Workbook Certification Examination
WorkbookforNISM-Series-VI: Depository OperationsCertification ExaminationNational Institute of Securities Marketswww.nism.ac.in1
This workbook has been developed to assist candidates in preparing for the National Instituteof Securities Markets (NISM) Certification Examination for Depository Operations.Workbook Version: December 2011Published by:National Institute of Securities Markets National Institute of Securities Markets, 2011Plot 82, Sector 17, VashiNavi Mumbai – 400 705, IndiaAll rights reserved. Reproduction of this publication in any form without prior permission ofthe publishers is strictly prohibited.2
DisclaimerThe contents of this publication do not necessarily constitute or imply its endorsement,recommendation, or favoring by the National Institute of Securities Market (NISM) or theSecurities and Exchange Board of India (SEBI). This publication is meant for general reading andeducational purpose only. It is not meant to serve as guide for investment. The views andopinions and statements of authors or publishers expressed herein do not constitute apersonal recommendation or suggestion for any specific need of an Individual. It shall not beused for advertising or product endorsement purposes.The statements/explanations/concepts are of general nature and may not have taken intoaccount the particular objective/ move/ aim/ need/ circumstances of individual user/ reader/organization/ institute. Thus NISM and SEBI do not assume any responsibility for any wrongmove or action taken based on the information available in this publication.Therefore before acting on or following the steps suggested on any theme or before followingany recommendation given in this publication user/reader should consider/seek professionaladvice.The publication contains information, statements, opinions, statistics and materials that havebeen obtained from sources believed to be reliable and the publishers of this title have madebest efforts to avoid any errors. However, publishers of this material offer no guarantees andwarranties of any kind to the readers/users of the information contained in this publication.NISM and SEBI do not warrant the totality and absolute accuracy, adequacy or completenessof the information and material and expressly disclaim any liability for errors or omissions inthis information and material herein. NISM and SEBI do not accept any legal liability what soever based on any information contained herein.While the NISM Certification examination will be largely based on material in this workbook,NISM does not guarantee that all questions in the examination will be from material coveredherein.3
About NISMIn pursuance of the announcement made by the Finance Minister in his Budget Speech inFebruary 2005, Securities and Exchange Board of India (SEBI) has established the NationalInstitute of Securities Markets (NISM) in Mumbai.SEBI, by establishing NISM, has articulated the desire expressed by the Indian government topromote securities market education and research.Towards accomplishing the desire of Government of India and vision of SEBI, NISM haslaunched an effort to deliver financial and securities education at various levels and acrossvarious segments in India and abroad. To implement its objectives, NISM has established sixdistinct schools to cater the educational needs of various constituencies such as investor,issuers, intermediaries, regulatory staff, policy makers, academia and future professionals ofsecurities markets.NISM brings out various publications on securities markets with a view to enhance knowledgelevels of participants in the securities industry.NISM is mandated to develop and implement certification examinations for professionalsemployed in various segments of the Indian securities markets.4
AcknowledgementThis workbook has been developed by NISM in cooperation with the Examination Committeefor Depository Operations Examination consisting of representatives from National SecuritiesDepository Limited (NSDL) and Central Depository Services Limited (CDSL). NISM gratefullyacknowledges the contribution of all the committee members.About the AuthorThis workbook has been developed by the certification team of NISM.5
About the Certification Examination for Depository ParticipantsThe examination seeks to create a common minimum knowledge benchmark for associatedpersons engaged or employed by a registered depository participant in:(a) dealing or interacting with clients;(b) dealing with securities of clients;(c) handling redressal of investor grievances;(d) internal control or risk management;(e) activities having a bearing on operational risk; or(f) maintenance of books and records pertaining to the above activitiesThe certification aims to enhance the quality of services as rendered by the DepositoryParticipants.Examination ObjectivesOn successful completion of the examination, the candidate should: Know the basics of the Indian securities market and the depository system, the needfor depository and the key features of the depository system in India. Understand the institutional structure of the depository system in India and thebusiness partners of a depository. Understand the regulatory framework in which the depositories and its DPs function,their eligibility criteria, registration procedure, rights and obligations etc. Know the various functions of the Depository and its Depository Participants (DPs) suchas dematerialisation, trading