LO 0706 Investment and Securities Law :

Module 04
Securities & Exchange Board of India & the
Depositories Act, 1996

Dr. Bharat G. Kaurani

Associate Professor
N. B. Thakur Law College, Nashik
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996

1. Background and Introduction, Constitution of SEBI

2. SEBI - Power and Functions, Role of SEBI in securities market.
3. SEBI - Power to issue Informal Guidance
4. SEBI - Power to issue Regulations, Rules under Securities
Market
5. Constitution of Securities Appellate Tribunal (SA), SAT - Power
and Functions

6. The Depositories Act, 1996 - Rights and Obligations of

depositories, Depository Participants, Issuers and beneficial
owners, Penalties. Dematerialisation and Re-materialisation of
securities (Procedure, Advantages and Disadvantages)

7. Relevant provisions of the Companies Act, 2013

 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
Background & Introduction, Constitution of SEBI:
Introduction / Background:
Before 1992, the three principal Acts governing the securities
market were:
1. The Capital Issues (Control) Act, 1947, which restricted
issuers access to the securities market and controlled the
pricing of issues; Controller of Capital issues was the
regulatory authority before SEBI came into existence
under this Act;
2. The Companies Act, 1956, which sets out the Code of
Conduct for the corporate sector in relation to issue,
allotment and transfer of securities, and disclosures to be
made in public issues; and
3. The Securities Contracts (Regulation) Act, 1956, which
provides for regulation of transactions in securities
through control over stock exchanges.
Module: 02 Regulatory Framework to Govern Securities in India:
Securities Legislations in India:
1.The SEBI Act, 1992: Under the Act, SEBI is established to
protect investors and also to develop and regulate securities
market in India.
2.The Securities Contracts Regulation Act, 1956: The
main purpose of the Act is to regulate securities transactions
and to control stock exchanges.
3.The Depositories Act, 1996: The main purpose is to
provide for electronic maintenance and transfer of ownership of
Demat securities.
4.The Companies Act, 2013: The main purpose is to set out
the code of conduct for the working of companies in relation to
prospectus, issue, allotment, and transfer of securities and
disclosures to be made while issuing securities.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996

Background & Introduction, Constitution of SEBI:

SEBI is a statutory body established on April 12, 1992 in
accordance with the provisions of the Securities and Exchange
Board of India Act, 1992.
The basic functions of the Securities and Exchange Board of
India is to protect the interests of investors in securities and
to promote and regulate the securities market.
Background:
Before SEBI came into existence, Controller of Capital Issues
was the regulatory authority; it derived authority from the
Capital Issues (Control) Act, 1947.
In April, 1988 the SEBI was constituted as the regulator of
capital markets in India under a resolution of the Government
of India
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996

Background & Introduction, Constitution of SEBI:

In addition, a number of other Acts, e.g. the Public Debt Act,
1944, the Income Tax Act, 1961, the Banking Regulation Act,
1949, have substantial bearing on the working of the securities
market.
The Capital Issues (Control) Act, 1947
The Act was enacted with an objective of controlling the
raising of capital by companies and to ensure that national
resources were channeled into proper lines, i.e. for desirable
purposes, to serve goals and priorities of the Government,
and to protect the interests of investors.
Under the Act any firm wishing to issue securities had to
obtain approval from the Central Government, which also
determined the amount, type and price of the issue.
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Securities & Exchange Board of India & the Depositories Act, 1996
Background & Introduction, Constitution of SEBI:
The previously self regulated stock exchanges were brought
under statutory regulation through the passage of the
Securities Contracts (Regulation) Act, 1956 which provides for
direct and indirect control of virtually all aspects of securities
trading and the running of stock exchange.
The Companies Act, 1956 deals with issue, allotment and
transfer of securities and various aspects relating to company
management.
A major development in the Indian Stock Market which
deserves a particular mention was the establishment of
Securities and Exchange Board of India (SEBI), on the lines of
the Securities and Investment board of the U.K. SEBI, which
was established on April 12, 1988 is required to take a holistic
view of the Indian securities markets.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
Background & Introduction, Constitution of SEBI:
The Capital Issues (Control) Act, 1947 was repealed in May
1992. With this, Government’s control over issue of capital,
pricing of the issues, fixing of premium and rates of interest on
debentures etc. ceased. The office that administered the Act
was abolished and the market was allowed to allocate
resources to competing uses. Indian companies were allowed
access to international capital market through issue of ADRs
i.e. American Depository Receipt and GDRs i.e. Global
Depositary Receipt
Shares of foreign stocks offered in foreign markets are
comprehensively known as depositary receipts. ... ADRs are
shares of a single foreign company issued in the U.S.
GDRs are shares of a single foreign company issued in more
than one country as part of a GDR program.
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Securities & Exchange Board of India & the Depositories Act, 1996

Background & Introduction, Constitution of SEBI:

However to ensure effective regulation of the market, SEBI,
which was established in 1988 has been given a legal status,
as a supervisory body in 1992 by enacting the Securities
and Exchange Board of India Act, 1992 with statutory
powers to regulate and promote the securities market.

