The Depositories Act, 1996

What it does

The Act provides for the regulation of depositories in securities. A depository holds securities in electronic form, in the accounts of the persons who own them, and transfers them by book entry, so that no certificate has to be delivered. The Act lays the legal foundation for the dematerialisation of securities and for the clearing and settlement systems built on it.

An investor who wants to hold shares in electronic form opens an account with a depository participant, which is an agent of the depository, and the securities are held in that account. When securities are dematerialised, the depository becomes the registered owner in the company's register, while the investor is the beneficial owner. The Act says that the depository, as registered owner, has no voting or other rights in respect of the securities held on behalf of the beneficial owner. Those rights belong to the beneficial owner.

The Act also provides for the transfer of securities through book entry, for the pledge or hypothecation of securities held in a depository, and for the rights and obligations of the depository, its participants, the issuer and the beneficial owner.

Who it binds

Depositories, depository participants, issuers of securities and the beneficial owners. The Securities and Exchange Board of India registers depositories and participants and regulates them through regulations made under the Act and the Securities and Exchange Board of India Act, 1992. The two depositories in India are NSDL and CDSL, and they, with their participants, are bound by the Act and by the regulations.

A company whose securities are held in a depository must record the depository as registered owner and must keep the record of beneficial owners that the depository furnishes. A company cannot refuse to register the transfer of securities because the transfer is by book entry.

What has changed, and when

The Act has been amended since 1996, including to provide for the pledge of securities in a depository and to widen the powers of the regulator over depositories and participants. The regime for dematerialisation has also moved through the Companies Act, 2013 and the rules under it, which require certain classes of company to issue and hold their securities in dematerialised form. The dates by which those requirements applied to different classes of company are found in the rules themselves.

What turns on it in practice

The Act is the reason that a shareholding in a listed company is a record in an account and not a share certificate. A transaction that transfers the securities, such as a sale, a pledge or an invocation of a pledge, has to be carried out through the depository system, and the instruction to the participant is the operative step. A pledge, for example, takes effect when it is recorded in the depository, and a lender that holds a pledge over shares will have checked the record and not the loan document alone.

The second point is who may exercise the rights attached to the securities. Because the beneficial owner holds the rights, a notice, a vote or a corporate action reaches the person named in the depository record on the relevant date, and a person who has acquired shares but is not yet on the record is not the person the company deals with.

The third is the connection to the firm's capital markets work. An issuer planning a public or private offer has to arrange for the securities to be allotted in dematerialised form where the law requires it, and the listing and continuing obligations assume that the securities are in the depository system.