and settlement, pledging and hypothecation.Understand how a demat account is opened, documents required to open an accountand significance of Power of Attorney (POA).Assessment StructureThe examination consists of 100 questions of 1 mark each and should be completed in 2 hours.The passing score on the examination is 60%. There shall be negative marking of 25% of themarks assigned to a question.Examination StructureThe exam covers knowledge competencies related to the basics of depository operations,services provided by the depository participants, account opening formalities andmaintenance of the account, and the regulatory framework in which the depositories functionand the different business partners of a Depository.How to register and take the examinationTo find out more and register for the examination please visit www.nism.ac.in6
TABLE OF CONTENTSChapter 1: Introduction to the Indian Capital Market . 91.1 Introduction . 91.2 Capital Market. 91.3 Regulatory Environment . 101.4 Regulators . 11Chapter 2: Introduction to Depository . 132.1 Need for a Depository System . 132.2 What is a Depository? . 152.3 Legal Framework . 162.4 Functions of a Depository . 20Chapter 3: Depository and its Business Partners . 233.1 Depository Participants. 233.2 Clearing Corporation / Clearing House . 323.3 Issuers and Registrar and Transfer Agents . 33Chapter 4: Functions of Depository Participant-Account Opening . 414.1 Types of Account. 414.2 Beneficial Owner Account. 414.3 Clearing Member Account . 574.4 Closure of Account . 584.5 Freezing of Accounts . 624.6 Changes in Client Details. 62Chapter 5: Functions of Depository Participant-Transmission and Nomination . 675.1 Transmission . 675.2 Nomination . 675.3 Transmission of Securities . 68Chapter 6: Functions of Depository Participant-Dematerialization . 736.1 International Securities Identification Number (ISIN) . 736.2 Dematerialization Process . 746.3 Rematerialisation . 837
Chapter 7: Functions of Depository Participant-Trading and Settlement. 877.1 Introduction . 877.2 Settlement of Off-Market Transactions . 877.3 Settlement of Market Transactions . 89Chapter 8: Special Services – Pledge & Hypothecation . 978.1 Introduction . 978.2 Procedure for Pledge/Hypothecation . 97Chapter 9: Special Services – Corporate Actions .1069.1 Important Terms . 1069.2 Procedure for Corporate Actions . 106Chapter 10: Special Services – Public Issues .11110.1 Public Issue Procedure . 111Chapter 11: Special Services – Debt Instruments & Government Securities .11511.1 Introduction . 11511.2 Certificate of Deposit (CD) . 11711.3 Commercial Paper (CP) . 11811.4 Government Securities . 119Chapter 12: Special Services – Warehouse Receipts .12712.1 Introduction . 127Annexures 1318
Chapter 1: Introduction to the Indian Capital Market1.1 IntroductionTransfer of resources from those with idle resources to others who have a productive need forthem is perhaps most efficiently achieved through the securities markets. To state formally,securities markets provide channels for allocation of savings to investments and therebydecouple these two activities. As a result, the savers and investors are not constrained by theirindividual abilities, but by the economy’s abilities to invest and save respectively, whichinevitably enhances savings and investment in the economy. A financial market consists ofinvestors (buyers of securities), borrowers (sellers of securities), intermediaries and regulatorybodies.The Indian financial market can be best illustrated in the figure below:FinancialMarketMoney MarketOrganisedMoney MarketUnorganisedMoney MarketShort TermLending /BorrowingMoneyLenders /IndigenousBankersCapital MarketPrimaryMarketSecondaryMarket1.2 Capital MarketThe capital market has two interdependent and inseparable segments, the new issuers (theprimary market) and stock (secondary) market. The primary market is used by issuers forraising fresh capital from the investors by making initial public offers or rights issues or offersfor sale of equity or debt; on the other hand the secondary market provides liquidity to theseinstruments, through trading and settlement on the stock exchanges. An active secondarymarket promotes the growth of the primary market and capital formation, since the investorsin the primary market are assured of a continuous market where they have an option toliquidate their investments.9
There are several major players in the primary market. These include the merchant bankers,mutual funds, financial institutions, foreign institutional investors (FIIs) and individualinvestors. In the secondary market, there are the stock exchanges, stock brokers (who aremembers of the stock exchanges), the mutual funds, financial institutions, foreign institutionalinvestors (FIIs), and individual investors. The Registrars and Transfer Agents, Custodians andDepositories are capital market intermediaries which provide important infrastructure servicesto both the primary and secondary markets.1.3 Regulatory EnvironmentThe securities market transactions are subject to regulationslegislations viz., the Securities and Exchange Board of India Act, 1992; the Securities Contracts (Regulation) Act, 1956; the Depositories Act, 1996 ; and certain provisions of the Companies Act, 1956.underthefourmain1.3.1 Securities and Exchange Board of India Act, 1992The SEBI Act, 1992 establishes SEBI with statutory powers for,(a) protecting the interests of investors in securities,(b) promoting