So, initially SEBI was a non statutory body without any

statutory power. It became autonomous and given statutory
powers by SEBI Act 1992.

The headquarters of SEBI is situated in Mumbai. The

regional offices of SEBI are located in Ahmedabad, Kolkata,
Chennai and Delhi.
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Securities & Exchange Board of India & the Depositories Act, 1996

Basic salient feature of the SEBI Act, 1992

1. The Act contained 35 sections in all. Sections 3, 4,5, and 6
deals with the establishment of SEBI.
2. The objects of the SEBI Act, 1992 are:
a) Providing fair dealings in the issue of securities and
ensuring a market place where funds can be raised at a
relatively low cost;
b) Providing a degree of protection to the investors and
safeguard their rights and interest so that there is a
steady flow of savings into the market;
c) Regulating and developing a Code of Conduct and fair
practices by intermediaries in the capital market like
brokers and merchant banks with a view to making
them competitive and professional.
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Securities & Exchange Board of India & the Depositories Act, 1996

Basic salient feature of the SEBI Act, 1992

3. Section 11 deals with powers and functions of SEBI,
4. Section 11C of the SEBI Act provides to investigate the
affairs of intermediaries or persons associated with the
securities market through investigating Authority.
5. Under Section 12 of the SEBI Act, 1992, intermediaries
shall register and obtain a certificate of registration.
6. Sections 15A to 15JA of the SEBI Act, 1992 deals with
penalties for various offences and adjudication.
7. Sections 15K to 15Q deals with the establishment of
Securities Appellate Tribunal (SAT). Section 15U deals with
appellate powers of SAT.
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Securities & Exchange Board of India & the Depositories Act, 1996
Basic salient feature of the SEBI Act, 1992
8. According to Section 15Z of the SEBI Act, 1992, 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.
9. Section 16 of the SEBI Act, 1992 gives power to the
Central Government to issue directions.
10. The Board i.e. SEBI has power to make regulations under
Section 30 of the SEBI Act, 1992.
11. Section 18 of the SEBI Act, 1992, provides the
responsibility to the SEBI to submit the Central Government
the prescribed returns and reports.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996

Constitution of SEBI:
Section 3 of the SEBI Act, 1992 empowers the Central
Government to establish a Board by the name of the
Securities and Exchange Board of India for the purpose of
this Act.

The Board shall be a body corporate by the name aforesaid,

having perpetual succession and a common seal, with power
subject to the provisions of this Act, to acquire, hold and
dispose of property, both movable and immovable, and to
contract, and shall, by the said name, sue or be sued.

The head office of the Board shall be at Mumbai. The Board

may establish offices at other places in India.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996

Constitution of SEBI / Management of the Board

The SEBI is managed by its members, which consists of
following:
a) The chairman who is nominated by Union
Government of India.

b) Two members, from among the officials of the

ministry of the Central Government dealing with
finance & administration of the Companies Act, 2013.

c) One member from The Reserve Bank of India.

d) The remaining 5 members are nominated by Union
Government of India, out of them at least 3 shall be
whole-time members.
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Securities & Exchange Board of India & the Depositories Act, 1996

Constitution of SEBI / Management of the Board

Section 4 of the SEBI Act, 1992:
The chairman and 5 other members shall be persons of
ability, integrity and standing who have shown capacity in
dealing with problems relating to securities market or have
special knowledge or experience of law, finance, economics,
accountancy, administration or in any other discipline which,
in the opinion of the Central Government, shall be useful
to the Board.

The office of SEBI is situated at SEBI Bhavan, Bandra Kurla

Complex, Bandra East, Mumbai- 400051, with its regional
offices at Kolkata, Delhi, Chennai & Ahmadabad.
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Securities & Exchange Board of India & the Depositories Act, 1996

POWERS AND FUNCTIONS OF THE BOARD - Sec.11:

SEBI plays an important role in regulating all the
players operating in the Indian capital market. It
attempts to protect the interest of investors and aims
at developing the capital markets by enforcing various
rules and regulations.

The Preamble of the Securities and Exchange Board of

India describes the basic functions of the Securities and
Exchange Board of India as to protect the interests of
investors in securities and to promote the
development of, and to regulate the securities market
and for matters connected therewith or incidental
thereto.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996

POWERS AND FUNCTIONS OF THE BOARD

SEBI has to be responsive to the needs of three groups,
which constitute the market:
a)the issuers of securities
b)the investors
c)the market intermediaries.

