The Complete Guide About National Securities Depository Limited (NSDL)
Posted by Fintra , updated 2022-03-10
One of the largest Depositories in the World, National Securities Depository Limited (NSDL) was established in August 1996. NSDL has a state-of-the-art infrastructure, which holds and settles most of the securities such as bonds, shares, etc., in dematerialized form in the Indian capital market. By using innovative and flexible technology systems, NSDL desires to support the brokers and investors in India's capital market. It also aims to ensure the safety and soundness of the Indian marketplaces by inventing settlement solutions to increase efficiency, minimize risk, and reduce costs. At first, India was known to have a vibrant capital market, but this paper-based settlement of trades gradually began to cause substantial problems such as bad delivery, delayed transfer of title, and many other problems. For these reasons, the implementation of the Depositories Act in August 1996 paved the way for the establishment of NSDL.
In this blog, Fintra will highlight the following topics:
- What is National Securities Depository Limited (NSDL)?
- Who Forms the Promoters and Investors in NSDL?
- Benefits of National Securities Depository Limited (NSDL)
- The Safety Measures Taken by NSDL
- Services Provided by NSDL
- NSDL e-Services
What is National Securities Depository Limited (NSDL)?
The National Securities Depository Limited (NSDL) is a financial entity that has been set up to hold securities in the form of tangible or non-physical certificates. In other words, it's like a bank account system, but for securities such as shares and bonds, in the form of either tangible or intangible certificates. NSDL was created having the purpose of facilitating quick transfer of securities. When compared to the traditional way of exchanging tangible certificates, since transfers are now done electronically, it saves lots of time. NSDL even maintains Demat accounts where financial securities are held in electronic forms.
NSDL plays a central role in producing various vital services and products which will continue to nurture the growing demands of the financial services industry. Speaking about the positive aspect of the depository system, the securities are kept in depository accounts, similar to holding funds in bank accounts. Since the transfer of securities' ownerships occurs through simple account transfers, it eliminates the hassles and risks commonly associated with paperwork. Therefore, the cost of transacting in a depository environment is greatly lower as compared to transacting in certificates. NSDL offers a bouquet of services to stockbrokers, custodians, investors, issuer companies, and many more through its nationwide network of Depository Partners.
Who Forms the Promoters and Investors in NSDL?
There are various promoters of NSDL, and they are Industrial Development Bank of India (IDBI), Unit Trust of India (UTI), and National Stock Exchange (NSE). The banks like State Bank of India (SBI), HDFC Bank, Dena Bank, Oriental Bank of Commerce, Axis Bank Limited, Canara Bank, Deutsche Bank, HSBC, Citibank, and Standard Chartered Bank are the principal shareholders of NSDL.
Benefits of National Securities Depository Limited (NSDL)
In the depository system, the transfer and ownership of securities happen using electronic book entries. At the outset, this system made the capital market face various dangers related to handling of paper. With the formation of NSDL, numerous benefits took place, and they are as follows:
- No bad deliveries: In the depository environment, once the holdings of an investor get dematerialised, the scenarios of facing bad delivery do not arise. In other words, they can't be held "under objection". In the physical environment, the buyer had to take risks of transferring and facing the uncertainty of the quality of assets purchased. In the depository environment, good capital begets good quality of assets.
- Elimination of risks associated with physical certificates: There are lots of security risks associated when dealing in physical securities such as theft of stocks, mutilation of certificates, loss of certificates during transfers through and from the registrars, damage due to wear and tear, destruction, and various other risks. In the depository system, because the certificates are held in Demat form, no security risks arise, and it even saves the cost incurred for issuing duplicate certificates.
- Immediate transfer and registration of securities: In the depository environment, when the securities get credited to the investor's account, he/she immediately becomes the legal owner of the securities. When this is done, there's no need to send them to the company's registrar for registration. In comparison to this, when the securities were purchased in the physical environment, the investor had to send them to the company's registrar for changing the ownership, and this used to take lots of time. This method exposed the investor to the risk of losing them in transit and opportunity cost in case there is a delay in transfer.
- Faster settlement cycle: In the case of NSDL, the settlement occurs on the 2nd working day from the trading day, i.e. T+2 rolling settlement. This allows faster turnover of transactions, and the liquidity with investor improves.
