In the depository system, the ownership and transfer of securities takes place by means of electronic book entries. At the outset, this system rids the capital market of the dangers related to handling of paper. NSDL provides numerous direct and indirect benefits like
- Elimination of bad deliveries - In the depository environment, once holdings of an investor are dematerialised, the question of bad delivery does not arise i.e. they cannot be held "under objection". In the physical environment, buyer was required to take the risk of transfer and face uncertainty of the quality of assets purchased. In a depository environment good money certainly begets good quality of assets.
- Elimination of all risks associated with physical certificates - Dealing in physical securities have associated security risks of theft of stocks, mutilation of certificates, loss of certificates during movements through and from the registrars, thus exposing the investor to the cost of obtaining duplicate certificates etc. This problem does not arise in the depository environment.
- No stamp duty for transfer of any kind of securities in the depository. This waiver extends to equity shares, debt instruments and units of mutual funds.
- Immediate transfer and registration of securities - In the depository environment, once the securities are credited to the investors account on pay out, he becomes the legal owner of the securities. There is no further need to send it to the company's registrar for registration. Having purchased securities in the physical environment, the investor has to send it to the company's registrar so that the change of ownership can be registered. This process usually takes around three to four months and is rarely completed within the statutory framework of two months thus exposing the investor to opportunity cost of delay in transfer and to risk of loss in transit. To overcome this, the normally accepted practice is to hold the securities in street names i.e. not to register the change of ownership. However, if the investors miss a book closure the securities are not good for delivery and the investor would also stand to loose his corporate entitlements.
- Faster settlement cycle - The settlement cycle follow rolling settlement on T+2 basis i.e. the settlement of trades will be on the 2nd working day from the trade day. This will enable faster turnover of stock and more liquidity with the investor.
- Faster disbursement of non cash corporate benefits like rights, bonus, etc. - NSDL provides for direct credit of non cash corporate entitlements to an investors account, thereby ensuring faster disbursement and avoiding risk of loss of certificates in transit.
- Reduction in brokerage by many brokers for trading in dematerialised securities - Brokers provide this benefit to investors as dealing in dematerialised securities reduces their back office cost of handling paper and also eliminates the risk of being the introducing broker.
- Reduction in handling of huge volumes of paper
- Periodic status reports to investors on their holdings and transactions, leading to better controls.
- Elimination of problems related to change of address of investor - In case of change of address, investors are saved from undergoing the entire change procedure with each company or registrar. Investors have to only inform their DP with all relevant documents and the required changes are effected in the database of all the companies, where the investor is a registered holder of securities.
- Elimination of problems related to transmission of demat shares - In case of dematerialised holdings, the process of transmission is more convenient as the transmission formalities for all securities held in a demat account can be completed by submitting documents to the DP whereas, in case of physical securities the surviving joint holder(s)/legal heirs/nominee has to correspond independently with each company in which shares are held.
- Elimination of problems related to selling securities on behalf of a minor - A natural guardian is not required to take court approval for selling demat securities on behalf of a minor.
- Ease in portfolio monitoring since statement of account gives a consolidated position of investments in all instruments.
There are various checks and measures in the depository system to ensure safety of the investor holdings. These include
- A DP can be operational only after registration by SEBI, which is based on the recommendation from NSDL and their own independent evaluation. SEBI has prescribed criteria for becoming a DP in the regulations.
- DPs are allowed to effect any debit and credit to an account only on the basis of valid instruction from the client.
- Every day, there is a system driven mandatory reconciliation between DP and NSDL.
- All transactions are recorded at NSDL Central System and in the databases maintained by business partners.
- There are periodic inspections into the activities of both DP and R&T agent by NSDL. This also includes records based on which the debit/credit are effected.
- All investors have a right to receive their statement of accounts periodically from the DP.
- Every month NSDL forwards statement of account to a random sample of investors as a counter check.
- In the depository, the depository holds the investor accounts on trust. Therefore, if the DP goes bankrupt the creditors of the DP will have no access to the holdings in the name of the clients of the DP. These investors can transfer their holdings to an account held with another DP.
- The data interchange between NSDL and its business partners is protected by protection measures of international standards such as encryption hardware lock. The protection measures adopted by NSDL are more than what is prescribed in the SEBI Regulations.
- Freeze Facility : A depository account holder (beneficiary account) may freeze securities lying in the account for as long as the account holder wants it. By freezing the account, account holder can prevent unexpected debits or credits or both, creeping into its account. The following types of freeze facility available in the NSDL system may be availed of by submitting freeze instruction to the DP in the prescribed form.
- Freeze for debits only
- Freeze for debits as well as credits
- Freeze a particular ISIN in the account
- Freeze a specific number of securities held under an ISIN in an account
- Certification in Depository Operations : NSDL has introduced a Certification Programme in Depository Operations (popularly known as NCFM certification), and it has been made compulsory for all DPs to appoint a person qualified in this certification in each of its branches. This way, NSDL wants to ensure that each branch of a DP that services investors has atleast one person who has thorough knowledge about depository system.
- Investor grievance : All grievances of the investors are to be resolved by the concerned business partner. If they fail to do so, the investor has the right to approach NSDL at the following address:
Investor Relationship Cell
4th floor, A Wing, Trade World
Kamala Mills Compound
Senapati Bapat Marg
Lower Parel, Mumbai- 400013
The investor relationship cell of NSDL would work towards resolution of the grievance.
- Insurance Cover : NSDL has taken a comprehensive insurance policy to help DP to indemnifying investors for the loss accrued to them due to errors, omissions, commission or negligence of DP.
- Computer and communication infrastructure : NSDL and its business partners use hardware, software and communication systems, which conform to industry standards. Further, the systems are accepted by NSDL only after a rigorous testing procedure. NSDL's central system comprises an IBM mainframe system with a back-up facility and a remote disaster back-up site.
- Machine level back-up : The IBM mainframe in which the data is processed has adequate redundancy built into its configuration. There is a standby central processing unit (CPU) to which processing can be switched over to in case of main system CPU failure. The disk has RAID implementation, which ensures that a failure of hard disk will not lead to loss in data. System has spare disk configuration where data is automatically copied from the main disk upon encountering the first failure (due to RAID implementation - first failure does not result in loss of data).All network components like router, communication controllers etc., have on-line redundancy and thus a failure does not result in loss of transaction.
- Disaster back up site : A disaster back up site equipped with a computer identical to the mainframe computer & computing resources has been set up at a distant location about 175 km away from Mumbai. The depository operations are often switched between the computing resources at Mumbai office and disaster back up site to ensure that the disaster site is always operational.
- Back-up in case of power failure : Continuity in power supply to the main systems is assured by providing for
- Dual uninterrupted power supply (UPS) for IBM-Mainframe and related components wherein the two UPSs are connected in tandem. In case of failure of primary UPS, the secondary UPS takes over instantaneously and thus, there is no interruption in operation, and
- Back-up diesel generator sets.
- Periodic Review : The NSDL hardware, software and communication systems are continuously reviewed in order to make them more secure and adequate for the size of business. These reviews are a part of an ongoing exercise wherein security considerations are given as much importance as operational efficiency.