilment of client’s funds obligation or
shall be disposed off in the market by TM/CM within five trading days after the pay-out.
The unpaid securities shall be sold from the Unique Client Code (UCC) of the respective
client. Profit/loss on the sale transaction of the unpaid securities, if any, shall be
transferred to/adjusted from the respective client account.
 In case the clients’ securities are kept in the ‘client unpaid securities account’ beyond seven
trading days after the pay-out, the depositories shall levy appropriate penalties upon such
TM/CM which shall not be permitted to be recovered from the client.
Client Margin Trading Securities Account
 TM/CM shall maintain separate client wise ledger for funds and securities of clients availing
margin trading facility. Accordingly, the securities that are bought under Margin Trading

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 Facility, shall be kept in a separate account titled as – ‘Client Margin Trading Securities
Account’. It also specifies that:
a) For the purpose of providing the margin trading facility, a stock broker may use own funds
or borrow funds from scheduled commercial banks and/or NBFCs regulated by RBI. A stock
broker shall not be permitted to borrow funds from any other source.

b) The stock broker shall not use the funds of any client for providing the margin trading
facility to another client, even if the same is authorized by the first client. Further, it has been
specified that client collateral/securities shall not be used for the purposes other than
meeting client’s margin requirements/pay-in. 31

Client Collateral Account

 Clients’ securities lying with the TM/CM in “client collateral account”, “Client Margin Trading
Securities account” and “client unpaid securities account” shall not be pledged to the
Banks/NBFCs for raising funds, even with authorization by client as the same would amount
to fund based activity by TM/CM which is in contravention to the Securities Contracts
(Regulation) Rules, 1957.

Monitoring with respect to handling of client’s securities:

Stock Exchanges, Clearing Corporations and Depositories have put in place a mechanism for
monitoring of the following:

a) Handling of unpaid clients’ securities by the TM/CM – Mechanism of matching of transfer of

securities with the securities obligation as obtained from the clearing corporation with respect
to the following:
 Securities transferred from the client unpaid securities account to the pool account;
 Securities transferred from the client unpaid securities account to the concerned client
account;
 Securities transferred from pool account to the concerned client account

b) Securities lying with TM/CM in client collateral account, client margin trading securities
account and client unpaid securities account shall not be permitted to be pledged/transferred to
Banks/NBFCs for raising funds by TM/CM.

Accordingly, the provisions with regard to running account settlement of clients’ funds and
securities stand modified to the extent as stated hereinabove and shall be applicable only as
guidelines for running account settlement of clients’ “funds” only.

31 Circular No. MRD/DOP/SE/Cir – 11/2008 dated April 17, 2008

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8.7 Government of India notification regarding the Indian Stamp (Collection of Stamp-
Duty through Stock Exchanges, Clearing Corporations and Depositories) Rules, 2019.
In order to facilitate ease of doing business and to bring in uniformity and affordability of the
stamp duty on securities across States and thereby build a pan India securities market, the Central
Government has made the amendments to the Indian Stamp Act, 1899. The amendment
proposes to create the legal and institutional mechanism to enable states to collect stamp duty
on securities market instruments at one place by one agency (through the Stock Exchanges or
Clearing Corporations authorised by the stock exchange or by the Depositories) on one
Instrument and subsequent disbursement of the duty collected to the respective states.

In this regard, Government of India (GOI) notified the Indian Stamp (Collection of Stamp-Duty
through Stock Exchanges, Clearing Corporations and Depositories) Rules, 2019 which came into
force on July 1, 2020.

Stamp-duty leviable under the Indian Stamp Act is to be collected before execution of off-market
transfers involving transfer of securities in the depository system. It shall be collected from the
transferor/pledgee DPs before executing off-market/pledge invocation transactions in the
depository system. The stamp duty shall be payable by the transferor on off-market transfers
within the depository and for inter-depository transfers. The stamp duty will be calculated and
collected on the ‘Consideration Amount’ as captured in depository system based on the
consideration details mentioned by the transferor on DIS. The ‘Consideration Amount’ field
would be mandatory for all types of off-market transfers.

The rate at which the stamp duty will be calculated will be governed by the provisions of Schedule
I of the Principal Act. Currently as per the Indian Stamp Act, three categories have been defined
for the securities i.e. ‘Debenture’, ‘Government Securities’ and ‘Securities other than Debenture’.
Stamp duty is not applicable on Government Securities.

In accordance with the regulatory communication, the Depository shall not be collecting stamp
duty for State of Sikkim.

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Review Questions
Questions to assess your learning:

1. Transfer due to a transaction done on a person to person basis is called ___________

transaction.
(a) Off Market
(b) Market
(c) Sub-Market
(d) Intra-Market

2. If adequate balances do not exist in the account, then delivery instruction will wait for
adequate balances till the end of the execution day. State whether True or False?
(a) True
(b) False

3. If a broker gives ________ of his clients to Clearing Corporation, then pay-out securities are
directly credited in the clients account by the Clearing Corporation.
(a) Names and PAN
(b) Pay-out breakup
(c) Identities
(d) PAN and DP IDs

4. Who is required to give the Inter-settlement Instructions to the Participants for securities
lying within a same CM account but in different settlement a pocket?
(a) Exchange
(b) Clearing House
(c) Depository
(d) Clearing Member

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Chapter 9: Special Services – Pledge & Hypothecation32

Learning Objectives:

After studying this chapter, you should know about the:

 Concept of pledging and hypothecation of securities

 Procedure for pledging and hypothecation of securities
 Corporate Benefits for pledged/hypothecated securities

9.1 Introduction
The creation of pledge and hypothecation against securities which are held in demat mode is
permitted under section 12 of the Depositories Act, 1996. Securities (free balances / lock-in
balance) held in a depository account can be pledged or hypothecated against a loan, credit, or
such other facility availed by the beneficial owner of such securities. For this purpose, both the
parties to the agreement, i.e., the pledgor and the pledgee must have a beneficial account with
the same depository as inter-depository pledge is presently not permitted. However, both parties
need not have their depository account with the same DP. The nature of control on the securities
offered as collateral determines whether the transaction is a pledge or hypothecation. If the
lender (pledgee) has unilateral right (without reference to borrower) to appropriate the
securities to his account and if the borrower (pledgor) defaults or otherwise, the transaction is
called a pledge. If the lender needs concurrence of the borrower (pledgor) for appropriating
securities to his account, the transaction is called hypothecation. Further lender [pledgee BO] has
the facility to give Standing Instructions for accepting pledge instructions in is favour, at the time
of opening of the demat account or at a later date i.e. the pledge requests initiated by the
borrower (pledgor) will be automatically accepted in lenders (pledgee) favour.

9.2Procedure for Pledge/Hypothecation

The pledgor initiates the creation of pledge/hypothecation through its DP and the pledgee
instructs its DP to confirm the creation of the pledge. The pledge/hypothecation so created can
either be closed on repayment of loan or invoked if there is a default. After the pledgor has repaid
the loan to the pledgee, the pledgor initiates the closure of pledge/hypothecation through its DP
and the pledgee instructs its DP to confirm the closure of the pledge/hypothecation. If the
pledgor defaults in discharging his obligation under the agreement, the pledgee may invoke the

32 It may be noted, that the term ‘hypothecation’ is used only in NSDL.

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pledge/ hypothecation. This has to be done after taking the necessary steps under the terms of
the agreement with the pledgor and as stated in the Bye-Laws of the depository and rules and
regulations framed by SEBI.

The following steps are involved in the creation of pledge/hypothecation:

9.2.1 Creation of Pledge/Hypothecation by Pledgor

A beneficial owner may contract a loan against the securities owned by him. He may borrow from
a bank or any other person. A pledge transaction needs an identification which may be an
agreement number. The borrower is called a pledgor and the lender is called a pledgee. There
can be any number of pledge/hypothecation transactions between the same set of pledgees and
pledgors. Each of these transactions has to be identified separately by a unique system generated
number (“pledge sequence number”) in the DP system and a separate set of instructions have to
be given against each of these transactions. Multiple pledge instructions can be executed on the
basis of a single agreement. In such cases, the same agreement number should be quoted for all
the pledge instructions. (Entering the agreement number is optional in CDSL system). The DP of
the pledgor initiates a pledge/hypothecation on request received from the pledgor in the
prescribed form. The pledgor submits the request form containing all details like the details of
securities to be pledged, the agreement number, closure date of the pledge/hypothecation (this
date is indicative of the duration of pledge/hypothecation), pledgee's details, etc. The DP verifies
the form for completeness and validity and ensures that the securities to be pledged exist in the
pledgor's account. If it is not found in order, it is returned to the pledgor for correction. If the
form is complete in all respects, the DP accepts it for processing and issues an acknowledgement
to the pledgor.

The DP then enters the details of the request in DP system as a pledge/hypothecation. On

entering the details, a pledge sequence number for the request is generated. The DP then verifies
it and confirms the requests. Securities are then debited from the free or locked-in balances and
credited as pledge setup balance in the demat account of the pledgor. The DP intimates to the
pledgor, the “pledge sequence number”. Figure 8.1 gives the procedure for pledging of demat
shares.

Pledgor BO also has the facility to setup the pledge request even in case of insufficient / nil
balance in the Pledgor BO account. The Pledgor BO shall have the facility to set up pledge request
with future date as execution date. If the execution date is not mentioned in the Pledge Request
Form, then business date on which the Pledgor DP verifies the pledge will be taken as execution
date.

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Further, the BO can pledge the securities as a pledgor and pledgee BO can accept the pledge as
a pledgee if both the BOs are registered for CDSLs easiest facility, as well as pledgee can execute
the confiscation if the pledgor fails to fulfill the obligation. BO also has the facility to initiate the
pledge for the purpose of Margin from their easiest login.

CM also has the facility to accept the Margin pledge from its easiest login as a pledgee as well
CM has the facility to repledge the securities to the CC as a pledger. (As already discussed under
section 5.4).

At NSDL, the said instruction can also be submitted by the client whose depository account is
registered for e-Token based facility for accessing SPEED-e facility of NSDL.

9.2.2 Procedure for Confirmation of Creation of Pledge/Hypothecation by Pledgee

Once a pledge/hypothecation request has been created and verified, the pledgor submits the
duly stamped and signed PRF to the pledgee alongwith the letter generated confirming the
pledge set-up. The details of the pledge/hypothecation are also electronically communicated to
DP system of pledgee's DP for confirmation. The pledge/ hypothecation request is displayed at
DP system of pledgee's DP.

In case of CDSL, if the pledgee DP has not obtained standing instruction from the pledgee BO to
confirm the pledge set-up, the pledgee BO shall submit duly signed PRF to its DP with PSN.

The DP also compares the details on the form with the details shown by DP system against the
pledge/hypothecation number. On being satisfied, the DP executes the order for accepting/
rejecting the pledge/ hypothecation request in DP system. In the case of rejection by the pledgee,
the DP enters reason for the rejection in DP system as specified in the form. Confirmation of the
acceptance/ rejection of pledge/hypothecation are electronically communicated to DP system of
the pledgor's DP. (Refer figure 9.1).

At NSDL, the said instruction can also be submitted by the client whose depository account is
registered for e-Token based facility for accessing SPEED-e direct facility of NSDL.

Acceptance of the creation of pledge/ hypothecation appears in DP system of the pledgor's DP

and pledgee's DP as a status change. Status of the pledge/hypothecation instruction will change
to "Accepted-Verified". DP of the pledgee must confirm the creation of pledge/hypothecation
before the date of expiry of pledge/ hypothecation mentioned in the request form for creation
of pledge submitted by the pledgor (not applicable in case of NSDL). The reason for rejection is
displayed in DP system of the pledgor's DP. The pledgor's DP cannot cancel the

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pledge/hypothecation order after confirmation of creation of the pledge/hypothecation by the
pledgee. Once the pledge is confirmed, statement of holding will show the quantity of pledged
securities separately as "pledged balance".

A pledgor (borrower) and pledgee (lender) may have their accounts with the same DP or different
DPs. The procedure described does not change. It remains the same irrespective of whether or
not they have accounts with different DPs. Even if both have their accounts with the same DP,
the procedure of receiving the pledge confirmation from the lender has to be followed. The
pledge will get credited only after the confirmation advice is entered in the DP system.

To eliminate the manual process of pledge confirmation and to facilitate DPs of Pledgee to
automatically confirm the pledge request in NSDL system, a flag namely “Standing Instruction
Indicator for Auto Pledge Confirmation‟ is incorporated in NSDL system. Accordingly, the pledge
request initiated by the Pledgor in favour of Pledgee client where “Standing Instruction Indicator
for Auto Pledge Confirmation‟ flag is enabled in the NSDL system, the pledge instruction will
automatically get Confirmed and the status will be updated as “Pledged‟ without the need to
submit Pledge Request Form (PRF) by the Pledgee for confirmation of pledge request.

Figure 9.1: Pledging of Demat Shares

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9.2.3 Closure (Unpledge) of a Pledge/Hypothecation by Pledgor
The pledgor can request for un-pledging / closure of pledge/hypothecation after the
performance of the underlying agreement. The pledgor submits an instruction in the prescribed
form to its DP to initiate the un-pledge / closure of pledge/hypothecation. The DP, upon receiving
such request, verifies the form for its completeness and validity and, if not found in order, returns
it to the pledgor for rectification. If it is found to be in order, the DP accepts it for processing and
issues an acknowledgement to the pledgor. The DP also compares the details given in the form
with those displayed at DP system against the pledge/hypothecation instruction number. The DP
enters the un-pledge / closure request details in DP system against the pledge/hypothecation
instruction number as per the instructions given in the form.

