Definition of Depository

Meaning

A depository can be compared to a bank. A depository holds securities (like shares, debentures, bonds, Government Securities, units etc.) of investors in electronic form. Besides holding securities, a depository also provides services related to transactions in securities.

Role and Need

Depository plays a vital role in the following areas:

Immediate transfer of securities;

No stamp duty on transfer of securities;

Elimination of risks associated with physical certificates such as bad delivery, fake securities, etc.;

Reduction in paperwork involved in transfer of securities;

Reduction in transaction cost;

Nomination facility;

Change in address recorded with DP gets registered electronically with all companies in which investor holds securities eliminating the need to correspond with each of them separately;

Transmission of securities is done by DP eliminating correspondence with companies;

Convenient method of consolidation of folios/accounts ;

Holding investments in equity, debt instruments and Government securities in a single account;

Depositories Act, 1996

[22 of 1996]

An Act to provide for regulation of depositories in securities and for matters connected therewith or incidental thereto.

BE it enacted by Parliament in the Forty-seventh Year of the Republic of India as follows: —

Chapter – I

Preliminary

Short title, extent and commencement.

This Act may be called the Depositories Act, 1996.

It extends to the whole of India.

It shall be deemed to have come into force on the 20th day of September, 1995.

Definitions.

In this Act, unless the context otherwise requires, —

“beneficial owner” means a person whose name is recorded as such with a depository;

“Board” means the Securities and Exchange Board of India Established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992);

“bye-laws” means bye-laws made by a depository under section 26;

“Company Law Board” means the Board of Company Law Administration constituted under section 10E of the Companies Act, 1956 (1 of 1956);

“Depository” means a company formed and registered under the Companies Act, 1956 (1 of 1956), and which has been granted a Certificate of registration under sub-section (1A) of section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992);

“Issuer” means any person making an issue of securities;

“Participant” means a person registered as such under sub-section (1A) of section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992);

“Prescribed” means prescribed by rules made under this Act;

“record” includes the records maintained in the form of books or Stored in a computer or in such other form as may be determined by Regulations;

“registered owner” means a depository whose name is entered as such in the register of the issuer;

“Regulations” means the regulations made by the Board;

“Securities Appellate Tribunal” means a Securities Appellate

Tribunal established under sub-section (1) of section 15K of the Securities and Exchange Board of India Act, 1992 (15 of 1992);]

“Security” means such security as may be specified by the Board;

“service” means any service connected with recording of allotment of securities or transfer of ownership of securities in the record of a Depository.

Words and expressions used herein and not defined but defined in the Companies Act, 1956 (1 of 1956), or the Securities Contracts (Regulation) Act, 1956 (42 of 1956), or the Securities and Exchange Board of India Act, 1992 (15 of 1992), shall have the meanings respectively assigned to them in those Acts.

Chapter – II

Certificate of Commencement of Business

Certificate of commencement of business by depositories.

No depository shall act as a depository unless it obtains a certificate of commencement of business from the Board.

A certificate granted under sub-section (1) shall be in such form as may be specified by the regulations.

The Board shall not grant a certificate under sub-section (1) unless it is satisfied that the depository has adequate systems and safeguards to prevent manipulation of records and transactions:

Provided that no certificate shall be refused under this section unless the depository concerned has been given a reasonable opportunity of being heard.

Chapter III

Rights and obligations of depositories, participants, issuers and beneficial owners

Agreement Between Depository and Participant

A depository shall enter into an agreement with one or more participants as its agent.

Every agreement under sub-section (1) shall be in such form as may be specified by the bye-laws.

Services of Depository

Any person, through a participant, may enter into an agreement, in such form as may be specified by the bye-laws, with any depository for availing its services.

Surrender of Certificate of Security

Any person who has entered into an agreement under section 5 shall surrender the certificate of security, for which he seeks to avail the services of a depository, to the issuer in such manner as may be specified by the regulations.

The issuer, on receipt of certificate of security under sub-section (1), shall cancel the certificate of security and substitute in its records the name of the depository as a registered owner in respect of that security and inform the depository accordingly.

A depository shall, on receipt of information under sub-section (2), enter the name of the person referred to in sub-section (1) in its records, as the beneficial owner

Registration of Transfer of Securities with Depository

Every depository shall, on receipt of intimation from a participant, register the transfer of security in the name of the transferee.

If a beneficial owner or a transferee of any security seeks to have custody of such security the depository shall inform the issuer accordingly.

Options to Receive Security Certificate or Hold Securities with Depository

Every person subscribing to securities offered by an issuer shall have the option either to receive the security certificates or hold securities with a depository.

Where a person opts to hold a security with a depository, the issuer shall intimate such depository the details of allotment of the security, and on receipt of such information the depository shall enter in its records the name of the allottee as the beneficial owner of that security.

Securities in depositories to be in fungible form.

All securities held by a depository shall be dematerialized and shall be in a fungible form.

Nothing contained in sections 153, 153A, 153B, 187B, 187C and 372 of the Companies Act, 1956 (1 of 1956), shall apply to a depository in respect of securities held by it on behalf of the beneficial owners.]

Rights of depositories and beneficial owner.

Not withstanding anything contained in any other law for the time being in force, a depository shall be deemed to be the registered owner for the purposes of effecting transfer of ownership of security on behalf of a beneficial owner.

Save as otherwise provided in sub-section (1), the depository as a registered owner shall not have any voting rights or any other rights in respect of securities held by it.

The beneficial owner shall be entitled to all the rights and benefits and be subjected to all the liabilities in respect of his securities held by a depository.

Register of Beneficial Owner

Every depository shall maintain a register and an index of beneficial owners in the manner provided in sections 150, 151 and 152 of the Companies Act, 1956 (1 of 1956).

Pledge or hypothecation of securities held in a depository.

Subject to such regulations and bye-laws, as may be made in this behalf, a beneficial owner may with the previous approval of the depository create a pledge or hypothecation in respect of a security owned by him through a depository.

Every beneficial owner shall give intimation of such pledge or hypothecation to the depository and such depository shall thereupon make entries in its records accordingly.

Any entry in the records of a depository under sub-section (2) shall be evidence of a pledge or hypothecation.

Furnishing of Information and Records by Depository and Issuer

Every depository shall furnish to the issuer information about the transfer of securities in the name of beneficial owners at such intervals and in such manner as may be specified by the bye-laws.

Every issuer shall make available to the depository copies of the relevant records in respect of securities held by such depository.

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 shall inform the depository accordingly.

The depository shall on receipt of intimation under sub-section (1) make appropriate entries in its records and shall inform the issuer.

Every issuer shall, within thirty days of the receipt of intimation from the depository and on fulfillment of such conditions and on payment of such fees as may be specified by the regulations, issue the certificate of securities to the beneficial owner or the transferee, as the case may be.

Act 18 of 1891 to Apply to Depositories

The Bankers’ Books Evidence Act, 1891 shall apply in relation to a depository as if it were a bank as defined in section 2 of that Act.

Depositories to Indemnify loss in Certain Cases

Without prejudice to the provisions of any other law for the time being in force, any loss caused to the beneficial owner due to the negligence of the depository or the participant, the depository shall indemnify such beneficial owner.

Where the loss due to the negligence of the participant under sub-section (1) is indemnified by the depository, the depository shall have the right to recover the same from such participant.

Rights and obligations of depositories, etc.

Subject to the provisions of this Act, the rights and obligations of the depositories, participants and the issuers whose securities are dealt with by a depository shall be specified by the regulations.

The eligibility criteria for admission of securities into the depository shall be specified by the regulations.

Chapter – IV

Enquiry and Inspection

Power of Board to call for information and enquiry.

The Board, on being satisfied that it is necessary in the public interest or in the interest of investors so to do, 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 require; or

Authorize 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.

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.

Power of Board to give directions in certain cases.

Save as provided in this Act, if after making or causing to be made an enquiry or inspection, the Board 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 interests of investors or securities market,

It may issue such directions,—

To any depository or participant or any person associated with the securities market; or

To any issuer, as may be appropriate in the interest of investors or the securities market. [Penalty for failure to furnish information, return, etc.

Any person, who is required under this Act or any rules or regulations or bye-laws made there under,—

To furnish any information, document, books, returns or report to the Board, fails to furnish the same within the time specified therefore, he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less for each such failure;

To file any return or furnish any information, books or other documents within the time specified therefore in the regulations or bye-laws, fails to file return or furnish the same within the time specified therefore, he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less;

To maintain books of account or records, fails to maintain the same, he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less.

Penalty for failure to enter into an agreement.

If a depository or participant or any issuer or its agent or any person, who is registered as an intermediary under the provisions of section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), and is required under this Act or any rules or regulations made there under, to enter into an agreement, fails to enter into such agreement, such depository or participant or issuer or its agent or intermediary shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less for every such failure.

Penalty for failure to redress investors’ grievances.

If any depository or participant or any issuer or its agent or any person, who is registered as an intermediary under the provisions of section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), after having been called upon by the Board in writing, to redress the grievances of the investors, fails to redress such grievances within the time specified by the Board, such depository or participant or issuer or its agents or intermediary shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less.

Penalty for Delay in Dematerialization or Issue of Certificate of Securities.

If any issuer or its agent or any person, who is registered as an intermediary under the provisions of section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), fails to dematerialize or issue the certificate of securities on opting out of a depository by the investors, within the time specified under this Act or regulations or bye-laws made hereunder or abets in delaying the process of dematerialization or issue the certificate of securities on opting out of a depository of securities, such issuer or its agent or intermediary shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less.

Penalty for Failure to Reconcile Records.

If a depository or participant or any issuer or its agent or any person, who is registered as an intermediary under the provisions of section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), fails to reconcile the records of dematerialized securities with all the securities issued by the issuer as specified in the regulations, such depository or participant or issuer or its agent or intermediary shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less.

Penalty for failure to comply with directions issued by Board under section 19 of the Act.