the development of the securities market, and(c) regulating the securities market.Its regulatory jurisdiction extends over corporates in the issuance of capital and transfer ofsecurities, in addition to all intermediaries and persons associated with securities market. Itcan conduct enquiries, audits and inspection of all concerned and adjudicate offences underthe Act. It has powers to register and regulate all market intermediaries and also to penalisethem in case of violations of the provisions of the Act, Rules and Regulations made thereunder. SEBI has full autonomy and authority to regulate and develop an orderly securitiesmarket.1.3.2 Securities Contracts (Regulation) Act, 1956The SC(R)A, 1956 provides for direct and indirect control of virtually all aspects of securitiestrading and the running of stock exchanges and aims to prevent undesirable transactions insecurities. It gives central government / SEBI regulatory jurisdiction over (a) stock exchangesthrough a process of recognition and continued supervision, (b) contracts in securities, and (c)listing of securities on stock exchanges. As a condition of recognition, a stock exchangecomplies with prescribed conditions from the central government. Organized trading activity insecurities takes place on a specified recognized stock exchange. The stock exchangesdetermine their own listing regulations which have to conform to the minimum listing criteriaset out in the Securities Contracts Rules.10
1.3.3 Depositories Act, 1996The Depositories Act, 1996 provides for the establishment of depositories in securities with theobjective of ensuring free transferability of securities with speed, accuracy and security by (a)making securities freely transferable subject to certain exceptions; (b) dematerialization of thesecurities in the depository mode; and (c) providing for maintenance of ownership records in abook entry form. In order to streamline the settlement process, the Act envisages transfer ofownership of securities electronically by book entry. The Act has made the securities of allcompanies freely transferable in the depository mode, restricting the company’s right to usediscretion in effecting the transfer of securities. The other procedural and the transfer deedrequirements stated in the Companies Act have also been dispensed with.1.3.4 Companies Act, 1956It deals with issue, allotment and transfer of securities and various aspects relating to companymanagement. It provides for standard of disclosure in public issues of capital, particularly inthe fields of company management and projects, information about other listed companiesunder the same management, and management perception of risk factors. It also regulatesunderwriting, the use of premium and discounts on issues, rights and bonus issues, payment ofinterest and dividends, supply of annual report and other information.1.4 RegulatorsThe responsibility for regulating the securities market is shared by Department of EconomicAffairs (DEA), Department of Company Affairs (DCA), Reserve Bank of India (RBI) and SEBI. Theactivities of these agencies are coordinated by a High Level Committee on Capital Markets. Theorders of SEBI under the securities laws are appellable before a Securities Appellate Tribunal.Most of the powers under the SCRA are exercisable by DEA while a few others by SEBI. Thepowers of the DEA under the SCRA are also con-currently exercised by SEBI. The powers inrespect of the contracts for sale and purchase of securities, gold related securities, moneymarket securities and securities derived from these securities and ready forward contracts indebt securities are exercised concurrently by RBI. The SEBI Act and the Depositories Act aremostly administered by SEBI. The rules under the securities laws are framed by governmentand regulations by SEBI. All these are administered by SEBI. The powers under the CompaniesAct relating to issue and transfer of securities and non-payment of dividend are administeredby SEBI in case of listed public companies and public companies proposing to get theirsecurities listed. The SROs ensure compliance with their own rules as well as with the rulesrelevant for them under the securities laws.11
Review QuestionsQuestions to assess your learning:1. Which of the following is NOT a part of the Primary Market?(a) Merchant Bankers(b) Mutual Funds(c) Exchanges(d) Registrars and Transfer AgentsAns: (c)2. An active promotes the growth of the primary market and capital formation.(a) secondary Market(b) bullion market(c) money market(d) forex marketAns: (a)3. aims at streamlining settlement process by transfer of ownership ofsecurities electronically by book entry without making the securities move from person to person.(a) Companies Act, 1956(b) Depositories Act, 1996(c) SEBI Act, 1992(d) SCRA, 1956Ans: (b)4. has powers to register and regulate all market intermediaries in the securities marketand also to penalise them.(a) RBI(b) Depositories(c) SEBI(d) IRDAAns: (c)12
Chapter 2: Introduction to Depository2.1 Need for a Depository SystemThe earlier settlement system on Indian stock excha
distinct schools to cater the educational needs of various constituencies such as investor, issuers, intermediaries, regulatory staff, policy makers, academia and future professionals of securities markets. NISM brings out various publications on securities markets with a view to enhance kno
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