When we talk about the Indian Financial Market, the only reference that comes in our mind is of the National Securities Depository Limited (NSDL). This organization plays a key role, as a mediator and a loyal supporter of investors and brokers who strand their trade in the Indian Financial Market.
NSDL was founded on 8th November 1996. It is India’s largest Central Securities Depository. NSDL based in Mumbai and was the brainchild of a National Economic group. The focus of the group was on building a robust system to handle securities. These securities are used in dematerialized format in the Indian financial market. It is now very much essential to change the practices of paper-based trade settlements which is century old. NSDL is considered a counter to paper-based systems.
History of NSDL
In August 1996, lawmakers introduced, Depositories Act that led to the creation of NSDL. Since then, NSDL has played a key role in creating products and services which benefit stakeholders. Indian Financial Market has been functional for a long time, a while back, the market is facing some issues with this paper-based route of settlement of trades. At that time a reliable and refined system, NSDL became a very popular institution in India because of simplicity associated and the fact that the transacting under the depository system is infinitely cheaper as compared to transacting with certificates.
What do you understand by ‘Securities’?
‘Securities’ are defined as a financial asset that is subject to trading. Securities counted as a financial instrument which comes in the form of common stocks, equity, warrants, fixed income securities such as:
- As stocks, ownership in a publicly traded entity
- As bonds, relationship with a Government body as a creditor
- Ownership rights as represented by an option
Securities comes with a specified financial value which is negotiable, interchangeable and usually segregated into equities and debts.
Debt securities include:
- Private-sector bonds and Public sector bonds
- Deposit certificates
- Shareholder ownership in a corporate entity
- Usually comes in the form of stocks
Difference between owner of Debt securities and Equity securities
The major difference between owners of Debt securities as compared to owners of Equity securities is that the latter is making profit generation from capital gains. An entity that generates securities is known as the issuer.
Which banks are the principal shareholders of NSDL?
- State Bank of India
- Standard Chartered Bank
- Axis Bank
- Deutsche Bank
- HSBC Bank
- Union Bank of India
- HDFC Bank
- Dena Bank
- Canara Bank
- Oriental Bank of Commerce
- Citi Bank
Advantages Offered by NSDL
No More Bad Deliveries: Every buyer in the Indian Financial Market needs to take massive risks of undertaking a transaction without getting any confirmation about the quality of assets that they are going to be purchased. This problem, one does not have to face in the case of using a depository platform. With NSDL, there is no question of being left with a situation of ‘under objection’.
Exemption from Stamp Duty: In traditional means, one must do the transfer of securities but by making use of the depository system, there is no need to have stamp duty in case of equity shares, mutual funds, and debt instruments.
Fast Settlements and Quick Turnarounds: Fast turnover appears in those cases where trades are being settled down on the second working day from the actual trade day. It will result in getting higher liquidity with the investor by using a depository platform.
Elimination of Use of the Paper: In earlier times, using paper certificates to deal with securities led to the creation of many obvious problems. It creates a possibility of certificates being stolen, destroyed, mutilated subject to atmospheric and weather conditions. But now with the help of depository systems, there is a predominant reliance on online solutions.
Fast Transfer and Registration of Securities: Traditionally, when the purchase of securities is done, investor had to forward the information to the company’s registrar to ensure a change of ownership and secondly, to get it duly recognized and registered. It is a time-consuming process. This process usually takes 3-4 months. With the help of a depository environment, as soon as payment confirmation is given, concerned securities are attached with the investor’s account and he or she becomes the legal owner of the transferred securities.
Avoid Maintaining an Offline Repository of Associated Literature: When you are doing online transactions of securities, it leads to using fewer papers and non-existent files and folders. Online, everything is available just with a click of button as per the convenience of the investor.
Easy Maintenance of Periodic Status Reports: With the help of a depository ecosystem, it becomes easier for investors to keep a regular update with regards to transactions and purchase or sale of securities. It will help investors to have a better understanding of the procedures and adjustments that he or she must undertake for a profitable future.
Quick Disbursements of Non- Cash Corporate Benefits: One of the major advantages of the NSDL system is that it offers investors the ability to make quick transfers of non-monetary corporate benefits. Since all the process happens via social media, risk of loss of paper-based certificates is nullified. Transfer of securities has taken place in a safe, quick and accountable manner.
Broker Friendly: The creation of a depository environment eliminates the cost which is incurred in the handling of the lengthy paper trails and eliminates the risk faced by the broker as an introducer.