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The details of the pledge/hypothecation un-pledge / closure request are communicated
electronically through depository system to the DP system of pledgee's DP for confirmation. On
receiving such intimation, the pledgee's DP is required to furnish the details of the un-pledge/
hypothecation closure requests received for confirmation to the pledgee. The pledgee then
submits his acceptance/rejection of the un-pledge / closure request in the prescribed form. The
DP verifies the form for its completeness and validity and, if not found to be in order, returns it
to the pledgee for rectification. If it is in order, the DP accepts it for processing and issues an
acknowledgement to the pledgee. The DP also compares the details on the form with those
displayed at DP system against the pledge/hypothecation instruction number. Figure 9.2 shows
the un-pledge / closure procedure.

The DP executes the order accepting/rejecting the un-pledge/hypothecation closure request in

DP system as per the instructions given in the form. In case of rejection by the pledgee, the DP
enters the reason for rejection in DP system as specified in the form. The acceptance/rejection
of un-pledge/hypothecation closure confirmation is electronically communicated to DP system
of the pledgor's DP. The securities accepted for un-pledge/closure gets debited from the pledged
balances of the pledgor and credited to its free/locked-in balances. In case of rejection by the
pledgee, the securities continue to remain as pledged balances in the pledgor's account. The
reasons for rejection are displayed in DP system of the pledgor's DP. Some of the reasons for
rejection are as follows:

• Un-pledge / Closure date not accepted

• Pledged quantity not accepted
• ISIN not accepted
• Security details not accepted
• Market value of pledged ISINs insufficient
• ISIN delisted from trading
• POA not received from all holders
• Holders not acceptable to the pledgee
• Agreement number differs from that on the agreement
• Others

The rejection reasons are not present in CDSL system. If the pledgee DP is rejecting the unpledge
request, he can enter the reason for same in a remark field provided for this purpose.

Figure 9.2: Pledge closure procedure

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In CDSL system, Pledge closure is referred as unpledge.
9.2.4 Unilateral Closure (Unpledge) of Pledge

The facility for unilateral closure (Unpledge) of Pledge by the Pledgee is also provided by the
depositories. In this case, the pledgee submits an instruction in the prescribed form to its DP to
initiate unilateral closure of pledge/hypothecation.

The process remains the same as mentioned under head (section9.2.3), Un-pledge/Closure of a
Pledge/Hypothecation by Pledgor. However, no action (confirmation / rejection) is required to
be taken by the pledgor and/or pledgor's DP. Figure 9.3 shows the process flow for universal
(unpledged) closure.

Figure 9.3: Unilateral Pledge Closure Procedure

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9.2.5 Invocation of Pledge by Pledgee

If the pledgor fails to discharge his obligations under the agreement of pledge or for any other
reason, the pledgee may invoke the pledge. He can then claim the beneficial ownership of the
concerned securities after taking the necessary steps in terms of the pledge agreement, Bye-Laws
of the depository and SEBI regulations. In such a case, the pledgee fills up the Invocation Request
Form (IRF) to his DP for invoking the pledge. The DP verifies the form for its completeness and
validity and if not found in order returns the same to the pledgee for rectification. If it is in order,
the DP accepts it for processing and issues an acknowledgement to the pledgee. The DP also
compares the details on the form with those on the DP system displayed against the pledge
number.

Figure 9.4 shows the process flow for pledge invocation. The DP enters (maker) the invocation
request details in DP system against the pledge instruction number as per the instructions given
in the form and verifies (checker) the details. On verification by pledgee, the securities are
transferred from the 'pledged balance' of the pledgor's beneficial owner account to the 'free
balance' of pledgee's beneficial owner account. It may be noted that in case of pledge, no
confirmation is required in DP system of the pledgor's DP for transferring securities from

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pledgor's (borrower's) account to pledgee's (lender's) account. Further if the pledge is for lock-in
securities, then invocation request cannot be setup till the lock-in period is over.

It is important to note that locked-in securities cannot be invoked before the lock-in release date.
In case of hypothecation, the pledgor instructs its DP to confirm the invocation of the
hypothecation in DP system.

Figure 9.4: Pledge Invocation

Capturing consideration amount in case of Pledge Invocation

As already discussed in the previous chapter, in terms of Rule 5 (7) of the Government of India
notification regarding the Indian Stamp (Collection of Stamp-Duty through Stock Exchanges,
Clearing Corporations and Depositories) Rules, 2019, in the case of transfer of securities pursuant
to invocation of pledge, duty shall be collected from the pledgee on the market value of the
securities. Therefore, Participants are requested to take note that the consideration is to be
obtained in case of “pledge invocation” from the pledgee along with the Pledge/Hypothecation
Form.

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9.2.6 Invocation of Hypothecation (Not applicable in CDSL)
If the borrower fails to discharge his obligations under the agreement of hypothecation or for
any other reason, the lender may invoke the hypothecation. He can then claim the beneficial
ownership of the concerned securities after taking the necessary steps in terms of the
hypothecation agreement, Bye-Laws of the depository and SEBI regulations. In such a case, the
lender submits a request in the prescribed form to his DP for invoking the hypothecation. The DP
verifies the form for its completeness and validity and, if not found in order, returns it for
rectification. If it is in order, the DP accepts it for processing and issues an acknowledgement to
the lender. The DP also compares the details on the form with those on the DP system displayed
against the hypothecation instruction number.

On receiving the instructions from the borrower, the DP executes the order for
accepting/rejecting the invocation request in the DP system as per the instructions given in the
form. In case of rejection by the borrower, the DP enters the reason for rejection in DP system
as specified in the form. The acceptance/rejection of invocation confirmation is communicated
to DP system of the lender's DP. In case of rejection by the borrower, the securities will continue
to remain as pledged balances in the borrower's account and the reasons for rejection are
displayed in DP system of the lender's DP.

9.2.7 Corporate Benefits for Pledged/Hypothecated Securities

Ownership of the pledged/hypothecated securities remains with the pledgor (borrower) until the
pledge is invoked. Hence, all corporate benefits - cash and non-cash - like dividends, bonus, rights
etc., will accrue to the borrower. Dividends will be given to the borrower in the usual manner
and bonus shares will be credited to his account as pledged balances. The securities arising out
of corporate actions like share splits or consolidation or exchange under a merger/acquisition
scheme are credited to the account of the pledgor with pledge marked. The checklist for
processing a pledging and hypothecation request by a depository participant is shown in Box 9.1.

Box 9.1: Checklist for pledge/hypothecation

While processing a pledge/hypothecation request, the DP should take care with regard to the
following steps/points:

1. Ensure that the instruction form is submitted in duplicate.

3. Pledgor DP and Pledgee DP each shall create at least two users to implement the Maker-
checker feature. Ensure that all compulsory fields in the instruction form are entered.

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4. Ensure that request for confirmation of pledge is given before the closure date mentioned in
the instruction form (not applicable in case of NSDL).
5. The DP shall maintain copies of all Pledge Request Forms (PRF), Unpledge Request Forms (URF)
& Invocation Request Forms (IRF) for a minimum period of 5 years or any such period
informed by SEBI / NSDL/ CDSL from time to time.

9.3 Recording of Non Disposal Undertaking (NDU) in the Depository System

The depository system provides a transparent mechanism for recording pledge transactions
entered between lenders and borrowers.

SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, requires promoters of
a company to disclose details of their encumbered shares including NDUs by promoters which
are covered under the scope of disclosures of 'Encumbrances'.

It has been observed that some shareholders, primarily promoters, enter into non-disposal
agreements/ non-disposal undertaking (NDU) for borrowing funds from various lenders. NDUs
are typically undertakings given by a shareholder not to transfer or otherwise alienate the
securities and are in the nature of negative lien given in favour of another party, usually a lender.

In order to enable the shareholders to record the NDUs in the depository system, it has been
decided to permit the depositories to offer a system for capturing and recording the NDUs. DPs
of Clients on whose securities, hold is created for NDU, shall be charged @ 0.01 percent of the
value of securities upon creation of hold, subject to a minimum of Rs. 25.

SEBI vide its circular dated July 24, 2020 advised the Depositories to record all types of
encumbrances, which are specified under Regulation 28(3) of SEBI (Substantial Acquisition of
Shares and Takeovers) Regulations, 2011.33

Lien is the right of a creditor in possession of goods, securities or any other assets belonging to
the debtor to retain them until the debt is repaid, provided that there is no contract express or
implied, to the contrary. It is a right to retain possession of specific goods or securities or other
movables of which the ownership vests in some other person and the possession can be retained
till the owner discharges the debt or obligation to the possessor. It is a legal claim by one person
on the property of another as security for payment of a debt.

All other encumbrances to be treated as ‘Other Encumbrances’ in CDSL system.

33
SEBI Circular Ref. No. SEBI/HO/MRD2/DDAP/CIR/P/2020/137 Dated July 24, 2020 .

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9.4 Margin obligations to be given by way of Pledge/ Re-pledge in the Depository
System34
SEBI vide circular dated February 25, 2020 had specified that margin obligations can be given by
way of Pledge/Re-pledge in the Depository System. The provisions of the said circular came into
effect from August 1, 2020. TM / CM were allowed to accept collateral from clients in the form
of securities, only by way of ‘margin pledge’, created in the Depository system in accordance with
Section 12 of the Depositories Act, 1996 read with Regulation 79 of the SEBI (Depositories and
Participants) Regulations, 2018 and the relevant Bye Laws of the Depositories.

Transfer of securities to the demat account of the TM / CM for margin purposes (i.e. title transfer
collateral arrangements) shall be prohibited. In case, a client has given a POA in favour of a TM /
CM, such holding of POA shall not be considered as equivalent to the collection of margin by the
TM / CM in respect of securities held in the demat account of the client. This provision came into
effect from August 01, 2020.

Depositories were advised to provide a separate pledge type viz. ‘margin pledge’, for pledging
client’s securities as margin to the TM / CM in the Depositories System. The TM / CM is required
to open a separate demat account for accepting such margin pledge, which shall be tagged as
‘Client Securities Margin Pledge Account. Accordingly Trading Members (TM) / Clearing Members
(CMs) can accept collateral from clients in the form of securities only by way of Margin Pledge
(MP) created in the depository system. For the purpose of providing collateral in form of
securities as margin, a client can margin pledge securities with TM, and TM can re-pledge the
same with CM, and CM in turn can re-pledge the same to Clearing Corporation (CC). The complete
trail of such re-pledge shall be reflected in the de-mat account of the pledger. The operational
mechanism for margin pledge is provided in Annexure 3.

Further, the framework for utilisation of pledged clients’ securities for exposure and margin is
provided in Annexure 4.

34
Reference: SEBI/HO/MIRSD/DOP/CIR/P/2020/28 dated February 25, 2020, SEBI/HO/MIRSD/DOP/CIR/P/2020/88
dated May 25, 2020, SEBI/HO/MIRSD/DOP/CIR/P/2020/90 dated May 29, 2020 and
SEBI/HO/MIRSD/DOP/CIR/P/2020/143 dated July 29, 2020

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Review Questions

Questions to assess your learning:

1. If the lender needs concurrence of the borrower for appropriating securities to his account,
the transaction is called ____________?
(a) Pledge
(b) Hypothecation
(c) Either of the above
(d) None of the above

2. State whether the given statement is true or false: “For pledging and hypothecation of
securities, the pledgee and the pledgor can have their account with DPs under the different
depository”.
(a) True
(b) False

3. When do we call that a Pledge transaction is completed?

(a) When SEBI approves the proposal
(b) When the depository gives its nod
(c) When the confirmation advice is entered in the DP system
(d) None of the above

4. Can a pledge be created for future date as the execution date? State Yes or No?
(a) Yes
(b) No

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Chapter 10: Special Services – Public Offering / Corporate Actions

Learning Objectives:

After studying this chapter, you should know about:

 The concept of corporate actions

 Terminology related to corporate actions.
 Procedure for corporate actions with respect to the monetary and non-monetary
benefits

10.1 Concept of Corporate Actions

Corporate actions are events, which affect the rights, obligations and/or interests of the
beneficial owners of the securities held in a depository. The most common examples are payment
of interest, dividend, bonus shares, rights, splits, merger, redemption, payment of call money,
liquidation etc. For securities held in demat mode, the depository facilitates the execution of
corporate actions. The depository Bye-Laws define corporate benefits to mean and include any
action taken by the issuer relating to prescribing the 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 action from time to time.

Corporate actions can be categorised into two types:

 Cash corporate actions involve distribution of monetary benefits, e.g., dividend and interest
etc. In case of cash corporate actions, depository merely provides information to the Issuer
about the persons entitled to receive corporate benefits as on a cut-off date.

 Non-cash corporate actions involve distribution of benefits other than cash such as bonus
issues, offer of shares on right basis, conversion of securities, etc. In case of non-cash
corporate actions, depository may facilitate the distribution of corporate benefits. Presently
the depositories in India facilitate the distribution of non-cash corporate benefits.

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10.2 Important Terms
Since corporate actions affect the beneficial owners of the securities, it is important to determine
the actual beneficial owner of the securities on the cut-off date announced by the issuer for a
specific corporate action. Such cut-off date is called record date/ book closure.

Record Date: Corporate actions affect the holder of the securities. Thus, whenever any corporate
action takes place it is necessary to determine the eligible BOs as of a particular date who are
entitled to the corporate benefits. The issuer thus announces a cut-off date to determine the BOs
of the securities as of that date. This date is referred to as the `Record Date’ and depository
system provides holding report i.e. list of BOs having holdings in the ISIN of the issuer as of end
of the day of record date.

Book Closure Start Date / End Date: In certain cases, issuer may setup a corporate action
specifying book closure start date and book closure end date. In such cases, the depository
system generates holding report i.e. list of BOs having holdings in the ISIN of the issuer as of end
of the day of one day prior to book closure start date.

