Introducing , National Securities Depository Ltd. (NSDL)
was inaugurated in November 1996 as the first depository in the country.
What is NDSL?
The Indian capital market has witnessed an unprecedented growth in the past few years, facilitated by modernisation of the trading systems. Automation of the trading infrastructure in 1994 has given us a trading system comparable with the best in the world. The establishment of a settlement guarantee scheme has removed counterparty risk in trading.
Though the advent of automated trading brought with it several associated benefits such as transparency in trading and equal opportunity for market players all over the country; the problems related to settlement of trades such as high instances of bad deliveries and delay in transfer of ownership have continued. As an answer to the myriad settlement problems, National Securities Depository Ltd. (NSDL) was inaugurated in November 1996 as the first depository in the country.
In a depository system, securities are held in securities (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.
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The introduction of scripless holding and transaction of securities provides various benefits to investors viz.
Benefits
In the depository system, the ownership and transfer of securities takes place by means of electronic book entries. At the outset, this system rids the capital market of the dangers related to handling of paper. NSDL provides numerous direct and indirect benefits, like:
elimination of bad deliveries - In the depository environment, once holdings of an investor are dematerialised, the question of bad delivery does not arise i.e. they cannot be held "under objection". Statistically, in the physical environment, about 20% of delivered stock constitutes bad deliveries. Of these, about 1% is ultimately absorbed by the system as bad delivery cost. Rectification of objection usually involves extensive follow up by the investor. Also, the investor cannot sell the securities till they are registered.
This means that in the physical environment, every fifth person taking delivery of stock gets securities, the genuineness to which there is a doubt whereas he parts with genuine funds.
elimination of all risks associated with physical certificates - Dealing in physical securities have associated security risks of theft of stocks, mutilation of certificates, loss of certificates during movements through and from the registrars, thus exposing the investor to the cost of obtaining duplicate certificates and advertisements, etc. This problem does not arise in the depository environment.
no stamp duty for transfer of equity instruments & units of mutual funds in the depository (In case of physical shares, stamp duty of 0.5% is payable on transfer of shares).
immediate transfer and registration of securities - In the depository environment, once the securities are credited to the investors account on pay out, he becomes the legal owner of the securities. There is no further need to send it to the company's registrar for registration. Having purchased securities in the physical environment, the investor has to send it to the company's registrar so that the change of ownership can be registered. This process usually takes around three to four months and is rarely completed within the statutory framework of two months thus exposing the investor to opportunity cost of delay in transfer and to risk of loss in transit. To overcome this, the normally accepted practice is to hold the securities in street names i.e. not to register the change of ownership. However, if the investors miss a book closure the securities are not good for delivery and the investor would also stand to loose his corporate entitlements.
faster settlement cycle -The exclusive demat segments follow rolling settlement cycle of T+5 i.e. the settlement of trades will be on the 5th working day from the trade day. This will enable faster turnover of stock and more liquidity with the investor.
pay in & pay out of securities & funds is on the same day for scripless trades - In the exclusive demat segments the settlement of trades (both securities and funds) is on the 5th working day from the trade day. This means that a buyer who parts with funds on the 5th working day, gets the securities on the same day evening and a seller who parts with securities on the 5th working day gets funds on the same day evening. This reduces the funding cost of 5-6 for a broker (in case of institutional trades) that they have to bear in the physical segment. In the physical segment, the settlement period is spread over a period of three to four days.
faster disbursement of non cash corporate benefits like rights, bonus, etc. - NSDL provides for direct credit of non cash corporate entitlements to an investors account, thereby ensuring faster disbursement and avoiding risk of loss of certificates in transit
reduction in rate of interest on loans granted - This benefit is provided by some banks against pledge of dematerialised securities as dematerialised securities eliminates the following hassles/ risks: getting securities registered in their name at the time of book closure and risk of stocks coming under objections when they are send to the company's registrar for registration if the pledgee defaults in repayment.
increase in maximum limit of advances from Rs. 10 lakh to Rs. 20 lakh per borrower and reduction in minimum margin from 50% to 25% by banks for advances against dematerialised securities as per the Monetary and Credit Policy for the first half of 1998-99 announced by the Reserve Bank of India.
reduction in brokerage of 0.25% to 0.5% by many brokers for trading in dematerialised securities - Brokers provide this benefit to investors as dealing in dematerialised securities reduces their back office cost of handling paper and also eliminates the risk of being the introducing broker.
reduction in handling of huge volumes of paper
periodic status reports to investors on their holdings and transactions, leading to better controls
Dematerialised securities can be delivered in the dematerialised or physical segment from April 1998 at those stock exchanges where trading in dematerialised securities is allowed. But physical securities are not allowed to be delivered in dematerialised segment, making dematerialised stocks held with the investors more liquid than physical stocks.
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