In the depository system, share certificates belonging to the investors are dematerialized and their names are entered in the records of depositary as beneficial owners. Investors’ names in the companies register are replaced by the name of depository as the registered owner of the securities. The beneficial owner continues to enjoy all the rights and benefits and be subject to all the liabilities in respect of the securities held by the depository. The ownership changes in, the depositary are done automatically on the basis of delivery vs. payment.
The investors opting to join depository mode are required to enter into agreement with depository through a participant who acts as an agent of depository. The agencies such as custodians, bank, financial institutions, large corporate brokerage firms, non – banking financial companies etc. act as participants of depositaries. The companies issuing securities are also required to enter into an agreement with the depositary.
Benefits of Depository system
The benefits from the depositary system are following:
- It reduces the cost of the issue and the transfer of securities by eliminating stamp duty.
- It reduces the scope of theft, forgery damages to securities certificates.
- It eliminates bad deliveries.
- It entitles the transferee to all the rights associated with the securities immediately on the settlement of purchase transaction.
- It enhances the liquidity of securities in the market.
- It makes faster disbursement of non cash corporate benefits like rights, bonus, etc. possible.
- It reduces brokerage by many brokers for trading in dematerialized securities.
- It eliminates problems relating to change of address of investors, transmission etc.
- It eliminates problems relating to selling securities on behalf of a minor.