CHAPTER

II

FUNCTIONS
OF
DEPOSITORY

The company (NSDL) has twin challenge ofpopularizing the depository

concept in the country and establishing the soundness of depository
system and procedures in the minds of investors.
-Excerpts from third annual report of NSDL, 1997-98
 22

FUNCTIONS OF DEPOSITORY
The functioning of Depository and its constituents in India is primarily governed by the

Depository Act 1996, SEBI ( Depository & Participant) regulations, bye- laws and business

rules of respective depositories. The operational and functional issues relating to depository

system have been discussed in this chapter to give an idea of the practical implications of

various statutory and regulatory provisions.

Through depository and its constituents or business partners perform numerous functions, this

chapter deals with the functions performed by them exclusive for investors regarding depository

operations. This chapter also pinpoints that function of‘Investor- Education and Awareness’

regarding depository operations has not been given much weightage by depository and its

constituents.

How to drag the investors into demat system- is a big challenge before depositories. NSDL is

making efforts in this direction for expansion of services through Investors-Depository Meets

(IDMs). These IDMs suffer with the disease of thin presence of investors. The chapter discusses

in detail about the materiality of efforts of NSDL regarding awakening people and dragging

them into depository system. All the efforts have been evaluated from practical point of view

and in the end of the chapter, some easy to implement operational suggestions have also been

prescribed to manage the efforts of NSDL in more successful, effective and fertile manner.

Functional Relationship among Different Constituents of Demat System

All the players of the demat system are interlinked and have functional linkage too. Depository

system comprises Depository and its constituents i.e Depository Participants (DPs), Issuers/

RTAs (Registers and transfer agents) and Clearing Members of Clearing Corporation of Stock

Exchange. The given diagram presents the functional relationship among different constituents

of Depository System.

Following analysis clarifies the relationship among different constituents of demat system:

(1) Issuers / RTAs - Depository

Linkage between both of them is very important. The Depository provides the total securities

balances in electronic form as free balance, pending dematerialisation and rematerialise balances

to the Issuer or its RTAon a daily basis for reconciliation purposes. The depository also provides

the entire shareholders details on a particular fix date to the Issuer or its RTA in case of Corporate
 23

actions or for internal reconciliation of records whenever demanded by the issuer company.

Clearing House of ( 2
Exchange

f!_ Network of DPs with

their Branches
—>

IT
Investors or BOs or
Account holders or
Clients

2.1- Functional Relationship among Different Constituents of Depository

For getting this linkage, Issuer of securities or company must enter into an agreement with

Depository either directly or through its RTA for getting their securities in demat mode. The

name of the depository is substituted for the name of the shareholders in the Register of Members

(ROM) as and when the shareholders dematerialises their shareholdings. The number of entries

on the ROM reduces progressively with the acceptance of demat system by more and more

shareholders. The service obligation gets shifted away from the company to the DP with whom

the shareholders hold the accounts. Thus the organic link between the company and shareholders

gets weak. As per the requirement of the SEBI (Depositories and DPs) Regulations, 1996, the

depository is required to furnish beneficial holders information to the company at reasonable

frequency.

(2) Clearing Corporation/Clearing House of Stock Exchanges - Depository

The depository allots a unique identification number to the Clearing Corporation (CC) once it

gets admitted as a User on the Depository. Depository also opens CC Transit account and CC

Settlement Account for the use of the CC. The CC too opens one special account known as CC

Account with itself. This CC account consists of (a) a Pool account (b) a Delivery Account (c)
 24

a Receipt-in Account. These three accounts have all the characteristics of a Clearing Member

account and movement of securities for pay-in and pay-out is permitted in the Pool account of

the CC to the Pool account of CM.

CC/CH enter into an agreement with Depository for the limited purpose of settlement of trade

done on exchange. For effecting fast and effiecint settlement of market trades done on exchanges,

this relationship is very important. Off market trades are settled outside clearing corporation.

Whenever any market trade is made, to give effect to settlement of trade investors issue delivery

instruction to their respective DPs to transfer securities into their CM accounts. DPs forward

these requests to Depository from where they are transferred to Clearing Corporation through

CC Transit account. Once the trade is settled through CC Settlement account of depository,

transfers are made to CMs accounts from there they are routed to the demat accounts of the

investors by the DPs. In this manner the relation ship between CC/ CH and Depository is

important for flow of securities for pay-in and pay-out.

(3) Network of DPs - Depository

This is the most important functional relationship between two participants in demat system.

Any intermediary cannot function as DP unless it enters into an agreement with the concerned

Depository in a prescribed form. The DP maintains continuous electronic communication with

the depository and is required to reconcile its records with the depository on a daily basis. The

Depositories Act defines the relationship between the depository and its DPs as agency

relationship, technically, it is a special relationship governed by the statute and different from

the traditional principle -agent relationship.

DPs are agents of Depository and in this capacity each and every information is exchanged

between both the constituents. All the depository operations are performed for investors

because of this relationship. Dematerialisation of securities, Settlement of trade in electronic

securities, pledge of securities, corporate actions and all services to investors regarding depository

operations are routed through DP to Depository and investors.

(4) Clearing Members - Depository

Any CC or exchange which is registered as a User with any depository take help of CMs for

settlement of trade done on exchange. CM must also be the registered member of the CC

having a unique CC-CM-Id. After receiving this identification number, he should get a CM-
 25

BP-Id from the depository. Only after getting these particular numbers, CM is authorised to

open CM account with DP of his choice. CM can open only one CM account.

CM is interlinked to Depository through his DP for the purpose of getting the trade settled on

exchange. No CM can move securities from its Pool account to the Pool account of another

CM.

(5) DPs and Investors (BOs) - Depository

Both are closely linked to each other. Any investor intending to avail demat services has to

enter into an agreement with a DP of his choice. The standard agreement is approved by SEBI

and forms part of NSDL’s Bye-laws. This agreement sets out in contractual from the nature of

services to be provided, rights and obligations of the DP as well as the Client (demat account

holder), and the fees/charges payable for the services.

