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NISM Certifications · NISM-Series-VI: Depository Operations · Introduction to the Indian Capital Market

Mr. Arvind Rao holds shares in demat form and wants to know why the Indian capital market moved from physical certificates to the depository system. Which of the following was a key problem of physical securities that the depository system addressed?

The depository system addressed the risks of physical certificates, namely forgery, loss, theft, bad delivery and delays in transfer and registration. Holding securities as electronic book entries makes transfer faster and safer. Dividend declaration, regulation and holding limits were not the main reasons for the move.

  1. ARisk of bad delivery, forgery, loss and delay in transfer of share certificatesCorrect
  2. BInability of companies to declare dividends on shares
  3. CAbsence of any regulator for the securities market
  4. DRestriction on the number of shares an investor could hold

Explanation

Physical certificates carried risks of forgery, theft, loss, mutilation and bad delivery, plus delays in transfer and registration. Electronic book-entry holding through depositories removed these problems. Dividends, regulation and holding limits were not the reasons for dematerialisation.

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