If any person fails to comply with the directions issued by the Board under section 19, within the time specified by it, he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less.

Penalty for Contravention where no Separate penalty has been Provided

Whoever fails to comply with any provision of this Act, the rules or the regulations or bye-laws made or directions issued by the Board there under for which no separate penalty has been provided, shall be liable to a penalty which may extend to one crore rupees.

Power to Adjudicate

For the purpose of adjudging under sections 19A, 19B, 19C, 19D, 19E, 19F and 19G, the Board shall appoint any officer not below the rank of a Division Chief of the Securities and Exchange Board of India to be an adjudicating officer for holding an inquiry in the prescribed manner after giving any person concerned a reasonable opportunity of being heard for the purpose of imposing any penalty.

While holding an inquiry, the adjudicating officer shall have power to summon and enforce the attendance of any person acquainted with the facts and circumstances of the case to give evidence or to produce any document, which in the opinion of the adjudicating officer, may be useful for or relevant to the subject-matter of the inquiry and if, on such inquiry, he is satisfied that the person has failed to comply with the provisions of any of the sections specified in sub-section (1), he may impose such penalty as he thinks fit in accordance with the provisions of any of those sections.

Factors to be taken into account by adjudicating officer.

While adjudging the quantum of penalty under section 19H, the adjudicating officer shall have due regard to the following factors, namely:—

The amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default;

The amount of loss caused to an investor or group of investors as a result of the default;

The repetitive nature of the default.

Crediting sums realized by way of penalties to Consolidated Fund of India.

All sums realized by way of penalties under this Act shall be credited to the Consolidated Fund of India.]

Chapter – V

Penalty

Offences.

Without prejudice to any award of penalty by the adjudicating officer under this Act, if any person contravenes or attempts to contravene or abets the contravention of the provisions of this Act or of any rules or regulations or bye-laws made there under, he shall be punishable with imprisonment for a term which may extend to ten years, or with fine, which may extend to twenty-five crore rupees, or with both.

If any person fails to pay the penalty imposed by the adjudicating officer or fails to comply with any of his directions or orders, he shall be punishable with imprisonment for a term which shall not be less than one month but which may extend to ten years, or with fine, which may extend to twenty-five crore rupees, or with both.]

Offences by Companies.

Where an offence under this Act has been committed by a company, every person who at the time the offence was committed was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly:

Provided that nothing contained in this sub-section shall render any such person liable to any punishment provided in this Act, if he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence.

Notwithstanding anything contained in sub-section (1), where an offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly.

Explanation.—for the purposes of this section,—

“Company” means any body corporate and includes a firm or other association of individuals; and

“Director”, in relation to a firm, means a partner in the firm.

Chapter – VI

Miscellaneous

Cognizance of offences by courts.

No court shall take cognizance of any offence punishable under this Act or any rules or regulations or bye-laws made there under, save on a complaint made by the Central Government or State Government or the Securities and Exchange Board of India or by any person.

No court inferior to that of a Court of Session shall try any offence punishable under this Act.

Composition of certain offences.

Notwithstanding anything contained in the Code of Criminal Procedure, 1973 (2 of 1974), any offence punishable under this Act, not being an offence punishable with imprisonment only, or with imprisonment and also with fine, may either before or after the institution of any proceeding, be compounded by a Securities Appellate Tribunal or a court before which such proceedings are pending.

Power to grant immunity.

The Central Government may, on recommendation by the Board, if the Central Government is satisfied, that any person, who is alleged to have violated any of the provisions of this Act or the rules or the regulations made there under, has made a full and true disclosure in respect of alleged violation, grant to such person, subject to such conditions as it may think fit to impose, immunity from prosecution for any offence under this Act, or the rules or the regulations made there under or also from the imposition of any penalty under this Act with respect to the alleged violation:

Provided that no such immunity shall be granted by the Central Government in cases where the proceedings for the prosecution for any such offence have been instituted before the date of receipt of application for grant of such immunity:

Provided further that recommendation of the Board under this sub-section shall not be binding upon the Central Government.

An immunity granted to a person under sub-section (1) may, at any time, be withdrawn by the Central Government, if it is satisfied that such person had, in the course of the proceedings, not complied with the condition on which the immunity was granted or had given false evidence, and thereupon such person may be tried for the offence with respect to which the immunity was granted or for any other offence of which he appears to have been guilty in connection with the contravention and shall also become liable to the imposition of any penalty under this Act to which such person would have been liable, had not such immunity been granted.]

Appeals.

Any person aggrieved by an order of the Board made [before the commencement of the Securities Laws (Second Amendment) Act, 1999] under this Act, or the regulations made there under may prefer an appeal to the Central Government within such time as may be prescribed.

No appeal shall be admitted if it is preferred after the expiry of the period prescribed therefore:

Provided that an appeal may be admitted after the expiry of the period prescribed therefore if the appellant satisfies the Central Government that he had sufficient cause for not preferring the appeal within the prescribed period.

Every appeal made under this section shall be made in such form and shall be accompanied by a copy of the order appealed against and by such fees as may be prescribed.

The procedure for disposing of an appeal shall be such as may be prescribed:Provided that before disposing of an appeal, the appellant shall be given a reasonable opportunity of being heard.

[Appeal to Securities Appellate Tribunal.

(1) Save as provided in sub-section (2), any person aggrieved by an order of the Board made, on and after the commencement of the Securities Laws (Second Amendment) Act, 1999, under this Act, or the regulations made there under, [or by an order made by an adjudicating officer under this Act] may prefer an appeal to a Securities Appellate Tribunal having jurisdiction in the matter.

No appeal shall lie to the Securities Appellate Tribunal from an order made by the Board with the consent of the parties.

Every appeal under sub-section (1) shall be filed within a period of forty-five days from the date on which a copy of the order made by the Board is received by the person referred to in sub-section (1) and it shall be in such form and be accompanied by such fee as may be prescribed:

Provided that the Securities Appellate Tribunal may entertain an appeal after the expiry of the said period of forty-five days if it is satisfied that there was sufficient cause for not filing it within that period.

On receipt of an appeal under sub-section (1), the Securities Appellate Tribunal may, after giving the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit, confirming, modifying or setting aside the order appealed against.

The Securities Appellate Tribunal shall send a copy of every order made by it to the Board and parties to the appeal.

The appeal filed before the Securities Appellate Tribunal under sub-section (1) shall be dealt with by it as expeditiously as possible and endeavor shall be made by it to dispose of the appeal finally within six months from the date of receipt of the appeal.

Procedure and powers of Securities Appellate Tribunal.

(1) The Securities Appellate Tribunal shall not be bound by the procedure laid down by the Code of Civil Procedure, 1908 (5 of 1908), but shall be guided by the principles of natural justice and, subject to the other provisions of this Act and of any rules, the Securities Appellate Tribunal shall have powers to regulate their own procedure including the places at which they shall have their sittings.

(2)The Securities Appellate Tribunal shall have, for the purpose of discharging their functions under this Act, the same powers as are vested in a civil court under the Code of Civil Procedure, 1908 (5 of 1908), while trying a suit, in respect of the following matters, namely:—

Summoning and enforcing the attendance of any person and examining him on oath;

Requiring the discovery and production of documents;

Receiving evidence on affidavits;

Issuing commissions for the examination of witnesses or documents;

Reviewing its decisions;

Dismissing an application for default or deciding it ex parte;

Setting aside any order of dismissal of any application for default or any Order passed by it ex parte; and

Any other matter which may be prescribed.

Every proceeding before the Securities Appellate Tribunal shall be deemed to be a judicial proceeding within the meaning of sections 193 and 228, and for the purposes of section 196 of the Indian Penal Code (45 of 1860) and the Securities Appellate Tribunal shall be deemed to be a civil court for all the purposes of section 195 and Chapter XXVI of the Code of Criminal Procedure, 1973 (2 of 1974).

Right to Legal Representation.

The appellant may either appear in person or authorize one or more chartered accountants or company secretaries or cost accountants or legal practitioners or any of its officers to present his or its case before the Securities Appellate Tribunal.

Explanation.—For the purposes of this section,—

“chartered accountant” means a chartered accountant as defined in clause (b) of sub-section (1) of section 2 of the Chartered Accountants Act, 1949 (38 of 1949) and who has obtained a certificate of practice under sub-section (1) of section 6 of that Act;

 “Company secretary” means a company secretary as defined in clause (c) of sub-section (1) of section 2 of the Company Secretaries Act, 1980 (56 of 1980) and who has obtained a certificate of practice under sub-section (1) of section 6 of that Act;

“cost accountant” means a cost accountant as defined in clause (b) of sub-section (1) of section 2 of the Cost and Works Accountants Act, 1959 (23 of 1959) and who has obtained a certificate of practice under sub-section (1) of section 6 of that Act;

“legal practitioner” means an advocate, vakil or an attorney of any High Court, and includes a pleader in practice.

Limitation

The provisions of the Limitation Act, 1963 (36 of 1963) shall, as far as may be, apply to an appeal made to a Securities Appellate Tribunal.

Civil court not to have jurisdiction.

No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which a Securities Appellate Tribunal is empowered by or under this Act to determine and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act.

[Appeal to Supreme Court.

Any person aggrieved by any decision or order of the Securities Appellate Tribunal may file an appeal to the Supreme Court within sixty days from the date of communication of the decision or order of the Securities Appellate Tribunal to him on any question of law arising out of such order:

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

Power of Central Government to make rules.

The Central Government may, by notification in the Official Gazette, make rules for carrying out the provisions of this Act.

In particular, and without prejudice to the generality of the foregoing power, such rules may provide for all or any of the following matters, namely [(a) the manner of inquiry under sub-section (1) of section 19H;

The time within which an appeal may be preferred under sub-section (1) of section 23;]

The form in which an appeal may be preferred under sub-section (3) of Section 23 and the fees payable in respect of such appeal;

The procedure for disposing of an appeal under sub-section (4) of section 23;

The form in which an appeal may be filed before the Securities Appellate Tribunal under section 23A and the fees payable in respect of such appeal.]

