Legal Framework of the Depository System

Holding and transferring securities electronically needed a clear legal foundation before it could replace paper certificates as the accepted mode of ownership, and the Maharashtra HSC (MSBSHSE) Std XII Secretarial Practice syllabus expects students to know the basic law behind the system, even though a state board naturally studies it as an application of the same securities-law principles that govern the wider Indian capital market.

The Depositories Act, 1996. The Depositories Act, 1996 is the central legislation that created the legal framework for the depository system in India. It gives legal recognition to:

• holding securities in electronic (dematerialised) form;
• the transfer of ownership of dematerialised securities by simple book-entry, without a physical transfer deed; and
• the registration of a depository as the entity through which such electronic holding and transfer takes place.

Before this Act, Indian company law recognised only a physical certificate as valid evidence of a shareholding; the Act made an entry in a depository's records equally valid.

SEBI (Depositories and Participants) Regulations, 1996. Under the powers given by the Depositories Act, the Securities and Exchange Board of India (SEBI) — the capital-market regulator — framed the SEBI (Depositories and Participants) Regulations, 1996. These regulations lay down the detailed operating rules: the eligibility conditions and registration procedure for a depository and for a Depository Participant, the rights and obligations of depositories, DPs, issuer companies and Beneficial Owners, and the safeguards (inspection, grievance redressal, internal controls) that keep the system safe and accountable. SEBI continues to regulate and supervise both depositories (NSDL and CDSL) and every DP registered with them. …