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

Mr. Arvind Shah, a retail investor, asks his broker why a stock exchange trade in India cannot simply be settled by exchanging paper certificates today. Which feature of the Indian capital market, introduced by the Depositories Act, 1996, best explains the shift?

The Depositories Act, 1996 allows securities to be held and transferred electronically by book entry through depositories. This eliminates paper certificate risks such as forgery, loss and delay. Depositories do not discover prices or replace exchanges; they only hold and transfer securities.

  1. AHolding and transferring securities in electronic book-entry form through depositoriesCorrect
  2. BMandatory physical delivery of certificates to the clearing corporation
  3. CSettlement of all trades only through bank drafts
  4. DReplacement of stock exchanges by depositories for price discovery

Explanation

The Depositories Act, 1996 enabled securities to be held in dematerialised form and transferred by book entry. This removes risks like theft, forgery and delays of paper certificates. Depositories do not perform price discovery; that is the exchange's role.

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