Power of Board to make Regulations.

Without prejudice to the provisions contained in section 30 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), the Board may, by notification in the Official Gazette, make regulations consistent with the provisions of this Act and the rules made there under to carry out the purposes of this Act.

In particular, and without prejudice to the generality of the foregoing power, such regulations may provide for—

(a) The form in which record is to be maintained under clause (i) of subsection (1) of section 2;

(b) The form in which the certificate of commencement of business shall be issued under sub-section (2) of section 3;

(c) The manner in which the certificate of security shall be surrendered under sub-section (1) of section 6;

(d) The manner of creating a pledge or hypothecation in respect of security owned by a beneficial owner under sub-section (1) of section 12;

(e) The conditions and the fees payable with respect to the issue of certificate of securities under sub-section (3) of section 14;

(f) The rights and obligations of the depositories, participants and the issuers under sub-section (1) of section 17;

(g) The eligibility criteria for admission of securities into the depository under sub-section (2) of section 17.

Power of Depositories to make Bye-Laws.

A depository shall, with the previous approval of the Board, make bye-laws consistent with the provisions of this Act and the regulations.

In particular, and without prejudice to the generality of the foregoing power, such bye-laws shall provide for—

The eligibility criteria for admission and removal of securities in the Depository;

The conditions subject to which the securities shall be dealt with;

The eligibility criteria for admission of any person as a participant;

The manner and procedure for dematerialization of securities;

The procedure for transactions within the depository;

The manner in which securities shall be dealt with or withdrawn from a Depository;

The procedure for ensuring safeguards to protect the interests of participants and beneficial owners;

The conditions of admission into and withdrawal from a participant by a beneficial owner;

The procedure for conveying information to the participants and beneficial owners on dividend declaration, shareholder meetings and other matters of interest to the beneficial owners;

The manner of distribution of dividends, interest and monetary benefits received from the company among beneficial owners;

The manner of creating pledge or hypothecation in respect of securities held with a depository;

Inter se rights and obligations among the depository, issuer, participants, and beneficial owners;

The manner and the periodicity of furnishing information to the Board, issuer and other persons;

The procedure for resolving disputes involving depository, issuer, company or a beneficial owner;

The procedure for proceeding against the participant committing breach of the regulations and provisions for suspension and expulsion of participants from the depository and cancellation of agreements entered with the depository;

The internal control standards including procedure for auditing, reviewing and monitoring.

Where the Board considers it expedient so to do, it may, by order in writing, direct a depository to make any bye-laws or to amend or revoke any bye-laws already made within such period as it may specify in this behalf.

If the depository fails or neglects to comply with such order within the specified period, the Board may make the bye-laws or amend or revoke the bye-laws made either in the form specified in the order or with such modifications thereof as the Board thinks fit.

Rules and regulations to be laid before Parliament.

Every rule and every regulation made under this Act shall be laid, as soon as may be after it is made, before each House of Parliament, while it is in session, for a total period of thirty days which may be comprised in one session or in two or more successive sessions, and if, before the expiry of the session immediately following the session or the successive sessions aforesaid, both Houses agree in making any modification in the rule or regulation or both Houses agree that the rule or regulation should not be made, the rule or regulation shall thereafter have effect only in such modified form or be of no effect, as the case may be; so, however, that any such modification or annulment shall be without prejudice to the validity of anything previously done under that rule or regulation.

Application of other laws not barred.

The provisions of this Act shall be in addition to, and not in derogation of, any other law for the time being in force relating to the holding and transfer of securities.

Removal of difficulties.

If any difficulty arises in giving effect to the provisions of this Act, the Central Government may, by order published in the Official Gazette, make such provisions not inconsistent with the provisions of this Act as appear to it to be necessary or expedient for removing the difficulty:

Provided that no order shall be made under this section after the expiry of a period of two years from the commencement of this Act.

Every order made under this section shall be laid, as soon as may be after it is made, before each House of Parliament.

Amendments to certain enactments.

[Repealed by Repealing & Amending Act, 2001]. Repeal and saving.

The Depositories (Third) Ordinance, 1996 (Ord. 28 of 1996), is hereby repealed.

Notwithstanding such repeal, anything done or any action taken under the said Ordinance shall be deemed to have been done or taken under the corresponding provisions of this Act.

Securities and Exchange Board of India (Depositories and Participants) Regulations, 1996

Chapter I

Preliminary

Short title & Commencement

These regulations may be called the Securities and Exchange Board of India (Depositories and Participants) Regulations, 1996.

They shall come into force on the date of their publication in the Official Gazette.

Definitions

In these regulations, unless the context otherwise requires, -

“Act” means the Securities and Exchange Board of India Act, 1992 (15 of 1992);

“Depositories Act” means the Depositories Act, 1996 (22 of 1996);

In these regulations, wherever the words “Depositories Ordinance” occur, they shall be replaced by the words “Depositories Act”.]

“Form” means any of the forms specified in the First Schedule;

“inspecting officer” means any person authorised by the Board under regulation 59

“Schedule” means any of the Schedules annexed to these regulations;

[Explanation

Any person who acting alone or in combination with others holds not less than 51 percent of the share capital of the depository as a sponsor and undertakes to perform the obligation under these regulations shall be deemed to be a sponsor for the purpose of these Regulations]

Words and expressions used and not defined in these regulations but defined in the Act or in the Depositories Ordinance shall have the meanings respectively assigned to them in the Act or the Depositories Ordinance.

“sponsor” means any person or persons who, acting alone or in combination with another person proposes to establish a depository and undertakes to perform the obligations of a sponsor under these regulations.

Chapter – II

Registration of Depository

Application for grant of certificate of registration

An application for the grant of a certificate of registration as a depository shall be made to the Board by the sponsor in Form A, shall be accompanied by the fee specified in Part A of the Second Schedule and be paid in the manner specified in Part B thereof.

The application shall be accompanied by draft bye-laws of the depository that is proposed to be set up.

Application to conform to the requirements

An application in Form A, which is not complete in all respects and does not conform, to the instructions specified therein shall be rejected:

Provided that before rejecting any such application, the sponsor shall be given in writing an opportunity to remove, within thirty days of the date of communication in this regard, the objections indicated by the Board.

Provided further that the Board may, on being satisfied that it is necessary to extend the period specified in the first proviso, extend such period by such further time as it thinks necessary in order to enable the applicant to remove the objections indicated by the Board.

Furnishing of information, clarification and personal representation

The Board may require the sponsor to furnish such further information or clarification regarding matters relevant to the activity of the depository for the purpose of consideration of the application.

The sponsor or his authorised representative shall, if so required, appear before the Board for personal representation, in connection with the grant of certificate of registration.

Consideration of application for grant of certificate of registration

The Board shall not consider an application under regulation 3, unless the sponsor belongs to one of the following categories, namely: -

A public financial institution as defined in section 4A of the Companies Act, 1956 (1 of 1956);

A bank included for the time being in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934);

A foreign bank operating in India with the approval of the Reserve Bank of India;

A recognized stock exchange within the meaning of clause (j) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956);

A body corporate engaged in providing financial services where not less than seventy five percent of the equity capital is held by any of the institutions mentioned in sub-clause (i), (ii), (iii) or (iv) jointly or severally;

A body corporate constituted or recognised under any law for the time being in force in a foreign country for providing custodial, clearing or settlement services in the securities market and approved by the Central Government; or

AAn institution engaged in providing financial services established outside India and approved by the Central Government.

*[(viii)            The applicant is a fit and proper person.]

Grant of certificate of registration

After considering the application under regulation 3, with reference to the qualifications specified in regulation 6, if the Board is satisfied that the company established by the sponsor is eligible to act as depository, it may grant a certificate of registration in Form B to the depository subject to the following, namely: -

The depository shall pay the registration fee specified in Part A of the Second Schedule in the manner specified in Part B thereof, within fifteen days of receipt of intimation from the Board;

The depository shall comply with the provisions of the 6*[Act], the Depositories Ordinance, the bye-laws, agreements and these regulations;

The depository shall not carry on any activity other than that of a depository unless the activity is incidental to the activity of the depository;

The sponsor shall, at all times, hold at least fifty one per cent of the equity capital of the depository and the balance of the equity capital of the depository shall be held by its participants;

No participant shall at any time, hold more than five per cent of the equity capital of the depository;

7*[Provided that for the purposes of clause (d) and Clause (e) no foreign entity individually or collectively either as a sponsor or as a participant or as a sponsor and participant together shall hold more than 20% of the equity capital of a depository.]

Explanation

For the purpose of this regulation, a foreign entity shall mean a body corporate or an entity where more than 51% of its equity is held by persons who are not citizens of India.

If any information previously submitted by the depository or the sponsor to the Board is found to be false or misleading in any material particular, or if there is any change in such information, the depository shall forthwith inform the Board in writing;

The depository shall redress the grievances of the participants and the beneficial owners within thirty days of the date of receipt of any complaint from a participant or a beneficial owner and keep the Board informed about the number and the nature of redressals;

The depository shall make an application for commencement of business under regulation 14 within one year from the date of grant of certificate of registration under this regulation; and

The depository shall amend its bye-laws from time to time as may be directed by the Board.

Payment of annual fee

A depository who has been granted a certificate of registration under regulation 7, shall pay annual fee specified in Part A of the Second Schedule in the manner specified in Part B thereof.

Procedure where certificate of registration is not granted

Where an application for the grant of certificate of registration under regulation 3 does not satisfy the requirements specified in regulation 7, the Board shall reject the application after giving the applicant an opportunity of being heard.

The decision of the Board to reject the application shall be communicated to the applicant in writing within thirty days of such decision, stating therein the grounds on which the application has been rejected.

