A Guide to the Depositories Act, 1996

A Guide to the Depositories Act, 1996

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The Depositories Act, 1996 regulates the depositories in securities in India.

Brief history

The Depositories Act, 1996 was first introduced before the Lok Sabha on 11/07/1996 as the Depositories Bill, 1996. The Bill was passed in the Lok Sabha on 16/07/1996 and was passed by the Rajya Sabha on 23/07/1996. The Bill received Presidential assent on 08/10/1996. 

Download:
Depositories Act, 1996

List of amendments

  1. Depositories Related Laws (Amendment) Act, 1997
  2. Securities Laws (Second Amendment) Act, 1999
  3. Securities Laws (Amendment) Act, 2004
  4. Securities Laws (Amendment) Act, 2014
  5. Finance Act, 2018

1. Important Definitions

Beneficial Owner means a person whose name is recorded as such with a depository.

Board means the Securities and Exchange Board of India.

Bye- laws means bye- laws made by a depository under Section 26 of this Act.

Depository means a company formed and registered under the Companies Act, 2013 who has been granted a registration certificate under the Securities and Exchange Board of India Act, 1992.

Issuer means any person making an issue of securities. 

Participant means a person registered under the Securities and Exchange Board of India Act, 1992.

Registered Owner means a depository whose name is entered as such in the register of the issuer.

Service means any service connected with recording of allotment of securities or transfer of ownership of securities in the record of a depository.


2. Rights and Obligations

  1. A depository has to enter into an agreement with one or more participants as its agent under the Act.
  2. 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.
  3. After a person enters into an agreement with the depository, such person has to surrender his or her certificate of security to the issuer.
  4. 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.
  5. 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.
  6. If a beneficial owner or a transferee of any security seeks to have custody of such security the depository shall inform the issuer accordingly.
  7. 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.
  8. All securities held by a depository is dematerialised and in fungible (mutually interchangeable) form.
  9. 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.
  10. The beneficial owner of the securities is entitled to all the rights, benefits and liabilities of securities held by the depository.
  11. Every depository is required to maintain a register and index of beneficial owners.
  12. 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.
  13. 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.
  14. 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.
  15. The depository has to indemnify the beneficial owner in case of any loss caused due to the negligence of the depository or participant.
  16. 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.

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3. Appeals and Repeal

  1. A person who is aggrieved by the decision of the Securities and Exchange Board of India (SEBI) can approach the Central Government or the Securities Appellate Tribunal as per the provisions of this Act.
  2. If an appeal is preferred to the Securities Appellate Tribunal then it has to be made within 45 days of the order passed by SEBI.
  3. The appellant can either appear before the Securities Appellate Tribunal in person or hire a chartered accountant, company secretary, cost accountant or legal practitioner to represent the appellant. 
  4. Civil courts are barred from exercising powers where the Securities Appellate Tribunal has jurisdiction.
  5. If any person is aggrieved by an order passed by the Securities Appellate Tribunal then such person can choose to appeal before the Supreme Court within 60 days of the order of the Tribunal.
  6. This Act has repealed the Depositories (Third) Ordinance, 1996.

4. Powers of Authorities under the Act

4.1 Depository

A depository has power to frame its own bye- laws which are consistent with the Depositories Act, 1996 and rules and regulations prescribed under it for the following matters-

  1. the eligibility criteria for admission and removal of securities in the depository
  2. the conditions subject to which the securities shall be dealt with
  3. the eligibility criteria for admission of any person as a participant
  4. the manner and procedure for dematerialisation of securities
  5. the procedure for transactions within the depository
  6. the manner in which securities shall be dealt with or withdrawn from a depository
  7. the procedure for ensuring safeguards to protect the interests of participants and beneficial owners
  8. the conditions of admission into and withdrawal from a participant by a beneficial owner
  9. 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
  10. the manner of distribution of dividends, interest and monetary benefits received from the company among beneficial owners
  11. the manner of creating pledge or hypothecation in respect of securities held with a depository
  12. rights and obligations among the depository, issuer, participants, and beneficial owners
  13. the manner and the periodicity of furnishing information to the Board, issuer and other persons
  14. the procedure for resolving disputes involving depository, issuer, company or a beneficial owner
  15. 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
  16. the internal control standards including procedure for auditing, reviewing and monitoring.

4.2 Securities and Exchange Board of India

  1. Power to issue certificate of commencement to a depository
  2. Power to refuse certificate of commencement to a depository
  3. Power to 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
  4. Power to 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.
  5. Power to give directions to any depository, participant, issuer or person associated with the securities market in the interest of investors, or orderly development of securities market
  6. Power to give directions to any depository, participant, issuer or person associated with the securities market to prevent the affairs of any depository or participant being conducted in the manner detrimental to the interests of investors or securities market
  7. Power to appoint adjudicating officer who will not be below the rank of Division Chief of the Board and empower such adjudicating officer
  8. Power to call and examine any record
  9. Power to give recommendations to the Central Government
  10. Power to make regulations
  11. Power to order a depository to make, amend or revoke bye- laws.

