IN 1968, American sharemarkets experienced a mechanical breakdown in dealing with the massive paperwork associated with share trading. Brokerage firms had to keep their offices closed for days to clear the backlogs. The resultant mess gave birth to the Depository Trust Company in 1973. The Indian markets may be rapidly heading towards a 1968 situation.
Over the last decade, the growth in the Indian capital market has resulted in a large number of shareholders: UTIs Mastergain 92 has a record 65 lakh folio holders. Along with this has also grown problems associated with settlement of trades. Investors have to face inconvenience in effecting registration of securities.
The trades done by institutional investors, both domestic and foreign, usually involve huge volumes of certificates. When ICICIs Rs 100 face-value share was split into Rs 10 face-value shares, there were 120 lakh separate pieces of paper to contend with! Apart from the physically cumbersome act of delivering the certificates, the system is fraught with wrong and forged signatures, stolen shares, fake certificates.
In June, when the National Securities Depository Ltd (NSDL) was registered with SEBI, following the Depository Ordinance, 1995, the idea was to keep ownership records in electronic holdings where the physical movement of the securities would be replaced by a book entry system, under which ownership would be transferred by electronic entries. As it is done in the developed world.
The ordinance makes a provision for the setting up of multiple depositories in India. The investor has the option of holding securities in a physical or dematerialised (electronic) form. The investor will open an account with a "depository participant" (DP) who will act as his agent in the depository system. Just like a bank branch, the DP will give the investor a passbook. All financial institutions, including banks, are eligible to become participants. Registrars, share transfer agents, the clearing corporation of an exchange, brokers and non-banking financial companies beyond a certain net worth are eligible.
The investor will hand over his share certificates through the DP to the relevant company/registrar who will have them destroyed and an equivalent number of securities will be credited in the investors electronic holdings (which will appear in the investors passbook). The investor can withdraw securities from the depository by requesting the physical certificates in which case the depository will provide for rematerialisation of electronic holdings. Fresh certificates will be handed out.
It is also mandatory that DPs are connected to the depository. The NSDL will also be connected to share transfer departments/registrars of the securities. Thus, when an investor buys shares in the depository mode, he will be the owner of the shares within a day of the settlement being completed. At present, it takes 40-60 days to get the shares registered in the investors name. Plus, no applying to the company for transfer of ownership, no fear of loss or theft, no fakes, no forged certificates.