10.3 Procedure for Corporate Actions

Whenever a corporate action is announced, the Issuer / its R&T Agent, informs the depository
about the proposed corporate action. The information of the corporate actions is made available
to the DPs through the depository system.

On receiving such information, DPs take the following steps to ensure that:
 the changes in tax status, bank details, change of address etc. in the beneficial owners'
accounts are updated well in advance of the book closure/record date;
 all positions in the transit accounts35, e.g., settlement accounts and intermediary accounts,
are cleared and the balances lying therein are transferred to the relevant beneficiary accounts
well in advance of the book closure/record date as per the instructions received from account
holders.

On the relevant cut-off date announced for the corporate action, the depository provides the
details of the holdings of the beneficial owners to the issuer or its R&T Agent. The details provided
by the depository include the particulars of tax-status, if any of the beneficial owner and his bank
account details. Securities balances lying in the accounts of the Clearing Members / Clearing
Corporations / Intermediaries will be eligible to receive corporate benefits. In such cases, the

35 CDSL does not have the concept of transit account.

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Issuer or its RTAs will distribute the corporate benefits to the Clearing Members / Clearing
Corporations / Intermediaries for onward distribution to the beneficial owners. The corporate
benefits availed by Clearing Members / Clearing Corporations and intermediaries shall be held in
trust on behalf of the beneficial owners.

10.3.1 Monetary Benefits

On the basis of the particulars of the holdings of beneficial owners received from the depositories
on the cut-off date, the Issuer / its R&T Agent distribute dividend, interest and other monetary
benefits directly to the beneficial owners.

Advancements in the field of electronic payment systems in the last decade have made available
various other modes of electronic funds transfer viz. National Electronic Funds Transfer (NEFT),
Real Time Gross Settlement (RTGS), etc. In view of such advancements, SEBI has vide its circular
no. CIR/MRD/DP/10/2013 dated March 21, 2013 modified the framework as under:

(i) For making cash payments to the investors, companies whose securities are listed on the
stock exchanges shall use, either directly or through their RTA& STA, any RBI (Reserve
Bank of India) approved electronic mode of payment such as ECS [LECS (Local ECS) / RECS
(Regional ECS) / NECS (National ECS)], NEFT, etc.
(ii) Further in order to enable usage of electronic payment instruments, companies whose
securities are listed on the stock exchanges (or their RTA& STA) shall maintain requisite
bank details of their investors.
a) For investors that hold securities in demat mode, companies or their RTA & STA shall
seek relevant bank details from the depositories. To this end, depositories have been
advised to ensure that correct account particulars of investors are available in the
database of depositories.36
b) For investors that hold physical share / debenture certificates, companies or their
RTA& STA shall take necessary steps to maintain updated bank details of the investors
at its end.
c) In cases where either the bank details such as MICR (Magnetic Ink Character
Recognition), IFSC (Indian Financial System Code), etc. that are required for making
electronic payment are not available or the electronic payment instructions have
failed or have been rejected by the bank, companies or their RTA& STA may use
physical payment instruments for making cash payments to the investors. Companies

36vide circular SEBI/MRD/DEP/Cir-3/06 dated February 21, 2006 and letter MRD/DEP/PP/123624/2008 dated April 23, 2008,

176
 shall mandatorily print the bank account details of the investors on such payment
instruments.

10.3.2 Non-monetary Benefits

On the basis of the particulars of the holdings of beneficial owners received from the depository
as of the cut-off date, the Issuer/its R&T Agent informs the eligible beneficial owners about the
corporate action/benefit. As per the Companies (Prospectus and Allotment of Securities) Rules,
2014, Rule 9A mandates the Issue of securities in dematerialised form by unlisted public
companies.
(1) Every unlisted public company shall – (a) issue the securities only in dematerialised form; and
(b) facilitate dematerialisation of all its existing securities in accordance with provisions of the
Depositories Act, 1996 and regulations made there under.
(2) Every unlisted public company making any offer for issue of any securities or buyback of
securities or issue of bonus shares or rights offer shall ensure that before making such offer,
entire holding of securities of its promoters, directors, key managerial personnel has been
dematerialised in accordance with provisions of the Depositories Act, 1996 and regulations made
there under.
(3) Every holder of securities of an unlisted public company, (a) who intends to transfer such
securities on or after 2nd October, 2018, shall get such securities dematerialised before the
transfer; or (b) who subscribes to any securities of an unlisted public company (whether by way
of private placement or bonus shares or rights offer) on or after 2nd October, 2018 shall ensure
that all his existing securities are held in dematerialized form before such subscription.

On receipt of these details, the depository makes the credit entries in the accounts of the
beneficial owners on a date requested by the Issuer / its R&T Agent (the execution date).

In cases where the details of accounts to which the Issuer / its R&T Agent has made allotment,
do not match with those maintained with the depository, such records will be rejected. The
depository then requires the Issuer / its R&T Agent to rectify the records. In case the Issuer / its
R&T Agent is unable to rectify the records within the stipulated period, the allotment of the
rejected records will have to be kept in abeyance and allotted as and when the demat accounts
of the allottees are confirmed. In case of listed companies shares allotted on preferential basis
and pursuant to conversion of warrants/debts have to be mandatorily be allotted in demat form.

10.3.3 Rights Issue

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SEBI has vide circular SEBI/HO/CFD/DIL2/CIR/P/2020/13 January 22, 2020 issued guidelines for
the purpose of Rights Issue whereby the concept of dematerialised Rights Entitlements (REs) has
been introduced:
 REs shall be credited to the demat account of eligible shareholders in dematerialized form.
 In REs process, the REs with a separate ISIN shall be credited to the demat account of the
shareholders before the date of opening of the issue, against the shares held by them as on
the record date.
 Physical shareholders shall be required to provide their demat account details to the
Issuer/Registrar to the Issue for credit of REs not later than two working days prior to the
issue closing date, such that credit of REs in their demat account takes place at least one day
before the issue closing date.

Trading of dematerialized REs on stock exchange platform

REs shall be traded on secondary market platform of Stock exchanges, withT+2 rolling settlement,
similar to the equity shares. Trading in REs on the secondary market platform of stock exchanges
shall commence along with the opening of the issue and shall be closed at least four days prior
to the closure of the rights issue.

Investors holding REs in dematerialized mode shall be able to renounce their entitlements by
trading on stock exchange platform or off-market transfer. Such trades will be settled by
transferring dematerialized REs through depository mechanism, in the same manner as done for
all other types of securities.

On closure of the Rights issue the Rights shares shall be credited to the demat accounts of the
allottees by way of corporate action mandatorily in demat form in a new (temporary) ISIN of the
company which is frozen for debit. This is so that securities cannot be transferred till such time
the shares are available for trading.

10.3.4 Merger/Amalgamation/Capital Reduction/Sub division etc

In case of merger/amalgamation, corporate actions of the securities under the ISIN of the
transferor company shall be debited and credit will be given in the ISIN of the transferee company
as per the applicable ratio. In case of listed companies credit is given in the temporary ISIN of the
transferee company which is frozen for debit. This is so that securities cannot be transferred till
such time the shares are available for trading.

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In case of Capital Reduction, a new ISIN will be created (may be with new face value or same face
value) and the securities shall be debited under the old ISIN i.e. the existing ISIN and credit is
given in the new ISIN as per the applicable ratio. In case of listed companies, credit is given in the
new (temporary) ISIN of the company which is frozen for debit. This is so that securities cannot
be transferred till such time the shares are available for trading.

In case of sub-division/consolidation, the face value of the securities undergoes a change. Thus a
new ISIN with the new face value will be obtained. Corporate action will be processed on the
record date as per the applicable ratio with credit being effected in the start of the next business
day. Securities will be debited in existing ISIN and credited in new ISIN.

In respect of bonus issues the eligible holders as on the record date fixed by the Company shall
be entitled to receive the bonus entitlement. The bonus shares in case of listed companies would
be credited as per the applicable ratio in the temporary ISIN of the company which is frozen for
debit. This is so that securities cannot be transferred till such time the shares are available for
trading. In case of unlisted companies, the same is credited to the normal ISIN.

Impact of Corporate Actions on SLB and Pool Balances

In case security balances are held in the Securities Lending and Borrowing/Pool Account of
Clearing Member, the securities will get debited/credited as per the appropriate predefined
ratio.

10.3.5 Rights of Pledgor/hypothecator

Ownership of the pledged/hypothecated securities remains with the pledgor (borrower) until the
pledge is invoked. Hence, all corporate benefits - cash and non-cash - like dividends, bonus, rights
etc., will accrue to the borrower. Dividends will be given to the borrower in the usual manner.
The securities arising out of corporate actions like bonus, share splits or consolidation or
exchange under a merger/acquisition scheme are credited to the account of the pledgor, with
pledge marked in favour of the pledgee, provided that on the execution date of the corporate
action, pledge exists for atleast one share.

10.3.6 Payment of Interest on Debt Securities

Eligible investors in debt securities will receive interest from the Issuers / its R&T Agents. In
respect of government securities, however, the depository distributes the interest to eligible
clients, after RBI has credited interest amount to the depositories account.

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10.4 Public Issue
The primary market provides the channel for raising funds from investors through sale of new
securities; the issuers of securities issue (create and sell) new securities in the primary market to
raise funds for investment and/or to discharge some obligation. The issue of securities in the
primary market can be made by a new company, a new company promoted by an existing
company, an existing public listed company, or an existing public unlisted company. They do so
either through public issues (initial public offer or follow on public offer) or private placement.
According to the Companies Act, 2013 every listed public company, making an initial offer of any
security of Rs. 10 crore and above has to issue it only in dematerialised form in accordance with
Depositories Act, 1996.

To encourage issue of securities in demat form, the SEBI has issued the following guidelines for
public issues in electronic mode:
 Issuer shall be required to enter into an agreement with all the depositories.
 In case of Public issues for Equity allotment is mandatory in demat form. In case of debt
securities, Issuer shall give an option to subscriber/investor to receive the physical certificates
or hold the securities in electronic mode with the depository.
 In order to eliminate the risks to investors on account of fake/forged certificates, bad
deliveries, delays in transfer, etc., trading in securities of company making an IPO shall be in
demat form only.

10.4.1 Public Issue Procedure

Allotment in public issues in respect of Equity is mandatory in demat form. To receive the
securities in electronic form, investor must open a demat account through any DP with any
depository before making an application. For this purpose, the application form should have
provision for investors to furnish their demat account number along with the following
information:
o Depository Name
o DP's Name
o DP-lD
o Beneficiary Account Number (BO ID)

The SEBI guidelines require that all public issues of the size of Rupees ten crores and above be
compulsorily made in demat form.

The disclosures and the instructions for exercising such an option is generally given in the
application form as well as in the offer document. Allotment in electronic form is given only when

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the client name and the beneficiary account are matched with details filled in the application
form. There are no charges for the allotment process. All the applications, whether with demat
option or not, are treated alike for allotment purposes.

On allotment, the Issuer / its R&T agent provides the details of successful allottees who have
opted for receiving securities in demat form, to the depository and the execution date when the
securities should be credited to the beneficial owner’s accounts. The depository will credit the
securities to the allottee accounts on the execution date and the Issuer / its R&T agent inform
the investors of the credit of securities in the electronic form by sending the allotment advice.
The statement of accounts provided by the Depository will indicate balances created in the
respective beneficiary owner's account. Figure 10.1 gives the process flow chart on an IPO
through the depository.

Role of DP in Public Issues

Investor intending to subscribe to a public issue can submit a completed Bid-cum-Application

form to a depository participant (whose name is mentioned on the website of the stock exchange
as eligible for this activity.
The DP will at the time of receipt of application give an acknowledgement to investor, by giving
the counterfoil or specifying the application number to the investor, as a proof of having accepted
the application form, in physical or electronic mode respectively.
After accepting the application form, respective DP shall capture and upload the relevant bid
details, in the electronic bidding system of stock exchanges.

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Figure 10.1: Process Flow of IPO through the depository
2. BO Id for
verification
Issuer / RTA Depository
3. Verification
report

4. Details of
allotments to BOs

5. Credits of
securities

6. Issuer send intimation

of allotment
Beneficial Owner

1. Application for allotment

10.4.2 Streamlining the Process of Public Issue of Equity Shares and convertibles
SEBI, in its endeavor to provide an efficient mechanism for raising funds, has been continuously
striving to streamline the process and methodologies associated with public issue fund raising
process. Towards this end, the time duration from issue closure to listing has been reduced from
12 working days to 6 working days with effect from January 01, 2016, making Application
Supported by Blocked Amount (ASBA) mechanism as the sole payment mechanism in public
issues.

As a part of the continuing efforts to further streamline the process, the use of Unified Payments
Interface (UPI) as a payment mechanism with Application Supported by Block Amount (ASBA) for
applications in public issues by retail individual investors through intermediaries (Syndicate
members, Registered Stock Brokers, Registrar and Transfer agent and Depository Participants)
has been introduced. The introduction of UPI as a payment mechanism, aims at increasing
efficiency, eliminating the need for manual intervention at various stages and reducing the time
duration from issue closure to listing by upto 3 working days.

Considering the time required for making necessary changes to the systems and to ensure
complete and smooth transition to UPI payment mechanism, the proposed alternate payment
mechanism and consequent reduction in timelines has been introduced in a phased manner as
under:

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Phase I: From January 01, 2019, the UPI mechanism for retail individual investors through
intermediaries has been made effective along with the existing process and existing timeline of
T+6 days.

Phase II: Thereafter, for applications by retail individual investors through intermediaries, the
existing process of physical movement of forms from intermediaries to Self-Certified Syndicate
Banks (SCSBs) for blocking of funds shall be discontinued and only the UPI mechanism with
existing timeline of T+6 days will continue, for a period of 3 months or floating of 5 main board
public issues, whichever is later.