Functions of SEBI:
1. SEBI is primarily set up to protect the interests of
investors in the securities market.
2. It promotes the development of the securities market
and regulates the business in stock market.
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Securities & Exchange Board of India & the Depositories Act, 1996
Functions of SEBI:
3. Registering & regulating the working of stockbrokers,
sub-brokers, portfolio managers, investment advisers, share
transfer agents, bankers, merchant bankers, trustees of trust
deeds, registrars, underwriters, and such other
intermediaries who may be associated with securities
markets in any manner.
4. It registers & regulates the working of depositories,
participants, custodians of securities, foreign portfolio
institutional investors, and credit rating agencies.
5. It prohibits insider trading, i.e. fraudulent and unfair trade
practices related to the securities markets.
6. Promoting investors’ education and training of
intermediaries of securities markets.
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Securities & Exchange Board of India & the Depositories Act, 1996
Functions of SEBI:
7. It monitors & regulates substantial acquisitions of shares
and take-over of companies.
8. Calling for information from, undertaking inspection,
conducting inquiries and audits of the stock exchanges,
mutual funds, other persons associated with the securities
market, intermediaries and self-regulatory organisations in
the securities market.
9. Performing such functions and exercising such powers
under the provisions of the Securities Contracts
(Regulation) Act, 1956, as may be delegated to it by the
Central Government.
10. SEBI takes care of research and development to ensure
the securities market is efficient at all times.
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Securities & Exchange Board of India & the Depositories Act, 1996
Functions of SEBI:
SEBI has taken a very proactive role in streamlining
disclosure requirements to international standards.
Controlling Price Rigging: The practice of inflating the
price of stocks, or enhancing their quoted value, by a
system of pretended purchases, creating an unusual demand
for such stocks.

Prohibition of Insider Trading: The employees or

executives who have access to the strategic information
about the company, use the same for trading in the
company’s stocks or securities, it is called insider trading
and is highly discouraged by the SEBI.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
Functions of SEBI:

The Board may take measures to undertake inspection of

any book, or register, or other document or record any
listed public company or a public company not being
intermediaries which intends to get its securities listed on
any registered stock exchange -

where the Board has reasonable grounds to believe that

such company has been indulging in insider trading or
fraudulent and unfair trade practices relating to securities
market.
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Securities & Exchange Board of India & the Depositories Act, 1996

Authority and Power of SEBI

The SEBI has three main powers:
SEBI has three functions rolled into one body: quasi-
legislative, quasi-judicial and quasi-executive.
It drafts regulations in its legislative capacity,
it conducts investigation and enforcement action in its
executive function and
it passes rulings and orders in its judicial capacity.

i. Quasi-Judicial: SEBI has the authority to deliver

judgements related to fraud and other unethical practices in
terms of the securities market. This helps to ensure fairness,
transparency, and accountability in the securities market.
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Securities & Exchange Board of India & the Depositories Act, 1996
Authority and Power of SEBI
ii. Quasi-Executive: SEBI is empowered to implement the
regulations and judgements made and to take legal action
against the violators. It is also authorised to inspect Books
of accounts and other documents if it comes across any
violation of the regulations. - enforcement action.

iii. Quasi-Legislative: SEBI reserves the right to frame

rules and regulations to protect the interests of the
investors. Some of its regulations consist of insider trading
regulations, listing obligations, and disclosure requirements.
These have been formulated to keep malpractices at bay.
Despite the powers, the results of SEBI’s functions still have
to go through the Securities Appellate Tribunal and the
Supreme Court of India.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
Authority and Power of SEBI
Though this makes it SEBI very powerful, there is an appeal
process to create accountability. There is a Securities
Appellate Tribunal which is a three-member tribunal. A
second appeal lies directly to the Supreme Court.
Other powers of SEBI:-
For the discharge of its functions efficiently, SEBI has been
vested with the following powers:
➢to approve by−laws of stock exchanges.
➢inspect the books of accounts and call for periodical
returns from recognized stock exchanges.
➢inspect the books of accounts of a financial
intermediaries.
➢To handle the registration of brokers.
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Securities & Exchange Board of India & the Depositories Act, 1996
Authority and Power of SEBI
Other powers of SEBI:-
➢Powers to suspend trading of any security in the
recognized stock exchange.
➢Power to restrain persons from accessing the securities
market.
➢Power to regulate or prohibit issue of prospectus, offer
document or advertisement soliciting money for issue of
securities.
➢Power to investigate.
➢Power to cancel certificate.
➢Power to impose penalties and adjudication.
➢Power to make regulations.
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Securities & Exchange Board of India & the Depositories Act, 1996
Authority and Power of SEBI
Other powers of SEBI:-
➢Power to prohibit the manipulative and deceptive devices,
insider trading and substantial acquisition of securities or
control.
➢Power to impound/seize and retain the proceeds or
securities in respect of any transaction which is under
investigation.
➢Power to attach bank account or accounts of any
intermediary or any person associated with the securities
market in any manner involved in violation of any of the
provisions of this Act. However, before or after passing such
orders give an opportunity of hearing to such
intermediaries or person concerned.
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Securities & Exchange Board of India & the Depositories Act, 1996
Authority and Power of SEBI
Powers of Civil Court:
The Board shall have the same powers as are vested in a
Civil Court under the Code of Civil Procedure, 1908, while
trying a suit, in respect of the following matters namely:
i. The discovery and production of books of account and
other documents, at such place and such time as may
be specified by the Board;
ii. Summoning and enforcing the attendance of persons
and examining them on oath;
iii. Inspection of any books, registers and other documents
of any person i.e. stock-broker, sub-broker, share
transfer agent, etc. at any place;
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
Authority and Power of SEBI
Powers of Civil Court:
iv. Inspection of any book, or register, or other document
or record of the company i.e. listed public company or
a public company which intends to get its securities
listed or any recognized stock exchange;