- Faster disbursal of non-cash corporate benefits: NSDL enables direct credit of corporate benefits in non-monetary forms such as right shares, bonus shares, etc. to the investor's account. It provides the facility of safe and quick transfer of securities, thus, the risk of certificates getting lost in transit is eliminated.
- Reduction in brokerage: The transfer of securities through depositories assists in decreasing the back office paperwork, the efforts needed at the end of brokers, and the risk faced by them being the introducer. As a result, the broker's brokerage charges are also reduced. This gets beneficial to investors and brokers.
- Status Reports: Since periodic statements of accounts, which contains details of transactions conducted along with the status of holdings, are provided to the investors, it facilitates better controls.
- Elimination of problems related to change of address of investor: Usually in the traditional system, if the investor desired to do any changes in the details of it such as communication address, the investor was required to go through the cumbersome process of getting it changed in every company in which he/she has invested. With the creation of NSDL, this process has been simplified, the investor now just has to inform his/her Depository Participants (DPs) about the change and submit the relevant documents. The data gets updated everywhere instantly, and there is no need to inform every company individually.
- Elimination of issues related to the transmission of Demat shares: In the case of dematerialised holdings, the procedure of transmission is very convenient because the transmission formalities for all securities are held in a Demat account and can be completed by simply submitting documents to the DP. In the case of physical securities, the surviving joint holder(s)/legal heirs/nominee is required to correspond independently with each firm in which the shares are being held.
- Elimination of problems related to selling securities on behalf of a minor: A natural guardian isn't required to take the approval from the court to sell Demat securities on behalf of a minor.
- Easy to do Portfolio Monitoring: It is easier now to do portfolio monitoring because the statement of account provides a consolidated position of investments in all instruments.
- Stamp duty: In the traditional method, stamp duty was essential, but now when securities are transferred via depositories, there's no need of paying stamp duty. In the case of transferring equity shares, debt instruments, and mutual funds, the same rule also applies.
The Safety Measures Taken by NSDL
Huge amounts of funds are involved in the execution of transactions at NSDL. Thus, various checks and measures are taken in the depository system to ensure the safety of the investor holdings. The various safety measures carried out in the depository system for investors holding are as follows:
- After doing registration by SEBI that is based on the recommendation from NSDL and their independent evaluation, a DP can get operational. SEBI has specified certain criteria for becoming a DP.
- A DP is allowed to make any credit and/or debit to an account only when a client gives valid instructions.
- A system driven mandatory reconciliation between DP and NSDL occurs every day.
- Every transaction occurring gets recorded at the NSDL Central System and in the databases maintained by the business partners.
- Periodic inspections are done into the activities of DP and R&T agent by the NSDL. This even includes records based on the debit/credit.
- Investors have the right to receive their account statements periodically from the DP.
- Every month, the Demat account holder receives a statement of account from NSDL/DP. SMS/Email alerts also get sent to the account holder from NSDL directly when many critical transactions/updates have occurred in the Demat account.
- In the depository, since it holds investors' accounts on trust, if the DP gets bankrupt, the creditors of the DP won't have access to the holdings in the name of the clients of the DP. The investors are then allowed to transfer their holdings to an account held with another DP.
- All the data that gets interchanged between NSDL and its business partners are protected as per international standards such as encryption hardware lock.
- Freeze Facility: A depository account holder (beneficiary account) can avail the freeze facility for freezing securities lying in the account as long as the account holder desires. Freezing the account enables the account holder to prevent unexpected debits/credits from creeping into its account. The account holder may activate any of the following freeze options:
- Debits only
- Debits and Credits
- Freezing just a particular ISIN in the account
- Freezing a specific number of securities held under an ISIN in an account
11. Certification in Depository Operations: Every associated staff who works at DPs has to obtain a certification from the National Institute of Securities Markets as specified by the SEBI. This procedure ensures that the staff is knowledgeable to provide different services to investors as per norms.
12. Investor Grievance: The investor's grievances get resolved by the concerned business partner, and if they fail to do so, the investor has the liberty to approach NSDL / SEBI.
