Capital Market and Securities Laws · Laws Governing Depositories and Depository Participants

Bye-laws of Depositories and Indemnity for Loss

Updated 11 October 2026 · Fact-checked

Under Section 26 of the Depositories Act, 1996, a depository makes bye-laws with SEBI's previous approval, and SEBI can direct changes. Under Section 16, the depository must indemnify a beneficial owner for loss caused by its own or a participant's negligence, then recover from the participant. Section 15 applies the Bankers' Books Evidence Act, 1891.

Understand Bye-laws of Depositories and Indemnity for Loss

A depository holds securities in electronic form. Its day-to-day working is governed by three layers: the Act, SEBI regulations, and the depository's own bye-laws. Bye-laws are the internal rulebook that tells participants, issuers and investors how things are done.

Section 26 gives each depository the power to make bye-laws. Two limits apply. The bye-laws must be consistent with the Act and the regulations, and the depository needs the previous approval of SEBI (the Board). So a depository cannot bring a bye-law into force on its own.

Section 26(2) lists what bye-laws must cover. Think of it in groups: admission and removal of securities, participant eligibility, dematerialisation and transaction procedure, pledge and hypothecation, dividend distribution and information to beneficial owners, dispute resolution, action against participants (suspension, expulsion), and internal control standards. SEBI can also order a depository to make, amend or revoke a bye-law. If the depository fails to comply in the time given, SEBI can do it itself.

Section 16 protects the investor. If a beneficial owner suffers loss because of the negligence of the depository or of a participant, the depository must indemnify the owner. This is without prejudice to any other law. The investor therefore deals with one liable party, the depository. If the depository paid for a participant's negligence, it has the right to recover that amount from the participant.

A note on Section 15. Many students link it with the Stamp Act. In the official text, Section 15 says the Bankers' Books Evidence Act, 1891 applies to a depository as if it were a bank. It deals with how depository records can be used as evidence. It does not deal with stamp duty.

Key rules to remember

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.

How to solve Bye-laws of Depositories and Indemnity for Loss questions

Use this method for any question on bye-laws or indemnity. It keeps your answer in the ICSI pattern: provision, facts, conclusion.

1Identify the issue: is it about making or changing bye-laws (Section 26), loss to an investor (Section 16), or evidence of records (Section 15)?
2State the provision in plain words, with the section number. For Section 26, mention SEBI's previous approval and consistency with the Act and regulations.
3List the facts that matter: who suffered the loss, whether it is a beneficial owner, who was negligent (depository or participant), and whether SEBI gave an order.
4Apply the rule to the facts. For Section 16, ask: is there loss, is the claimant a beneficial owner, and is there negligence by the depository or participant?
5Add the second stage. If a participant was negligent and the depository paid, state the right of recovery under Section 16(2).
6Check for other remedies. Section 16 applies without prejudice to other laws, and Section 28 says the Act is in addition to other laws.
7End with a clear conclusion in one or two sentences that answers the exact question asked.

Quickest way: Three-question check

When to use it: Use when you have only a few minutes for a short-note or a short fact-based question.

Who acts? Depository makes bye-laws, SEBI approves, SEBI can direct.
Who is hurt? Only a beneficial owner is indemnified, and only for negligence of depository or participant.
Who pays finally? Depository pays first, then recovers from the participant if the participant was negligent.
Write the section numbers (26, 16, 15) in the first line of each point so the examiner sees them at once.

Common mistakes in Bye-laws of Depositories and Indemnity for Loss

Saying the depository can make bye-laws without SEBI's approval.
Students remember that bye-laws are 'its own' rules and forget the control point.
Fix: Write 'with the previous approval of the Board' in every Section 26 answer.
Linking Section 15 with the Indian Stamp Act, 1899.
Some notes and search results mix up the sections, because stamp duty is also a depository topic.
Fix: Remember Section 15 as the Bankers' Books Evidence Act, 1891 section: a depository is treated as a bank for evidence purposes.
Saying the depository indemnifies only for its own negligence.
Students read Section 16 as a pure depository liability.
Fix: The text covers negligence of the depository or the participant. Then add the recovery right against the participant.
Saying the depository can recover from the participant in every case.
Students merge sub-sections (1) and (2).
Fix: Recovery under Section 16(2) arises only where the loss was due to the participant's negligence and the depository has indemnified it.
Thinking SEBI cannot make bye-laws itself.
Students stop reading at Section 26(3).
Fix: Read sub-section (4): if the depository fails to comply within the period, SEBI may make, amend or revoke the bye-laws.
Confusing regulations, rules and bye-laws.
All three are subordinate rule-making and look alike.
Fix: SEBI makes regulations (Section 25), the Central Government makes rules (Section 24), and the depository makes bye-laws (Section 26).