v. Issuing commissions for the examination of witnesses

or documents.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
SEBI - Power to issue Informal Guidance
Introduction:
No law is perfect, thus giving a wider probability of
ambiguity among various stakeholders. Moreover, the
business environment being dynamic in nature requires to
be at par with the current scenario in order to achieve its
ultimate goal and also each situation would not necessarily
be same as that of the situation quoted under the law or
based upon which a prior judgement has already been
pronounced.
The “SEBI” receives numerous requests from a variety of
market participants with a motive to obtain an advance
guidance on the interpretation of SEBI Act, Rules,
Regulations and Circulars.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996

SEBI - Power to issue Informal Guidance

Keeping in mind the instances that have arisen upon the
multiple interpretations or ambiguity in the minds of the
market participants and powers bestowed Section 11(1) of
the SEBI Act 1992 the regulator introduced

the Securities and Exchange Board of India (Informal

Guidance) Scheme, 2003 (herein after mentioned to as
“Informal Guidance Scheme”). Securities and Exchange
Board of India (Informal Guidance) Scheme, 2003:

In order to have better regulation and orderly development

of the securities market.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996

SEBI - Power to issue Informal Guidance

The said scheme was of contemporary importance as SEBI
receives a number of requests from various market
participants for advance guidance on the interpretation of
the provisions of SEBI Act, Rules, Regulations, and Circulars.

It was a formal scheme launched by SEBI in the name of

providing informal guidance. As the name suggests the
guidance provided is 'informal' and is not to be construed
as a conclusive decision of any question of law or fact by
SEBI.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
SEBI - Power to issue Informal Guidance

SEBI's informal guidance scheme though not a super hit

gave an average performance.The immediate year after its
launch, i.e., 2004, there were 63 no action/interpretive
letters issued by SEBI under this scheme. In the subsequent
years, on an average of 12-14 no action/interpretive letters
were given by SEBI under the Scheme.

One of the reasons may be SEBI is coming up with more

clearer rules, regulations and circulars or people have got
answers of all their questions.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
SEBI - Power to issue Informal Guidance
Persons eligible to make a requisition for informal
guidance:
➢Intermediary registered under section 12 of the Act;
➢Listed company;
➢Company which intends to get its securities listed and
which has filed either a listing application with any stock
exchange or a draft offer document with the board or the
Central Listing Authority;
➢Mutual fund trustee company or
➢asset management company;
➢Any acquirer or prospective one under the Securities and
Exchange Board of India (Substantial Acquisition of Shares
and Takeovers) Regulations, 1997.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
SEBI - Power to issue Informal Guidance
Forms of guidance:
No-action letters: Such letters indicate that the
Department would or would not recommend action under
any Act, Rules, Regulations, Guidelines, Circulars or other
legal provisions administered by SEBI to the Board if the
proposed transaction in a request made under is
consummated.

Interpretative letters: Such letters provide

interpretation of a specific provision of any Act, Rules,
Regulations, Guidelines, Circulars or other legal provision
being administered by SEBI in the context of a proposed
transaction in securities or a selected factual situation.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
SEBI - Power to issue Informal Guidance
Pre-requisites and time frame:
➢The application shall be accepted by the Department only
when the following conditions are fulfilled:
➢It shall state that it is made under this scheme and also
state whether it is a request for a no-action letter or an
interpretive letter;
➢It shall be accompanied with Rs. 25,000 towards fees;
➢It shall be addressed to the concerned Authority;
➢It shall describe the request, disclose and analyse all
material facts and mention all applicable legal provisions.
SEBI may dispose off the request expeditiously but not later
than 60 days after the receipt of the request. The
Department may hear or conduct an interview if it feels
necessary. The requestor shall be entitled only to reply.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
SEBI - Power to issue Regulations, Rules under
Securities Market :
The Board may, by notification, make regulations consistent
with this Act and the rules made there under to carry out
the purposes of this Act.
Such regulations may provide for all or any of the following
matters namely:

➢The times and places of meetings of the Board and the

procedure to be followed at such meetings, including
quorum necessary for the transaction of business;
➢The terms and other conditions of service of officers and
employees of the Board;
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
SEBI - Power to issue Regulations, Rules under
Securities Market :
➢The matters relating to issue of capital, transfer of
securities and other matters incidental thereto and the
manner in which such matters shall be disclosed by the
companies;

➢The conditions subject to which certificate of registration

is to be issued, the amount of fee to be paid for certificate
of registration and the manner of suspension or
cancellation of certificate of registration.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
SEBI - Power to issue Regulations, Rules under Securities
Market :
Some of the Regulations made by SEBI are as follows:
➢Securities and Exchange Board of India (Prohibition of
Insider Trading) Regulations, 1992,
➢Securities and Exchange Board of India (Buy Back of
Securities) Regulations, 1998,
➢Securities and Exchange Board of India (Prohibition of
Fraudulent and Unfair Trade Practices Relating to Securities
Market) (Amendment) Regulations, 2013,
➢Securities and Exchange Board of India (Issue of Capital
and Disclosure Requirements) (Second Amendment)
Regulations, 2013
➢SEBI (Investor Protection and Education Fund)
(Amendment) Regulations, 2014.
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Securities & Exchange Board of India & the Depositories Act, 1996
Constitution of Securities Appellate Tribunal (SAT),
- Power and Functions:
Securities Appellate Tribunal is a statutory body
developed under the provisions of Section 15K of the
Securities and Exchange Board of India Act. Securities
Appellate Tribunal was mainly established to hear an appeal
against the order passed by the SEBI or by an adjudicating
officer under the SEBI Act.

Composition of Securities Appellate Tribunal (SAT)

Securities Appellate Tribunal (SAT) would consist of the
following:
One presiding Officer
Other members
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
Constitution of Securities Appellate Tribunal (SAT), - Power
and Functions:
Presiding Officer
The Central Government will appoint the presiding Officer
of Securities Appellate Tribunal in discussion with the chief
justice of India or nominee. The person so appointed as the
presiding Officer should meet with the following
requirements:
➢The retired or sitting judge of the supreme court
➢The retired or sitting judge of the high court
➢The retired or sitting judge of the high court, who has
completed at least seven years of service as a judge in a
high court.
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Securities & Exchange Board of India & the Depositories Act, 1996
Constitution of Securities Appellate Tribunal (SAT), - Power
and Functions:
Members :The Central Government will appoint the two
members of the Securities Appellate Tribunal. The member
so appointed should possess the following qualities:
➢The member should be capable of dealing with problems
related to the securities market.
➢The member should possess qualification and experience
related to corporate law, securities laws, economics, finance
or accountancy.
Tenure
Presiding Officer: The tenure for Presiding Officer will be
five years from the date of appointment or re-appointment.
Members: The tenure for the member will be five years
from the date of appointment or re-appointment.
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Securities & Exchange Board of India & the Depositories Act, 1996
Power of Securities Appellate Tribunal (SAT)
The Securities Appellate Tribunal (SAT) will have the same
powers as vested in a civil court under the code of civil
procedure while trying a suit, with respect of the following
matters namely:
➢Enforce and summon the attendance of any person
➢Require the discovery and production of documents
➢Receive evidence on affidavits
➢Issue commissions for the examination of the documents
or witnesses
➢Dismiss an application for default or deciding it ex-parte
➢Set aside any order or dismissal of any application for
default or any other order passed by it ex-parte
➢Any other matter as and when prescribed.
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Securities & Exchange Board of India & the Depositories Act, 1996
Who can make an appeal?
Every person aggrieved by order of the Securities and
Exchange Board of India or adjudicating officer is liable to
make an appeal to the Securities Appellate Tribunal (SAT).

Time Limit
Every appeal to the Securities Appellate Tribunal should be
filed within 45 days from the day on which a copy of the
order passed by the Securities and Exchange Board of India
or adjudicating office is received.
The Securities Appellate Tribunal may allow an appeal after
the expiry of the specified period of 45 days if the reason
for not filing the appeal with the said period is satisfied.
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Securities & Exchange Board of India & the Depositories Act, 1996
The appeal should be made in three copies along with the
additional copies for each additional appeal, and that should
be signed by the authorised person.

On receipt of the appeal, the Securities Appellate Tribunal

may confirm, modify or set aside the order appealed against
and such appeal should be disposed of within 6 months
from the date of receipt of such appeal.
Appear before SAT
As per the SEBI Act, any authorised person who is
a Company Secretary, Chartered Accountant (CA), Cost
Accountant or Legal Practitioner can appear before
Securities Appellate Tribunal (SAT).
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Securities & Exchange Board of India & the Depositories Act, 1996
Appeal against the orders of SAT
Every person aggrieved by any order or decision of
Securities Appellate Tribunal can file an appeal to the
supreme court. Also, the appeal only can be made on any
question of law.