Phase III: Subsequently, final reduced timeline will be made effective using the UPI mechanism.
10.4.3 Tender Offer

SEBI had issued circular No. CIR/CFD/POLICY CELL/1/2015 dated April 13, 2015 on Mechanism for
acquisition of shares through stock exchange mechanism pursuant to tender-offers for the
purpose of takeovers, buy back and delisting of securities.

1. The Clients (eligible shareholders) who wish to participate in the tender offers viz., buyback,
takeover and delisting offer of company will be required to mention the details as per the existing
process (as given below) while submitting delivery instructions slip (DIS) or electronic instructions
to the Participants.

 Execution Date
 Tender Offer Type (i.e. Market Type)
 Event Number (i.e., Settlement Number)
 CM BP ID
 ISIN
 Quantity

2. Participant will continue to submit or upload the delivery instructions in NSDL system as per
existing process.
3. Upon submission of the delivery instruction in respect of tender offer in eDPM system, if
sufficient balance is available in the demat account of the client, requisite quantity will be blocked
in the demat account of the client in favour of respective Clearing Corporation based on the
market type and settlement number of tender offer. The target account of ‘Clearing Member’
which is specified in the DIS and entered in the eDPM system will be used to track that the
transaction is pertaining to the respective Clearing Member whose CM-BP-ID is specified.

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4. Upon receipt of inter-depository instruction in respect of tender offer where the target
account in NSDL system is a Clearing Member Pool Account, the shares will be automatically
transferred to the Clearing Corporation.
5. As per the new process, Clearing Members will not be required to submit any instructions i.e.
neither physical DIS or electronic instructions to the Participants for executing Irreversible
Delivery Out (i.e. early Pay-in) instructions in favour of Clearing Corporation, as was done
previously.
6. In order to submit the request of Client for participating in the tender offer, brokers are
required to place the order at the exchange system during the tendering period. For more
information, Brokers / Clearing Members may refer the guidelines issued by respective stock
exchanges / clearing corporations.
7. The aforesaid tender offer instruction executed from demat account of the client will be the
irreversible nature instructions.
8. Participant will not be able to cancel the tender offer instructions executed in the depository
system and that are in the status “Instruction Ready for Settlement”. However, tender offer
instruction which is in the status “Overdue” or “Future Dated” can be cancelled by the
Participant.

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Review Questions

Questions to assess your learning:

1. Which of the following is a "Cash Corporate Actions"?

(a) Corporate Benefits
(b) Dividend
(c) Rights
(d) Bonus

2. Record Date for a Corporate Action is announced by:

(a) Exchanges
(b) Issuers
(c) Depository
(d) Shareholders

3. Issuer shall be required to enter into agreement with all the _______________ before coming
out with a public offer.
(a) Depositories
(b) Depository Participants
(c) Investors
(d) SEBI

4. The securities offered in the public offer can only be traded in the stock exchange in demat
form?
(a) True
(b) False

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CHAPTER 11: Special Services - Debt Instruments & Government Securities

LEARNING OBJECTIVES:

After studying this chapter, you should know about dematerialisation, settlement and
redemption process for:

 Certificate of Deposits
 Commercial Papers
 Government Securities

11.1 Introduction

A Debt Security is a written agreement to repay a loan, usually with interest, within a given time
frame. A Debt Security is also referred to as a Debt Instrument. Depending on features like Issuer,
tenure, interest rate, etc., debt instruments can be classified into different categories like bonds,
debentures, commercial paper, government securities, treasury bills, etc. These are further
classified broadly into subordinate bonds, floating rate bond/debenture, deep discount bond,
secured/unsecured debentures, zero coupon bonds, variable coupon rate bond, etc. While
financial institutions or corporate bodies issue bonds, debentures and commercial paper,
government securities and treasury bills are issued by governments - State or Central.

The features associated with a debt instrument differentiate it from other instruments. These
include coupon/interest rate, redemption/maturity date secured or unsecured put/call option (if
any). An Issuer may issue multiple debt instruments by varying the features of the instruments.
Any type of debt instrument can be admitted in the depository system. Instruments like bonds,
debentures, commercial paper, certificates of deposit, etc., irrespective whether they are
listed/unlisted/privately placed or even issued to a single holder, can be dematerialised.

Identification
Each debt security is given a unique identification in the depository system, which is linked to the
special features of the security, through an ISIN and a descriptor. Each instrument is identified
separately in the system through a unique code called ISIN. The description of each instrument
is communicated / available to all the DPs and Issuers / RTAs through circulars / reports.

Instrument Descriptor
The instrument descriptor in the depository system indicates:
• Name of the Issuer

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• Coupon/Interest Rate
• Security name
• Redemption date
• Face Value
For example, the descriptor 'ICICI BANK LIMITED SR-B98 14.25 UMD 14FB05 FVRS1LAC’ indicates:
Issuer Name: ICICI Bank Limited
Coupon Rate: 14.25percent
Instrument Name: Series B98 UMD
Redemption date: 14/02/2005
Face Value: Rs. 1,00,000

In addition to this the depository forwards the complete details of the instrument to all
Depository Participants vide circulars.

Admission of Debt Instrument to the Depository System

An Issuer may offer demat facility for its debt instruments by sending a request to the
depositories detailing the type of instrument, along with a Letter of Intent. On receipt of the
request, a tripartite agreement is signed between the depository, the Issuer and Registrar &
Transfer Agent. Once admitted, these securities are made available for dematerialisation by the
depository.

Mode of Operation
The manner of operation of debt instrument in the depository is identical to that which is
followed for the equity segment. The only difference is that a debt instrument has a limited life.

Key features
• Identification of right ISIN while processing demat/remat requests: Debt instruments can
have exactly the same features. But they are differentiated either by a different coupon rate
or redemption date or put/call exercise date or interest payment schedule or by being
secured / unsecured.

• Differentiating between the Letter of Allotment (LOA) and Debenture Certificates: On issue of
secured debentures, the Issuer initially allots LOA till the charges are created. On creation of
the charge, debenture certificates are issued in lieu of the LOA. The depository allots the ISIN
to a LOA. On creation of charge, the nomenclature of ISIN of LOA is changed to that of a
debenture.

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 For e.g. Descriptor for LOA ISIN - KMPL 9.5 LOA 29DC05 FVRS1LAC is changed to KMPL 9.5
NCD 29DC05 FVRS1LAC LOA UPTO 23MR05.

• Time value of money: Debt instruments bear interest. Receiving the credit of a debt
instrument into demat account a day earlier, will result in earning one-day interest.
Therefore, the execution date is crucial while executing any transfer instruction for debt
instrument.

• Redemption date: On redemption, the ISIN associated with the instrument is de-activated in
the depository system.

Allotment in Demat Form

Any new instrument can be issued directly in dematerialised form. Securities will be directly
credited into the accounts of the investor by the depository on receipt of allotment details from
Issuer/ Registrar & Transfer Agent.

Corporate Action
Interest payment for debt instruments is handled in the same way as corporate benefits are
handled for equity. Issuer will send interest warrant directly to the investor.

Instruments with Call/Put Option in Demat Form

Call option, in simple terms, means the Issuer has an option of repaying the debt raised through
the instrument at a time earlier than the final redemption date. Put option, in simple terms,
means investor has an option of demanding repayment on the debt instrument at a time earlier
than the final redemption date. Exercising of call/put option only prepones the redemption date
of an instrument. If a company exercises a call option, the procedure followed is the same as one
followed in normal redemption. On fulfilling the procedure prescribed, Issuer will send the
redemption proceeds to the investor directly.

Investors in Demat Debt Instruments

The depositories have no restriction on existing accounts being used for demat of debt
instruments. It depends upon the convenience of investors whether they want to open a separate
account for debt instruments. The procedure for dematerialisation of debt instrument is same as
that for equity shares. In order to dematerialize the certificates; an investor has to open an
account with a DP. He then requests for the dematerialisation of certificates by filling up a
dematerialisation request form (DRF), which is available with DP and submits it along with the
physical certificates. The investor has to ensure that before the certificates are handed over to
the DP for demat, they are marked as "submitted for dematerialisation". A DP does not provide

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a separate Transaction Statement for debt instruments. A single transaction statement reflects
all the holdings and transactions in a particular account, irrespective of the type of instrument.

11.2 Certificate of Deposit (CD)

The investor has the choice of holding Certificate of Deposit (CD) in a separate account or all its
holdings in one account. The minimum size to be subscribed/ transacted by investor through the
depository system is Rs. 1 lakh.

Dematerialisation
The procedure for dematerialisation of CD is same as that carried out for equity shares. The client
will submit a request to the DP, in the DRF, along with the original CD certificate/s to be
dematerialised. Before submission, the client/holder has to write on the reverse of the 'CD'
(certificate/s) in the space provided for endorsement followed by signature of authorised official
of holder;

"SURRENDERED FOR DEMATERIALISATION and credit to my/our demat ACCOUNT. (Account

number) with (DP) name /-------- number.

The DP would give an acknowledgement (DRF acknowledgement portion) to its client confirming
the acceptance of the CD for dematerialisation. Only those CD, which have been made available
for dematerialisation by its issuer, can be dematerialised. Direct allotment of Certificates of
Deposit can be made in dematerialised form. The procedure followed is identical to that followed
for direct credit of equity shares during IPO/ Bonus/ Rights. Investors will have to provide demat
account number alongwith DP ID to the Issuer.

Settlement
The seller authorizes its DP through Delivery Instructions to debit his account and transfer the
security into the account of Buyer who may have opened account with the same or any other DP.
Buyer receives the said securities in its account immediately if the buyer has given one-time
standing instruction to its DP. Settlement of funds between the parties is settled outside the
depository.

Redemption
CD’s will be extinguished directly from the beneficial owner accounts of Investors through
corporate action for the purpose of redemption. As per the RBI Monetary and Credit Policy of
2002-03, effective June 30, 2002, banks and FIs require to issue CDs only in the dematerialised
form.

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11.3 Commercial Paper (CP)

An investor can subscribe to minimum of Rs. 5,00,000 or multiples thereof, as the face value of a
Commercial Paper in the depository system is taken as Rs. 5,00,000. The securities (CP) will be
credited in the investor's account in terms of units. For eg. If the investor invests 5 crore issue in
a CP issue, then 100 units will be credited to his account. The investor has the choice of holding
Commercial Paper in a separate account or all its holdings in one account.

Dematerialisation
For dematerialisation of CP, the client has to submit the CP alongwith demat request form (which
is available with DP) to the DP. Only those commercial papers, which have been made available
for dematerialisation by its Issuer, can be dematerialised. After dematerialisation, the transaction
statement, received periodically by the client, will reflect all credits in a particular account
irrespective of type of instrument. Allotment of Commercial Paper can be made directly in
dematerialised form. Investors will have to provide demat account number along-with DP ID to
the Issuer. Issuer will provide these details to the Issuing & Paying Agent (IPA). The Issuer will
provide the details of the IPA certificate and other documents required by the depository to
credit the IPAs CP allotment account one day prior to the value day. On the allotment date, the
IPA can transfer the securities from its allotment account to the subscribers account.

Settlement
Buyer and seller decide upon price and quantity of securities to be transacted. The seller
authorizes its DP through delivery instructions to debit his account and transfer the securities
into the account of Buyer who may have opened account with the same or any other DP. Buyer
receives the securities in its account immediately if the buyer has provided standing instruction
to its DP. Settlement of funds is between the parties and is as per their mutual convenience.

Redemption
As per the Reserve Bank of India (RBI) Commercial Paper Directions, 2017 issued by RBI on August
10, 2017 and Operational guidelines on Commercial Paper issued by Fixed Income Money Market
and Derivatives Association of India (FIMMDA) on October 5, 2017, for redemption of commercial
paper, investors will no longer be required to transfer commercial paper held in their beneficial
owner accounts to Issuing and Paying Agents (IPAs) Redemption account. Commercial Papers will
be extinguished directly from the beneficial owner accounts of Investors through corporate
action for the purpose of redemption.

For all secondary market transactions, the seller will forward the copy of IPA certificate to the
buyer.

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As per the RBI Monetary and Credit Policy 2001-02, effective June 30, 2001, banks, financial
institutions (FIs), primary dealers (PDs) and satellite dealers (SDs) are permitted to make fresh
investments and hold CP only in dematerialised form and outstanding investments in scrip form
should also be converted into demat by October, 2001.

For any buying or selling of demat debt instruments, the procedures involved for delivery or
receipt of debt instrument is the same as that involved for equity shares.

11.4 Government Securities

Government security means a security created and issued by the Central Government or a State
Government for the purpose of raising a public loan. There are two types of Government
Securities, Dated Securities and Treasury Bills. Dated Securities have a maturity period of more
than one year. Treasury Bills have a maturity period of up to one year. All the activities relating
to issue of government securities (G-Secs) - issue management, settlement of trade, distribution
of interest and redemption - are handled by the Reserve Bank of India through its Public Debt
Office (PDO).

Although only corporate and institutional investors subscribe to government securities,

individual investors have also been permitted to subscribe to these securities. An investor in
government securities has the option to have securities issued either in physical form or in book-
entry form (commonly known as SGL form). There are two types of SGL facilities, viz., SGL-1 and
SGL-2.

In the SGL-1 facility, the account is opened with the RBI directly. Only entities, which fulfill all the
eligibility criteria prescribed by RBI, are permitted to open SGL-1 account. SGL-1 facility can be
used only for own investments of the account holder. Any entity, which is permitted to open SGL-
1 account, may avail of SGL-2 facility as well. However, SGL-2 facility is to be used to keep
accounts of the constituent investors. In other words, SGL-2 is used to route investments of
clients who are not eligible to directly open SGL-1 accounts. The entity which offers SGL-2 facility,
has to keep sub-accounts for each investor separately in its books; SGL-2 account with RBI will
show the consolidated balances of all account holders.

