Depository system in India | Disadvantages | Remedial measures

After the 1990s, the various reforms undertaken by the Indian government, has influenced the capital market also. The Stock exchanges in India, have introduced online trading. For this purpose, dematerialization of securities has been undertaken. The Depository system in India has removed all the evils which were in the previous system that consisted of bad deliveries, loss of securities in transit, forgery and mutilation of share certificates.

Depository system in India:

Depository system in IndiaWith the modernization of Indian capital market, the transactions have increased in number. In order to introduce the Depository system in India, the Indian government passed the Depository Act 1996 and that has enabled the Bombay Stock Exchange (BSE.) and National Stock Exchange (NSE) to set up their Depositories. The NSE has set up NSDL known as National Securities Depository Ltd in 1996. The NSE was helped by IDBI and UTI in the promotion of NSDL.

How depository system in India Improved:

All the functions of depositories are undertaken by NSDL with the help of electronic network. The magnitude of transactions of NSDL could be judged by the volume of transactions undertaken by NSE which has gone up multifold. This is no mean an achievement, especially when the NSE could overtake BSE within 10 years of its inception. Comparatively, BSE is 125 years old.

The total number of depository participant in India has increased to 125 and it has more than 1,500 locations throughout country. There are more than 30 Iakh clients with Depository Participants. The dematerialization process involves a network system, combining Depository Participant with stock exchange, broker and the company whose securities are traded. Thus, the network system has enabled NSDL to improve the Depository system in India over the years.

Role of BSE in Depository system:

Similar to NSDL, the Bombay Stock Exchange (BSE) has promoted CDSL (Central Depository Services Ltd) in 1999. Compared to NSDL, the activity in CDSL is slightly on the lesser side which is evident from the value of securities and the number of beneficiaries.

The annual turn over in the Bombay Stock Exchange has also increased multifold. Badla system has been abolished and this has provided more scope for further activity in the Depository system in India.

Rolling Settlement in Depository System in India:

Rolling settlement has been introduced in India by which investors would receive payment on the fifth day after sale. Whereas in the previous weekly settlement process, sale proceeds of transactions done on the first trading day were made available on the 12th day and on the 8th day if the trade took place on the last day of the trading cycle.

NSE was the first exchange to introduce rolling settlement in the country. This is due to the introduction of Depository system in India. Since Electronic transfer of funds and dematerialization of securities are possible, rolling settlement could be duly introduced. However, transfer of funds in India still takes 2 or 3 days, as all banks in the country are not yet connected electronically with all their branches.

Disadvantages of depository system in India:

  • Increasing costs are experienced by shareholders, as the Depository Participants (D.P) debit the clients’ account for holding their account. This is due to the presence of number of depositories in the country.
  • Depository system is not effectively regulated by SEBI. This is evident from the fact that the Clearing and Settlement Corporation is not effectively handled by the SEBI.
  • The depository system should be made mandatory must, but some companies keep it as an option and do not consider it important. The stock market transactions will be uniform only if depository system is made mandatory in India.
  • When looking at the sheer number of securities yet to be dematerialized, it gives and impression that the General Public still lack knowledge of Depository system in India.
  • Discrimination between dematerialized and physical shares will affect transactions in the market. This has to be avoided.

Remedial Measures to overcome weakness in depository system in India:

For overcoming the above defects in the depository system in India, SEBI has to take up certain regulatory measures. This should be in the form of

  1. Compulsory dematerilization of all securities.
  2. Single depository system in place of multiple depository system; and
  3. Reducing the cost of dematerilization and depository charges.

If the above steps are taken, dematerilization will not only go a long way in improving our capital market but will also make our capital market on par with other foreign capital markets, as a result of which linking of our capital market with other foreign markets will be made easy.

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