All the functions of Depository System are performed by DPs for investors. All the services for

investors are provided by DPs only through their linkage with Depository. Investors give

instruction physically and electronically to their DPs regarding movement of securities only.

DPs forward all their requests to Depository and entries are made in the accounts of investors.

There is maximum flow of information between these two participants.

All the above constituents of depository system perform various operations which come under

the category of demat services. For providing functional linkage among different constituents,

computer systems are required having connectivity. All the computers installed by DPs (DPM-

DP). Issuers (DPM-SHRs), and stock exchanges (DPM-CC) are connected to depository central

system (DM) through V-SAT (very small aperture terminal) or leased lines. They are collectively

called Business Partner Systems. Any transaction conducted by any computer system in the

depository system which is targetted to reach any other computer system first gets recorded in

DM and then reaches the target. No two business partners’ systems can communicate to each

other without passing through the DM.

Functions of Different Constituents of Demat System

All constituents of demat system work as a team for performing different functions for demat

account holders. Following is the detail of functions performed by constituents system:

(1) Key functions of Depository

A depository is very much like a bank in many of its operations. To have a better understanding
 26

of the depository system, an analogy between bank and depository has been made:

Table 2.1
Depositories and Banks-an Analogy

Depositories Banks

They hold securities in their accounts. They hold funds in their accounts.

They transfer securities between demat They transfer funds between accounts on
accounts on the instruction of account the instruction of the account holders.
holders.
They facilitate transfer of ownership They facilitate transfer without having to
without having to handle securities. handle money

They provide safekeeping of securities. They provide safekeeping of money

They try to give quality services to their They also try to give quality services to
clients. They also provide the facility to their clients. Most of the banks provide
monitor the demat account through Internet banking facility to their clients.
Internet.
They make entries in electronic accounts They make entries in accounts on the basis
on the basis of Delivery Instruction Slips. of Cheques and Pay-in-Slips.
Besides keeping records, they also facilitate They also perform various other functions
functions like pledge and hypothecation, like credit creation, lending, project
corporate actions and stock lending and financing and agencies job etc.
borrowing.

Source: Handbookfor NSDL Depository Operations Module 1, page 21 (modifiedand enlarged

form)

The above table clearly explains the similarities between the operations of the banks and

Depositoies but there are some functional differences between the two that are explained as

below:
 27

Table 2.2
Depositories-Banks-the Differences

Depositories Banks
All joint holders are required to sign Either of holders can sign instructions while
instructions while operating a Joint demat operating a Joint Bank account.
account.
Interest can be earned only by Depending upon the type of account, clients
participating in stock lending scheme are entitled for interest.
They do not move balances in account They use balances held in clients accounts.
without account holder’s authorization
Signature and photograph of nominee is to Nomination is kept confidential by the
be provided by accountholder. banks.
Demat services have limited spread and Banking services are accepted universally
acceptance among people by the people.
Demat services are governed by SEBI Banking services are governed by RBI.
They do not have any right to rectify an They have the right to rectify an error or
error or omission committed by DPs omission committed by then without
without pre-consent of beneficial owners. consent of account holders.

Source: Handbook for NSDL Depository Operations Module-1 (modified & enlargedform)

The above table clearly points out the differences in the operations of depositories and banks. It

can be concluded that demat operations are somewhat similar and somewhat different from

banking operations. Even banks provide demat services as DPs to people.

Principal functions of a depository is to dematerialise securities and enable their transaction in

book entry form. Apart from that it performs the following functions:

(i) To work as Custodian of electronic securities.

(ii) To enable the transactions in securities in book entry form by debiting transferor DP AJc and

crediting the transferee DP A/c

(iii) To record the allotment in case of IPOs, originally allotted in electronic form by the issuers

to the beneficial owners.

(iv) All the services provided by DPs for investors are facilitated through depository only.
 28

(v) To handle corporate actions in two ways:

(a) It merely provides information to the issuer about the persons entitled to receive corporate

benefits ( monetary and non- monetary both)

(b) It itself takes the responsibility of distribution of non- cash benefits.

(vi) To provid information about the voting rights to the Issuers and the beneficial owners of the

securities.

(vii) To maintain a linkage with Clearing Corporation or Clearing House of a stock exchange

to give effect to Clearance and Settlement System for trades done in securities by the investors.

Basically Depository is main constituent which interlinks all concerned constituents for all

types of depository services. It acts as a tunnel from where each and every act of demat service

passes and it does not permit direct linkage between its different constituents.

(2) Functions of DPs.

The primary function of DPs is to provide securities related services offered by depository to its

business partners including investors. All the operational procedures under Depository System

are performed with the help of DPs.

DPs are Depositories’ interfaces for investors. As per Section 4 of the Depository Act, 1996, ‘A

DP is an agent of the depository who provides various services of the depository to investors’.

Any investor who likes to avail the services of a depository has to enter into an agreement with

any DP of his choice. The DP will then make the depository services available to that investor

In strict legal sense, Depository Participant is an entity which is registered as a DP with SEBI

under the provisions of SEBI Act. As per the provision of the SEBI Act, a DP can function

regarding depository related services only after obtaining a certificate of registration from

SEBI. On the basis of the prescribed eligibility criteria, Depository Participant may be of any

of the following categories:

♦ Institutional participants e.g. banks and financial institutions

♦ Broker participants

♦ Clearing Corporation

♦ Custodian participants

♦ Registrar and Share Transfer Agents

♦ Non- Banking Financial Companies

All the above categories of DPs provide operations with same safety levels.
 FUNCTIONS OF DPs

To act as service providers to investors, as they are Depository inter-faces for investors

CORE SERVICES SPECIAL OTHER HIDDEN SERVICES

1) Account Opening SERVICES SERVICES 1) To maintain records
for an investor 1) Pledge and 1) Rematerialsation of all the transaction
2) Dematerialisation Hypothecation at the option of entered between
of securities of securities investor Depository and
3) To give effect to 2) Stock lending 2) Facility to investors for a period
transfers in demat and Borrowing operate demat of five years.
accounts in case as approved account through
presentation of services of DPs for investors:

2) To preserve details
of trade of intermediary of Internet of securities
securities SEBI 3) Account freezing dematerial ised and
4) Settlement of 3) Non- monetary and defreezing rematerialised on
Off- market trade Corporate facility behalf of beneficial
2.2- Functions of DPs

5) Transmission and benefits/ actions 4) Daily updating owners.