The appeal should be made within 60 days from the date of

receiving a copy of the order or decision of Securities
Appellate Tribunal. However, the supreme court may further
allow a period of 60 days for making an appeal, if it satisfied
that the applicant was prevented from filing the appeal
within the first 60 days due to sufficient cause.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
The Depositories Act, 1996 -
Introduction
India witnessed rapid growth in the capital market in the
21st century. However, the transactions involved paperwork
that was tedious as well as voluminous. The existing system
was paper-based and had issues like bad deliveries, delays in
transfers, settlement periods that were long, etc.

These characteristics were the sign of a market that was

underdeveloped. Also, this was not on par with international
markets and standards.
To overcome these challenges, a Depository system was
introduced. The aim was to remove the challenges with the
state of the art technology.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
The Depositories Act, 1996 –
The Depositories Act, 1996 was enacted with the objective
of ensuring free transferability of securities with speed,
accuracy, and security, by making securities of public
companies freely transferable subject to certain exceptions
by restricting company’s right to use discretion in effecting
the transfer securities and dispensing with the transfer deed
and other procedural requirements under the Companies
Act.
Depository:
To explain in simple terms a depository is a place where
something is deposited for security purposes. It could be a
bank, a company or an institution that holds securities and
facilitates the exchange of the securities. The depository is
an institution that is allowed to accept monetary deposits
from its customers.
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Securities & Exchange Board of India & the Depositories Act, 1996
The Depositories Act, 1996 –
The definition of depositories under the Depositories Act,
1996 is that a “depository” is a company registered under
the Companies Act, 1956. It would be granted a certificate of
registration under Section 12(1A) of (SEBI) Act, 1992.
Hence the Depository becomes an organization like a
central bank. The main role of Depositories is to
dematerialize the securities which mean converting the
securities from physical form to electronic form and enabling
transactions in electronic form.
The depository needs to obtain a certificate of
commencement of business from SEBI. At present two
Depositories are functioning in India:
➢National Securities Depository Limited (NSDL)
➢Central Depository Services (India) Limited (CDSL)
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
The Depositories Act, 1996 –
According to Section 3 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.
Every depository must have adequate mechanisms for
reviewing, monitoring and evaluating the depository’s controls,
systems, procedures and safeguards. It should conduct an
annual inspection of these procedures and forward a copy of
the inspection report to SEBI.
The depository is also required to 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.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
The Depositories Act, 1996 –

In the event of loss or destruction, sufficient back up of

records should be available at a different place.
Adequate measures should be taken, including insurance, to
protect the interests of the beneficial owners against any
risks.

Every depository is required to extend all such co-operation

to the beneficial owners, issuers, issuers’ agents, custodians
of securities, other depositories and clearing organisations, as
is necessary for the effective, prompt and accurate clearance
and settlement of securities transactions and conduct of
business.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
The Depositories Act, 1996 –

Parties to a Depository:
In a depository system, the following parties are involved
the depository,
the beneficial owner;
the participant;
the issuer.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
The Depositories Act, 1996 –Working of Depository:
In the depository system, share certificates belonging to the
investors are dematerialized which means shares are
converted to electronic form.
As per the system the names of the investors are then
recorded in the depository as beneficial owners. After this
change, the investor’s names in the company register get
replaced by the name of the depository as the registered
owner of the securities.
The depository does not have any voting rights or any other
economic rights in respect of the shares as a registered
owner. The beneficial owner continues to enjoy all the rights
and benefits and is subject to all the liabilities held by a
depository. A beneficial owner is a person whose name is
recorded with the depository.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
The Depositories Act, 1996 –
Depository Participant (DP):
The Depository Participant is the link between the owner
of the securities and the depositors. He is deemed to be an
agent of the depository. Accordingly, he is authorized to
offer depository services to investors.

As per SEBI regulations and Depository Act, a depository

cannot interact directly with beneficial owners. He has to
deal with its agents called Depository Participant. Neither
can the investors directly approach the depository for any
services. They have to interact through the DP.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
The Depositories Act, 1996 –
Depository Participant (DP):
The participant means a person through whom the
beneficial owner of the securities would avail of the
depository service and is the custodial agencies like banks,
financial institutions as well as large corporate brokerage
firms.