4.3 Central Government

  1. Power to grant immunity
  2. Power to hear appeals against orders passed by the adjudicating officer appointed by SEBI and an order passed by SEBI
  3. Power to establish Special Courts
  4. Power to appoint judges of a Special Court
  5. Power to prescribe rules
  6. Power to remove difficulties.

4.4 Securities Appellate Tribunal

  1. Power to adjudicate and hear appeals against orders passed by SEBI or the adjudicating officer appointed by SEBI
  2. Power to summon and enforce attendance of any person and examine such person on oath
  3. Power to require the discovery and production of documents
  4. Power to receive evidence on affidavit
  5. Power to issue commission for the examination of witnesses or documents
  6. Power to review its own decisions
  7. Power to dismiss an application or for deciding it ex parte
  8. Power to deal with any other matter prescribed.

5. Penalties


Particulars of Offence

Penalty

Any person who is required to furnish any information, document, books, returns or report to the Board, fails to furnish the same within the time specified therefor or who furnishes or files false, incorrect or incomplete information, return, report, books or other documents

Not less than INR 1 lakh which may extend up to INR 1 lakh per day in continuing offences subject to the limit of INR 1 crore.

Any person who is required to file any return or furnish any information, books or other documents within the time specified therefor in the regulations or bye-laws, fails to file return or furnish the same within the time specified or who furnishes or files false, incorrect or incomplete information, return, report, books or other documents

Not less than INR 1 lakh which may extend up to INR 1 lakh per day in continuing offences subject to the limit of INR 1 crore.
Any person who is required to maintain books of account or records, fails to maintain the same
Not less than INR 1 lakh which may extend up to INR 1 lakh per day in continuing offences subject to the limit of INR 1 crore.

If a depository, participant, issuer or its agent or any other person who is registered as an intermediary under the SEBI Act, 1992 and is required under this Act or any rules or regulations made, to enter into an agreement and fails to enter into such agreement

Not less than INR 1 lakh which may extend up to INR 1 lakh per day in continuing offences subject to the limit of INR 1 crore.

If any depository, participant, issuer or its agent or any other person who is registered as an intermediary under the SEBI Act, 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

Not less than INR 1 lakh which may extend up to INR 1 lakh per day in continuing offences subject to the limit of INR 1 crore.

If any issuer or its agent or any person who is registered as an intermediary under the SEBI Act, 1992 fails to dematerialise or issue the certificate of securities on opting out of a depository by the investors, within the time specified or abets in delaying the process of dematerialisation or issue the certificate of securities on opting out of a depository of securities

Not less than INR 1 lakh which may extend up to INR 1 lakh per day in continuing offences subject to the limit of INR 1 crore.

If a depository, participant, issuer or its agent or any other person who is registered as an intermediary under the SEBI Act, 1992 fails to reconcile the records of dematerialised securities with all the securities issued by the issuer as specified in the regulations

Not less than INR 1 lakh which may extend up to INR 1 lakh per day in continuing offences subject to the limit of INR 1 crore.

If any person fails to comply with the directions issued by the Board within the time specified by it

Not less than INR 1 lakh which may extend up to INR 1 lakh per day in continuing offences subject to the limit of INR 1 crore.

Where a depository fails to conduct its business with its participants or any issuer or its agent or any person associated with the securities markets in a fair manner in accordance with the rules, regulations made by the Board or directions issued by the Board

Not less than INR 5 crores which may extend up to INR 25 crores or three times the amount of gains made out of such failure, whichever is higher.

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 thereunder for which no separate penalty has been provided

Not less than INR 1 lakh which may extend up to INR 1 crore

If a person fails to pay the penalty imposed or fails to comply with a direction of disgorgement order or fails to pay any fees due to the Board
1. Attachment and sale of the person’s movable property

2. Attachment of the person’s bank accounts

3. Attachment and sale of the person’s immovable property

4. Arrest of the person and his detention in prison

5. Appointing a receiver for the management of the person’s movable and immovable properties

6. Important Judgements

National Securities Depository Ltd. v. SEBI, Civil Appeal No. 5173 of 2006 with Civil Appeal No. 186 of 2007 dated 07/03/2017 (Supreme Court)- In this case before the Supreme Court, a circular issued by SEBI was challenged. This circular advised depositories to amend all bye- laws, rules and regulations from 09/01/2006 to ensure that no charges would be levied on a depository and consequently, by a depository on a beneficial owner when the beneficial owner transfers all securities lying in his account to another branch of the same depository or to another depository. The Supreme Court upheld the circular and dismissed the appeals.

Jayanand Jayant Salgaonkar v. Jayashree Jayant Salgaonkar & Anr., Suit No. 503 of 2014 (Bombay High Court)- In this case, the Bombay High Court held that legal heirs and not the nominees will obtain the ownership rights of share certificates. It held that nomination only provides a depositary quittance. The nominee continues to hold the securities in trust and as a fiduciary for the legal heir claimants under the succession law. Therefore, the rights of a nominee cannot override the rights of legal heirs of deceased and this is because the Depositories Act, 1996 does not displace the law of succession. 


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Manohar Samal