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

Registration and Agreements of Depositories and Participants

Updated 11 October 2026 · Fact-checked

Under Section 4 of the Depositories Act, 1996, a depository must enter into an agreement with one or more participants as its agent, in the form specified by its bye-laws. A person then uses the depository through a participant under Section 5. To solve questions, state the provision, apply it to the facts, and conclude.

Understand Registration and Agreements of Depositories and Participants

A depository holds securities in electronic form. It cannot deal with every investor directly. It works through participants, who are its agents and the link between the investor and the depository.

Section 4 makes this link legal. A depository shall enter into an agreement with one or more participants as its agent. Every such agreement must be in the form specified by the bye-laws of the depository. So the depository cannot use a free-form contract. The form is fixed in advance.

There is a second agreement. Under Section 5, any person, through a participant, may enter into an agreement with a depository to use its services. This agreement is also in the form specified by the bye-laws. An investor who opens a demat account is making this agreement. Note the words "through a participant": the investor reaches the depository only via the participant.

The Act also punishes failure. Under Section 19B, a depository, participant, issuer or its agent, or an intermediary registered under Section 12 of the SEBI Act, 1992, that is required to enter into an agreement and fails to do so is liable to a penalty. The penalty is not less than one lakh rupees. It may extend to one lakh rupees for each day the failure continues, subject to a maximum of one crore rupees.

The text supplied to you does not set out the registration conditions for a participant, so this page does not state SEBI's detailed registration requirements. Remember only the general idea: a participant is a registered intermediary, and the Act links the agreement duty to intermediaries registered under Section 12 of the SEBI Act. Check the depository regulations in your study material for the registration conditions.

Key rules to remember

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.

How to solve Registration and Agreements of Depositories and Participants questions

Use this method for any question on agreements of depositories and participants.

1Identify which agreement the question is about: depository and participant (Section 4), or person and depository through a participant (Section 5).
2State the rule in plain words with the section number.
3Note the form requirement: the agreement must be in the form specified by the bye-laws.
4Check the facts: who is the party, and is the participant acting as agent of the depository?
5If an agreement was not made, apply Section 19B and state the penalty range.
6Where the facts involve surrender of a certificate, add Section 6 and trace the steps in order.
7Write a clear conclusion that answers the exact question asked.

Quickest way: Three-line answer: rule, facts, conclusion

When to use it: Use it for short-answer questions when you have only a few minutes.

Line 1: Section 4 requires the depository to enter into an agreement with participants as its agent, in the bye-law form.
Line 2: Apply to the facts. Mention Section 5 if an investor is involved.
Line 3: Conclude. If an agreement is missing, add the Section 19B penalty.

Common mistakes in Registration and Agreements of Depositories and Participants

Saying the investor signs the Section 4 agreement.
Sections 4 and 5 both mention agreements and look alike.
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.
Students think of ordinary contracts.
Fix: Both agreements must be in the form specified by the bye-laws.
Stating the Section 19B penalty as a fixed ₹1 crore.
The maximum is the number students remember.
Fix: State the range: not less than ₹1,00,000, up to ₹1,00,000 per day, capped at ₹1,00,00,000.
Treating a participant as the owner of the securities.
The participant keeps the investor's account, so it looks like the holder.
Fix: A participant is only the depository's agent. The investor is the beneficial owner.
Quoting SEBI registration conditions from memory without a basis.
Students mix up rules for different intermediaries.
Fix: State only what you know from the regulations in your study material, and cite the correct source.

Worked examples

Example 1

Explain the agreement between a depository and a participant under the Depositories Act, 1996. Can the depository fix its own form of agreement?

Show the solution

Provision: Section 4(1) says a depository shall enter into an agreement with one or more participants as its agent.
Form: Section 4(2) says every such agreement shall be in the form specified by the bye-laws.
Analysis: the depository makes its bye-laws with the previous approval of SEBI under Section 26(1), so the form is not left to private choice.
Link: the bye-laws deal with matters such as the eligibility criteria for admission of a person as a participant (Section 26(2)(c)).
Conclusion: the depository must use the form specified in its bye-laws.

Answer: A depository must enter into an agreement with participants as its agent under Section 4(1). The agreement must be in the form specified by the bye-laws, which are made with SEBI's previous approval. So the depository cannot use a form of its own choice.

Example 2

A depository and a participant, both required to enter into an agreement, fail to do so for 10 days. State the consequence under the Depositories Act, 1996.

Show the solution

Provision: Section 19B applies to a depository or participant required to enter into an agreement who fails to do so.
Penalty: not less than ₹1,00,000, and it may extend to ₹1,00,000 for each day the failure continues.
Cap: the total is subject to a maximum of ₹1,00,00,000.
Application: for 10 days, the per-day figure can reach 10 × ₹1,00,000 = ₹10,00,000. That is below the cap.
Conclusion: each is liable to a penalty of at least ₹1,00,000, and up to ₹10,00,000 on these facts.

Answer: Under Section 19B, each defaulter is liable to a penalty of not less than ₹1,00,000. It may extend to ₹1,00,000 per day of continuing failure, so up to ₹10,00,000 for 10 days, within the ₹1,00,00,000 cap.

Exam tips

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.
For the difference between a depository and a participant, say the depository holds securities and the participant is its agent and the investor's link.
Do not invent registration conditions. Use only what your study material supports.

Practice questions from Laws Governing Depositories and Depository Participants

Registration and Agreements of Depositories and Participants in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Registration and Agreements of Depositories and Participants: frequently asked questions

What does Section 4 of the Depositories Act, 1996 say?

It says a depository shall enter into an agreement with one or more participants as its agent. The agreement must be in the form specified by the bye-laws.

What is the difference between a depository and a depository participant?

A depository holds securities in electronic form. A participant is its agent and the link through which an investor uses the depository's services. The depository enters into an agreement with the participant under Section 4.

What is the penalty for failing to enter into a required agreement?

Section 19B provides a penalty of not less than ₹1,00,000. It may extend to ₹1,00,000 for each day the failure continues, subject to a maximum of ₹1,00,00,000.

How does an investor use a depository?

Under Section 5, a person, through a participant, enters into an agreement with a depository in the form specified by the bye-laws. Then, under Section 6, the person surrenders the certificate to the issuer, and the depository records the person as beneficial owner.