11.4.1 Specific Features of Dealings in Government Securities

Account Opening

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The depositories in India have been given permission to maintain SGL accounts, of investors
through its DPs. Any client account opened with a DP may be used for dealing in government
securities. Thus, equity shares, mutual fund units and G-Secs can be dealt with through a single
account.

Dematerialisation of Government Securities

Government securities, like other securities, may be held either in physical form or as electronic
entries in an SGL account. They are held in the depository system,
i. on account of dematerialisation of physical securities; or
ii. on account of transfer from SGL accounts maintained by other eligible entities; or
iii. on fresh issue of securities in dematerialised form.

Dematerialisation of Physical Certificates

The physical certificates are registered in the name of the holder with any one of the PDOs of
RBI. The DP will accept request for dematerialisation from registered holders only. Requests for
partial dematerialisation of a certificate are not entertained. The client has to submit a request
to the DP in the DRF for G-Secs (DRF-GS) along with following documents37:
1. Physical certificates of securities to be dematerialised.
2. Form of Transfer38. The DP ensures that the client has filled the following on the DRF-GS:
a) Option exercised as 'Submitting Physical G-Sec to ………. (depository name)'
b) Account No.
c) Account Holder Name
d) Name of the Security
e) Face Value of Securities to be Dematerialised (in words and Figures)
f) Certificate Number
Some of the details as mentioned above may not be required by both the depositories.
ISIN number for a G-sec can be determined by relating the security description available on the
physical certificate with ISIN description given by the depository. The following information is
available on physical certificates:
• Nomenclature (Description) of the stock, e.g., 13.85percent Government Stock 2001
• Book Debt Certificate No., e.g., BY34 (BY stands for issuing office Bombay)
• Face Value
• Date of redemption

37 However, the specification on the form need not be same for all the depositories, such as in case of CDSL, the DRF is the same
for G-Sec as used for other securities.
38 RBI prescribed form to effect transfer of securities held in physical form. The DP ensures that the Form of Transfer is printed

on a single sheet of semi security paper. The form can be obtained from the concerned depository through e-mail. Requests for
partial dematerialisation of a certificate are not entertained.

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 • Date of Issue
• Name of Holder

The DP scrutinizes the form of transfer, the DRF-GS and the certificates which involves the
following:

 Compare the order of holders' names on DRF-GS and certificates with the client account.
 Whether the certificate details mentioned on the DRF and the physical certificates
enclosed tally.
 Verification of client's signature on the DRF with the specimen signature recorded by the
DP during the account opening.
 In case of Trusts and Corporate Bodies, DP shall ensure the registration number of the
signatories in the form of transfer is mentioned. Any signature difference may result in
rejection of the transfer by RBI.
 ISIN
 Security descriptor
 Whether Face value as mentioned in DRF-GS tallies with what is mentioned on the
Certificates

Box 11.1: ISIN

The DP captures the demat request for the G-sec if the ISIN already exists in the depository
system. If the ISIN for that specific G-Sec has not been activated, the DP informs the G-Sec cell of
the depository by faxing a standard letter along with a photocopy of the certificate or the SGL
credit advice. Based on this communication, ISIN is generated and activated in the depository
system. The DP ensures that in case of different Loan Codes the Clients submit separate DRF-GS
and Form of Transfer. If the certificate numbers of the stock are in consecutive order for a single
Loan Code, a single Form of Transfer may be used.

On receipt of the certificates, the DP ascertains whether PDO Mumbai or any other PDO has
issued the certificates submitted for dematerialisation. In case of certificates issued by a PDO
outside Mumbai, the DP will accept them provided the Form of Transfer has been attested by
the respective PDOs. On finding the forms and security count in order, the DP issues an
acknowledgement slip duly signed and stamped to the client. In case the certificates are
mutilated, or they are defaced in such a way that the material information is not readable, the
DP does not accept the certificates for dematerialisation.

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The DP fills details on the DRF-GS pertaining to ISIN and Loan Code. The DP has to ensure that
the ISIN and Loan code are verified at two levels. After verification, the dematerialisation request
is entered in the DP system. The DP must ensure that number of the security is entered in the
quantity field in the DP system. A dematerialisation request number (DRN) will be generated by
the system which has to be entered in the space provided for the purpose in the DRF-GS. A person
other than the person who entered the data should verify details entered in the system for the
DRN. The DP then releases the request to depository module.

The DP has to endorse on the reverse of the certificate by writing 'Tendered for Cancellation and
credit to SGL A/c No. _____________, Mumbai'. The DP is instructed not to punch holes on the
face of G-Secs. This is unlike the procedure for forwarding other securities to the
respective R&T. The DP has to despatch the certificates along with the request form after duly
authenticating the DRF-GS to the depository, within seven working days of accepting them from
the client. The depository fills-in and signs the relevant portion of the Form of Transfer and
submit the documents to RBI for credit in the SGL-2 account of the depository. On receiving the
necessary confirmation from RBI, the depository confirms acceptance of the request for
dematerialisation. The DP informs the client, of the changes in the client's account following the
confirmation of the request. During the ‘shut period’ applicable to Government securities, RBI
will not register transfer of securities during this period. Therefore, dematerialisation requests
entertained during shut period may take long time to get confirmed.

Objections for demat of Government Securities

The depository acts as a R&T Agent and discharges RTA functions for G-Secs. On receipt of
physical certificates with the DRF-GS and the form of transfer, the G-Sec cell of the depository
matches the details provided in the DRF-GS with the electronic message received by the
depository’s system. In case of a mismatch, the depositories G-Sec cell sends a letter/fax to the
DP intimating them of the mismatch, seeking necessary clarification/documentation from the DP.
The DRN is kept pending till such rectification is obtained. The DP does not generate a fresh
request in the system until it receives electronic intimation of rejection.

The depository’s G-Sec cell also rejects the dematerialisation requests in case RBI rejects the
transfer on account of signature mismatch or in case the signatories are not registered with RBI.
In such cases, the DP intimates the client of rejection by letter/fax along with the rejection memo
sent by the depository's G-Sec cell.

Procedure for Transferring Government Securities in SGL Form to Depository account

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An investor may be holding balances with any other entity in a book entry form (SGL I or II) which
the investor may like to transfer into the depository’s account. Even this process is handled
through dematerialisation module of the depository. The client has to submit a request (DRF-GS)
along with a SGL credit advice and a request letter for ‘Value free transfer’.

The DP must ensure that the client has filled the following details in the DRF-GS including:
• Entered the option exercised as "Transfer of SGL securities to ……..(depository name)" (Not
applicable to CDSL)
• Account No.
• Account Holder Name
• Name of the Security
• Face Value of Securities to be Transferred (in words and Figures)
It may be noted here, that each depository may have its own specific requirement details apart
from the ones, which have been mentioned above.

The DP should ensure that the SGL account from where the BO wishes to transfer securities to
depository’s SGL account is registered with PDO at RBI, Mumbai. This is ascertained by examining
the prefix to the SGL account number that shall begin with the prefix "BY". The DP has to fill in
details of ISIN and Loan Code on the DRF-GS. If the documents are in order, the DP issues an
acknowledgement slip duly signed and stamped to the client.

The DP scrutinizes the document / letter of authority (as may be specified by the depositories)
and the DRF-GS which involves the following:
• Verification of Clients signature or of the authorised signatory in case of corporates on the
DRF-GS with the specimen signature recorded with the DP. If the signature differs, the DP
should satisfy himself of the identity of the client.
• Compare the order of holders' names on DRF-GS with the Client account.
• Loan code and Face Value mentioned in the DRF-GS.
• The DP shall scrutinise that in case of different ISIN/Loan Codes separate DRF-GS is submitted
by the Clients.
• The DP shall also ensure that the ISIN and Loan code are verified at two levels. After
verification, the DRF-GS is entered in the depository system.
• DP must ensure that number of securities is entered in the quantity field in the depository
system.
• A DRN will be generated by the system. The DRN so generated is entered in the space
provided for the purpose in the DRF-GS.
• A person other than the person who entered the data should verify details entered in the
system for the DRN. The request is then released to Depository software system by the DP.

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• The DP will fill the relevant portion viz., the authorisation portion of the request form.
• The DP will despatch the DRF-GS along with the other documents within seven working days
of accepting the same from client to the Depository G- Sec Cell.
• On receipt of the documents the request is initiated in the RBI E Kuber system by the SGL
party and intimated to the depository.
• The depository shall then confirm the request in the
RBI E Kuber system post which the balances shall be credited in the CSGL account of the
depository.
• The demat request is then confirmed in the depository system and the electronic balances
are credited to the demat account of the holder.
• The DP may inform the client of the changes in the client's account following the confirmation
of the request.
 RBI will not register transfer of securities during the ‘Shut Period’. Therefore,
dematerialisation requests entertained during shut period may take long time to get
confirmed.

Settlement of Depository Trades

Procedure for transfer of government securities within the depository is exactly similar to that of
transfer of equity shares.

Settlement of RBI Trades39

Procedure for purchase or sale of government securities when the counter party has government
security balances in book entry form with any other SGL entity may involve the following steps
as listed below.

Purchase by Depository Client

In case of purchase of government securities by a depository client from a seller holding securities
in an SGL account with other eligible entity, the buying client should submit inter-SGL trade
purchase instructions in the prescribed format to the DP. The client should also make necessary
funds available to the depository for the purchase of these securities. The DP, on the basis of the
purchase instruction form, executes a dematerialisation instruction for the quantity of security
purchased, at least one day prior to the day of trade settlement at RBI. The DP should also
forward the purchase instruction form to the depository. On the basis of the documents received

39 This facility is not enabled at CDSL.

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from the DP, the depository executes the designated form and submits it to RBI for settlement.
On settlement day, the RBI credits the SGL-2 account of the depository and debit its current
account for funds. On receiving information about crediting of securities from RBI the depository
confirms the receipt of securities to the client.

Sale by Depository Client

In case of sale of government securities by a depository client to a buyer who maintains an SGL
account with other eligible entity, the selling client should submit Inter-SGL Trade Sale Instruction
in the prescribed format to the DP. The DP, on the basis of the sale instruction form, executes a
rematerialisation instruction for the quantity of security sold, at least one day prior to the day of
trade settlement at RBI. The DP also forwards the sale instruction form to the Depository. On the
basis of the documents received from the DP, the depository executes the designated form and
submits it to RBI for settlement. On settlement day, the RBI debits the SGL-2 account of the
depository and credits its current account for purchase consideration. The depository credits the
current account of the DP with the sale consideration and intimates the DP accordingly. The DP,
on receiving the intimation, credits the amount to the account of the client.

A facility is made available to demat account holders of bank Participants who are SGL Account
Holders and direct members of NDS-OM and CCIL. With this, retail individual investors holding
Demat Accounts with bank Participants will be able to purchase or sell government securities
through the NDS-OM system. So far, access for trading in secondary market on NDS-OM was
limited to only those maintaining SGL/CSGL accounts. These new guidelines will now facilitate
efficient access for retail investors holding demat accounts to the government securities market
and encourage retail participation. To make it easier for retail investors to trade, NSDL has also
integrated NDS-OM web module with its e-services facility. It allows the bank Participants to
make available web trading facility to investors so that investors can directly trade online in
government securities using the web module of NDS-OM and their existing NSDL demat account.

11.4.2 Inter-Depository Transfers for Government Securities (GSec)

Inter Depository Transfers (between Constituent Subsidiary General Ledger Accounts of

depositories) shall be eligible for Value Free Transfer (VFT) if such transfers are arising out of
trades in exchanges between demat account holders of different depositories. In such case,
depositories shall put in place suitable mechanisms to ensure, the bonafide nature of these
transfers before effecting the VFT. 40 The IDTs of Government Securities is applicable for Central

40
RBI Circular No. RBI/2018-19/78 IDMD.CDD.No.1241/11.02.001/2018-19 dated November 16, 2018.

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Government Securities, State Development Loans, Treasury Bills and Sovereign Gold Bonds
issued by RBI on behalf of Central and State Governments.
The NSDL participants are required to obtain a one-time self-declaration from the demat account
holders that the transactions involved is a bonafide transfer instruction before executing IDT
instructions in Government Securities in their demat accounts. Participant shall verify the
declaration before execution of every IDT instruction by retrieving such confirmation from its
records. IDT of Government Securities would be allowed only in the demat accounts that have
one-time self-declaration flag enabled. NSDL DPM allow market transfers for Government
Securities between the Depositories through the “Inter Depository Transfer” module.
In case of CDSL, the current Market type and Settlement details in respect of Corporate Bond
settlement is applicable for IDT of Government Securities. The IDT in Government Securities
except Sovereign Gold Bonds (SGB) is permitted only for aforesaid market type and settlement
details. In case of SGB, IDT will be permitted for any market type and settlement details. IDT for
Central Government Securities, State Development Loans and Treasury Bills will be permitted for
the minimum quantity of 100 units or multiple thereof. However, this restriction will not be
applicable for Sovereign Gold Bonds. IDT in Sovereign Gold Bonds will be permitted for minimum
quantity of one unit.
Inter depository debit transactions of G-Sec would be allowed for only those clients whose One
Time Self Declaration stating that the transactions executed in his / her demat account are
bonafide transactions and is obtained by the DP through electronic / physical mode and recorded
in CDSL system.
For transfer of G-Sec via IDT (Only On-market transactions), the deadline time is as follows.
Deadline time Deadline time for Depository
for Participants Participants to deadline time for
to verify & verify & processing of IDT
Transaction
Batch release G-Sec IDT release G-Sec IDT delivery/receipt
Days
delivery/receipt delivery/receipt instructions
instructions instructions received from
through CDAS EASIEST Participants
I Batch 12:00 Noon 11:55 AM 12:15 PM
On weekdays
II Batch 03.00 PM 02.55 PM 03.15 PM
(i.e. Monday
III Batch / Final
to Friday 05.00 PM 04.55 PM 05.15 PM
Batch
On 1st, 3rd
and 5th Final Batch 01.30 PM 01.25 PM 01.45 PM
Saturday

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RBI circular also requires Participants to ensure board approved risk management processes and
audit oversight are applied before transactions in Government Securities are accepted and
confirm the same to depositories. The participants are required to report compliance of the
same.