Chapter – III

Certificate of Commencement of Business

Application for grant of certificate of commencement of business

A depository, which has been granted a certificate of registration under regulation 7, shall within one year from the date of issue of such certificate make an application to the Board for commencement of business in Form C.

Application to conform to the requirements

Any application in Form C, which is not complete in all respects and does not conform to instructions specified therein shall be rejected:

Provided that before rejecting any such application, the applicant shall be given in writing an opportunity to remove within thirty days of the date of communication in this regard, the objections indicated by the Board.

Provided further that the Board may, on being satisfied that it is necessary to extend the period specified in the first proviso, extend such period by such further time as it thinks necessary in order to enable the applicant to remove the objections indicated by the Board. Furnishing of information, clarification, and personal representation

The Board may require the depository to furnish such further information or clarification regarding matters relevant for the grant of certificate of commencement of business.

The depository or its authorised representative, if so required, shall appear before the Board for personal representation in connection with the grant of certificate of commencement of business.

Consideration of application for grant of certificate of commencement of business

The Board shall take into account for considering grant of certificate of commencement of business, all matters which are relevant to the efficient and orderly functioning of the depository and in particular, the following, namely, whether:

The depository has a net worth of not less than rupees one hundred crore;

The bye-laws of the depository have been approved by the Board;

The automatic data processing systems of the depository have been protected against unauthorised access, alteration, destruction, disclosure or dissemination of records and data;

The network through which continuous electronic means of communications are established between the depository, participants, issuers and issuers’ agents is secure against unauthorised entry or access;

The depository has established standard transmission and encryption formats for electronic communications of data between the depository, participants, issuers and issuers’ agents;

The physical or electronic access to the premises, facilities, automatic data processing systems, data storage sites and facilities including back up sites and facilities and to the electronic data communication network connecting the depository, participants, issuers and issuers’ agents is controlled, monitored and recorded;

The depository has a detailed operations manual explaining all aspects of its functioning, including the interface and method of transmission of information between the depository, issuers, issuers’ agents, participants and beneficial owners;

The depository has established adequate procedures and facilities to ensure that its records are protected against loss or destruction and arrangements have been made for maintaining back up facilities at a location different from that of the depository;

The depository has made adequate arrangements including insurance for indemnifying the beneficial owners for any loss that may be caused to such beneficial owners by the wrongful act, negligence or default of the depository or its participants or of any employee of the depository or participant; and

The grant of certificate of commencement of business is in the interest of investors in the securities market.

The Board shall, before granting a certificate of commencement of business under this Chapter make a physical verification of the infrastructure facilities and systems established by the depository.

Grant of certificate of commencement of business

After considering the application under regulation 13 with reference to the matters specified in sub-regulation (1) of regulation 13 and making physical verification under sub- regulation (2) of that regulation, if the Board is satisfied that the depository is eligible to commence business as a depository, shall grant a certificate of commencement of business in Form D.

Procedure where certificate of commencement of business is not granted

If the Board, after considering the matters specified in sub-regulation (1) of regulation 13 and making physical verification under sub- regulation (2) of that regulation, is of the opinion that the depository shall not be granted a certificate of commencement of business, it may either-

Direct the depository to conform to the matters specified in regulation 13; or

Reject the application after giving the applicant an opportunity of being heard.

The decision of the Board to reject the application shall be communicated to the depository in writing within thirty days of such decision, stating therein the grounds on which the application has been rejected.

Chapter – IV

Registration of Participant

Application for grant of certificate of registration

An application for the grant of a certificate of registration as a participant shall be made to the Board in Form E, through each depository in which the applicant proposes to act as a participant, shall be accompanied by the fee specified in Part A of the Second Schedule and be paid in the manner specified in Part B thereof.

The depository shall forward to the Board the application in Form E as early as possible, but not later than thirty days along with its recommendations and certifying that the participant complies with the eligibility criteria including adequate infrastructure as provided for in these regulations and the bye- laws of the depository.

Application to conform to the requirements

An application in Form E, which is not complete in all respects and does not conform to the instructions specified therein, shall be rejected:

Provided that before rejecting any such application, the applicant shall be given in writing an opportunity to remove within thirty days of the date.

Provided further that the Board may, on being satisfied that it is necessary to extend the period specified in the first proviso, extend such period by such further time as it thinks necessary in order to enable the applicant to remove the objections indicated by the Board. Furnishing information, clarification, and personal representation of communication in this regard, the objections indicated by the Board

The Board may require the applicant, or the depository to which the applicant is to be admitted as a participant, to furnish such further information or clarification as may be considered necessary for the grant of a certificate of registration to the applicant.

The applicant or his authorised representative shall, if so required, appear before the Board for personal representation in connection with the grant of a certificate of registration.

Consideration of application for grant of certificate of registration

For the purpose of grant of certificate of registration, the Board shall take into account all matters which are relevant to or relating to the efficient and orderly functioning of a participant and in particular, whether the applicant complies with the following requirements, namely: -

The applicant belongs to one of the following categories,-

A public financial institution as defined in section 4A of the Companies Act, 1956 (1 of 1956);

A bank included for the time being in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934);

a foreign bank operating in India with the approval of the Reserve Bank of India;

A state financial corporation established under the provisions of section 3 of the State Financial Corporations Act, 1951 (63 of 1951);

An institution engaged in providing financial services, promoted by any of the institutions mentioned in sub clause (i), (ii), (iii), (iv) jointly or severally;

A custodian of securities who has been granted a certificate of registration by the Board under sub- section (1A) of section 12 of the Act;

A clearing corporation 8*[or a clearing house] of a stock exchange;

A stock broker who has been granted a certificate of registration by the Board under sub-section (1) of section 12 of the Act:

*[Provided that the stock-broker shall have a minimum net worth of rupees 50 lakhs and the aggregate value of the portfolio of securities of the beneficial owners held in dematerialised form in a depository through him, shall not exceed

*[100 times of the net worth of the stock broker]

Provided further that if the stock broker seeks to act as a participant in more than one depository, he shall comply with the criteria specified in the first proviso separately for each such depository; or

*[Provided further that where the stockbroker has a minimum networth of Rupees Ten crore, the limits on the aggregate value of the portfolio of securities of the beneficial owners held in dematerialized form in a depository through him shall not be applicable.]

A non-banking finance company, having a net worth of not less than rupees fifty lakhs:

Provided that such company shall act as a participant only on behalf of itself and not on behalf of any other person;

[Provided further that a non-banking finance company may act as a participant on behalf of any other person, if it has a networth of ` 50 crores in addition to the networth specified by any other authority]

[(x)   A registrar to an issue or share transfer agent who has a minimum net worth of

[rupees ten crores] and who has been granted a certificate of registration by the Board under sub – section (1) of Section 12 of the Act.]

The applicant is eligible to be admitted as a participant of the depository through which it has made the application to the Board;

The applicant has adequate infrastructure, systems, safeguards and trained staff to carry on activity as a participant; and

The applicant is a fit and proper person.]

The grant of certificate of registration is in the interests of investors in the securities market

Grant of Certificate of Registration

After considering the application under regulation 16, with reference to the matters specified in regulation 19, if the Board is satisfied that the applicant is eligible for grant of certificate of registration, grant a certificate in Form F.

The grant of certificate of registration in Form F shall be subject to the following namely:-

The participant shall pay the registration fee specified in Part A of the Second Schedule in the manner specified in Part B thereof, within fifteen days of the receipt of intimation from the Board;

The participant shall comply with the provisions of the 17*[Act], Depositories Ordinance, the bye-laws, agreements and these regulations;

The depository through which an application for certificate of registration has been forwarded holds a certificate of commencement of business under regulation 14;

If any information previously submitted by the participant to the Board is found to be false or misleading in any material particular, or if there is any change in such information, the participant shall forthwith inform the Board in writing;

The participant shall redress the grievances of beneficial owners within thirty days of the date of the receipt of the complaint and keep the depository informed about the number and the nature of redressals; and

The participant shall pay annual fees specified in Part A of the Second Schedule in the manner specified in Part B thereof.

*[Participants to abide by Code of Conduct

The Participant holding a certificate shall, at all times, abide by the Code of Conduct as specified in Third Schedule.]

Period of validity of the certificate of registration

The certificate of registration issued under regulation 20, or renewed under regulation 22 shall be valid for a period of five years from the date of its issue or renewal, as the case may be.

Renewal of Certificate of Registration

Three months before the expiry of the period of validity of a certificate of registration, the participant shall, if it so desires, make an application for renewal in Form E through the depository in which it is a participant.

The application for renewal under sub-regulation (1) shall accompany the fee specified for issue of certificate of registration and shall be dealt with in the same manner as if it were a fresh application for grant of certificate of registration.

Conditions of renewal of certificate of registration

he Board may renew a certificate of registration granted to a participant subject to the conditions of certificate of registration specified in regulation 22.

Procedure where certificate of registration is not granted

Where an application for the grant of certificate of registration under regulation 16 or for its renewal under regulation 22 does not satisfy the requirements specified in regulation 19, the Board shall reject the application after giving the applicant an opportunity of being heard.

The decision of the Board to reject the application shall be communicated to the applicant in writing within thirty days of such decision, stating therein the grounds on which the application has been rejected.

Effect of refusal to renew a certificate of registration

Any participant whose application for a certificate of registration as a participant has been rejected by the Board under regulation 24 shall from the date of expiry of the certificate of registration sought to be renewed, cease to carry on any activity as a participant:

Provided that the Board may, in the interest of the investors in the securities market permit the participant to carry on activities undertaken prior to the receipt of the intimation of refusal subject to such condition as the Board may specify.

Chapter – V

Rights and Obligations of Depositories, Participants, Issuers, Manner of Surrender of Certificate of Security and Creation of Pledge or Hypothecation

Rights and obligations of depositories, etc

The depositories, participants, issuers, and issuers’ agents, in addition to the rights and obligations laid down in the Depositories 19*[Act] and the bye-laws shall have the rights and obligations arising from the agreements entered into by them.

