Features and Regulations of SEBI (Depository and Participants) Regulation Act
In September 1995, Depositories Ordinance was promulgated. Following the issue of ordinance, SEBI sought views from the public on the framework of depository system. Finally, SEBI (Depository and Participants) Regulation Act was promulgated by the Government in May 1996. The regulations and features of the Act are explained below:
1. Scope of the Act
This legislation enables the issue of scripless trading, transfer of ownership through electronic media and holding of securities. As per the regulations, equity shares, debentures, warrants, bonds, units of mutual funds, rights under collective investment schemes and venture capital funds, commercial paper, certificate of deposit, money market instruments and unlisted securities are eligible to be admitted to the depository for dematerialisation.
2. Depository institutions
SEBI (Depository and Participants) Regulation Act provides for the formation of depository institution under the Companies Act. The depository institutions will be owned by the market participants. The minimum net worth of the depository should be Rs.100 crores.
3. Depository participants
A depository participant could be a public financial institution as defined in Section 4A of the Companies Act, 1956, Scheduled banks, RBI approved foreign banks operating in India, State Financial Corporations established under Section 3 of the State Financial Corporation Act, institutions engaged in providing financial services, promoted by any of the institutions mentioned above, either jointly or severally, custodians of securities who are registered with SEBI, NBFCs having a net worth of Rs.50 lakhs or more. These should fulfill the admission criteria laid down by SEBI. Depository participant is the representative of an investor in the depository system.
4. Investor’s option
As per the provisions of the ordinance, the holder of securities shall have an option whether to remain in non-depository mode or shift to depository mode. Those who like to remain in non-depository mode shall hold the physical possession of certificates of securities. The investors who opt to hold securities under depository mode shall open an account with a depository participant. They are given an identification number which serves as a reference for all their transactions with the depository participants. The investor will have the freedom to switch from the depository mode to non-depository mode and vice versa.
5. Free transferability
The Act has provided for free transferability of securities. By deleting Section 22A from the Securities Contracts Regulation Act and inserting Section 111A in the Companies Act, SEBI (Depository and Participants) Regulation Act has taken away the companies’ right to use their discretion in effecting transfer of securities. This would mean that on payment of agreed consideration, the buyer is automatically entitled to all the rights on securities. The depository participant, on being intimated about the delivery of securities, should effect transfer on delivery against payment. In the depository mode, the use of transfer deed is dispensed with.
6. Rights of the transferee
As per the provisions of the Act, the transferee of shares will have all rights associated with the shares. SEBI can appeal to the Company Law Board in case of any transfer in contravention of any provisions of SEBI Act or Sick Industrial Companies Act. On the strength of such an appeal, the Company Law Board can suspend the voting rights in respect of such transfer. However, the transferee will be entitled to other benefits in the form of bonus, rights and dividend attached to the security. On completion of the enquiry, the Company Law Board can direct the depository to rectify the ownership records.
Share certificates need not carry distinctive numbers and all shares will be part of fungible mess. All share certificates are interchangeable like withdrawing money from a bank which we do without comparing the printed number on the currency notes against the number of currency notes deposited earlier.
8. No stamp duty
Secondary market transactions in the depository mode are exempt from stamp duty. But when securities are issued by the issuer company, the company pays stamp duty regardless of the mode of holding securities by the security holder. If an investor opts to exit from a depository, the issue of share certificates attracts stamp duty. In other words, all transactions outside the depository mode are subject to stamp duty.
9. Legal evidence
The ownership records maintained by the depository or depository participants serve as a legal evidence in legal proceedings. The investor who remains in depository mode is given a pass book or statement of holding. These documents confirm the position of the investor legally.
10. Pledge or hypothecation
The securities left in the depository mode can become the subject matter of pledge or hypothecation. To encourage retail investors to invest in demat equity/debt, RBI has decided to increase the ceiling to Rs.20 lakhs if the advances are secured by demat shares. The minimum margin required against such shares has been reduced to 25%.