11.4.3 Corporate Benefits with respect to Government Securities

DP must ensure that changes in the beneficial owner's accounts, such as change in bank details,
change of address, etc., are updated well in advance of the due date of interest payment and/or
redemption payment due date. The depository should distribute the interest to clients who have
balances in government securities, on which interest payment is due, before the EOD of the
interest payment due date, after RBI has been made it available to the depository. The depository
pays the redemption amount to clients who have balances in government securities, due for
redemption, before the EOD of the redemption due date, after the redemption amount has been
made available to depository by RBI. The depository makes the payment directly to the clients or
to the bank account of the clients as per the instructions received from the clients.

11.4.4 Rematerialisation of Government Securities

Conversion of securities in Depositories SGL II to Physical Securities

An investor in government securities holding electronic balances in the depositories SGL-2
account can convert them into physical certificates or to book entry form by the process of
rematerialisation. For this, an application has to be made to the depository, through the DP, in
the Rematerialisation Request Form (RRF-GS). On receipt of the RRF-GS, the DP checks the form
for completeness, correctness and validity. The DP should also ensure that sufficient free security
balance is available in the account of the client. If the form is found to be in order and there is
sufficient balance, the DP accepts the RRF-GS and blocks the balance of the client to the extent
of the requested quantity and intimates the request to the depository. On receipt of such
request, the depository blocks the balance of the client in depository system to the extent of
quantity sought to be rematerialised. The DP should forward the RRF-GS to the depository within
seven days of accepting such request from the client. The depository should forward the
rematerialisation request to RBI in the prescribed form in case physical certificate is required by
the client.
On receipt of the debit confirmation from RBI, the depositories confirm the acceptance of RRF-
GS and forward the physical certificates along with the form of transfer to the client directly. In
case the request was for transfer to an SGL account with other eligible entity, the depository
should confirm the acceptance of RRF to the DP, after obtaining approval from RBI. On receipt of
such confirmation from RBI, the depository removes the balance from the client's account. The
DP then informs the client accordingly.

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Objections by Depositories Shareholders System for G-SECs

The depositories G-Sec cell, on receipt of the RRF-GS, matches the Rematerialisation Request
Number given on the RRF-GS with the electronic message received by the depository’s system
linked to its shareholders system. In case of a mismatch, the depositories G-Sec’s cell will send a
letter/fax to the DP intimating them of the mismatch. The DP has to resolve the mismatch.

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Review Questions

Questions to assess your learning:

1. Who resolves the mismatch during rematerialisation of government securities?

(a) Depository Participant
(b) Depositories G-Sec cell
(c) SEBI
(d) RBI

2. State whether the statement is true or false: An investor in government securities holding
electronic balances in the depositories SGL-1 account can convert them into physical
certificates by the process of rematerialisation.
(a) False
(b) True

3. RBI does not register transfer of securities during ________.

(a) Closure Period
(b) Shut Period
(c) Lock Period
(d) Enclose Period

4. What is the maturity period of Treasury Bills?

(a) Upto One year
(b) Upto 3 months
(c) Upto 6 months
(d) More than 10 years

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CHAPTER 12: Foreign Portfolio Investors (FPI)

LEARNING OBJECTIVES:

After studying this chapter, you should know about:

 The concept of Foreign Portfolio Investors

 Eligibility criteria for a Foreign Portfolio Investor applying for a Depository
Participant.

12.1 Introduction

SEBI had issued the notification viz. FPI Regulations, 2014 on January 7, 2014 to put in place a
framework for registration and procedures with regard to foreign investors who propose to make
portfolio investment in India and vide its Circular No. CIR/IMD/FIIC/02/2014 dated January 8,
2014 issued the operational guidelines for Designated Depository Participants (DDPs) in respect
of FPI regime. Subsequently, FPI regime commenced in India from June 1, 2014.

FPI regime offer a single route to various class of foreign investors viz., FIIs, Sub Accounts & QFIs
under portfolio investment scheme to converge into one class of foreign investor viz., Foreign
Portfolio Investor (FPI). DDPs will do the registration of FPI and will carry out the necessary due
diligence process and issue registration certificate to the FPI. All existing FIIs, Sub Accounts & QFIs
are deemed to be FPIs from June 1, 2014.

No person shall buy, sell or otherwise deal in securities as a foreign portfolio investor unless it
has obtained a certificate granted by the designated depository participant on behalf of the
Board. An application for the grant of certificate as foreign portfolio investor shall be made to
the designated depository participant in prescribed forms and shall be accompanied by the fee
as specified in the regulations.

12.2 Eligibility criteria of FPI applying for a Depository Participant

The designated depository participant shall not consider an application for grant of certificate of
registration as a foreign portfolio investor unless the applicant satisfies the following conditions
namely, -
a. the applicant is a person not resident in India;

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b. the applicant is resident of a country whose securities market regulator is a signatory to
International Organisation of Securities Commission’s Multilateral Memorandum of
Understanding or a signatory to bilateral Memorandum of Understanding with SEBI;
c. the applicant being a bank, is a resident of a country whose central bank is a member of Bank
for International Settlements (BIS);
d. the applicant is not resident in a country identified in the public statement of Financial Action
Task Force (FATF) as:
1. a jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of
Terrorism deficiencies to which counter measures apply; or
2. a jurisdiction that has not made sufficient progress in addressing the deficiencies or has
not committed to an action plan developed with the Financial Action Task Force to
address the deficiencies;
e. the applicant is not a non-resident Indian;
f. the applicant is legally permitted to invest in securities outside the country of its
incorporation or establishment or place of business;
g. the applicant is authorised by its Memorandum of Association and Articles of Association or
equivalent document(s) or the agreement to invest on its own behalf or on behalf of its
clients;
h. the applicant has sufficient experience, good track record, is professionally competent,
financially sound and has a generally good reputation of fairness and integrity;
i. the grant of certificate to the applicant is in the interest of the development of the securities
market;
j. the applicant is a fit and proper person based on the criteria specified in Schedule II of the
Securities and Exchange Board of India (Intermediaries) Regulations, 2008; and
k. any other criteria specified by the Board from time to time.

Categories of foreign portfolio investor:

An applicant shall seek registration as a foreign portfolio investor in one of the categories
mentioned below or any other category as may be specified by SEBI from time to time:
(a) `Category I foreign portfolio investor’ which shall include Government and Government
related investors such as Central Banks, Governmental agencies, Sovereign Wealth Funds and
international or multilateral organisations or agencies;
(b) "Category II foreign portfolio investor" which shall include:
(i) appropriately regulated broad based funds such as mutual funds, investment trusts,
insurance/reinsurance companies;
(ii) appropriately regulated persons such as banks, asset management companies,
investment managers/ advisors, portfolio managers;

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(iii) broad based funds that are not appropriately regulated but whose investment manager is
appropriately regulated. However, the investment manager of such a broad based fund should
itself be registered as Category II foreign portfolio investor. Also, the investment manager should
undertake that it shall be responsible and liable for all acts of commission and omission of all its
underlying broad based funds and other deeds and things done by such broad based funds under
these regulations.
(iv) university funds and pension funds; and
(v) university related endowments already registered with the SEBI as foreign institutional
investors or sub-accounts. The applicant seeking registration as an FPI shall be considered to be
`appropriately regulated ‘, if it is regulated or supervised by the securities market regulator or
the banking regulator of the concerned foreign jurisdiction, in the same capacity in which it
proposes to make investments in India. Further, the `broad based fund’ shall mean a fund,
established or incorporated outside India, which has at least twenty investors, with no investor
holding more than 49 percent of the shares or units of the fund. If the broad based fund has an
institutional investor who holds more than 49 percent of the shares or units in the fund, then
such institutional investor must itself be a broad based fund. For ascertaining the number of
investors in a fund, direct investors as well as underlying investors shall be considered. In this
respect, it should be noted that only investors of entities which have been set up for the sole
purpose of pooling funds and making investments, shall be considered for the purpose of
determining underlying investors.

(c) "Category III foreign portfolio investor" which shall include all others not eligible under
Category I and II foreign portfolio investors such as endowments, charitable societies, charitable
trusts, foundations, corporate bodies, trusts, individuals and family offices.

Eligibility criteria of Designated Depository Participant.

(1) SEBI shall not consider an application for the grant of approval as designated depository
participant unless the applicant satisfies the following conditions, namely:
(a) the applicant is a participant registered with SEBI;
(b) the applicant is a custodian of securities registered with SEBI;
(c) the applicant is an Authorised Dealer Category-1 bank authorised by the Reserve Bank
of India;
(d) the applicant has multinational presence either through its branches or through
agency relationships with intermediaries regulated in their respective home jurisdictions;
(e) the applicant has systems and procedures to comply with the requirements of
Financial Action Task Force Standards, Prevention of Money Laundering Act, 2002, Rules
prescribed thereunder and the circulars issued from time to time by the Board;

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 (f) the applicant is a fit and proper person based on the criteria specified in Schedule II of
the Securities and Exchange Board of India (Intermediaries) Regulations, 2008; and
(g) any other criteria specified by SEBI from time to time.

Other than the above stated criteria, SEBI may also consider an application from a global bank,
regulated in its home jurisdiction, for grant of approval to act as designated depository
participant, if it is satisfied that it has sufficient experience in providing custodial services and the
grant of such approval is in the interest of the development of the securities market. However,
that global bank should be registered with the SEBI as a participant, custodian of securities, and
shall have tie up with Authorised Dealer Category-1 bank.

Engagement of Designated Depository Participant (DPP)

Each FPI shall engage a DDP before making investment in Indian securities market. At all times
the DDP and the Custodian of Securities (Custodian) of the FPI shall be the same entity.

SEBI circular No. CIR/IMD/FPIC/123/2016 dated November 17, 2016 regarding revised
Requirement for copy of PAN Card to open accounts of FPIs. Extract of aforesaid SEBI Circular is
given below: “Based on representations received from stakeholders and to further ease the
PAN verification process at the time of account opening of FPIs, it is decided that the
intermediaries can verify the PAN of FPIs online from website authorised by Income Tax
department at the time of account opening for FPIs. However, FPIs need to provide the copy of
PAN card within 60 days of account opening or before remitting funds out of India, whichever is
earlier to their intermediaries.”

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Review Questions

1. The Designated Depository Participant and the _____________________ of the Foreign

Portfolio Investor (FPP) shall be the same entity.
(a) Stock Broker
(b) Custodian of the Securities
(c) Banker
(d) R&T Agents

2. Which of the following conditions are required to be met for becoming Designated
Depository Participant?
(a) The applicant shall have multinational presence either through its branches or through
agency relationships with intermediaries regulated in their respective home jurisdictions.
(b) The applicant should be an Authorised Dealer Category-1 bank authorised by RBI.
(c) The applicant should be a custodian of securities registered with the Board
(d) All of the above

3. A resident Indian can also be a Foreign Portfolio Investor. State True or False?
(a) True
(b) False

4. Which of the following is considered a Foreign Portfolio Investor?

(a) Foreign Institutional Investors
(b) Sub-Accounts
(c) Qualified Financial Institutions
(d) All of the above

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Chapter 13: Investor services

LEARNING OBJECTIVES:

After studying this chapter, you should know about:

 SCORES

 Transfer of Shares to Demat Account of IEPF Authority

13.1 Introduction to Redressal of complaints through (SCORES)

SEBI Complaints Redress System (SCORES) platform is a web based centralized system to capture
investor complaints against listed companies and registered intermediaries and is available 24x7.
It was introduced on June 8, 2011 and has been facilitating redressal of investor grievances in a
speedy manner. SEBI encourages investors to lodge complaints through electronic mode in
SCORES. However, complaints received from investors in physical form are also digitized by SEBI
and uploaded in SCORES. Thereafter, follow-up actions of the complaint are done in electronic
form only i.e. through SCORES. Investors can easily access, retrieve and preserve the complaints
lodged by them in electronic mode. Further, it enhances the turnaround time and speed of
redressal of a complaint. Investors may contact the Investor Associations (IAs) recognized by SEBI
for any assistance in filing complaints on SCORES. The lists of Investor Associations are available
on SEBI website (www.sebi.gov.in). Investors may also seek assistance in filing complaints on
SCORES from SEBIs toll free helpline number 1800 266 7575 or 1800 22 7575.

SEBI has received inputs from listed companies and intermediaries that investor grievances can
be resolved faster if the grievance been taken up directly with the entity at the first instance.
Accordingly, it appears to be prudent and time saving if the investors approach the concerned
listed company or registered intermediary first with all the requisite details to redress the
complaints. In case, the listed company or registered intermediary fails to redress the complaint
to the investor’s satisfaction, the investor may file a complaint in SCORES. At present following
types of complaints are not dealt through SCORES:

1. Complaints against the companies which are unlisted/delisted, in dissemination board of

Stock Exchanges,
2. Complaints those are sub-judice i.e. relating to cases which are under consideration by court
of law, quasi-judicial proceedings etc.

