THE DEPOSITORIES ACT, 1996

Objectives:

(a) It acts as a legal basis for establishment of depositories;

(b) Dematerialization of securities in the depositories mode becomes possible;

(c) Making the securities fungible;

(d) Making the shares, debentures and any interest thereon of a public limited company freely transferable;

(e) Exempting all transfers of shares from the stamp duty. 

Eligibility for depository system: Any company or institution must:

(a) Be formed and registered as a company under the Act;

(b) Be registered with SEBI as a depository;

(c) Have framed bye – laws with the previous approval of SEBI;

(d) Have one or more participants;

(e) Have adequate systems and safeguards to prevent manipulation of the records;

(f) Comply with the Depositories Act, 1996 & SEBI (Depositories & Participants) Regulations, 1996;

(g) Meet all the eligibility criteria.

Eligible securities required to be in Depository mode: The Act gives the option to the investors to receive securities in physical form or in depository mode. It is not necessary that all eligible securities must be in the depository mode. In the scheme of the depository‟s legislation, the investor has been given supremacy. The investor has the choice of holding physical securities or opt for a depository based ownership record.  

However, in case of fresh issue of securities, all securities have to be in dematerialized form. However, after that investor will also have the freedom to switch from depository mode to non-depository mode and vice versa. The decision would be entirely with the investor.  

Fungibility: Fungibility means interchangeable or exchangeability. All securities held in depository shall be fungible i. e. all certificates of the same security shall become interchangeable in the sense that investor loses the right to obtain the exact certificate he surrenders at the time of entry into depository. It is like withdrawing money from the bank without bothering about the distinctive numbers of the currencies. 

In short, if a security or commodity is fungible if it is perfectly interchangeable with any other of the same type and class securities or commodities. Most financial securities are fungible a share in a particular company is exactly the same as another share in the same company. Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution. 

Rights of Depositor and the Beneficial Owner: The depository becomes the registered owner for the purpose of transferring ownership of securities on behalf of the beneficial owner. The beneficial owner possesses all the rights and benefits and is subjected to all the liabilities in respect of securities held by a depository. 

Register of Beneficial Owner: Every depository is required to maintain a register and an index of beneficial owners in the manner provided in the companies act.  

Pledge or Hypothecation of Securities held in a Depository: A beneficial owner may with the previous approval of depository create a Pledge or Hypothecation in respect of security owned by him through a depository. Every beneficial owner should give intimation of such pledge or hypothecation to the DP and such depository is required to make entries in its records accordingly. Any entry in the records of a depository should be evidence of a Pledge or Hypothecation. 

Option to opt out in respect of any security: If a beneficial owner seeks to opt out of a depository in respect of any security he should inform the depository accordingly. Every issuer may, within 30 days of the receipt of intimation from the depository and on fulfillment of such conditions and on payment of such fees, issue the certificate of securities to the beneficial owner.    

Depositories to Indemnify Loss in certain cases: Any loss caused to the beneficial owner due to the negligence of the depository or the participant, would be indemnified by the depository to such beneficial owner. Where the loss due to the negligence of the participant is indemnified by the depository, the depository has the right to recover the same from such participant.   

Powers of SEBI: 

1) SEBI in the public interest or in the interest of investors may by order in writing call upon any issuer, depository, participant or beneficial owner to furnish in writing such information relating to the securities held in a depository as it may required; Or  Authorise any person to make an enquiry or Inspection in relation to the affairs of the issuer, beneficial owner, depository or participant, who shall submit a report of such enquiry or inspection to it within such period as may be specified in the order. 

2) Every director, manager, partner, secretary, officer or employee of the depository or issuer or the participant or beneficial owner shall on demand produce before the person making the enquiry or inspection all information or such records and other documents in his custody having a bearing on the subject matter of such enquiry or inspection.  

3) if after making enquiry or inspection, SEBI is satisfied that it is necessary in the interest of investors, or orderly development of securities market or to prevent the affairs of any depository or participant being conducted in the manner detrimental to the interest of investors or securities market, SEBI may issue such directions to any depository or participant or any other person associated with the securities market, or to any issuer as may be appropriate in the interest of investors or securities market. 

Power of the Board to give Directions:

SEBI may after proper investigations and enquiry, issue such directions to any depository or participant or any person associated with the securities market or to any issuer which may be in the interest of investors or the securities market or to prevent the affairs of any depository or participant being conducted in the manner detrimental to the interest of investor or securities market. 

Penalties under the Act:

1. Penalty for failure to furnish information/ Return/ Documents/ Report to the board; Maintain books of accounts or records.

2. Penalty for failure to enter into Agreement.

3. Penalty for failure to redress investor‟s Grievances

4. Penalty for delay in dematerialization or Issue of Certificate of Securities 

5. Penalty for failure to reconcile records. One Lakh rupees for each day during which such failure continues or One Crore; Whichever is Less. 

Penalty for contravention where no separate penalty has been provided: Which may extend to one crore rupees. Appeal to Securities Appellate Tribunal: Any person aggrieved by an order of SEBI or by an adjudicating officer under this act may prefer an appeal to a SAT having jurisdiction in the matter. However, No appeal

shall lie to SAT from an order made by SEBI with the consent of the parties. Every appeal shall be filed within a period of 45 days from the date on which a copy of the order made by SEBI is received by the person and it shall be in such form and be accompanied by such fees as may be prescribed.  

Provided that the SAT may entertain an appeal after the expiry of the said period of 45 days if it is satisfied that there was sufficient cause for not filing it within that period.  

On receipt of an appeal, SAT may pass such order as it thinks fit, confirming, modifying or setting aside the order appealed against after giving opportunity of being heard. 

SAT shall send a copy of every order made by it to SEBI and parties to the appeal. The appeal filed before SAT shall be dealt with by it as expeditiously as possible and Endeavour shall be made by it to dispose of appeal finally within 6 months from the date of receipt of the appeal. 

Appeal to Supreme Court: Any person aggrieved by any decision or order of SAT may file an appeal to Supreme Court within 60 days from the date of communication of decision or order of SAT to him on any question of law arising out of such order. 

Provided that Supreme Court may, if it is satisfied that the appellant was prevented by sufficient cause from filing the appeal within the said period, allow within a further period not exceeding 60 days. 

Power of SEBI to make Regulations:

■ The requirements to be complied with by a person for seeking registration as a Depository with SEBI

■ The requirements for registration of a person as a Participant under SEBI act;

■ The requirements for grant of certificate of commencement of business by depositories and the form in which the certificate of commencement of business has to be issued. 

■ The manner in which the certificate of security shall be surrendered to the issuer by any investor who is desirous of availing depository services.

■ The manner in which the issuer has to cancel the certificates of securities received by it for cancellation and its intimation to the depository.

■ The eligibility criteria for admission of securities into the depository

■ The rights and obligation of depositories, participants and the issuers whose securities are dealt with by a depository.

■ The requirements to be complied with by a beneficial owner for creating with the previous approval of depository, pledge or hypothecation in respect of a security owned by him through depository.

■ The conditions and fees payable with respect to the issuer of certificate of securities to the beneficial owner where the beneficial owner seeks to opt out of the depository.