Easily Changes Can be Made in Address: In the traditional system, when the investor is willing to change the address, the process is that the investor needs to update the same to the registrar through a paper dominated process. It is quite a lengthy process. In the Depository system, address change is reflected in the individual database of the company where the investor is listed as the registered owner of securities.
Transmission of Demat Shares: When it comes to NSDL, transfer of securities held in the Demat Account. It involves simple provision of required documents to the concerned department in a smooth manner.
Sale of Securities for Minors: The guardian is responsible for doing sale of securities for the minor when you are using a depository platform and there is no requirement of seeking approval of court of law for the same.
What are the services offered by NSDL?
Basics services include:
- Account Maintenance
- Market transfers which help in facilitating of trade settlements
- Nomination or transmission
- Off market transfers
Services targeted to: Investors, Brokers, Banks, other security issuers who participate in the Indian Financial market.
Value added services:
- Electronic study and trade settlement services
- Special Value-added offerings which includes delivery of securities.
- Hypothecation and pledge
- Lending of stocks
- Online services such as SPEED-e and IDeAS
- Distribution of cash and non- cash corporate benefits.
Note: NSDL is known for making electronic innovations which work as a system that allow brokers to transfer the contract notes to custodians or fund managers via online media.
NSDL Consolidated Account Statement
- Help subscribers to access all their financial assets that too electronically in the form of a single Demat account.
- NSDL CAS statement includes references to a popular instrument such as mutual funds, equity shares, bonds, government securities which are being held in debentures, demats or instruments concerning money market etc.
- NSDL CAS is one of the popular tools which helps an investor to track his or her investment portfolios.
Online Services Offered by NSDL
Online services offered by NSDL are also known as e- services which will help players of various stature of Indian Financial market in conducting their business in a better way.
It is a common form of internet infrastructure which allows depository participants (including clearing members) to offer depository services to the clients. Demat account holders subscribing to this facility for giving delivery instructions to the Depository participants. The users of SPEED-e can also check the latest transactions and balances in their Demat account through another online service that is an Internet-based Demat account statement and it can also monitor the status of execution of their instructions.
The most important benefit of SPEED-e is the convenience of submitting delivery instructions through the internet. Clients can access the SPEED-e website from anywhere in the world and at any point of time.
Internet Based Demat Account Statement (IDeAS): This idea was launched on January 01, 2004. It helps the Demat account holder to view the transactions and balances of the last 30 days regarding his or her Demat account via online media. It is available for the users of SPEED-e. In this, brokers can also download the information and can update in their back offices.
When you are looking for transfer and management of securities, for this NSDL introduced STEADY that is primarily responsible for communicating of contract notes that come from a certified broker given to intended fund managers. Services include requisite digital signatures. Apart from that STEADY also recipient fund managers modifying and enhancing the contract notes. STEADY is best for FII and domestic institutional trades.
Depository Account Validation
Depository Account Validation (DAN) is a secured online platform which offers subscribers to do authentication of identities such as DP ID, PAN details of investors or client ID. This option allows the subscriber of NSDL to give confirmation regarding the basic details of the investor community. Also ensure greater reliability and trust to the investor. DAN is applicable for public issues, public offers etc., and is also offering services to lead managers and syndicate members.
- SPICE stands for ‘Submission of Power of attorney-based instructions for clients electronically’.
- Refers to time saving action wherein clearing members (It is for those clients who have bestowed the (Power of Attorney) in favor of respective clearing member).
- It can utilize the SPEED-e to give auto pay instructions to participants and get it debit from the Client’s Demat accounts hosted here and consequently credit the pool accounts which belong to the Clearing member.
- It also helps in eliminating the cumbersome routine of giving paper-based delivery instructions to the participant.
- It stands for ‘Submission of Instructions Through Mobile Phone’. It is very simple and a fast process.
- It is one of the most convenient facilities which allow the users of SPEED-e to utilize a password for login, to ‘simply’ issue Client to Clearing Member Pool Account transfer instructions using their registered mobile phones.
- After that, the subscriber also must log on to the website of SPEED-e via GPRS enabled Mobile phone and affect the transaction.
