The Depositories Ordinance provides for the establishment of depositories subject to registration with SEBI. SEBI will prescribe conditions to be met before the `Certificate of Commencement of Business' can be issued. Investors will have the choice of continuing with their existing share certificates or opt for a depository. Investors opting to hold their securities in the depository mode will be required to get in touch with a `participant' in the depository system, (who will be registered with SEBI). The `participant' will be agencies like banks, FIs, custodians of securities and stock brokers. Upon entry into the system, share certificates will be `dematerialized' and names of beneficial owners would be registered in the books of the depository.
The introduction of electronic book entry transfer in a depository will eliminate the need for physical movement of securities in the transfer process, which is a significant bottleneck at present in India's paper-based settlement system. It will, therefore, considerably enhance the efficiency of the securities market and offer benefits to investors in the form of greater accuracy and safety in share transactions and improved liquidity of secondary market transactions. However, the full benefits of the depository system can accrue only if clearance and settlement systems are also modernized. Towards this ends, the stock exchanges have been directed to automate their operations, reduce settlement cycles and set up a Clearing House by June 30, 1996. The direct delivery from broker to broker, which involved counter-party risk, will be replaced by a contract between the Clearing House and brokers.
Custodial services, that is, security depository services along with all other services concerning securities transfer, interest and dividend collection, taking or making deliveries, etc. are provided by the Stock Holding Corporation of India Ltd. and some foreign banks.
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