So, Depository Participants includes brokers, banks,

insurance companies, Stock Exchange clearing cells, financial
institutions, institutional managers, fund mangers etc.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
The Depositories Act, 1996 –
Rights and Obligations of Depositories:
➢A depository has to enter into an agreement with one or
more participants as its agent under the Act.
➢Any person can enter into an agreement with a depository
to avail its services through a participant in the procedure
specified by the bye- laws of that particular depository.
➢After a person enters into an agreement with the
depository, such person has to surrender his or her
certificate of security to the issuer.
➢After receipt of certificate of security by the issuer,
the issuer is supposed to cancel the certificate of security
and make a record in its entries with the depository’s name
as the registered owner of that security and inform
the depository about the entry.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
The Depositories Act, 1996 –
Rights and Obligations of Depositories:
➢If the participant intimates a depository about transfer
of security then the depository has to 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.
➢Under the Act, every person who subscribes to securities
offered by an issuer has the option of either receiving
security certificates or holding those securities with
a depository.
➢All securities held by a depository is dematerialised and in
fungible (mutually interchangeable) form.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
The Depositories Act, 1996 –
Rights and Obligations of Depositories:
➢Under the Act, the depository is the registered owner for
the purpose of effecting transfer of ownership of securities
on behalf of the beneficial owner.
➢The beneficial owner of the securities is entitled to all
the rights, benefits and liabilities of securities held by
the depository.
➢Every depository is required to maintain a register and
index of beneficial owners. Records of securities
dematerialised and re-materialised. The names of transferor,
transferee and the dates of transfer of securities and details
of holding of the securities of the beneficial owners as at the
end of the each day.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
The Depositories Act, 1996 –
Rights and Obligations of Depositories:
➢If a beneficial owner seeks to opt out of a depository in
respect of any security he or she has to inform the
depository accordingly.
➢After the depository receives intimation from the
beneficial owner, it has to make appropriate entries in its
records and inform the issuer.
➢After the issuer receives intimation from the depository
about the wishes of the beneficial owner to opt out of
the depository for any security, the issuer has to issue
certificate of securities to the beneficial owner or
transferee as the case may be within a period of 30 days
after the completion of the requisite conditions and payment
of the required fees.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
The Depositories Act, 1996 – Rights and Obligations of
Depositories:
➢Depository is required to maintain continuous connectivity
with issuers, registrars & transfer agents, participants &
clearing houses.
➢As per the regulations and bye- laws of the depository,
a beneficial owner can pledge or hypothecate in respect of
every security owned by him or her with the previous
approval of the depository.
➢The depository has to indemnify the beneficial
owner in case of any loss caused due to the negligence of
the depository or participant.
➢If negligence is caused by the participant and the
depository indemnifies loss on behalf of the participant,
then the depository is fully entitled to recover the amount
from the participant.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
The Depositories Act, 1996 –
Services provided by a depository
Services are provided by a depositor through a DP are:
1. Opening a Demat Account
The first step is to open a Demat Account. Demat Account is
the short form for Dematerialisation Account. It is the
process of holding investments like mutual funds, shares,
bonds, government securities, etc. It does away with the
hassles of maintenance of physical documents.
2. Dematerialization
This process is the conversion of physical shares to
electronic shares. When a shareholder uses this facility, the
Company takes back the physical shares through the
depository system and equal numbers of shares are credited
into the shareholder’s account.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
The Depositories Act, 1996 –
Services provided by a depository:
3. Re-materialization
This is the exact opposite of Dematerialization. Here physical
securities are issued in place of securities in electronic
form.
4. Other services
Pledging Dematerialized shares
Dematerialized shares can be pledged. After the loan is
repaid a request can be made through one’s DP to close the
pledge through a standard format.
Initial Public Offerings
Public offer credits can be directly received into the Demat
account.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
The Depositories Act, 1996 –
Services provided by a depository: 4. Other services
Receipt of cash/non-cash benefits
When rights or bonus or disvidend is announced by any
corporate event for a particular security, the depository will
give the details of all the clients having electronic holdings to
the registrar as on that date. The registrar will then calculate
the benefits due to all the shareholders.

Transmission of securities
In case there is a need for transmission of securities due to
death, lunacy, bankruptcy, insolvency, or by any other lawful
means, it is possible through the depository system. The
claimant will have to fill in a transmission request form
supported by valid documents.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
The Depositories Act, 1996 –
Services provided by a depository:

4. Other services
Freezing Account with DP
If at any time one wishes that no transaction should be
effected in one’s account, one may advise one’s DP
accordingly. DP will freeze the account of the investor until
further instructions.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
The Depositories Act, 1996 –
Dematerialization process
1. Appointing DP
The investor chooses a DP of his choice and opens an
account with him. The process will be just like opening an
account with a bank. The Investor gets an identification
number called Client ID. This is just like the bank account
number. This number is the reference point for all
transactions with DP.
Every investor with the help of a DP has to agree with a
depository to get his holding dematerialized. This step is
necessary whether an investor already has securities or
securities are yet to be issued in a fresh issue.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
The Depositories Act, 1996 – Dematerialization process
2. “Demat” Request
The investor makes an application to DP’s in a form called
Dematerialisation Request Form is known as DRF. This form
is provided by the DP, the investor hands over his share
certificates after cancelling them in writing. The certificates
are then surrendered to get dematerialized for Demat. The
DP will accept certificates registered only in the investor’s
name.
3.Verification and confirmation by Registrar
The depository electronically intimates the issuer or its
Registrar of the dematerialization request. The issuer or the
Registrar has to verify the security certificates. He also has
to verify that the DRF has been made by the person
recorded as a member in its Register of Members.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
The Depositories Act, 1996 – Dematerialization process
4. Crediting the Client’s Account
The investor’s account is credited by DP with the number of
shares dematerialized. After this, the investor holds the
securities in electronic form.The investor gets the
information in the form of a statement.