Depository to declare specific securities eligible arising from the agreements entered into by them

Every depository shall, in its bye-laws, state the specific securities which are eligible for being held in dematerialised form in the depository.

Securities eligible for dematerialization

The following securities shall be eligible for being held in dematerialised form in a depository:-

Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;

Units of mutual funds, rights under collective investment schemes and venture capital funds, commercial paper, certificates of deposit, securitised debt, money market instruments and 20*[government securities] unlisted securities shall also be similarly eligible for being held in dematerialised form in a depository.

Agreement between depository and issuer

Either on the issuer or on the investors exercising an option to hold his securities with a depository in dematerialised form, the issuer shall enter into an agreement with a depository to enable the investor to dematerialise the securities.”]

[Provided that no agreement shall be required to be entered into where depository itself is an issuer of securities]

[Provided further that no agreement shall be required to be entered into where State or Central Government is the issuer of Government securities]

Where the issuer has appointed a Registrar to the Issue or Share Transfer Agent, who has been granted certificate of registration by the Board under sub-section (1) of section 12 of the Act, the depository shall enter into a tripartite agreement with the issuer and the Registrar to the Issue or Share Transfer Agent, as the case may be, in respect of the securities to be declared by the depository as eligible to be held in dematerialised form.

Systems and Procedures

Every depository shall have systems and procedures which will enable it to co-ordinate with the issuer or its agent, and the participants, to reconcile the records of ownership of securities with the issuer or its agent, as the case may be, and with participants, on a daily basis.

Connectivity

Every depository shall maintain continuous electronic means of communication with all its participants, issuers or issuers’ agents, as the case may be, clearing houses and clearing corporations of the stock exchanges and with other depositories.

Transfer to be affected only after payment

The depository shall satisfy the Board that it has a mechanism in place to ensure that the interest of the persons buying and selling securities held in the depository are adequately protected and shall register the transfer of a security in the name of the transferee only after the depository is satisfied that payment for such transfer has been made.

Withdrawal by participant

Every depository shall allow any participant to withdraw or transfer its account, if the request for such withdrawal or transfer is in accordance with conditions stipulated therefor in the bye-laws of the depository.

Internal Monitoring, Review and Evaluation of Systems and Controls

Every depository shall have adequate mechanisms for the purposes of reviewing, monitoring and evaluating the depository’s controls, systems, procedures and safeguards.

External monitoring, review and evaluation of systems and controls

Every depository shall cause an inspection of its controls, systems, procedures and safeguards to be carried out annually and forward a copy of the report to the Board.

Insurance Against Risks

Every depository shall take adequate measures including insurance to protect the interests of the beneficial owners against risks likely to be incurred on account of its activities as a depository.

Manner of Keeping Records

Where records are kept electronically by the depository, it shall ensure that the integrity of the automatic data processing systems is maintained at all times and take all precautions necessary to ensure that the records are not lost, destroyed or tampered with and in the event of loss or destruction, ensure that sufficient back up of records is available at all times at a different place.

Records to be Maintained

Every depository shall maintain the following records and documents, namely: -

Records of securities dematerialised and rematerialised;

The names of the transferor, transferee, and the dates of transfer of securities;

A register and an index of beneficial owners;

*[(cc) details of the holdings of the securities of the beneficial owners as at the end of each day.]

Records of instructions received from and sent to participants, issuers, issuers’ agents and beneficial owners;

Records of approval, notice, entry and cancellation of pledge or hypothecation, as the case may be;

Details of participants;

Details of securities declared to be eligible for dematerialisation in the depository; and

Such other records as may be specified by the Board for carrying on the activities as a depository.

Every depository shall intimate the Board the place where the records and documents are maintained.

Subject to the provisions of any other law, the depository shall preserve records and documents for a minimum period of five years.

Co-operation with other entities

Every depository shall extend all such co-operation to the beneficial owners, issuers, issuers’ agents, custodians of securities, other depositories and clearing organizations as is necessary for the effective, prompt and accurate clearance and settlement of securities’ transactions and conduct of business.

Prohibition of Assignment

No depository shall assign or delegate to any other person its functions as a depository, without the prior approval of the Board.

Agreement by participant

Every participant shall enter into an agreement with a beneficial owner before acting as a participant on his behalf, in a manner specified by the depository in its bye-laws.

Separate Accounts

Separate accounts shall be opened by every participant in the name of each of the beneficial owners and the securities of each beneficial owner shall be segregated, and shall not be mixed up with the securities of other beneficial owners or with the participant’s own securities.

A participant shall register the transfer of securities to or from a beneficial owner’s account only on receipt of instructions from the beneficial owner and thereafter confirm the same to the beneficial owner in a manner as specified by the depository in its bye-laws.

Every entry in the beneficial owner’s account shall be supported by electronic instructions or any other mode of instruction received from the beneficial owner in accordance with the agreement with the beneficial owner.

Statement of Accounts

Every participant shall provide statements of account to the beneficial owner in such form and in such manner and at such time as provided in the agreement with the beneficial owner.

Transfer or withdrawal by beneficial owner

Every participant shall allow a beneficial owner to withdraw or transfer from his account in such manner as specified in the agreement with the beneficial owner.

Connectivity

Every participant shall maintain continuous electronic means of communication with each depository in which it is a participant.

Monitoring, reviewing and evaluating internal systems and controls

Every participant shall have adequate mechanism for the purposes of reviewing, monitoring and evaluating the participant’s internal accounting controls and systems.

Reconciliation

Every participant shall reconcile his records with every depository in which it is a participant, on a daily basis.

Returns

Every participant shall submit periodic returns to the Board and to every depository in which it is a participant in the format specified by the Board or the bye-laws of the depository, as the case may be.

Record of services

Every participant shall maintain the following records and documents, namely: -

Records of all the transactions entered into with a depository and with a beneficial owner;

Details of securities dematerialised, rematerialised on behalf of beneficial owners with whom it has entered into an agreement;

Records of instructions received from beneficial owners and statements of account provided to beneficial owners; and

Records of approval, notice, entry and cancellation of pledge or hypothecation, as the case may be.

Every participant shall make available for the inspection of the depository in which it is a participant all records referred to in sub-regulation (1).

Every participant shall allow persons authorised by the depository in which it is a participant to enter its premises during normal office hours and inspect its records.

Every participant shall intimate the Board the place where the records and documents are maintained.

Subject to the provisions of any other law, the participant shall preserve records and documents for a minimum period of five years.

Manner of Keeping Records

Where records are kept electronically by the participant, it shall ensure that the integrity of the data processing systems is maintained at all times and take all precautions necessary to ensure that the records are not lost, destroyed or tampered with and in the event of loss or destruction, ensure that sufficient back up of records is available at all times at a different place.

Records to be Maintained Depository-Wise

If a participant enters into an agreement with more than one depository, it shall maintain the records specified in regulation 49 separately in respect of each depository.

Prohibition of assignment systems

No participant shall assign or delegate its functions as participant to any other person, without the prior approval of the depository.

Agreement by issuer

Every issuer whose securities have been declared as eligible to be held in dematerialised form in a depository shall enter into an agreement with the depository in accordance with the provisions of regulation 29.

[Provided that no agreement shall be required to be entered into in case: -

The depository is the issuer of securities; or

The State or the Central Government is the issuer of Government securities.]

[Manner of Handling Share Registry Work

All matters relating to transfer of security, maintenance of records, holders of security, handling of physical security and establishing connectivity with the depositories shall be handled and maintained at a single point i.e., either in-house by the issuer or a share transfer agent registered with the Board.]

Redressal for Investor Grievances

Every issuer or its agent or any person who is registered as an intermediary under this Act, shall redress the grievances of beneficial owners within thirty days of the date of receipt of complaint and keep a depository informed about the number and nature of grievances redressed by it and the number of grievances pending before it.]

Manner of Surrender of Certificate of Security

Any beneficial owner, who has entered into an agreement with a participant, shall inform the participant of the details of the certificate of security, which is to be dematerialised, and shall surrender such certificate to the participant:

Provided that where a beneficial owner has appointed a custodian of securities, then he may surrender the certificates of security to the participant through his custodian of securities.

The participant shall, on receipt of information under sub- regulation (1), forward such details of the certificate of security to the depository and shall confirm to the depository that an agreement has been entered into between the participant and the beneficial owner.

The participant shall maintain records indicating the names of beneficial owners of the securities surrendered the number of securities and other details of the certificate of security received.

*[(4) The participant shall, within 7 days of the receipt of certificate of security refer to in sub-regulation (1) furnish to the issuer details specified in regulation 2 along with the certificate of security.]

*[(5) Within 15 days of receipt of the certificate of security from the participant shall confirm to the depository that the security comprised in the said certificate have been listed on the stock exchange or exchanges where the earlier issued securities are listed and shall also after due verification immediately mutilate and cancel the certificate of security and substitute in its record the name of the depository as the registered owner and shall send a certificate to this effect to the depository and to every stock exchange where the security is listed.

Provided that in case of unlisted companies the condition of listing in all stock exchanges where earlier issued shares are listed shall not be applicable.]

Immediately upon receipt of information from the issuer under sub-regulation (5), the depository shall enter in its records the name of the person who has surrendered the certificate of security as the beneficial owner, as well as the name of the participant from whom it has received intimation under sub-regulation (2), and shall send an intimation of the same to the participant.

The issuer shall maintain a record of certificates of securities, which have been dematerialised.

Reconciliation

The issuer or its agent shall reconcile the records of dematerialised securities with all the securities issued by the issuer, on a daily basis.

[Provided that where the State or the Central Government is the issuer of Government securities, the depository shall, on a daily basis, reconcile the records of the dematerialised securities.]