Nomination of for investors the data base of 3) To maintain records
electronic 4) Allotment in all beneficial of instructions
securities case of Public accounts received from
Issuesf IPO in 5) To issue beneficial owners and
demat form Transaction statement of account
5) Distribution of Statements/ provided to beneficial
cash corporate Holding owners.
benefits only for statements at 4) To maintain records
govt, securities regular intervals of approval, notice,
entry and cancellation
pledge hypothecation.
29

DPs perform numerous functions or services for investors. Given below is the diagrammatic
 30

The above diagram shows that DPs provide numerous services to investors regarding day to

day operations. These services have been above classified as core sendees, special services,

other services and hidden services. For providing all these services, DPs perform the different

functions which are listed below:

(i) They give effect to dematerialisation, i.e. getting physical securities converted into

electronic from.

(ii) They convey request of investors for dematerialization, i.e. getting electronic securities

balance held in a BO account converted into physical form.

(iii) They maintain record of holdings of BO in the electronic form.

(iv) They give effect to Settlement of trade by delivering/ receiving underlying securities

from/ in BO accounts with the help of transfer entries.

(v) They facilitate settlement of off- market trades i.e. transactions between BOs entered

outside the stock exchange.

(vi) They provide electronic credit in respect of securities allotted by Issuers under IPO.

(vii) They receive (on behalf of demat account holders) non-cash corporate benefits, such as.

allotment of bonus and rights shares, securities ensuing upon consolidation, stock split

or merger/ amalgamation of companies. After receiving these benefits, DPs distribute

these benefits into the eligible investors’ accounts.

(viii) They facilitate pledging of dematerialised securities on behalf of BO.

(ix) They facilitate securities lending and borrowing, if the DP is registered as an ‘Approved

Intermediary” for this purpose.

(x) Transmission of securities in case of death of an investor.

(xi) They undertake the responsibility of distribution of cash corporate benefits in case of

govt, securities only.

(xii) They maintain and preserve records of all the transactions with investors for a minimum

period of five years for future references.

DPs are the most important participants from investor’s point of view. All the operations, concerns

and matters of investors are handled by the DPs only. They are the bridges between Depository

and investors.
 31

(3) Functions performed by Issuers/ RTAs

Registrar to an issue and share transfer Agent is a critical link in the Capital Market between

Issuer (company), stock trades and Investors. Whether it is a primary Public Issue or a Secondary

Market Trade, role of RTAs is important. Most of the issuer companies engage services of

RTAs for all type of demat services for their shareholders.

RTAs presence is important in a depository setup for performing following functions:

(i) Dematertialisation of Securities -Issuers/ RTAs verify the validity of the securities as well

as the fact that the demat request has been made by the person recorded as a member in Register

of members. After such verification the Issuer/ RTA intimates Depository and authorizes an

electronic credit for those securities in favour of the investor. On receipt of such intimation, DP

makes the credit entries in the account of the concerned investors. No credit of any securities to

the accounts of any investor can be made unless Depository has received an intimation from

Issuers/ RTAs. In this way they play a key role in the process of dematerialisation.

(ii) Reconciliation of electronic holdings held with depository- RTAs are involved in updating

of data downloaded from Depository on a periodical basis. Proper records are kept in the books

of RTAs about all the beneficial owners of securities. When ever any corporate action is taken

place, they reconcile holdings in demat accounts of investors with the records maintained by

them. If there is any mismatch of records them non-monetary corporate benefit in relation to

that beneficial owner is suspended to be paid through DP. Later on that benefit is directly sent

by the RTA to respective beneficial owners of securities.

(iii) Corporate Benefits/Actions- They inform Depositories about the corporate actions relating

to securities and prescribe date for book closures, record dates, dates of conversion of debentures,

dates for redemption or maturity of securities, call money dates and such other actions from

time to time.

(iv) Initial allotments in demat form - They provide DPs list of eligible investors with specified

number of securities to be transferred into the demat accounts of eligible investors who are

willing to have securities directry in their demat accounts.

(v) Confirmation of beneficiary holdings- Depository updates the data on daily basis regarding

accounts of beneficial owners. RTAs also up-date data downloaded by Depository on a periodical

basis. Thus the records maintained with the Depository as well as with RTA are reconciled.
 32

Whenever required, RTA assists in confirmation of beneficial holding of investors with the

Depository.

(vi) Rematerialization of hoIdings-They issue physical securities when an investor requests

through its DP for rematerialisation. The Issuers/ RTAs after validating the rematerialisation

request, dispatch the securities certificates to the investor within the period of 30 days from the

date of request.

In addition to above important function they also performed these functions related with investors-

(a.) They distribute dividend, interest or other monetary benefits directly to the eligible BOs on

the basis of the list provided by Depositories.

(b.)They take decision regarding rejection of any Dematerialisation request on some genuine

ground and intimate electronically to the Depositories regarding such rejection within a

period of 15 days.

(c.) They authorise Depositories for transfer and all other related actions concerned with securities

once any company joins Depository System.

An investor is not directly linked with RTA in depository environment. All the issues, concerns,

complaints and functions related with Issuers/RTAs are handled by the Depository itself or

through its DPs for investors.