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3. Complaints falling under the purview of other regulatory bodies viz. RBI, IRDAI, PFRDA, CCI,
etc., or under the purview of other ministries viz., MCA, etc.
4. Complaints against a sick company or a company where a moratorium order is passed in
winding up / insolvency proceedings.
5. Complaints against the companies where the name of company is struck off from RoC or a
vanishing company as per list published by MCA.
6. Suspended companies, companies under liquidation / BIFR / etc.

To enhance investor satisfaction on complaint redressal, SEBI has already put in place a
‘Complaint Review facility’ under SCORES wherein an investor if unsatisfied with the redressal
may within 15 days from the date of closure of his complaint in SCORES opt for review of the
complaint and the complaint shall be escalated. Effective from August 01, 2018, following
procedure shall be followed for filing and redressal of investor grievances using SCORES:

1. Investors who wish to lodge a complaint on SCORES are requested to register themselves on
www.scores.gov.in by clicking on “Register here”. While filing the registration form, details
like Name of the investor, PAN, Contact details, Email id, Aadhaar card number (optional),
CKYC ID(optional) etc. may be provided for effective communication and speedy redressal of
the grievances. Upon successful registration, a unique user id and a password shall be
communicated to the investor through an acknowledgement email / SMS.
2. An investor shall use login credentials for lodging complaint on SCORES (“Login for registered
user” section).
3. The complainant may use SCORES to submit the grievance directly to companies /
intermediaries and the complaint shall be forwarded to the entity for resolution. The entity
is required to redress the grievance within 30 days, failing which the complaint shall be
registered in SCORES
4. Presently, the limitation period for filing an arbitration reference with stock exchanges is
three year. In line with the same and in order to enhance ease, speed & accuracy in redressal
of investor grievance, the investor may lodge a complaint on SCORES within three years from
the date of cause of complaint, where; Investor has approached the listed company or
registered intermediary for redressal of the complaint and, The concerned listed company or
registered intermediary rejected the complaint or, The complainant does not receive any
communication from the listed company or intermediary concerned or, The complainant is
not satisfied with the reply given to him or redressal action taken by the listed company or
an intermediary.

SEBI has informed that a study was conducted under aegis of Quality Council of India (QCI) to
understand some of the root causes of grievances / complaints on securities market related
issues lodged on Centralised Public Grievance Redressal and Monitoring System (CPGRAMS)
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portal and the measures suggested to address the issues included providing a link to SCORES
portal within Demat/ Trading Account Dashboard of the Clients/ investors to make it easier to
lodge grievances. Accordingly, as advised by SEBI all Participants are required to provide the link
to SCORES portal on the website of the Participant, from where the client can view details of the
demat account w.e.f. July 1, 2018.

With a view to make the complaint redressal mechanism through SCORES more efficient, SEBI
has advised as under:

1. DPs shall display the following information on their websites:

Filling complaints on SCORES- Easy & Quick

a. Register on SCORES portal

b. Mandatory details for filling complaints on SCORES
i. Name, PAN, Address, Mobile Number, E-mail ID
c. Benefits:
i. Effective Communication
ii. Speedy redressal of the grievances

2. DPs shall include the abovementioned procedure for filling of complaints on SCORES and
benefits for the same in the welcome kit to be given to the investors at the time of their
registration with them.

SEBI through its circular dated March 10, 2017 41 had advised DP’s to redress the investor
complaints within 15 days. To implement the same and ensure smooth facilitation, NSDL has
developed a facility for uploading and downloading of Investor Grievance related
correspondence through online portal i.e. e-PASS (https://www.epass.nsdl.com/epass/). This
facility has been made available to DPs with effect from August 6, 2018 and subsequently the
practice of sending Investor Grievance related correspondence from NSDL and filling of its
response/ reply by DPs through letters/ emails has been discontinued.

CDSL has developed a facility for investor to post the complaints through CDSL website. A user-
friendly format is made available on the website to enable the investors to register their
complaints with ease. The online complaint is automatically registered in CDSL Back office and
same is being forwarded to respective DP to their web based audit login. The system driven alert
for registration of complaints is also sent to DP on their registered email id. CDSL has also

41 SEBI Circular No. SEBI/HO/MIRSD6/CIR/P/2017/20

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developed a facility for upload / download Investor Grievance related correspondence through
electronic mode i.e. through web based audit login. This facility has been made available to
DPs/RTAs.

13.2 Introduction to Transfer of Shares to Demat Account of IEPF Authority

In terms of Section 124 (6) of Companies Act, 2013 and the Rules notified thereunder, the shares
in respect of which dividend has not been paid or claimed for a period of seven consecutive years
or more, are required to be transferred by the company to the Investor Education and Protection
Fund Authority (IEPF). As per the Rule 6 amended vide Investor Education and Protection Fund
Authority (Accounting, Audit, Transfer and Refund) Amendment Rules, 2017, where the 7-year
period provided under sub-section (5) of section 124 is completed during September 7, 2016 to
May 31, 2017, the due date for transfer of such shares by companies was May 31, 2017. All
companies are required to transfer such shares to IEPF, whether held in dematerialized form or
physical form, to the demat account of IEPF Authority by way of corporate action. In cases, where
there is a specific order of Court or Tribunal or Statutory Authority restraining any transfer of
such shares and payment of dividend or where such shares are pledged or hypothecated under
the provisions of the Depositories Act, 1996 or shares already been transferred under sub-rule
(1) of above rules, the company shall not transfer such shares to the Fund. The company is
required to furnish a statement of shares not transferred to the Investor Education and
Protection Fund (Form No. IEPF-3), which inter-alia requires the company to attach order of
court/tribunal/statutory authority specifying the date of such order.

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Review Questions

Questions to assess your learning:

1. SEBI Complaints Redress System (SCORES) platform is a web based centralized system to
capture investor complaints against ____________.
(a) Listed Companies
(b) Unlisted Companies

2. The entity is required to redress the grievance within ______ days, failing which the complaint
shall be registered in SCORES.
(a) Thirty
(b) Forty-five
(c) Fifteen
(d) Sixty

3. Complaints falling under the purview of which of the regulatory bodies can be filed under the
SCORES?
(a) PFRDA
(b)CCI
(c) SEBI
(d) All of the above

4. The company is required to furnish a statement of shares not transferred to the Investor
Education and Protection Fund. State whether True or False?
(a) True
(b) False

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 ANNEXURES

Annexure 1: Process of Aadhar e-KYC of Resident Investors in the Securities Markets under
section 11A of the PMLA, 2002

A. Online Portal based Investor (Resident) e-KYC Process (Aadhaar as an OVD)

a. Investor visits portal of KUA or the SEBI registered intermediary which is also a Sub-KUA to
open account/invest through intermediary.
b. For Aadhaar e-KYC, investor is redirected to KUA portal. Investor enters the Aadhaar Number
or Virtual Id and provides consent on KUA portal. Adequate controls shall be in place to
ensure that Aadhaar Number is not stored anywhere by the Sub-KUA or KUA.
c. Investor will then receive OTP in mobile number registered with Aadhaar. Investor enters the
OTP sent by UIDAI on KUA portal for Aadhaar e-KYC.
d. KUA will receive the e-KYC details from UIDAI upon successful Aadhaar authentication which
will be further forwarded to Sub-KUA in encrypted format (using KUAs own encryption key)
and will be displayed to the investor on portal. Sharing of e-KYC data by the KUA with Sub-
KUA may be allowed under Regulation 16(2) of Aadhaar (Authentication) Regulation, 2016.
Sub-KUA shall clearly specify the name of the KUA and Sub- KUA, and details of sharing of
data among KUA and Sub-KUA while capturing investor consent.
e. Investor will fill the additional detail as required under KYC format.
f. SEBI registered Intermediary will upload additional KYC details to the KUA.
B. Assisted Investor (Resident) e-KYC process (Aadhaar as an OVD)
a. Investor approaches any of the SEBI Registered Entity/ Sub-KUAs i.e. Mutual Fund
Distributors or appointed persons for e-KYC through Aadhaar.
b. SEBI registered entities (Sub-KUAs) will perform e-KYC using registered / Whitelisted devices
with KUAs.
c. KUA will be required to ensure that all devices and device operators of Sub-KUA are registered
/ whitelisted devices with KUA.
d. Investor will then be required to enter Aadhaar No. or Virtual Id and provide consent on the
registered device.
e. Investor would then have to provide biometric on the registered device.
f. SEBI registered intermediary (Sub-KUA) fetches the e-KYC details through the KUA from UIDAI
which will be displayed to the investor on the registered device.
g. Investor will also provide the additional detail as required.

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The KUA/ sub-KUA while performing the Aadhaar authentication shall also comply with the
following:

a. For sharing of e-KYC data with Sub-KUA under Regulation 16(2) of Aadhaar
(Authentication) Regulations, 2016, KUA shall obtain special permission from UIDAI by
submitting an application in this regard. Such permissible sharing of e- KYC details by KUA
can be allowed with their associated Sub-KUAs only.
b. KUA shall not share UIDAI digitally signed e-KYC data with other KUAs. However, KUAs
may share data after digitally signing it using their own signature for internal working of
the system.
c. e-KYC data received as response upon successful Aadhaar authentication from UIDAI will
be stored by KUA and Sub-KUA in the manner prescribed by Aadhaar Act/Regulations and
circulars issued by UIDAI time to time.
d. KUA/Sub-KUA shall not store Aadhaar number in their database under any circumstances.
It shall be ensured that Aadhaar number is captured only using UIDAI`s Aadhaar Number
Capture Services (ANCS).
e. The KUA shall maintain auditable logs of all such transactions where e-KYC data has been
shared with sub-KUA, for a period specified by the Authority.
f. It shall be ensured that full Aadhaar number is not stored and displayed anywhere in the
system and wherever required only last 4 digits of Aadhaar number may be displayed.
g. As per Regulation 14(i) of the Aadhaar (Authentication) Regulation, 2016, requesting
entity shall implement exception-handling mechanisms and backup identity
authentication mechanism to ensure seamless provision of authentication services to
Aadhaar number holders.
h. UIDAI may conduct audit of all KUAs and Sub KUAs as per the Aadhaar Act, Aadhaar
Regulations, AUA/KUA Agreement, Guidelines, circulars etc. issued by UIDAI from time to
time.
i. Monitoring of irregular transactions - KUAs shall develop appropriate monitoring
mechanism to record irregular transactions and their reporting to UIDAI.
j. Investor Grievance Handling Mechanism - Investor may approach KUA for their grievance
redressal. KUA will ensure that the grievance is redressed within the timeframe as
prescribed by UIDAI. KUA will also submit report on grievance redressal to UIDAI as per
timelines prescribed by UIDAI.

KUAs and Sub-KUA shall also comply with the Aadhaar Act Regulations, circulars, guidelines etc.
issued by UIDAI from time to time. In case of any non-compliance on the part of KUAs/sub KUAs,
SEBI may take necessary action.

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Annexure 2: Use of Technology for KYC

SEBI, from time to time has issued various circulars to simplify, harmonize the process of KYC by
investors / RI. Constant technology evolution has taken place in the market and innovative
platforms are being created to allow investors to complete KYC process online. SEBI held
discussions with various market participants and based on their feedback and with a view to allow
ease of doing business in the securities market, it has been decided to make use of following
technological innovations which can facilitate online KYC:
a. eSign service is an online electronic signature service that can facilitate an Aadhaar holder to
forward the document after digitally signing the same provided the eSign signature
framework is operated under the provisions of Second schedule of the Information
Technology Act and guidelines issued by the controller.
b. In terms of PML Rule 2 (1) (cb) “equivalent e-document” means an electronic equivalent of a
document, issued by the issuing authority of such document with its valid digital signature,
including documents issued to the Digital Locker account of the investor as per Rule 9 of the
Information Technology (Preservation and Retention of Information by Intermediaries
Providing Digital Locker Facilities) Rules, 2016.
c. Section 5 of the Information Technology Act, 2000 recognizes electronic signatures (which
includes digital signature) and states that where any law provides that information or any
other matter shall be authenticated by affixing the signature or any document shall be signed
or bear the signature of any person then such requirement shall be deemed to have been
satisfied, if such information or matter is authenticated by means of a digital signature affixed
in such manner as prescribed by the Central Government. Therefore, the eSign mechanism
of Aadhaar shall be accepted in lieu of wet signature on the documents provided by the
investor. Even the cropped signature affixed on the online KYC form under eSign shall also be
accepted as valid signature.
In order to enable the Online KYC process for establishing account based relationship with the RI,
Investor’s KYC can be completed through online / App based KYC, in-person verification through
video, online submission of Officially Valid Document (OVD) / other documents under eSign, in
the following manner:

i. The investor visits the website/App/digital platform of the RI and fills up the online KYC form
and submits requisite documents online.

ii. The name, photograph, address, mobile number, email ID, Bank details of the investor shall be
captured online and OVD / PAN / signed cancelled cheque shall be provided as a photo / scan of
the original under eSign and the same shall be verified as under:

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  Mobile and email is verified through One Time Password (OTP) or other verifiable
mechanism. The mobile number/s of investor accepted as part of KYC should preferably
be the one seeded with Aadhaar. (the RI shall ensure to meet the requirements of the
mobile number and email as detailed under SEBI circular no. CIR/MIRSD/15/2011 dated
August 02, 2011).
 Aadhaar is verified through UIDAIs authentication / verification mechanism. Further, in
terms of PML Rule 9 (16), every RI shall, where the investor submits his Aadhaar number,
ensure that such investor to redact or blackout his Aadhaar number through appropriate
means where the authentication of Aadhaar number is not required under sub-rule (15).
RI shall not store/ save the Aadhaar number of investor in their system. e-KYC through
Aadhaar Authentication service of UIDAI or offline verification through Aadhaar QR Code/
XML file can be undertaken, provided the XML file or Aadhaar Secure QR Code generation
date is not older than 3 days from the date of carrying out KYC. In terms of SEBI circular
No. CIR/MIRSD/29/2016 dated January 22, 2016 the usage of Aadhaar is optional and
purely on a voluntary basis by the investor.
 PAN is verified online using the Income Tax Database.
 Bank account details are verified by Penny Drop mechanism or any other mechanism
using API of the Bank. (Explanation: based on bank details in the copy of the cancelled
cheque provided by the investor, the money is deposited into the bank account of the
investors to fetch the bank account details and name.) The name and bank details as
obtained shall be verified with the information provided by investor.
 Any OVD other than Aadhaar shall be submitted through Digiocker/under eSign
mechanism.
iii. In terms of Rule 2 (d) of Prevention of Money-Laundering (Maintenance of Records) Rules,
2005 (PML Rules) “Officially Valid Documents” means the following:
 the passport,
 the driving licence,
 proof of possession of Aadhaar number,
 the Voter's Identity Card issued by Election Commission of India,
 job card issued by NREGA duly signed by an officer of the State Government and
 the letter issued by the National Population Register containing details of name,
address, or any other document as notified by the Central Government in consultation
with the Regulator.
iv. Further, Rule 9(18) of PML Rules states that in case OVD furnished by the investor does not
contain updated address, the document as prescribed therein in the above stated Rule shall be
deemed to be the OVD for the limited purpose of proof of address.

