Laws Governing Depositories and Depository Participants: formula sheet

Key formulas

Beneficial owner (s. 2(1)(a))

Beneficial owner = person whose name is recorded as such with a depository

The investor. Entitled to all rights and benefits and subject to all liabilities (s. 10(3)).

Registered owner (s. 2(1)(j))

Registered owner = depository whose name is entered as such in the register of the issuer

Deemed owner only to effect transfers (s. 10(1)). No voting or other rights (s. 10(2)).

Depository (s. 2(1)(e))

Depository = company registered under the Companies Act + certificate of registration under s. 12(1A) of the SEBI Act

The Act's definition refers to the Companies Act, 1956; read it as the Act is worded.

Participant (s. 2(1)(g))

Participant = person registered under s. 12(1A) of the SEBI Act, 1992

Acts as the depository's agent under s. 4.

Option to hold (s. 8)

Subscriber's option: receive certificates OR hold with a depository

If demat is chosen, the issuer intimates the depository, which records the allottee as beneficial owner.

Fungibility (s. 9(1))

All securities held by a depository = dematerialised + fungible

Securities of the same class are interchangeable.

Transfer (s. 7(1))

Participant intimates → depository registers transfer in transferee's name

No certificate or transfer deed is needed in the depository.

Depository and participant agreement (Section 4)

Depository shall enter into an agreement with one or more participants as its agent; form as specified by bye-laws

Section 4(1) gives the duty. Section 4(2) gives the form.

Person and depository agreement (Section 5)

Any person, through a participant, may enter into an agreement with a depository to avail its services; form as specified by bye-laws

This is the investor's agreement. It is made through a participant.

Penalty for failure to enter into agreement (Section 19B)

Penalty: minimum ₹1,00,000; may extend to ₹1,00,000 for each day of continuing failure; maximum ₹1,00,00,000

Applies to a depository, participant, issuer or its agent, or registered intermediary required to enter into an agreement.

Surrender of certificate (Section 6)

Person with Section 5 agreement surrenders certificate to issuer; issuer cancels it, enters depository as registered owner; depository enters person as beneficial owner

Shows how the agreement leads to dematerialisation.

Depository as registered owner

Depository = registered owner, only for effecting transfer on behalf of beneficial owner (Section 10(1))

Applies notwithstanding any other law. The purpose is limited to transfer.

No other rights for depository

Depository as registered owner: no voting rights or other rights in securities held (Section 10(2))

Subject to the transfer power in Section 10(1).

Beneficial owner's position

Beneficial owner = all rights and benefits + all liabilities (Section 10(3))

Dividends, voting and other rights belong to the investor.

Source of rights and obligations

Rights and obligations of depositories, participants, issuers = specified by regulations (Section 17(1))

Eligibility for admission of securities is also by regulations (Section 17(2)).

Fungible, dematerialised securities

All securities held by a depository: dematerialised and fungible (Section 9(1))

Fungible means one unit is interchangeable with another of the same kind.

Register of beneficial owners

Every depository maintains a register and index of beneficial owners (Section 11)

Kept in the manner of Sections 150, 151 and 152 of the Companies Act, 1956, as the Act states.

Information flow

Depository informs issuer of transfers (Section 13(1)); issuer gives depository copies of relevant records (Section 13(2))

Intervals and manner for the depository's information are set by bye-laws.

Indemnity

Loss to beneficial owner from negligence of depository or participant: depository indemnifies (Section 16(1)); may recover from participant (Section 16(2))

Recovery right applies where the participant's negligence caused the loss.

Bye-laws: power and limits (Section 26(1))

Depository makes bye-laws = previous approval of SEBI + consistent with Act and regulations

Both conditions must be met. Approval is taken before the bye-laws are made, not after.

SEBI's direction power (Section 26(3) and (4))

SEBI order in writing → depository makes, amends or revokes bye-laws within the period specified → on failure, SEBI may do it itself

SEBI may make the bye-laws in the form in its order or with such modifications as it thinks fit.

Indemnity (Section 16(1))

Loss to beneficial owner + negligence of depository or participant → depository indemnifies the beneficial owner

The duty applies without prejudice to any other law in force. Negligence is the trigger.