13. Insurance Cover: For the loss accrued to the investors due to omissions, errors, commission, or negligence of DP, NSDL provides a comprehensive insurance policy to assist DP in indemnifying the investors.
14. Computer and communication infrastructure: NSDL and its business partners use software, hardware, and communication systems that blend with the industry standards. The NSDL's central system contains an Intel-based system that has a backup facility along with a remote disaster backup site.
15. Machine level backup: The Intel servers have sufficient redundancy built into their configuration. The servers have been designed in clusters in which processing can be switched over in case the primary system fails. The disk has RAID implementation, ensuring that a failure of the hard disk won't lead to data loss. Moreover, the system also has a spare disk configuration where the data automatically gets copied from the main disk upon facing the first failure due to RAID implementation. It's believed that during the first failure no data is lost. Since the network components such as a router, communication controllers etc., have online redundancy, a failure doesn't result in loss of transaction.
16. Disaster backup site: NSDL maintains a disaster backup site that ensures 24×7 availability of the data even after natural and/or man-made disasters. This site is identical to the mainframe computer, and it operates when the main computer gets in-operational.
17. Periodic Review: The NSDL's entire software, hardware, and communication systems are reviewed constantly to make them more adequate, effective, and secured. These reviews keep occurring to ensure security considerations are given much importance as to operational efficiency.
Services Provided by NSDL
NSDL offers various services, and they can be grouped under three categories:
- Basic Services: According to the provisions of the Depositories Act, NSDL provides manifold services to brokers, investors, banks, and other security issuers participating in the Indian financial market. Any broker, investor, or intermediary who desires to avail services of NSDL, has to open a depository account with the DPs.
There can be three types of Depository accounts:
- Beneficiary account
- Clearing member account
- Intermediary account
The services that are provided on the above accounts are as follows:
- Dematerialization: This is the process in which investors can convert physical certificates into electronic balances. For dematerialization, investors have to deface the certificates and surrender them to the Depository Participant. Then, the DP intimates NSDL and they send certificates to the concerned Issuer/ R&T agent. A confirmation request is communicated to NSDL when the Issuer/ R&T agent gets satisfied with the certificates. Upon receiving the confirmation, the securities get credited to the depository account of the investor by NSDL.
- Rematerialisation: This is a process through which investors convert their securities held in electronic form into physical certificates. For doing this, investors have to submit a rematerialisation request to the DP who has the investor’s account. The DP then blocks the holding of the investor by entering the rematerialisation request in the system, and the securities remain blocked only to the extent to which the rematerialisation request has been received. Next, the DP sends the request to NSDL and the request form to Issuer/ R&T agent. When the request form is received, the Issuer/ R&T agent prints out the certificates and dispatches them to the client. Even the NSDL is informed about the acceptance of the request. Finally, the process ends when the client’s blocked balances get debited.
- Market Transfer: Investors can purchase or sell the securities held by them in the dematerialized form.
- Off-Market Transfer: Trades that don't settle through the Clearing Corporation/Clearing House of exchange are categorised as “Off-Market Trades”. A few examples of off-market trades are delivery of securities to or from sub-brokers and delivery for trade-for-trade transactions.
- Inter-Depository Transfer: Inter-depository transfers occurs when there's a transfer of securities from an account in one depository to an account in another depository.
- Transmission: Transmission denotes the devolution of title to shares otherwise than by transfer. For example, devolution by inheritance, death, succession, bankruptcy, marriage, etc. This is operational by the law.
- Corporate Actions: Corporate actions refer to the benefits that have been given by companies to the investors. These benefits can be monetary such as interest, dividend, etc. or non-monetary such as rights, bonus, etc.
- Value-added Services: NSDL offers varied other services such as automatic delivery of securities to clearing corporations, hypothecation of securities, pledge, distribution of various cash and non-cash benefits, stock lending, Demat of NSC/KVP, Demat of warehouse receipts, and many others. A few of the services that are provided are as follows:
- Pledge or Hypothecation of Securities: To avail credit or loan facility, securities that are held in a depository account can be hypothecated or pledged. For pledging securities, borrowers (pledgers) and the lenders (pledgee) must have an account in the NSDL depository.