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v. PML Rules allows an investor to submit other OVD instead of PAN, however, in terms of SEBI
circular No. MRD/DoP/Cir- 05/2007 dated April 27, 2007 the requirement of mandatory
submission of PAN by the investors for transaction in the securities market shall continue to
apply.
vi. Once all the information as required as per the online KYC form is filled up by the investor, KYC
process could be completed as under:
 The investor would take a print out of the completed KYC form and after affixing their wet
signature, send the scanned copy / photograph of the same to the RI under eSign, or
 Affix online the cropped signature on the filled KYC form and submit the same to the RI
under eSign.
vii. The RI shall forward the KYC completion intimation letter through registered post/ speed post
or courier, to the address of the investor in cases where the investor has given address other
than as given in the OVD. In such cases of return of the intimation letter for wrong / incorrect
address, addressee not available etc, no transactions shall be allowed in such account and
intimation shall also sent to the Stock Exchange and Depository.

viii. The original seen and verified requirement under SEBI circular no. MIRSD/SE/Cir-21/2011
dated October, 5 2011 for OVD would be met where the investor provides the OVD in the
following manner:
 As a clear photograph or scanned copy of the original OVD, through the eSign mechanism,
or;
 As digitally signed document of the OVD, issued to the DigiLocker by the issuing authority.
ix. SEBI vide circular no. MIRSD/Cir- 26 /2011 dated December 23, 2011 had harmonized the IPV
requirements for the intermediaries. In order to ease the IPV process for KYC, the said SEBI
circular pertaining to IPV stands modified as under:
 IPV/ VIPV would not be required when the KYC of the investor is completed using the
Aadhaar authentication / verification of UIDAI.
 IPV / VIPV shall not be required by the RI when the KYC form has been submitted online,
documents have been provided through digiocker or any other source which could be
verified online.
Features for online KYC App of the RI
SEBI registered intermediary may implement their own Application (App) for undertaking online
KYC of investors. The App shall facilitate taking photograph, scanning, acceptance of OVD through
Digilocker, video capturing in live environment, usage of the App only by authorized person of
the RI. The App shall also have features of random action initiation for investor response to
establish that the interactions not pre-recorded, time stamping, geo-location tagging to ensure

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physical location in India etc is also implemented. RI shall ensure that the process is a seamless,
real-time, secured, end-to-end encrypted audiovisual interaction with the customer and the
quality of the communication is adequate to allow identification of the customer beyond doubt.
RI shall carry out the liveliness check in order to guard against spoofing and such other fraudulent
manipulations. The RI shall before rolling out and periodically, carry out software and security
audit and validation of their App. The RI may have additional safety and security features other
than as prescribed above.

Feature for Video in Person Verification (VIPV) for Individuals

To enable ease of completing IPV of an investor, intermediary may undertake the VIPV of an
individual investor through their App. The following process shall be adopted in this regard:

i. Intermediary through their authorised official, specifically trained for this purpose, may
undertake live VIPV of an individual customer, after obtaining his/her informed consent. The
activity log along with the credentials of the person performing the VIPV shall be stored for easy
retrieval.
ii. The VIPV shall be in a live environment.
iii. The VIPV shall be clear and still, the investor in the video shall be easily recognisable and shall
not be covering their face in any manner.
iv. The VIPV process shall include random question and response from the investor including
displaying the OVD, KYC form and signature or could also be confirmed by an OTP.
v. The RI shall ensure that photograph of the customer downloaded through the Aadhaar
authentication / verification process matches with the investor in the VIPV.
vi. The VIPV shall be digitally saved in a safe, secure and tamper-proof, easily retrievable manner
and shall bear date and time stamping.
vii. The RI may have additional safety and security features other than as prescribed above.

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Annexure 3: Operational Mechanism for Margin Pledge

Initiation of Margin Pledge

1. For the purpose of providing collateral in form of dematerialised securities as margin, a client
shall initiate the margin pledge only in favour of the TM / CM’s separate client securities margin
account tagged as ‘Client Securities Margin Pledge Account’ through physical instruction or
electronic instruction mechanism provided by the Depositories. Such instructions shall have
details of client UCC, TM, CM and Default Segment.

2. In cases where a client has given a Power of Attorney (the “POA”) to the TM / CM, the TM /
CM may be allowed to execute the margin pledge on behalf of such client to the demat account
of the TM / CM tagged as ‘Client Securities Margin Pledge Account’.

3. The ‘pledge request form’ shall have a clause regarding express consent by the client for re-
pledge of the securities by the TM to CM and further by the CM to CC.

4. On receipt of the margin pledge instruction either from the client or by TM / CM as per the
POA, DP of a client shall initiate a margin pledge in the client’s account and the status of
instruction will remain pending till confirmation is received from client / pledgor. The client will
submit acceptance by way of One Time Password (the “OTP”) confirmation on mobile number /
registered e-mail id of the client or other verifiable mechanism. Such OTP confirmation from
client shall also be required, if securities of such client are being re-pledged. The Depositories
shall develop a verifiable mechanism for confirmation of the pledge by the client.

5. In client account, margin pledge or re-pledge shall be reflected against each security, if it is
pledged / re-pledged and in whose favour i.e. TM / CM / CC.

6. The TM can re-pledge only in favour of CM’s demat account tagged as ‘Client Securities Margin
Pledge Account’. The CM shall create a re-pledge of securities on the approved list only to the CC
out of ‘Client Securities Margin Pledge Account’. While re-pledging the securities to the CC,
CM/TM shall fully disclose the details of the client wise pledge to the CC/CM. CM would need to
have visibility of client level position and client collateral so that CM shall allow exposure and /
or margin credit in respect of such securities to that client to whom such securities belong.

Release of Margin Pledge

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7. In case of a client creating pledge of the securities in favour of the TM / CM against margin,
the TM / CM may release the ‘margin pledge’ after their internal exposure and risk management
checks. The request for release of pledge can be made by the client to its DP or to the TM / CM,
who shall release the pledge in the Depository system.

8. For release of client securities given to TM/CM as margin pledge and which are re-pledged in
favour of the CC, the CM shall make a request to the CC. The client through TM, or the TM on his
own, may request the CM to make an application to the CC for the release of margin pledge. CC
shall do margin utilisation check at the CM level before releasing the re-pledge of securities to
the CM. The CC will release the re-pledged client securities to CM after blocking other available
free collateral of CM. The CM /TM in turn after doing their risk management shall release the
securities to TM / client, as the case may be.

Invocation of Margin Pledge

9. In case of default by a client of TM where the clients securities are re- pledged with the CM/
CC, the invocation request shall be made by the TM to CM and CM in turn will make request to
CC as per the procedure laid down by the Depositories under their bye-laws.

10. In case of default by a client of TM who has pledged securities with TM, The TM shall invoke
the pledge.

11. In case of default by a client of TM whose securities are re-pledged by TM with CM, the
invocation request shall be made by TM to the CM. The CM, after doing its internal exposure and
risk management, shall release the re-pledged securities to the ‘Client Securities Margin Pledge
Account’ of the TM. The TM in turn will invoke the pledge of client’s securities.

12. In the event of default by a client of a TM, whose securities are re-pledged by TM with CM
and CM in turn has re-pledged with CC, the TM shall make a request for invocation of pledge with
CM and CM in turn shall file a request with CC to release the re-pledged securities for invocation.
The CC shall block equivalent available free collateral provided by CM and shall release the re-
pledged securities of that defaulting client of TM to CM in “Client Securities Margin Pledge
Account” of CM. The CM shall do his own risk assessment of TM and would release re-pledged
securities of the defaulting client of TM in “Client Securities Margin Pledge Account” of TM and
TM shall invoke the pledge in Demat account of the client.

13. In case of default by a client/ TM of CM whose securities are re-pledged with CC, CM shall file
a request with CC for invocation of the pledged/ re-pledged securities of that client/TM. CC shall

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block the equivalent available free collateral provided by CM and shall release the re-pledged
securities of that defaulting client/TM in “Client Securities Margin Pledge Account” of CM and
the CM shall invoke the pledge in Demat account of the client/ TM.

14. In case of default by TM or client of TM, CM shall be entitled to invoke pledged/ re-pledged
securities of the TM. CM shall also be entitled to invoke directly the repledged securities of client
of TM having open position with CM to close out such positions.

15. In case of default by the CM, CC shall invoke securities pledged by the CM. After exhausting
the CM own collateral, CC may also invoke re-pledge securities of that client who has open
position and their re-pledged securities are blocked by CC to close out their open positions. The
re-pledge securities of other clients who did not have any open position with CC, their securities
shall not be available to CC for invocation to meet settlement default of the CM.

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Annexure 4: Framework for Utilization of Client’s Pledged Securities For Exposure And Margin

1. At present, the margin requirement is computed in real time at client level by the CC and is
aggregated at the level of CMs to arrive at the total margin requirement. The CC maintains and
monitor the collateral at the level of CM. The CM is required to provide the collateral in various
acceptable forms such as Cash, Bank Guarantee, Govt. Securities, pledge of acceptable shares,
etc.

2. The day to day real time risk management with respect to client / TM exposure, and the margin
requirement shall continue to be the responsibility of the CM, and CC shall not monitor the client
level exposure against the available client level collateral in real time.

3. In order to provide exposure to CM and/or to the clients / TM of a CM, CC shall aggregate

margin requirement at CM level that shall be compared against the available collateral in real
time as aggregate of;

a. cash and cash equivalent deposited by CM,

b. own securities pledged by CM with CC,
c. CC requires minimum 50% of the collateral to be deposited in cash and cash equivalent,
if the total securities pledged by CM with CC exceed the total cash and cash equivalent,
the value of securities will be restricted to amount of cash and cash equivalent.
d. The TM’s proprietary margin requirement will be treated as a client of CM and aggregated
along with other clients.

4. CM shall be allowed to re-pledge acceptable/approved client securities with the CC by

furnishing the UCC wise client details. CC shall not allow any exposure to the CM on re-pledged
securities of the client / TM. In case of a trade by a client / TM whose securities are re-pledged
with CC, the CC shall first block the available collateral provided by CM as mentioned in point 3
above. However, at periodical interval (latest by end of day), CC shall release the blocked
securities collateral of CM to the extent of re-pledged securities collateral of that client / TM
available with the CC.

5. In the event of default by a client of TM, the TM shall make good the default to CM. In the
event of default by a client or TM on its proprietary position, the CM shall make good the default
to CC. However in the event of default by client/s leading to default of TM and also the CM, the
following process shall be applied by TM/CM/CC for invocation of pledged and re-pledged
securities of client/TM/CM:

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a. In case of default by a client of TM/CM or default of TM leading to the default of CM, CC
shall: (i). encash the available collateral including cash, cash equivalent collateral, CM’s
own pledged securities; (ii). after encashing the available collateral of CM, also be entitled
to directly invoke the re-pledged securities of client / TM who has any open position so
as to close out the open positions of that client; (iii). not be entitled to invoke re-pledged
securities of those clients who did not have any open position to meet settlement
obligation of the defaulting CM.

b. In case of default by a client of TM or default of TM, CM shall: (i). be entitled to liquidate

available cash, cash equivalent collateral and TM’s own pledged /or re-pledged securities
with CM/ CC to meet settlement/margin obligations of defaulting TM or client(s) of that
TM; (ii). after encashing the available collateral of TM, be entitled to directly invoke re-
pledged securities of the client of defaulting TM who has open position through CM so as
to close out his position; (iii). not be entitled to invoke re-pledged securities of those
clients of defaulting TM who did not have any open position; (iv). ensure that the client
securities of TM/ CM re-pledged with the CC are not utilized for meeting the margin
requirement/ settlement obligation of a TM’s/CM’s own proprietary position or margin
requirement/ settlement obligation of any other client of TM / CM.

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This workbook has been developed to assist candidates in preparing for the National Institute of
Securities Markets (NISM) Certification Examination for Depository Operations. NISM-Series-VI:
Depository Operations Certification Examination seeks to create a common minimum knowledge
benchmark for associated persons engaged or employed by a registered depository participant in (a)
dealing or interacting with clients; (b) dealing with securities of clients; (c) handling redressal of
investor grievances; (d) internal control or risk management; (e) activities having a bearing on
operational risk; (f) maintenance of books and records pertaining to the above activities.

The book covers the various functions of depositories and their depository participants, the
regulatory framework under which the depository system functions in India.