Right of recovery (Section 16(2))

Loss due to participant's negligence indemnified by depository → depository recovers it from that participant

Recovery is available only where the depository has actually indemnified the loss caused by the participant.

Bankers' Books Evidence Act (Section 15)

Bankers' Books Evidence Act, 1891 applies to a depository as if it were a bank under section 2 of that Act

Concerns evidence of records. Not the Indian Stamp Act, 1899.

Related powers

Section 25: SEBI makes regulations. Section 24: Central Government makes rules. Section 28: Act is in addition to, not in derogation of, other laws on holding and transfer of securities

Useful for questions that ask who makes what.

Quick revision

• A depository must enter into an agreement with one or more participants as its agent, in the form specified by the bye-laws (Section 4).
• On receiving intimation from a participant, the depository registers the transfer of security in the transferee's name (Section 7(1)).
• If a beneficial owner or transferee wants custody of the security, the depository informs the issuer (Section 7(2)).
• All securities held by a depository must be dematerialised and in fungible form (Section 9(1)).
• The depository is deemed the registered owner only to effect transfer of ownership on behalf of a beneficial owner (Section 10(1)).
• Apart from that, the depository has no voting or other rights in the securities it holds (Section 10(2)).
• The beneficial owner enjoys all rights and benefits and bears all liabilities for his securities (Section 10(3)).
• A beneficial owner may pledge or hypothecate securities with the depository's previous approval; the depository's entry is evidence of the pledge (Section 12).
• Loss to a beneficial owner from negligence of the depository or participant must be indemnified by the depository, which can recover from a negligent participant (Section 16).
• A depository makes bye-laws with the Board's previous approval, consistent with the Act and regulations (Section 26(1)).
• If a depository ignores the Board's direction on bye-laws, the Board may make, amend or revoke them itself (Section 26(4)).
• Penalty for delay in dematerialisation or issue of certificate: not less than ₹1,00,000, up to ₹1,00,000 per day, maximum ₹1,00,00,000 (Section 19D).

Common mistakes

• Saying the depository has voting rights because it is the registered owner. Fix: Section 10(2) says the depository has no voting or other rights. The beneficial owner holds all rights and benefits.
• Treating a depository and a custodian as the same. Fix: A depository is registered under the SEBI Act and holds securities in demat form and records ownership transfer. A custodian safeguards clients' assets, mostly for institutions. Compare the functions, not the word 'hold'.
• Saying the investor signs the Section 4 agreement. Fix: Section 4 is depository with participant. Section 5 is person with depository, through a participant.
• Saying the agreement can be in any form the parties choose. Fix: Both agreements must be in the form specified by the bye-laws.
• Saying the depository has voting rights because it is the registered owner. Fix: Remember that Section 10(2) says the depository has no voting rights or other rights, save the transfer power in Section 10(1).
• Treating the beneficial owner as only a nominal holder with no liabilities. Fix: Quote Section 10(3): the beneficial owner is entitled to all rights and benefits and is subjected to all liabilities.
• Saying the depository can make bye-laws without SEBI's approval. Fix: Write 'with the previous approval of the Board' in every Section 26 answer.
• Linking Section 15 with the Indian Stamp Act, 1899. Fix: Remember Section 15 as the Bankers' Books Evidence Act, 1891 section: a depository is treated as a bank for evidence purposes.

Exam tips

• Learn the definitions in section 2(1) almost word for word; examiners reward exact terms for beneficial owner, registered owner, participant and depository.
• In a 'rights' question, always contrast registered owner with beneficial owner and cite section 10.
• For benefits of demat, give points such as safety from loss or forgery, faster transfer and lower paperwork, each with one line of reasoning.
• Use the answer pattern: provision, facts, conclusion. Write the section number beside each rule.
• Do not claim penalty amounts or timelines unless you are sure. Section 19D penalty for delay in demat is up to one lakh rupees per day, subject to a maximum of one crore rupees.
• Learn Sections 4, 5 and 19B together. Questions often test the difference between them.
• Always write "in the form specified by the bye-laws". Examiners look for it.
• Use the ICSI answer pattern: provision, facts, conclusion. Cite the section.