(4) Functions performed by CC/CH of stock exchange and Clearing Members

CC/CH performs these functions in depository environment:

(i) It ensures payment against delivery and guarantees settlement of trade done on exchange

by investors.

(ii) It co-operates at all times to redress the grievances of investors and DPs in respect of its

operation in relation to Depository System.

(iii) It verifies all the trades, consolidates all the transactions and then make settlement of

money and securities through netting of transactions.

Role of Clearing Corporation/ Clearing House is totally absent regarding Off- Market trades

done by investors.

Investors are attached to CMs through DPs for settlement and Clearance of trades done by them

on stock exchanges. Clearing members play vital role in settlement process through CM accounts

opened with any DP to facilitate settlement of trades executed by investors. These CM A/cs are
 33

only transit accounts where securities can be kept only for the purpose of delivering for pay-in

or distribution to buying investors after payout. They perform following functions in depository

environment:

(i) They ensure settlement of trades executed through registered stock- brokers or sub­

brokers.

(ii) They inform about settlement deadlines to selling clients to safe guard them against

auctions of securities in case of bad deliveries.

(iii) They complete the pay-in (both for securities as well as for fund) before the deadline

prescribed by the stock exchange.

CMs role is very important in settlement of trade in rolling segment.

Performance Appraisal of Different Functions performed by Different

Constituents of Depository System
There are several laws, by-laws and business rules relating to different aspects of depositories.

Due to greater number of laws, greater seems to be the possibility for regulatory and operational

overlaps and gaps. An attempt is made to evaluate the performance of different functions

performed by each constituent of depository system. Although SEBI is regulatory body regarding

all depository operations but it has been also included in this list for the compact presentation

of Investors’ opinion about the overall satisfaction level regarding operations of different

constituents. The results of respondent investors were complied as follows:

Table 2.3
Respondent Sample Investors on Overall Satisfaction about Role of SEBI
and Functions Performed by Constituents
Regulator and Constituents Percentage of Investors Recommending
of Demat System Performance of Constituents as Satisfactory
SEBI 89
Depositories 88
DPs 82
Brokers / CMs 72
Companies/ Issuers 68

Source: Field investigation

 Chart 2.3

RESPONDENT SAMPLE INVESTORS ON OVERALL SATISFACTION

ABOUT ROLE OFSEBI
AND FUNCTIONS PERFORMED BY CONSTITUENTS
P e r c e n ta g e o f In v e sto r s
R e c o m m e n d a tio n s

Regulator and Constituents of Demat System

Source: Table 2.3

 35

In the light of above fact as per the table (and Chart 2.3), it is clear that as high as 89% of

investors are satisfied with present regulatory role of SEBI regarding operational frame work of

depository system. Depository Act, 1996 has empowered SEBI to regulate Depositories, DPs,

Issuers and stock exchanges. Depository is required to make Bye laws only with the prior

approval of SEBI. All the Bye laws of Depository system have been made only after the

recommendation of SEBI. Satisfaction of about nine-tenths of investors regarding role of SEBI

in depository environment is a proof and self evidence of very good legal framework of demat

system .

11% of the investors are not satisfied with present role of SEBI. Their concern for dissatisfaction

is due to high cost of dematarialisation imposed on investors as well as pending problems

regarding dematerialisation of securities.

About 88% of investors are totally satisfied with the role of Depository regarding demat

operations. Satisfaction of more then fourths of Investors regarding operations performed by

DPs is a healthy indication of general satisfaction of investors. 72% of investors have no

grievances with their brokers/ CMs while the satisfaction level is the lowest in case of issuers /

companies. Only 68% of the investors are comfortable with their issuers/ companies because of

the so many problems concerned with securities.

Non satisfaction by 12% of investor with regards to depositories is due to the fact that depositories

exercise no control over the charges charged by DPs. Dissatisfaction of 18% of investors from

their DPs is due to high charges as well as because of poor standard of services provided by few

DPs. Dissatisfaction of 28% of sample investors with regards to their brokers/ CMs, is due to

the fact that investors some times face the problems related with settlement of trade without

their any negligence. About 32% of investors are not satisfied with the functions of their

companies / Issuers because of irritating problem of dematerialization concerned with RTAs.

Conclusion

About 68% to 88% of sample Investors have accepted the performance of different constituents

as satisfactory in every case, it is clear indication of overall satisfactory performance of demat

participants and there is no scope of overlaps in the functions of different constituents although

their functions are closely knitted.

In present depository environment all operations regarding securities are performed automatically
 36

with help of computers. Capital Market has been institutionalised because geographical barriers

have been abolished due to screen-based trading and Internet based facility ofNSDL and CDSL

to submit instructions electronically. Although the present system seems to be satisfactory with

all aspects regarding operational functions performed by different Depository constituents yet

the object of accelerating awareness among present and prospective investors has not

being given much weightage. No constituent of depository system has been entrusted with

the task of investors’ education and awareness. Here the question arises that who should be

responsible for this task of attracting prospective investors, educating and making them aware

about the system. One common question was asked from investors and all personnel working

in different constituents of depository system. Results of the responses have been complied as

follows:

Table 2.4
Distribution of Response Frequencies on Responsibility
of Investors’ Education And Awareness
Responsibility Percent of Percent of DPs’ and Percent of CMs’ &
of Investors’ Investors’ Response Depositories’ RTAs’ Response
Education in Favour Response in Favour in Favour
Govt. (SEBI) 40 50 25
Depositories 51 60 50
DPs 35 43 42
Brokers 19 38 Nil
Issuers & 5 23 Nil
RTAs
Self- education 14 25 25
by Investors

Source: Field Investigation

Note: Total of percentages in this table exceeds 100 because many investors opted for more

than one option

An important outcome of this response table (and Chart 2.4) is that it is the combined

responsibility of SEBI, Depositories and DPs to make people aware and educate about the

system.