30Audit

Every issuer shall submit audit report on a quarterly basis starting from September 30, 2003 to the concerned stock exchanges audited from a qualified chartered accountant or a practicing company secretary, for the purposes of reconciliation of the total issued capital, listed capital and capital held by depositories in dematerialized form, the details of changes in share capital during the quarter and the in-principle approval obtained by the issuer from all stock exchanges where it is listed in respect of such further issued capital.

The audit report under sub-regulation (1) shall also give the updated status of the register of members of the issuer and confirm that security have been dematerialized as per requests within 21 days from the date of receipt of request from the issuer and where the dematerialization has not been effected within the said stipulated period, the report shall disclose the reasons for such delay.

The issuer shall immediately bring to the notice of depositories and the stock exchanges, any difference observed in its issue, listed, and the capital held by depositories in dematerialized form.]

Connectivity

Every issuer or its agent shall establish continuous electronic means of communication with the depository with which it has entered into an agreement.

Information

Every issuer whose securities have been declared as eligible for dematerialisation in a depository shall give information to the depository about book closures, record dates, dates for the payment of interest or dividend, dates for annual general meetings and other meetings, dates for redemption of debentures, dates for conversion of debentures and warrants, call money dates and such other information at the time and in the manner as may be specified by the depository in its bye-laws or agreement.

[Provided that no such information would be required to be given to the depository where the State or the Central Government is the issuer of Government securities.]

Manner of creating pledge or hypothecation

If a beneficial owner intends to create a pledge on a security owned by him, he shall make an application to the depository through the participant who has his account in respect of such securities.

The participant after satisfaction that the securities are available for pledge shall make a note in its records of the notice of pledge and forward the application to the depository.

The depository after confirmation from the pledgee that the securities are available for pledge with the pledgor shall within fifteen days of the receipt of the application create and record the pledge and send an intimation of the same to the participants of the pledgor and the pledgees.

On receipt of the intimation under sub-regulation (3) the participants of both the pledgor and the pledgee shall inform the pledgor and the pledgee respectively of the entry of creation of the pledge.

If the depository does not create the pledge, it shall send along with the reasons intimation to the participants of the pledgor and the pledgee.

The entry of pledge made under sub-regulation (3) may be cancelled by the depository if the pledgor or the pledgee makes an application to the depository through its participant.

Provided that no entry of pledge shall be cancelled by the depository with the prior concurrence of the pledgee.

The depository on the cancellation of the entry of pledge shall inform the participant of the pledgor.

Subject to the provisions of the pledge document, the pledgee may invoke the pledge and on such invocation, the depository shall register the pledgee as beneficial owner of such securities and amend its records accordingly.

After amending its records under sub-regulation (8) the depository shall immediately inform the participants of the pledgor and pledgee of the change who in turn shall make the necessary changes in their records and inform the pledgor and pledgee respectively.

If a beneficial owner intends to create a hypothecation on a security owned by him he may do so in accordance with the provisions of sub-regulations (1) to (9).

The provisions of sub – regulations (1) to (9) shall mutatis mutandis apply in such cases of hypothecation.

Provided that the depository before registering the hypothecatee as a beneficial owner shall obtain the prior concurrence of the hypothecator.

No transfer of security in respect of which a notice or entry of pledge or hypothecation is in force shall be effected by a participant without the concurrence of the pledgee or the hypothecatee as the case may be.]

*[Investment Advice

A depository or a participant or any of their employees shall not render, directly or indirectly, any investment advice about any security in the publicly accessible media whether real-time or non-real-time, unless a disclosure of his interest including long or short position in the said security has been made, while rendering such advice.

In case an employee of the depository or the participant is rendering such advice, he shall also disclose the interest of his dependent family members and the employer including their long or short position in the said security, while rendering such advice.

Appointment of compliance officer

A depository and a participant shall appoint a compliance officer who shall be responsible for monitoring of the compliance of the Act, rules and regulations, notifications, guidelines, instructions, etc., issued by the Board or the Central Government and for redressal of investor’s grievances.

The compliance officer shall immediately and independently report to the Board any non-compliance observed by him]

Chapter – VI

Inspection

Board’s right to inspect

The Board may appoint one or more persons as inspecting officer to undertake inspection of the books of accounts, records, documents and infrastructure, systems and procedures, or to investigate the affairs of a depository, a participant, a beneficial owner, an issuer or its agent for any of the following purposes, namely:-

To ensure that the books of account are being maintained by the depository, participant, issuer or its agent in the manner specified in these regulations;

To look into the complaints received from the depositories, participants, issuers, issuers’ agents, beneficial owners or any other person;

To ascertain whether the provisions of the Act, the Depositories 35*[Act], the bye-laws, agreements and these regulations are being complied with by the depository, participant, beneficial owner, issuer or its agent;

To ascertain whether the systems, procedures and safeguards being followed by a depository, participant, beneficial owner, issuer or its agent are adequate;

To suo motu ensure that the affairs of a depository, participant, beneficial owner, issuer or its agent, are being conducted in a manner which are in the interest of the investors or the securities market.

Notice before inspection and investigation

Before ordering an inspection or investigation under regulation 59, the Board shall give not less than 10 days notice to the depository, participant, beneficial owner, issuer or its agent, as the case may be.

Notwithstanding anything contained in sub-regulation (1), where the Board is satisfied that in the interest of the investors no such notice should be given, it may, by an order in writing direct that such inspection be taken up without such notice.

During the course of an inspection or investigation, the depository, a participant, a beneficial owner, an issuer or its agent against whom the inspection or investigation is being carried out shall be bound to discharge his obligation as provided in regulation 61.

Obligations on inspection by the Board

It shall be the duty of the depository, a participant, a beneficial owner, an issuer or its agent whose affairs are being inspected or investigated, and of every director, officer and employee thereof, to produce to the inspecting officer such books, securities, accounts, records and other documents in its custody or control and furnish him with such statements and information relating to his activities as a depository, a participant, a beneficial owner, an issuer or its agent, as the inspecting officer may require, within such reasonable period as the inspecting officer may specify.

The depository, a participant, a beneficial owner, an issuer or its agent shall allow the inspecting officer to have reasonable access to the premises occupied by him or by any other person on his behalf and also extend reasonable facility for examining any books, records, documents and computer data in the possession of the depository, a participant, a beneficial owner, an issuer or its agent or such other person and also provide copies of documents or other materials which, in the opinion of the inspecting officer are relevant for the purposes of the inspection.

The inspecting officer, in the course of inspection of investigation, shall be entitled to examine or to record the statements of any director, officer or employee of the depository, a participant, a beneficial owner, an issuer or its agent.

It shall be the duty of every director, officer or employee of the depository, a participant, a beneficial owner, an issuer or its agent to give to the inspecting officer all assistance in connection with the inspection, which the inspecting officer may reasonably require.

Submission of Report to the Board

The inspecting officer shall, as soon as possible, on completion of the inspection or investigation as the case may be, submit a report to the Board:

Provided that if directed to do so by the Board, he may submit interim reports.

*[Action on inspection or investigation report

The Board or the Chairman shall after consideration of inspection or investigation report take such action as the Board or Chairman may deem fit and appropriate including action under the Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002]

*[Application of Chapter

Nothing contained in this Chapter shall be applicable to the State or the Central Government where it is the issuer of the Government securities]

*[Appointment of Auditor

The Board shall have the power to appoint an auditor to inspect or investigate, into the books of accounts, records, documents, infrastructures, systems and procedures or affairs of a depository, a participant, a beneficial owner, an issuer or its agent.

Provided that the auditor so appointed shall have the same powers of the inspecting or investigating officer as stated in regulations 59 and 60, and the obligation of the depository, participant, beneficial owner, issuer or its agent and their respective directors, officers and employees, as the case may be, as stated in Regulation 61, shall be applicable to the inspection or investigation under this Regulation.

Board to Recover the Expenses

The Board shall be entitled to recover from the depository, a participant, a beneficial owner, an issuer or its agent as the case may be, such expenses including fees paid to the auditors as may be incurred by it for the purposes of inspecting or investigating the books of accounts, records, documents, infrastructures, systems and procedures of the depository, a participant, a beneficial owner, a issuer or its agent, as the case may be.]

Foot Notes

Substituted for “Ordinance” by Securities and Exchange Board of India (Depository and Participants) (Amendment) Regulations, 1997 published in the official Gazette of India dated 07.02.1997.

Following regulation 63 was substituted by Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002.

“Communication of findings etc.

The Board shall, after consideration of the inspection report or the investigation report referred to in regulation 62, communicate the findings of the inspecting officer to the depository, participant, issuer or its agent, as the case may be, and give him an opportunity of being heard.

On receipt of the reply if any, from the depository, participant, issuer or its agent, as the case may be, the Board may call upon him to take such measures as the Board may deem fit in the interest of the securities market and for due compliance with the provisions of the Act, the Depositories a*[Act], regulations, the bye- laws and agreements.

Substituted for “Ordinance” by Securities and Exchange Board of India (Depository and Participants) (Amendment) Regulations, 1997 published in the official Gazette of India dated 07.02.1997.

Regulation 63A inserted by Securities and Exchange Board of India (Depository and Participants) (Second Amendment) Regulations, 1998 published in the official Gazette of India dated 21.01.1998.

Regulations 63A and 63B were inserted by Securities and Exchange Board of India (Depository and Participants) (Second Amendment) Regulations, 1999 published in the official Gazette of India dated 07.07.1999

Chapter – VII

Procedure for Action in Case of Default

[Liability for action in case of default

A depository or a participant who-

Contravenes any of the provisions of the Act, the Depositories Act, the bye-laws, agreements and these regulations;

Fails to furnish any information relating to its activity as a depository or participant as required under these regulations;

Does not furnish the information called for by the Board under clause (a) of sub-section (1) of section 18 of the Depositories Act or furnishes information which is false or misleading in any material particular;

Does not co-operate in any inspection or investigation or enquiry conducted by the Board;

Fails to comply with any direction of the Board issued under section 18 of the Depositories Act;

Fails to pay the annual fee referred to in regulation 8, shall be dealt with in the manner provided under the Securities and Exchange Board of India (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002.]