Application Fee: NSDL Services
Here you can check the comprehensive listing regarding the minor and major charges which are applicable for availing the NSDL services to its Depository participants, subscriber and issuers.
|Services offered by the NSDL||Application fee charges|
|Entry Fees||Rs 25,000(It is non-refundable)|
|Pledge Fee||Rs 25 for each instruction given for the creation of hypothecation or pledge.|
|Settlement Fee||Rs 4.50 per debit instruction given by NSDL|
|Fee taken for dematerialization of securities||NIL|
|Fee taken for dematerialization of securities||NIL|
|Minimum Fees||Rs.1,00,000 (if fee charged to the Participants is less than this, than the difference will be charged thereof).|
|Security Fees||Each Participant must pay an interest free refundable security deposit of Rs.10 lakh. However, Clearing Corporation/House of a Stock Exchange will be exempt from this.|
Details Regarding Applicable Fee for Issuers
When we are talking about the case of issuer, he or she is applicable to pay an annual custody fees at the rate of Rs 8 per portfolio (ISIN Position) in NSDL, provided the minimum amount (plus service tax) is as listed below:
|NOMINAL VALUE OF SECURITIES ADMITTED||AMOUNT|
|Less than or equal to Rs 5 Crore||Rs 6000|
|Above 5 Cr but less than 10 Cr||Rs 15000|
|Above Rs 10 Cr but less than 20 Cr||Rs 30,000|
|Above Rs 20 Cr||Rs 50,000|
In order to make shares available for dematerialization, an issuer of unlisted securities is required to make a payment of joining fees of Rs 30,000(plus taxes). However, if the issuer can make listing of securities in any certified stock exchange within one year of joining NSDL and crediting of the joining fees, then the issuer gets an advantage of adjusting one-time custody fees or annual custody fees, whichever is applicable.
How to Become NSDL Business Partner
NSDL is one of the premier organizations that offer a range of services to Depository Participants (DP), Agents, Stock Exchanges as represented by the clearing houses and issuers. NSDL considered their participants as Business Partners. NSDL requires these partners to be fully integrated into its own depository system. Their aim is to give services to investors and clearing members efficiently and effectively.
Ways to Achieve Status of Privileged Business Partner of NSDL
As a Depository Participant (DP)
- NSDL reaches out to its target investors by making use of a medium known as Depository Participant.
- These participants are basically entities and organizations that provide financial services.
- They have set infrastructure that can be utilized by NSDL to reach its target audience. It includes banks, brokers, financial institutions, custodians etc.
- Working of DP and NSDL in combination is considered as a two prolonged process. It also includes both evaluation and confirmation by the Securities and Exchange board of India (SEBI).
As an Issuer
- Aim of the issuer is to become a part of NSDL machinery to offer Demat facilities to its privileged shareholders by taking advantage of securities which are listed under NSDL.
- In order to become, NSDL business partner, an issuer must submit the required set of documents followed by three blank copies of three-part agreement made by NSDL and R&T agent.
- Both R&amp;T agent and issuer must sign the agreement and return it back to the NSDL at the specified contact address.
- NSDL issues an ISIN (International Securities Identification Number) to facilitate these activities with an aim of helping with future transactions.
As a R&T Agent
- The need for R&T agents (Registrar and Transfer agents) in the NSDL format lies with the fact that issuers may use the computer facility. This facility is basically known as DPM-SHR which is usually built in house by the issuer or borrowed from the R&amp;T agent for the creation of securities in Demat form.
- Securities in Demat form can be created in two ways and can extinguish also in two ways. The control of effecting these crucial actions retained by the R&amp;T agent and by the issuer. It will further help in the process of lending out the computer facility which is required to confirm upon and action these activities.
How a R&T Agent Can Align with the NSDL as a Business Partner?
- Making introduction through a formal letter issued by NSDL.
- Procuring of necessary software and hardware components/configurations.
- Procuring of Multi-protocol Label switching (MPLS) Line.
- Submitting of Form B to NSDL, preceded by installing requisite software/ hardware/ network systems and peripherals.
- Submission of stipulation fees for the procurement of the DPM-SHR software.
- Giving of comprehensive training to personnel regarding operations and equipment.
- Doing Pilot training to ensure the proper working and response of the configured software system.
- Getting confirmation of status of R&amp;T agent at the time when NSDL activates business partner in the form of share registrar.
- Post the above actions, the subscriber is an active R&T Agent on the NSDL ecosystem.
As a Clearing Corporation/House
- In the business, doing settlement of shares and average stock exchange. It needs a robust settlement mechanism which is offered by a typical clearing corporation which is also known as a clearing house.
- Securities and Exchange board of India must have to give approval before said settlement guarantee mechanism can be floated in the larger market.
What are the Admission Criteria to Become a NSDL Business Partner?