All the constituents of depository system agree that major responsibility of investor education
 Chart 2.4

DISTRIBUTION OF RESPONSE FREQUENCIES ON

RESPONSIBILITY OF
INVESTORS’ EDUCATION AND AWARENESS

sasuodsay JO 38BJU39J9J
Constituents responsible for Investors' Education and Awareness

Source: Table 2.4

 38

and awareness lies on the shoulder of Depositories. More than half of investors, DPs and half of

the RTAs / CMs have symmetry in their opinion regarding responsibility of task of investor

education and awareness as duty of Depositories. Other entity responsible for this task are

DPs which have been recommended by 35% of Sample investors, 43% of DPs itself and 42%

of RTAs / CMs.

Although issuers/ companies are considered to be the most beneficial because of the demat

system yet recommendation for their responsibility as educator has not been recommended by

investors. Only 5% of investors consider them responsible for this function which is very

negligible.

While 14 % of sample investors believe in self-education about the system, expectation level of

all other constituents of Depositories is 25% from investors.

Conclusion

While Depositories are engaged in task of investor education and awareness, role of other

constituents is totally absent in this regard. Constituents of Depository take no pains in making

people aware and educate about the system and it is clear from their response in the above table

where recommendation of RTAs and CMs are nil in there own favour of taking responsibility

of investors education. While 43% of DPs accept themselves responsible for educating investors.

As all the demat constituents are depository service providers as well as beneficiaries of demat

system, they must participate with Depository to make people educate as they themselves would

receive the benefits in terms of more and more clients as well as business in the market.

In the light of the above table, it can be established without much effort that major responsibility

of education and awareness of investors lies on the shoulders of the Depository as the percentage

of response is highest in favour of Depositories in each category.

NSDL’s Efforts regarding Making People Educate about the System

NSDL is the major depository of India. In its third annual report (1997-98), NSDL has accepted

that the company has twin challenge of popularising the depository concept in the country

and establishing the soundness of depository systems and procedures in the minds of

investors. How far depository has been successful in its effort of accelerating awareness among

investors, it needs to be evaluated.

NSDL has adopted a number of measures to educate people about the operation of Depository.
 39

Following is the list of efforts in this regard:

1. IDMs (Investors Depository Meets)-IDM is a platform where NSDL interacts with present

and prospective users of depository system with the purpose of creating awareness about the

facilities, benefits and precautions regarding operating demats accounts. One more purpose of

these meeting is to get feedback of the operations of the system. Here investors are approached

through a series of meetings. This is the only mode of direct interaction between Depository

and investors.

These IDMs are aimed to provide first hand information to the investors. The DPs are allowed

to put up their stalls so that investors can directly interact with them.

2. National wide advertisement compaign in newspapers of national importance- NSDL

undertakes investor awareness compaign through print media in districts of the country having

significant investment population. Such type of campaigns were launched in September 2002

in leading financial dailies, English dailies and vernacular dailies with the view to empower

investors with necessary precautions to be taken while availing of Depository services and to

inform them various important facilities of the system. It was targeted in 248 districts in the

country. The ‘Dos and Don’ts were published to draw investors’ attention towards various

safety related issues in maintaining depository accounts.*

3. Web-site- NSDL launched its revamped web-site www. nsdl.co.in with several users-friendly

features. The web-site hosts exhaustive information for investors who are interested in self-

education. It gives list of demat securities, DP locations and contact details, important circulars,

procedures, legal provisions, system requirements and list of companies which have poor demat

confirmation record.

4. Nest Update- It is monthly bulletin of NSDL. It has different section on corporate actions,

name change of companies, date of IDMs and all-important information about demat.

5. DPs’ Directory- NSDL releases zone-wise DPs’ Directory. This directory provides a ready

reference to the DP service centers in different locations/ towns, cities and other contact details.

The directory also gives a comparison of tariff structure of different DPs.

6. Investors’ Guide- NSDL publishes “Investors’ guide to the depository system’ for promoting

investors’ understanding about depository system. The guide attempts to answer all frequently

*extracts from annual report of NSDL 2002- 03

 40

asked questions that an investor may have in relation to depository system. Investors may obtain

a copy of this publication free of cost from NSDL branches.

7. Help-desk of Depository -Depositories have established help- desks for investors which

can direct investors to appropriate agency in case of any discrepancy. Phone Numbers of NSDL

or CDSL office are the help -desk numbers that are published in their all important documents.

Phone number of help- desks of CDSL is 011-30970188 and of NSDL is 011-23353815, OH-

23353817.

All the above points indicate about the efforts made by NSDL regarding educating people so

far.

Materiality of Depository’s Endeavour of Investors Awareness through IDMs

‘Become an informed investor and reap the rewards’ this is a common mantra which means that

an investor can be benefited only when he is an informed investor. NSDL conducts IDMs

across the country to get in touch of all the present and prospective users of depository system

and to get their feedback about demat operations. But how successful such meetings are? Are

they really beneficial ? How many investors have ever attended such meetings? These are

some of concerned issues that drag attention. To analyze these queries, a question was asked

from investors regarding attending such meetings

Table 2.5
Composition of Response Frequencies on attending IDMs
by Retail Investors

Percent of Sample Percent of Sample

Particular Investors who have ever Investors who never
attended such Meetings attended any such Meeting
Investors-Depository Meets
organized anywhere and 3 97
anytime by NSDL

Source: Field Investigation

As per the above table it can be concluded that these meetings have been attended by only 3%

of sample investors. Attendance of 3% of investors indicates a very poor presence of investors

during meetings. 97% of the investors have never attended any such meetings. Even the
 41

records of NSDL indicate and verify this bitter fact regarding the success of these meetings.

