Depository system is a system wherein the securities of investors are held in the electronic form with the depository at the request of the investors and transfer of securities takes place by means of book entries on the ledger of the depository. The system is also referred as the ‘scrip less trading system’ as the system dispenses with the securities and its movement in the physical form.
The depository system provides for the establishment of depositories to curb the irregularities in the capital market and protect the interests of the investors. The system facilitates an orderly conduct of the financial markets through the free transferability of securities with speed, accuracy and transparency.
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Main Features of “Depository System” are:
1. Securities in Dematerialised Form:
Depository system provides for maintenance of ownership record of the securities of the investor in a book entry form. The system immobilizes physical securities so that there is no physical certificate in existence. The securities are dematerialized to be held only as electronic records maintained with the depository.
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2. Fungibility:
In the depository system, the securities dematerialized are not identified by distinctive numbers or certificate numbers as in the physical environment. Thus, all securities in the same class are identical and interchangeable. For example, all equity shares in the class of fully paid up shares are interchangeable.
3. Parties Involved:
In a depository system, the parties involved are:
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(i) the depository;
(ii) the depository participant (DP);
(iii) the beneficial owner; and
(iv) the issuer.
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The depository renders service connected with the recording of ownership of securities in its record. A depository functions through depository participants who are the agent of the depository through whom the investors avail of the depository service.
In the depository system, the ownership of securities dematerialized, is bifurcated between Registered Owner and Beneficial Owner. For the securities dematerialized, depository is the Registered Owner in the books of the issuer (i.e. company); the investor of securities who has availed the services of the depository is the Beneficial Owner.
A depository is deemed to be registered owner (of the securities) for the purposes of effecting transfer of ownership of the securities on behalf of the beneficial owner.
However, the depository does not have any voting rights or any other rights in respect of the securities which are under depository’s custody. The beneficial owner is entitled to all the rights and benefits and subjected to all the liabilities in respect of his securities held by a depository.
4. Free Transferability of Shares:
Transfer of securities held in dematerialized form takes place freely through electronic book-entry system. The system dispenses with the transfer deed and other procedural requirements with respect to transfer of securities.
5. No Stamp Duty:
No stamp duty for transfer of securities in the electronic form is payable. In case of transfer of physical shares, stamp duty of 0.5 percent is payable on the market value of shares transferred.
6. No Risk:
All risks associated with physical certificates such as delays, loss in transit, theft, bad deliveries, etc. are eliminated in the depository system.