Securities And Exchange Board Of India (Custodian Of Securities) Regulations, 1996

Chapter – I

Preliminary

Short title and Commencement

These regulations may be called the Securities and Exchange Board of India (Custodian of Securities) Regulations, 1996.

They shall come into force on the date of their publication in the Official Gazette.

Definitions

In these regulations, unless the context otherwise requires:-

“Act” means the Securities and Exchange Board of India Act, 1992 (15 of 1992);

“Certificate” means a certificate of registration granted by the Board under these regulations;

“Client” means any person who has entered into an agreement with a custodian of securities to avail of custodial services provided by the custodian of securities;

“Custodian of securities” means any person who carries on or proposes to carry on the business of providing custodial services;

“Custodial services” in relation to securities means safekeeping of securities of a client and providing services incidental thereto, and includes-

Maintaining accounts of securities of a client;

Collecting the benefits or rights accruing to the client in respect of securities;

Keeping the client informed of the actions taken or to be taken by the issuer of securities, having a bearing on the benefits or rights accruing to the client; and

Maintaining and reconciling records of the services referred to in sub-Clauses (i) to (iii). (f) “Custody account” means an account of a client maintained by a custodian of securities in respect of securities;

“enquiry officer” means an enquiry officer appointed by the Board, under regulation 29;

“Form” means any of the forms set out in the First Schedule;

“inspecting officer” means an inspecting officer appointed by the Board under regulation 21;

Chapter – II

Registration of Custodians of Securities

Application for Grant of Certificate

Any person proposing to carry on business as custodian of securities on or after the commencement of these regulations shall make an application to the Board for grant of a certificate.

Any person who is carrying on business as a custodian of securities on the date of commencement of these regulations shall make an application to the Board for grant of certificate within a period of three months from the date of such commencement.

Provided that the Board may, in special cases, where it is of the opinion that it is necessary to do so for reasons to be recorded in writing, may extend the period up to a maximum of six months from the date of such commencement.

An application for grant of a certificate under sub- regulation (1) or sub-regulation shall be made in Form A and shall be accompanied by an application fee as specified in Part A of the Second Schedule and be paid in the manner specified in Part B thereof.

Any person referred to in sub-regulation (2) who fails to make an application for grant of certificate within the period or the extended period specified therein, shall cease to carry on any activity as custodian of securities and shall be subject to the directions of the Board with regard to the transfer of records, documents or securities relating to his activities as custodian of securities.

Application to conform to requirements

An application under regulation 3 which is not complete in all respects or which does not conform to the instructions specified therein shall be rejected;

Provided that, before rejecting any such application, the Board shall give the applicant an opportunity to remove the objection, within such time as may be specified by the Board.

Furnishing of information, clarification, and personal representation

The Board may require the applicant to furnish such further information or clarification regarding matters relevant to the activities of a custodian of securities for the purpose of consideration of the application.

The applicant or his authorized representative shall, if so required, appear before the Board for personal representation, in connection with the grant of certificate.

Consideration of application for grant of certificate

For the purpose of the grant of a certificate, the Board shall take into account all matters which are relevant to the activities of a custodian of securities and, in particular, whether:-

The applicant fulfils the capital requirement in accordance with regulation 7;

The applicant has the necessary infrastructure, including adequate office space, vaults for safe custody of securities and computer systems capability, required to effectively discharge his

Activities as Custodian of Securities

The applicant has in his employment adequate and competent persons who have the experience, capacity and ability of managing the business of the custodian of securities;

The applicant has prepared a complete manual, setting out the systems and procedures to be followed by him for the effective and efficient discharge of his functions and the arms length relationships to be maintained with the other businesses, if any, of the applicant;

The applicant is a person who has been refused a certificate by the Board or whose certificate has been cancelled by the Board;

The applicant, his director, his principal officer or any of his employees is involved in any litigation connected with the securities market;

The applicant, his director, his principal officer or any of his employees has at any time been convicted of any offence involving moral turpitude or of any economic offence; and

The applicant is a fit and proper person] and the grant of certificate is in the interest of investors.

Notwithstanding anything contained in sub-regulation (1) the Board shall not consider an application made under regulation 3 unless the applicant is a body corporate.

Capital Requirement

The capital requirement referred to in clause (a) of sub- regulation (1) of regulation 6 shall be a net worth of a minimum of rupees fifty crores.

Explanation

For the purposes of this regulation, the expression “net worth” means the paid up capital and the free reserves as on the date of the application.

Notwithstanding anything contained in sub-regulation (1), any custodian of securities which;

Has been approved by the Board under the provisions of Securities and Exchange Board of India (Mutual Fund) Regulations, 1993, or the Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995, or the Government of India Guidelines for Foreign Institutional Investors dated September 14, 1992, even if it does not have the net worth specified in sub- regulation (1) may continue to function as a custodian of securities and shall within a period of one year from the date of commencement of these regulations raise its net worth to that specified in sub- regulation (1);

[Provided that the period specified above may be extended by the Board upto a maximum of 5 years;]
Has made an application under regulation 3 shall be permitted to fulfil his capital adequacy requirements within one month of the receipt of certificate under regulation 8.

Procedure and grant of certificate

After considering the application under regulation 3, with reference to the matters specified in regulation 6, if the Board on being satisfied that all particulars sought have been furnished and the applicant is eligible for the grant of a certificate, shall send an intimation of the same to the applicant.

On receipt of an intimation from the Board under sub- regulation (1), the applicant shall pay to the Board a registration fee specified in Part A of Second Schedule in the manner specified in Part B thereof.

The Board shall thereafter grant a certificate in Form B to the applicant on receipt of the registration fee.

Conditions of certificate

The certificate granted to the custodian of securities shall be subject to the following conditions, namely:-

It shall not commence any activities as custodian of securities unless it fulfils the capital requirement specified in regulation 7;

It shall abide by the provisions of the Act and these regulations in the discharge of its functions as custodian of securities;

It shall enter into a valid agreement with its client for the purpose of providing custodial services;

It shall pay annual fees as specified in Part A of the Second Schedule in the manner specified in Part B thereof;

If any information previously submitted by it to the Board is found by it to be false or misleading in any material particular, or if there is any change in such information, it shall forthwith inform the Board in writing; and

Besides providing custodial services, it shall not carry on any activity other than activities relating to rendering of financial services.

Procedure where Certificate is not Granted

After considering an application for grant of certificate made under regulation 3, if the Board is satisfied that a certificate should not be granted, the Board may reject the application after giving the applicant a reasonable opportunity of being heard.

The decision of the Board to reject the application shall be communicated within thirty days of such decision to the applicant in writing, stating therein the grounds on which the application has been rejected.

An applicant, who is aggrieved by the decision of the Board under sub-regulation (1) may, within a period of thirty days from the date of receipt of communication under sub- regulation (2), apply to the Board for re-consideration (4) The Board shall, as soon as possible, in the light of the submissions made in the application for re-consideration made under sub-regulation (3) and wherever necessary, after giving the applicant a reasonable opportunity of being heard, convey its decision in writing to the applicant. of its decision.

Effect of Refusal to Grant Certificate

Any custodian of securities whose application for grant of certificate has been rejected by the Board shall, on and from the date of the receipt of the communication under sub- regulation (2) of regulation 10, cease to carry on any activity as custodian of securities and shall be subject to the directions of the Board with regard to the transfer of records, documents or securities that may be in its custody or control relating to its activity as custodian of securities.

Chapter – III

General Obligations and Responsibilities of Custodians

Code of Conduct

Every custodian of securities shall abide by the Code of Conduct as set out in the Third Schedule.

Segregation of Activities

Where a custodian of securities is carrying on any activity besides that of acting as custodian of securities, then,-

The activities relating to his business as custodian of securities shall be separate and segregated from all other activities;

Its officers and employees engaged in providing custodial services shall not be engaged in any other activity carried on by him.

Monitoring, review evaluating and inspecting systems and controls

Every custodian of securities shall have adequate mechanisms for the purposes of reviewing, monitoring and evaluating the custodian’s controls, systems, procedures and safeguards.

The custodian of securities shall cause to be inspected annually the mechanism referred to in sub-regulation (1) by an expert and forward the inspection report to the Board within three months from the date of inspection.

Prohibition of Assignment

No custodian of securities shall assign or delegate its functions as a custodian of securities to any other person unless such person is a custodian of securities.

Separate custody account

Every custodian of securities shall open a separate custody account for each client, in the name of the client whose securities are in its custody and the assets of one client shall not be mixed with those of another client.

Agreement with the client

Every custodian of securities shall enter into an agreement with each client on whose behalf it is acting as custodian of securities and every such agreement shall provide for the following matters, namely:-

The circumstances under which the custodian of securities will accept or release securities from the custody account;

The circumstances under which the custodian of securities will accept or release monies from the custody account.

The circumstances under which the custodian of securities will receive rights or entitlements on the securities of the client;

The circumstances and the manner of registration of securities in respect of each client;

Details of the insurance, if any, to be provided for by the custodian of securities.

Internal Controls

Every custodian of securities shall have adequate internal controls to prevent any manipulation of records and documents, including audits for securities and rights or entitlements arising from the securities held by it on behalf of its client.

Every custodian of securities shall have appropriate safekeeping measures to ensure that such securities are protected from theft and natural hazard.

Maintenance of records and documents and furnishing of information

Without prejudice to the provisions of any other law for the time being in force, every custodian of securities shall maintain the following records and documents, namely:-

Records containing details of securities received and released on behalf of each client

Records containing details of monies received and released on behalf of each client;

Records containing details of rights or entitlements of each client arising from the securities held on behalf of the client;

Records containing details of registration of securities in respect of each client ;(e)            Ledger  for each client;

Records containing details of instructions received from and sent to clients; and records of all reports submitted to the Board.