Table 2.6
Composition of Information regarding Investors’Attendance
in IDMs as per NSDL Records

Total number of Gties Covered No. of Investors Average No. of

Financial Year IDMs organized for IDMs attended the Investors attending
during the Year Meetings one IDM
2000-01 61 61 9331 153
2001-02 93 85 11000 118
2002-03 84 84 9000 107
2003-till Aug.05 312 N.A 43669 140
Total 550 73000 133

Source: Data complied from annual reports of different relevant periods and Nest Update

Sept. 2005

The above table clearly indicates about the total number of meetings organized by NSDL during

different financial years. Average number of investors attending one IDM is decreasing every

year which indicates the least interest and thin presence of investors in these meetings .

Till August 2005, NSDL has conducted 550 IDMs across country with more than 73000 investors

participating in these seminars*. On the basis of this data, on an average only 133 investors

have attended one IDM that is the proof of less popularity of these meetings.

Non- attendance of IDMs by 97% (Table 2.5) of sample investors is due to either lack of

information about such meetings or no interest of common people in such seminars.

Both these factors play an important role in thin attendance of investors in such meetings. It is

worthwhile to mention that Data of field investigation of survey are related to the urban and

developed cities like Delhi and Faridabad where people are educated and NSDL organise

meetings almost every year. Reason for non-attendance of meetings by such large number of

investors have been analyzed in the following table:

*as per Nest Update, September 2005, p. 7

 42

Table 2.7
Composition of Response Frequencies on Reasons for Non- attendance of
IDMs by the Present and Prospective Investors
Reasons for not attending any IDM Percent of Respondent Investors
Accepting the reason
No information regarding such meetings 77
No interest in attending such meetings 47
No such meeting was ever held in our city 23

Source: Field Investigation

Note: Actual total of percantages in this table exceeds 100 because many investors opted for

more than one reasons for not attending Investors- Depository Meet.

The above table indicates about the reasons for non-attendance of any such meetings by investors.

77% of investors have no information regarding such meetings. They have no idea regarding

such meetings which indicates less effective methodology adopted by NSDL regarding providing

information of date of IDM to investors. Around half of the investors (47%) have no interest in

such meetings. Either they believe in self-education about any system or they do not have the

time to attend such meetings or they find meetings useless events. Around 23 %of investors

have the opinion that no such meeting was ever held in their cities, it again indicates about lack

of information regarding date and venue of such meetings to common investors.

As IDM is the only direct communication between NSDL and investors, the question arises

how useful these meetings are? Regarding utility of such meetings, a question was asked from

investors as well as from DPs through questionnaires and results of the survey were complied

as follows:

Table 2.8
Composition of Response Frequencies of Investors regarding
Degree of Beneficial of IDMs
Degree of Beneficial Percent of Percent of Respondent
of IDMs Respondent Investors DPs & Depositories
Very much beneficial 37.5 47.5
Beneficial to certain extent 37.5 25
Not beneficial at all 25 27.5
Source: Field Investigation
 43

The result based on Table 2.7 indicates regarding usefulness of such meetings. As 37.5+ 37.5=

75% of investors (out of those who have attended these meetings) find such meetings as

beneficial. 37.5% consider these meetings very much beneficial while an equal % of respondent

investors consider these meetings as beneficial to certain extent. These results clearly tell that

these meetings are beneficial. 25% investors find such meetings not much beneficial. It may be

due to the cause that these meetings are just informative and the outcomes of such meetings are

not implemented because of the absence of DPs in these meetings. Problems can only be

discussed on the platform of IDMs but they cannot be solved without presence of DPs with

whom investors have direct interaction.

Response of DPs and Depositories were collected on the materiality of IDMs as they themselves

are directly attached to the IDMs. Following table explains the DPs’ opinions regarding IDMs:

Table 2.9
DPs’ Responses regarding Statements related with IDMs
Percent of Sample DPs’ & Depositories’

Statements response recommending the Statement as

True

Meetings are attended by large 29

number of investors.

Sufficient number of meetings are 36

held throughout the year.

Meetings are held in almost all cities 33

of the country.

Source: Field Investigation

(i) Meetings are attended by large no. of investors- 29% of respondent DPs accept this

statement as true that large number of investors attend such meetings while 71% of DPs do

not accept this statement. As the statement is not accepted by more then double number of

DPs acceptance, it can be concluded that undoubtedly there is thin attendance in such meetings.

(ii) Sufficient number of meetings are held throughout the year - Non- recommendation by

64 %(100-36) of DPs regarding holding of meeting through the year indicates about less frequency

of such meeting in a year as compared to national- wide dispersal of depository system.

(iii) Meetings are held in almost all cities-Again an important query about such meetings that

whether such meetings are held in almost all cities. This fact is supported by exactly one third
 44

of majority of DPs while two- third majority is against this statement. Non-support by two-third

of DPs indicates an important fact that such meetings are not held in almost all cities, especially

in rural areas.

Although the meetings are beneficial but not fertile. Majority of investors has never attended

these meetings. Even the DPs response indicates that there is something lacking regarding

these IDMs which needs to be amended.

Weaknesses of Investors’ Education and Awareness Programme conducted

by NSDL
What are the barriers or hurdles in the popularity of these IDMs? What are the shortcomings in

other efforts of NSDL’s Investors’ Education and Awareness Programme? Following are the

observations of the researcher and sample investors regarding lack of desired popularity of

NSDL’s efforts for attracting, awaking and dragging present and prospective investors towards

demat system:

(i) Less effective methodology adopted by NSDL to provide information to investors

regarding IDMs- NSDL has been making sincere efforts regarding IDMs which are directly

organized for investors. But the way adopted by NSDL regarding informing investors about

such meeting is not effective. NSDL publishes the date and place of such meetings in its monthly

bulletin known as Nest Update. This magazine is not for private circulation so investors are

unknown about such meetings well in advance. The monthly bulletin can be electronically

down loaded from the web site of NSDL but it comes under the category of self education. In

a country like India where only 14% investors believe in self education (as per Table 2.4), this

medium of informing people about IDMs is not much effective. This event is also informed to

investors by NSDL through these ways:

(a) Advertisements in Newspapers of national level (not newspapers of local ones, which can

inform common people about date of such meeting).