- NSDL must be convinced that the concerned Clearing Corporation or House will make flawless and timely payment against delivery or guarantee settlement.
- NSDL is satisfied with the clearing corporation /house ‘operational acumen to provide services that are directly related to clearing/settlement of transactions in terms of securities and is being given to the depository in its dematerialized form.
- Clearing corporation /house is sympathetic to the concerns and queries of the participants and is always ready to address such concerns and queries.
- Clearing Corporation House must possess all the necessary software and hardware systems which are deemed crucial to make an interaction with the Depository without timeouts and lags.
- Overall modus for a Clearing Corporation house to join the NSDL as business partner is the same as the procedure applicable to become Depository Participant (DP).
As an Investor
Role of an investor is very crucial as it allows the system to work flawlessly. The Indian Capital market has too risen leaps and bounds. It is all possible because of the faith shown by average investors. They are superiorly aided by NSDL to ensure settlement of trades without any glitch.
Procedure to Get Investor Onboard the NSDL Ship Are As Follows:
- Investors must open a beneficiary account with a Depository Participant. It is almost the same procedure as opening a bank account.
- Investor can deposit, transfer or hold securities from her or his beneficiary account without moving any share certificates. It is similar to managing a normal savings account without physically meeting the cash transactions.
- The account which is opened in the depository system is known as; Beneficiary account’ and account holder is known as ‘Beneficial owner’.
As a Broker
- When we think about the Stock Exchange, the first thing that comes into our mind is stockbrokers. They are acting as a loud determined warrior in the game of bull and bears.
- Brokers are serving as an important and irreplaceable link between investors and the associated Clearing Corporation / House operating in the Depository system.
- All sale and purchase of securities are sourced through concerned Clearing and corporation house-based depository accounts.
What a Broker Must Do in Order to Participate in the System and Settle Trades in Dematerialized Securities?
- Brokers must operate a clearing account with any Depository Participant (DP) of his or her choice.
- Make sure that account is utilized only for reception and transfer of shares from and to the concerned Clearing Corporation /House. So, the broker herself or himself does not retain any ownership over the shares.
Safety and Securities with NSDL
In NSDL, precautions are maintained to ensure safety of the investor holding. Here is the list of safety protocols:
- SEBI (Securities and Exchange Board of India) is a watchdog which ensures selection of the Depository Participants and only credible entities are selected. Apart from SEBI evaluation, proposed Depository participants must also pass the strict evaluation which NSDL is conducting on its own.
- Every enacted transaction must be duly recorded on the central server of NSDL and on individual databases maintained by various business partners.
- All investors should receive periodic account statements from their respective depository participants and are also allowing them to have complete control on their individual securities portfolio.
- NSDL conducts a regular check into the activities of Depository Participants and R&T agents.
- One of the most interesting precautions taken by NSDL is forwarding of the account statements to a random list of investors as a secondary reference. The investor is now able to make comparison between statements that are issued by his or her depository participant against the one that is issued by NSDL to check discrepancies.
- Depository Participants are not allowed to action any credit or debit request to the concerned account without verifying instructions from the client.
- Exchange of data between business partners and NSDL is being strictly protected by encryption in accordance with the latest technologies available in the market. The encryption systems implemented by NSDL are more robust that ones which are prescribed by the Securities and Exchange Board of India.
- There is a Freeze facility which allows an account holder to freeze the securities that are existing in her or his depository account if he or she wants. Freezing accounts prevents the performance of any desirable/accidental/malicious activity. By requesting the DP (via the proper format), an account holder can activate any of the following freeze options-
- Debits only
- Debits & Credits
- Freezing just an individual ISIN in the account
- Freezing a specified number of securities that exist as part of an ISIN in an account.
- Another important action point of NSDL is grievance redressal. All those grievances raised by the investor must be addressed by the concerned business partner. If the business partner will not properly acknowledge the problem of investors, then investors in that case can directly approach the NSDL. Complete contact information is available on the website of NSDL.
- NSDL has a potent insurance policy in order to provide compensation to investors for the possible loss that could be incurred by them due to such unforeseen or accidental mistakes as omissions, errors or loss due to the concerned DP’s negligence.
- NSDL makes sure that business partners utilize computer hardware and software that is cutting edge and conforms to the set industry standards.
- To ensure NSDL presence is available 24×7 and should not get impacted by any natural calamities or manmade calamities, a disaster backup website is maintained. This website features a computer which is identical to the mainframe computer and is always available to take the lead as and when the mainframe computer is rendered non- operational.