Similarly, if an investor purchases shares from the Stock

Exchange, he/she will get delivery of the shares in damat
form.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
The Depositories Act, 1996 –
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 authorise any person to make an enquiry or
inspection in relation to the affairs of the issuer, beneficial
owner, depository or participant,

who shall submit a report of such enquiry or inspection to it

within such period as may be specified in the order.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
The Depositories Act, 1996 –
Penalty for delay in dematerialisation 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
SEBI Act, 1992 (15 of 1992), fails to dematerialise 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 there-under or abets in
delaying the process of dematerialisation 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.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
The Depositories Act, 1996 –
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 SEBI Act, 1992 (15 of 1992),
fails to reconcile the records of dematerialised 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.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
The Depositories Act, 1996 –
Benefits/Advantages of Depository System
The following are the benefits of the depository system are
listed below:
➢Depository system holds all securities in the country listed
in the particular stock exchange.
➢In a depository system, blank transfers are avoided, and
holding of shares in Benami names is also prevented.
➢Through this depository system, interest and dividend on
securities are evenly distributed.
➢Depository system avoids delay in registration of transfers.
➢Depository acts as collateral security for raising of loans
from any banks or financial institution
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
The Depositories Act, 1996 –
Benefits/Advantages of Depository System
Other Benefits:
Securities in dematerialized form
The depository model is more or less similar to holding
funds in bank accounts. Transfer of ownership of securities is
done through simple account transfer.This method is simpler
and avoids cumbersome paperwork.
Registered and beneficial owner
There are two types of ownership of securities. One is a
registered owner and the other is a beneficial owner. For all
the dematerialized securities, Depository is the registered
owner but ownership rights, duties and liabilities are with
beneficial owners.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
The Depositories Act, 1996 –
Benefits/Advantages of Depository System Other Benefits:
Easy transferability of shares:
The transfer takes place freely through the electronic system
and dispenses the procedural formalities related to
paperwork.
No stamp duty
For the transfer of physical shares, then the stamp duty of
0.5% is payable on the market value of the shares. However,
there is no such duty on the electronic form.
No risk
Physical certificates have issues like loss in transit, theft, bad
deliveries, etc. There is hardly any risk involved in the
electronic system as compared to physical certificates.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
The Depositories Act, 1996 –
Benefits/Advantages of Depository System Other Benefits:
The system has led to an opportunity for development of
retail brokerage business and for development of more
sophisticated custodial services which can be offered to the
smaller investor.
The system provides Up-to-date knowledge of shareholder’s
names and addresses. And there will be savings in costs of new
issues from reduction in printing and distribution costs. It may
also lead to increased efficiency of registrar and transfer agent
functions and better facilities for communication with
shareholders, conveying benefits of corporate actions and
information notices. Furthermore there will be an improved
ability to attract international investors without having to
incur the expenditure of issuance in overseas markets.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
The Depositories Act, 1996 – Conclusion:
The Depository Act which provides for the establishment of
depositories like NSDL and CDSL to curb the irregularities
in the capital market and protect the interests of the
investors and paved a way for an orderly conduct of the
financial markets through the free transferability of securities
with speed, accuracy and transparency.

The advantages of dematerialization are paperless trading

and transfer of shares through the use of technology, the
transfer is immediate, the investor is relieved of problems
with physical certificates like bad delivery, fake certificates,
elimination of physical forms, similarly elimination of stamp
duty, time and cost gets saved in posting certificates,
investors are relieved of issues like loss of certificates, etc.
 Module 04
Securities & Exchange Board of India & the Depositories Act, 1996
The Depositories Act, 1996 – Conclusion:
However, there are disadvantages too.The key market
players like stockbrokers need to be monitored as they have
the capability of market manipulation.
Some multiple legal frameworks and acts need to be adhered
to. Also at different levels in the process of
Dematerialization, various agreements are entered. This
makes the process complex.
The biggest limitation is that in order to have a demat
account one needs to be internet savvy and therefore,
people who are not that literate with internet will find it
hard to operate their demat account.
However, the advantages of dematerialization outweigh the
disadvantages.
Module 04 completed

Thank you

Dr. B. G. Kaurani