Every custodian of securities shall intimate to the Board the place where the records and documents under sub- regulation (1) are maintained.

Every custodian of securities shall preserve the records and documents maintained under sub-regulation (1) for a minimum period of five years.

Appointment of Compliance Officer

(1) Every custodian of securities shall appoint a compliance officer who shall be responsible for monitoring the compliance of the Act, rules and regulations, notifications, guidelines, instructions etc issued by the Board or the Central Government and for redressed of investors’ grievances.

The compliance officer shall immediately and independently report to the Board any non-compliance observed by him.]

Information to the Board

The Board may, at any time, call for any information from a custodian of securities with respect to any matter relating to its activity as custodian of securities.

Where any information is called for by the Board under sub-regulation (1), it shall be the duty of the custodian of securities to furnish such information, within such reasonable period as the Board may specify.

Chapter – IV

Inspection and Audit

Board’s Right to Inspect

The Board may appoint one or more persons as inspecting officer to undertake inspection of the books of accounts, records and documents of the custodian of securities for any of the following purposes, namely:-

To ensure that the books of account, records and documents are being maintained by the custodian of securities in the manner specified in these regulations;

To investigate into complaints received from investors, clients or any other person, on any matter having a bearing on the activities of the custodian of securities;

To ascertain whether the provisions of the Act and these regulations are being complied with by the custodian of securities; and

To investigate suo motu into the affairs of the custodian of securities, in the interest of the securities market or in the interest of investors.

Notice Before Inspection

Before ordering an inspection under regulation 21, the Board shall give not less than ten days notice to the custodian of securities.

Notwithstanding anything contained in sub-regulation (1), where the Board is satisfied that in the interest of the investors no such notice should be given, it may by an order in writing direct that the inspection of the affairs of the custodian of securities be taken up without such notice.

During the course of an inspection, the custodian of securities against whom the inspection is being carried out shall be bound to discharge his obligations as provided in regulation 23.

Obligations of custodian on inspection by the Board

It shall be the duty of the custodian of securities whose affairs are being inspected, and of every director, officer and employee thereof, to produce to the inspecting officer such books, securities, accounts, records and other documents in its custody or control and furnish him with such statements and information relating to his activities of the custodian of securities, as the inspecting officer may require, within such reasonable period as the inspecting officer may specify.

The custodian of securities shall allow the inspecting officer to have reasonable access to the premises occupied by such custodian or by any other person on his behalf and also extend reasonable facility for examining any books, records, documents and computer data in the possession of the custodian of securities or such other person and also provide copies of documents or other materials which, in the opinion of the inspecting officer are relevant for the purposes of the inspection.

The inspecting officer, in the course of inspection, shall be entitled to examine or to record the statements of any director, officer or employee of the custodian of securities.

It shall be the duty of every director, officer or employee of the custodian of securities to give to the inspecting officer all assistance in connection with the inspection, which the inspecting officer may reasonably require.

Submission of Report to the Board

The inspecting officer shall, as soon as possible, on completion of the inspection submit an inspection report to the Board:

Provided that if directed to do so by the Board, he may submit an interim report.

Communication of findings etc. to the custodian of securities

The Board shall, after consideration of the inspection report or the interim report referred to in regulation 24, communicate the findings of the inspection officer to the custodian of securities and give him an opportunity of being heard.

On receipt of the reply if any, from the custodian of securities, the Board may call upon the custodian of securities to take such measures as the Board may deem fit in the interest of the securities market and for due compliance with the provisions of the Act, the rules framed there under and these regulations.

Appointment of Auditor

The Board shall have the power to appoint an auditor to inspect or investigate, as the case may be, into the books of accounts, records, documents or affairs of the applicant or the custodian as the case may be;

Provided that the auditors so appointed shall have the same powers as vested in the investing officer under regulation 21 and the applicant or custodian and its directors, officers and employees shall be under the same obligations, towards the auditor so appointed, as are mentioned in regulation 23.

Board to Recover the Expenses The Board shall be entitled to recover from the custodian or the applicant as the case may be, such expenses including fees paid to the auditors a s may be incurred by it for the purposes of inspecting the books of accounts, records and documents of the applicant or the custodian as the case may be.

Chapter – V

Procedure for Action in Case of Default

Suspension of certificate

The Board may suspend the certificate granted to a custodian of securities where the custodian of securities:

Contravenes any of the provisions of the Act, the rules framed there under or these regulations;

Fails to furnish any information relating to his activity as custodian of securities as required by the Board;

Furnishes to the Board information which is false and misleading in any material particular;

Does not submit periodic returns or reports as required by the Board;

Does not co-operate in any enquiry or inspection conducted by the Board;

Fails to update its systems and procedures as recommended by the Board;

Fails to resolve the complaints of clients or fails to give a satisfactory reply to the Board in this behalf;

Is guilty of misconduct or makes a breach of the Code of Conduct specified in the Third Schedule;

Fails to pay annual fees.

Cancellation of Certificate

The Board may cancel the certificate granted to a custodian of securities:-

When it is guilty of fraud or has been convicted of an offence involving moral turpitude; or

It has been guilty of repeated defaults of the nature specified in regulation 26

Explanation

In this regulation, “fraud” has the same meaning as is assigned to it in section 17 of the Indian Contract Act, 1872. (9 of 1872)

Manner of making order of cancellation or suspension

No order of suspension or cancellation of certificate shall be made by the Board against a custodian of securities, except after holding an enquiry in accordance with the procedure specified in regulation 29

Manner of holding enquiry before suspension or cancellation

For the purpose of holding an enquiry under regulation 28, the Board may appoint one or more enquiry officer.

The enquiry officer shall issue to the custodian of securities, at its registered office or its principal place of business, a notice setting out the grounds on which action is proposed to be taken against it and calling upon it to show cause against such action within a period of fourteen days from the date of receipt of the notice.

The custodian of securities may, within fourteen days from the date of receipt of such notice, furnish to the enquiry officer a written reply, together with copies of documentary or other evidence relied on by it or sought by the Board from the custodian of securities.

The enquiry officer shall give a reasonable opportunity of hearing to the custodian of securities to enable him to make submissions in support of its reply made under sub-regulation (3).

Before the enquiry officer, the custodian of securities may either appear in person or through any person duly authorized by the custodian of securities;

Provided that no lawyer or advocate shall be permitted to represent the custodian of securities at the enquiry;

Provided further that where a lawyer or an advocate has been appointed by the Board as a presenting officer under sub- regulation (6), it shall be lawful for the custodian of securities to present its case through a lawyer or advocate.

The enquiry officer may, if he considers it necessary, ask the Board to appoint a presenting officer to present its case.

The enquiry officer shall, after taking into account all relevant facts and submissions made by the custodian of securities, submit a report to the Board and recommend the penal action, if any, to be taken against the custodian of securities as also the grounds on which the proposed action is justified.

Show-cause notice and order

On receipt of the report from the enquiry officer, the Board shall consider the same and issue to the custodian of securities a show-cause notice as to why the penal action as proposed by the enquiry officer should not be taken against it.

The custodian of securities shall, within fourteen days of the date of the receipt of the show-cause notice, send a reply to the Board.

The Board, after considering the reply of the custodian of securities to the show-cause notice, if received within a period of fourteen days shall, as soon as possible but not later than thirty days from the receipt of the reply or the date of hearing, if any, which ever is later, pass such order as it deems fit, including an order for the suspension or cancellation of the certificate.

Every order made under sub-regulation (3) shall be self-contained and shall give reasons for the conclusions stated therein, including the justification for the penalty if any, imposed by that order.

Effect of suspension and cancellation of certificate

On and from the date of the suspension of the certificate, the custodian of securities shall cease to carry on any activity as a custodian of securities during the period of suspension, and shall be subject to the directions of the Board with regard to any records, documents or securities that may be in its custody or control, relating to its activities as custodian of securities.

On and from the date of cancellation of the certificate, the custodian of securities shall, with immediate effect, cease to carry on any activity as a custodian of securities, and shall be subject to the directions of the Board with regard to the transfer of any records, documents or securities that may be in its custody or control, relating to its activities as custodian of securities.

Publication of order of suspension or cancellation

The order of suspension or cancellation of certificate passed under sub-regulation 3 of Regulation 30 shall be published by the Board in at least two daily newspapers.

National Securities Depository Limited

Although India had a vibrant capital market which is more than a century old, the paper-based settlement of trades caused substantial problems like bad delivery and delayed transfer of title till recently. The enactment of Depositories Act in August 1996 paved the way for establishment of NSDL, the first depository in India.

This depository promoted by institutions of national stature responsible for economic development of the country has since established a national infrastructure of international standards that handles most of the securities held and settled in dematerialised form in the Indian capital market

Using innovative and flexible technology systems, NSDL works to support the investors and brokers in the capital market of the country. NSDL aims at ensuring the safety and soundness of Indian marketplaces by developing settlement solutions that increase efficiency, minimise risk and reduce costs. At NSDL, we play a quiet but central role in developing products and services that will continue to nurture the growing needs of the financial services industry

In the depository system, securities are held in depository accounts, which is more or less similar to holding funds in bank accounts. Transfer of ownership of securities is done through simple account transfers. This method does away with all the risks and hassles normally associated with paperwork. Consequently, the cost of transacting in a depository environment is considerably lower as compared to transacting in certificates.

Depository Participant:

NSDL depository reaches its services to investors through market intermediaries called Depository Participants (DP), who as per SEBI regulations could be organisations involved in the business of providing financial services like banks, brokers, custodians, financial institutions, etc. This system of using the existing distribution channel helps NSDL to reach to a wide cross section of investors spread across a large geographical area

The admission of the DPs involves a detailed evaluation by NSDL and a further evaluation and approval by SEBI.

Realising the potential in this market, all the custodians in India and a number of banks, financial institution and major brokers have already joined NSDL as DPs and they are providing services in a number of cities. Many more organisations are in various stages of establishing connectivity with NSDL.