(b) Invitation Cards directly from NSDL to randomly selected investors

(c) Invitation cards of NSDL through DPs (which are generally never displayed or delivered to

investors by any DP).

NSDL needs to be aware about its faulty and defective way of inviting and attracting people

towards IDMs. Above facts are the root causes of the fact that a very high percentage of investors
 45

(77 % of sample investors as per Table 2.7) have no information regarding an event like IDM.

(ii) Lack of interest of large number of investors in seminars like IDM- Lack of interest of

people in such meetings or considering these meetings a wasteful effort with zero end results is

the cause of non-success of these meetings. In these meetings interaction is made between

Depository and investors and the bridge (DPs) between them are absent. DPs are allowed to put

their stall but no representative of DPs is present in such meetings who can understand the

problems of investors and can inform the Depository about DPs problems in resolving those

issues. Problems regarding demat operations can only be discussed but can not be solved for

investors without presence of DPs. This makes the meetings meaningless and most of the

investors do not find it useful to attend such meetings.

(iii) Number of meeting organized or frequency of meetings is very less as compare to

total number of investors-Total number of meetings organized by Depository is limited. Roughly

one meeting is organized in a city once in a year which is very less keeping in view the wide

spread depository system. As per the annual reports ofNSDL only 61,93 and 84 meetings were

organized all over the country in 61 ,85 and 84 cities in the year 2000-2001 , 2001-02,and

2002-03 respectively. Total 550 meetings have been organized till August 2005 (As per the

Nest Update of September, 2005) in different cities which is itself the proof of very limited

number of such meetings organized by the NSDL.

(iv) Attended by very thin investor population- Total number of investors attending such

meetings is so limited, which is indicator of less effectiveness of such meetings. As per the

annual reports ofNSDL only 9331, 11000 and 9000 persons attended such meetings in annual

year ending on 31 st march 2001,2002 and 2003 respectively. This the proof of thin attendance

of investors in such meetings.

(v) Meetings are not organized in all parts of country covering semi-developed or rural

areas- Limited number of meetings organised by NSDL during any particular year is itself an

indication that such meetings do not cover investors from all over the country. NSDL chooses

those cities that are already heavy investors population. Semi developed or rural areas are always

deprived from such meetings where need for education and awareness is at the peak.

(vi) ‘Investors Guide to Depository’ is not within reach of all investors- ‘Investors guide to

the Depository’ for promoting investors understanding of the system is although free of cost
 46

but an investor can get a copy of it only in IDMs. These booklets are distributed only in IDMs

so very- very limited number of persons get a copy of it. As number of meetings as well as

attendance of the meeting is very thin, most of the people have no copy of such guide.

(vii) No combined contribution of all the constituents of Depository in investors Education

and Awareness- As per the Table 2.4, Invstors’ education and awareness is a collective

responsibility of all partners of depositories. But DPs, CMs, Issuers/RTAs take no pains for

popularising the demat System. In the capacity of agents and business partner of Depository,

all constituents should shake hands with Depository in Investors’ awareness and education

compaign.

(viii) IDMs are the only mode adopted by NSDL regarding approaching investors directly-

But as the table given below indicates that seminars (Investor Depository Meets) are the least

effective way to communicate with investors in India.

Table 2.10
Response frequencies on Source of obtaining Knowledge
about any System.

Source of Receiving Knowledge about any System Percent of respondent investors

(i) TV Channels 07
(ii) Newspapers 40
(iii) Magazines 12
(iv) Brokers 34
(v) Friends 23
(vi) Seminars 03

Source: Field Investigation

Note: The actual total of percentages in this table exceeds 100 because many investors opted

for more than one source for attaining knowledge about any system.

The above table (and Chart 2.10) clearly indicate that the most powerful source of spreading

and popularising any system is the newspapers which is supported by 40 % of investors while

the seminars and workshops have been recommended by only 3% of investors as medium for

communication. Other modes of communication with people are brokers, friends and TV

channels which have been accepted by 34%, 23% and 7% of investors.

 Chart 2.10

RESPONSE FREQUENCIES ON SOURCE OF OBTAINING

KNOWLEDGE ABOUT ANY SYSTEM
P e rc e n ta g e

TV Channels Newspapers Magazines Brokers Friends Seminars

Sources of Knowledge

| □ Percent of Respondent Investors

Source: Table 2.10

 48

(ix) DP Directory- Although this directory is useful as it contains information about addresses

and fee structures of different DPs in a particular Zone but the directory is not for private

circulation and it is outside the approach of common investors.

(x) Web-site of NSDL -It is a web-site full of treasure of information. Each and every information

regarding depository system is available on it. But visiting a web-site by an investor comes in

the category of self-education that is not much popular in India.

Because of the above limitations, efforts of NSDL have not been much fruitful regarding

popularising the depository system in the country.

Suggestions for Mending NSDL’s efforts

NSDL’s efforts regarding popularising the depository system can be better rewarded with little

amendments in present efforts. As per Table2.8, Investors- Depository Meets are beneficial for

investors but majority of the people have no information regarding such meetings. As IDMs are

the main effort of NSDL’s Investors’ Education and awareness Programme, some suggestions

regarding making these meetings really a fruitful effort have been mentioned. These suggestions

were also the part of questionnaire for investors, DPs and Depositories. Response of sample

investors and DPs regarding these suggestions (concerned with meetings) have been complied

as follows:

Table 2.11
Investors’ Recommendations of Suggestions regarding Mending IDMs

Percent of sample Percent of sample

Suggestions Investors’ DPs + Depositories’
Recommendations Recommendations
(a) The date of Investors Depository
Meets should be printed on the statements 92 79
of demat accounts to be sent by DPs to
investors at regular intervals.
(b) Investor Depository Meets should be
made more interesting, knowledgeable 97 95

and interactive.
 49

(c) Frequencies of such meetings should 74 79

be increased.
(d) Meetings should be held in different
areas especially in small cities to attract 92 92
present and prospective investors.