Worked examples

Example 1

Mehta Securities Ltd., a depository participant of a depository, negligently processes a transfer instruction, and investor Ramesh, a beneficial owner, suffers a loss of ₹4,50,000. Ramesh claims against the depository. Advise on the liability of the depository and its remedy.

Show the solution

Provision: Section 16(1) of the Depositories Act, 1996 says that where a beneficial owner suffers loss due to the negligence of the depository or the participant, the depository shall indemnify the beneficial owner. This is without prejudice to any other law.
Facts: Ramesh is a beneficial owner. He has suffered a loss of ₹4,50,000. The loss arose from the negligence of the participant, Mehta Securities Ltd.
Application: The negligence of a participant is covered by Section 16(1). So Ramesh can claim from the depository, and the depository must indemnify him.
Remedy of the depository: Under Section 16(2), where the loss due to the participant's negligence is indemnified by the depository, the depository has the right to recover the amount from that participant.
Conclusion: The depository is liable to indemnify Ramesh for ₹4,50,000. After paying, it can recover the same amount from Mehta Securities Ltd.

Answer: The depository must indemnify Ramesh under Section 16(1) and can then recover ₹4,50,000 from Mehta Securities Ltd. under Section 16(2).

Example 2

SEBI considers it expedient that a depository amend its bye-law on the procedure for resolving disputes with beneficial owners. SEBI issues a written order with a time limit, but the depository does nothing. What can SEBI do, and what must the depository ordinarily do when it makes bye-laws?

Show the solution

Provision on making bye-laws: Section 26(1) requires the depository to make bye-laws with the previous approval of SEBI, consistent with the Act and the regulations. Section 26(2)(n) lists the procedure for resolving disputes involving a depository, issuer, company or beneficial owner as a matter bye-laws must provide for.
Provision on SEBI's direction: Under Section 26(3), where the Board considers it expedient, it may by order in writing direct a depository to make any bye-laws, or to amend or revoke bye-laws already made, within the period it specifies.
Facts: SEBI has passed a written order with a period, and the depository has failed to comply.
Application: Section 26(4) says that if the depository fails or neglects to comply within the specified period, SEBI may itself make, amend or revoke the bye-laws. It can do so in the form given in its order or with such modifications as it thinks fit.
Conclusion: SEBI can itself amend the dispute-resolution bye-law. In the ordinary course, the depository must make its bye-laws only with SEBI's previous approval.

Answer: SEBI may itself amend the bye-law under Section 26(4), as the depository failed to comply with the order under Section 26(3). Ordinarily, the depository makes bye-laws only with SEBI's previous approval under Section 26(1).

Exam tips

Learn the sub-sections of Section 26 by number: (1) power and approval, (2) matters covered, (3) SEBI's direction, (4) SEBI acting on default.
For Section 16 questions, always write both parts: indemnity to the beneficial owner and recovery from the participant.
In a short note on Section 15, write that the Bankers' Books Evidence Act, 1891 applies to a depository as if it were a bank, and do not mention stamp duty.
Group the Section 26(2) matters in your answer instead of listing all sixteen items from memory. Give four or five with the heads, and say 'including'.
Use the same layout in every answer: provision with section, facts, then a one-line conclusion.

Practice questions from Laws Governing Depositories and Depository Participants

Bye-laws of Depositories and Indemnity for Loss: frequently asked questions

Can a depository make bye-laws on its own?

No. Under Section 26(1), a depository makes bye-laws with the previous approval of SEBI. The bye-laws must also be consistent with the Act and the regulations.

When is a depository liable under Section 16?

A depository is liable when a beneficial owner suffers loss due to the negligence of the depository or of a participant. The depository must indemnify the beneficial owner. If the participant was at fault, the depository can recover the amount from the participant.

Does Section 15 apply the Indian Stamp Act, 1899 to depositories?

No. In the official text, Section 15 applies the Bankers' Books Evidence Act, 1891 to a depository as if it were a bank under section 2 of that Act. It concerns evidence of records, not stamp duty.

Who makes regulations, rules and bye-laws under the Depositories Act?

SEBI makes regulations under Section 25. The Central Government makes rules under Section 24. The depository makes bye-laws under Section 26, with SEBI's previous approval.

Can SEBI force a depository to change its bye-laws?

Yes. Under Section 26(3), SEBI can order a depository in writing to make, amend or revoke bye-laws within a specified period. If the depository does not comply, SEBI may do it itself under Section 26(4).