Laws Governing Depositories and Depository Participants

Law Governing Depositories and Depository Participants: In the 21st century, rapid growth in the Indian capital market is observed. But with the existing system, there have been issues like delays and bottlenecks which indicate market inefficiencies and not as per the standards of the international market. To proactively deal with these challenges a depository system was introduced. The legal framework for this depository system is provided by the Depository Act of 1996.

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What is a Depository?

• Central Depository Services (India) Limited (CDSL)
• National Securities Depository Limited (NSDL)

What is a Depository Participant?

Legal Framework for Depository and Depository Participant

• Under the Act, a depository must designate one or more participants as its agent.
• Anybody can consent to use a depository's services by becoming a participant in the process outlined in the depository's regulations.
• A person must give up their certificate of security to the issuer after reaching an agreement with the depository.
• Upon receiving a certificate of security, the issuer is required to cancel the certificate, record the depository's name as the registered owner of the security, and notify the depository.
• The depository must record the transfer of security in the transferee's name if the participant notifies it about a transfer of security.
• The depository must notify the issuer whenever the beneficial owner of any security requests custody of such security.
• A subscriber who an issuer offers security has the option of receiving the security certificate or retaining the securities with a depository.
• Every security that a depository holds can be dematerialized into electronic form with the provision of interchanging.
• The depository is considered as the registered owner to transfer ownership of securities on behalf of the beneficial owner.
• All rights, advantages, and obligations about securities held by the depository belong to the beneficial owner of the securities.
• Each depository must maintain a database and index of beneficial owners.
• A beneficial owner may pledge or hypothecate any security in their possession with prior depository approval, following the rules.
• A beneficial owner choosing not to receive any securities from the depository must notify the depository. The depository accordingly informs the issuer and makes the necessary changes in its database.
• After receiving notification from the depository regarding the beneficial owner's desire to opt out of the depository for any security, the issuer must provide the certificate of security to the beneficial owner within 30 days of complying with the requirements and payment of the necessary fees.
• If the depository or participant is negligent and causes a loss, the depository is required to compensate the beneficial owner.
• The depository is entitled to regain the money from the participant to compensate for damages caused by the participant's negligence.

The Depositories Act, 1996

• Depositories Related Laws (Amendment) Act, 1997
• Securities Laws (Second Amendment) Act, 1999
• Securities Laws (Amendment) Act, 2004
• Securities Laws (Amendment) Act, 2014
• Finance Act, 2018

Other Laws Concerning Depositories

• The Companies Act, 2013
• The Indian Stamp Act, 1899
• Securities and Exchange Board of India Act, 1992
• Securities Contracts (Regulation) Act, 1956
• Benami Transaction (Prohibition) Act, 1988
• Income Tax Act, 1961