Source: Field Investigation

(a) The date of IDMs should be printed on the statements of demat accounts to be sent by

DPs to investors- The date of IDMs should be printed on the statements of demat accounts to

be sent by DPs to investors at regular intervals. This suggestion was recommended by 92% of

investors and 79% of DPs. As DPs are accountable to issue Transaction / Holding Statements to

investors at regular intervals, implementation of this suggestion demands no extra cost for

Depositories as well as for DPs. Every investor will come to know about the date of such

meetings through his Transaction Statement and it will result in increased number of attendance

of investors in such meetings. Complaints of 77% of investors (As per Table 2.7) regarding not

getting any information about date, time and venue of IDM can be resolved by writing the date

of IDM on the statement.

(b) IDMs should be made more interesting, knowledgeable and interactive- Such meetings

can be made more interactive, worthwhile and productive by requesting the DPs (present in

that particular city) representatives to attend such meetings. All matters should be discussed in

the presence of DPs’ representatives so that they can also share their difficulties in resolving

some of the problems faced by the investors. In this manner, such meetings will act as Open-

Munch to resolve all concerns regarding operations, processes and procedures of demat system.

Whether the problem is concerned with demat charges or regarding the process of

dematerialisation of securities, such arrangements will also result in drastic improvement in

number of investors attending such meetings as well as will uplift the standard of services

provided to investors by DPs.

97% of investors as well as 95 % of DPs+ Depositories recommend this sugge0e*i==B^£roper

interaction among investors, DPs and Depositories, so many issues can be < xd.

Presence of Representatives of DPs of city where meeting is organizin

IDMs more attractive, knowledgeable and interactive.

 50

(C) Frequency of such meetings should be increased: if suggestion (b) is practically applicable,

then frequency of such meetings should be increased so that more and more investors are

benefited. This suggestion has been recommended by 74% of investors and 79% of DPs. Meetings

should also be organized at different venues to make investors from different locations more

comfortable to approach the venue of meetings, only then majority of investors can attend these

IDMs. Increased frequency of meetings is conditional and will be successful only when

suggestion (a) and (b) is implemented in full form. If it is adopted without suggestion (a) and

(b), it will be of no use.

(d) Meetings should be held in different areas especially in small cities to attract and more

investors- Small cities have potential prospective investors. Such meetings should be organized

in different cities to attract more and more investors towards the demat system. 92% of sample

investors and 92% of sample DPs have recommended this suggestion. By having detailed analysis

about investors accounts in different cities and semi-urban potential aeras, NSDL can take

decision that which part of the country is least participative in depository system. Those areas

can be selected to organize such meetings.

Suggestion (a) to (d) is basically for IDMs and especially for the persons who have already

joined the demat system. Some other suggestions to make prospective investors aware about

the system are:

(e) To give articles on depository services in different newspapers of local languages-In

India, newspapers are the strongest media to inform people as is also clear from Table 2.11

where around forty percent people have supported this fact. More and more articles should be

published in local newspapers in local language so that potential investors can understand the

simple procedures of depository services in simple language. It will be a powerful media to

awake and attract more and more new investors.

(f) To promote DPs to start DP franchise centers in different potential areas- As per the

records of NSDL, there are 223 DPs with 3017 franchises as on 31s1 March,2006. Keeping in

view the total investors population in India, this number is very less. NSDL should promote

DPs to open more and more franchises at remote locations so that local investor is able to

approach a DP nearby to open a demat account. Rural Banks can be provided with special

incentives to start depository services in rural area.

 51

(g) Local DPs and brokers should also organise seminars in their areas to make more and

more people aware about depository services- As per Table 2.7, 47% of sample investors

have no interest in attending a seminar like IDM while remaining 53% of investors are interested

in meetings and seminars. On the contrary, Table 2.6 shows that only 3% of sample investors

have gained knowledge about any system through Seminars and meetings. This indicates that

this 3% can be converted into 53% ( potential investors believing in meetings) investors. If

local DPs take pains to organise seminars frequently, potential investors can be explored and

drag into the depository system. Participation of local DPs and brokers will benefit them as

well in terms of increased business and clientage. Depository should make it mandatory for

DPs and brokers to organise some limited number of meetings for the potential investors.

(h) Circulation of Nest Update through DPs to their clients-All important information are

written in Nest Updates and CDSL Infolines. More physical copies of these bulletins should be

printed and should be made available to common investors through DPs so that investors can

come to know about developments, amendments and other different valuable information about

depository system. Presently both the Depositories publish the physical copies of monthly

bulletin in thousands only and keeping in view the investor population of the country, this

number is totally insufficient. Most of these copies lie idle in DPs’ offices and are thrown

away as waste magazines.

(i) Written material available regarding depository system (like ‘Investors Guide to

Depository’and monthly bulletins) should be sent to different libraries- Libraries should

be provided with the printed and published information about demat system. Persons visiting

the libraries will be able to have knowledge about demat system.

(J) To promote research work on depository system: SEBI as well as Depositories should

persuade research scholars to take- up researchs in this field. Till now, not much research has

been conducted on different legal and operational aspects of depository system. Such researches

can be a powerful tool to remove drawbacks of present depository system as well as can play a

vital role in making people aware about the system.

(k) Display on notice board- It should be made mandatory for all DPs to display all relevant

information and monthly bulletin of depositories on the notice boards available in DPs office.

Any person visiting DP office can get knowledge about the system from there.
All the above suggestions demand no much extra costs and efforts, but they can be of great use

in NSDL’s endeavor to awake and attract potential investors into depository services.

Implementation of above suggestions will generate the desired environment to tap the huge

unexplored resources of investors into the securities market. Investors should ‘Be alert, attentive

and active’ is the basic mantra for all demat operations and that can be achieved only through

‘Investors’ Education and Awareness Programmes’.