- Automatic Delivery out Instructions: Based on the net delivery obligations of its Clearing Members, this enables the Clearing Corporation to execute delivery-out instructions for moving securities from CM Pool Account to CM Delivery Account automatically. Clearing Corporation generates Auto DOs on behalf of only those Clearing Members who have authorized it.
- Dividend Distribution: Presently, NSDL is only facilitating distribution of corporate cash benefits such as dividends to shareholders. The details of the security's beneficial owners as on the record date of the concerned company are provided by NSDL to the company or its registrar. This data is then shared with the transfer agent (R & T agent). Thereafter, the company’s R & T agent sends dividend entitlements to the beneficial owners. Beneficial owners are now eligible in the same manner as the shareholders holding physical certificates.
- Lending and Borrowing: The transactions involving borrowing and lending of securities are executed through approved mediators duly registered under the Securities Lending Scheme, 1997 with SEBI. The intermediary can only deal in the depository system through a special account known as an Intermediary Account, which is opened with a DP. Intermediary accounts can only be opened with the DP after the intermediary has obtained SEBI approval and registered itself with SEBI under the Securities Lending Scheme. The intermediary should also acquire approval from NSDL.
- Public Issue: Investors have an option to seek allotment of public issues in electronic form. The NSDL depository system has the facility for allotment of securities directly into the investor's depository account in the Demat form. As per the SEBI guidelines, trades in shares issued through the public will only be settled in Demat form. Experts advise that investors should seek allotment in Demat form.
- SMS Alert: For Demat account holders, NSDL does offer an SMS Alerts facility wherein they receive alerts directly from NSDL for various transactions like failed instructions, debit transfers, overdue instructions, and more. No charges are levied by NSDL for offering this SMS Alert facility to investors.
- NSDL CAS (Consolidate Account Statement): This is a single statement that has the record of all investments owned in single and joint names in the security market. This facility enables subscribers to access electronically their financial assets as a part of a single account. The NSDL consolidated account statement comprises details of multiple financial instruments such as investments in equity shares, mutual funds, debentures, government securities held in Demat form, bonds, and money market instruments like treasury bills, etc. The statement is only provided to the primary or sole account holder of the investment account whether held in a joint or single name.
As a part of NSDL's value-added services, it even provides varied online services called e-services. These services facilitate quicker and more reliable execution of a transaction. The varied e-services offered by NSDL are as follows:
- SPEED-e: This service enables investors to directly upload delivery instructions on the SPEED-e website; this reduces the turnaround time. Only those participants who have subscribed for this service can avail it. The subscribers are provided with access rights by using passwords, a smart card, or an e-token.
- IDeAS (Internet-based Demat Account Statement): This service enables the facility of viewing balances and transactions executed in the Demat account online.
- STEADY (Securities Trading Information Easy Access and Delivery): This service was launched for contract notes, and through this service, brokers electronically can deliver/submit contract notes to custodians/ fund managers. Brokers must transmit digitally signed trade information with encryption, as it also enables the recipient to modify or enhance contract notes.
- Depository Account Validation (DAN): In this service, subscribers may validate/authenticate identities such as DP ID, client ID, PAN, and other basic details provided by the investor via the online platform.
- SPICE (Submission of Power of attorney based Instructions for Clients Electronically): In this, the Clearing Members submit auto pay-in instructions to participants on SPEED-e facility to debit from the Clients Demat accounts and credit their Clearing Member (CM) Pool Accounts. Clearing Members are those who have given Power of Attorney (POA) in favour of the Clearing Member.
- SIMPLE (Submission of Instruction through Mobile Phone Login Easily): This service is for clients who availed the SPEED-e services and use passwords to login. It enables the clients to issue transfer instructions using their mobile phones that have been registered with NSDL. For executing a transaction, subscribers have to login to the SPEED-e website using any phone, which has the GPRS facility enabled.
India's capital market has always been very active. Due to the paper-based settlements, some drawbacks were arising such as bad distribution, delayed execution of transition, and many others which have been mentioned above. The Depositories Act, 1996, gave birth to the creation of Security Depositories for managing securities. India's first and largest depository, NSDL's primary purpose is to handle securities held in the Indian capital market in a dematerialized form.