Friday, 19 May 2017

Rights and obligations of Issuer, Participant and Beneficial owner under the Depository Act, 1996

As per section 17 of depository Act the rights and obligations of the depositories, participants and the issuers whose securities are dealt with by a depository shall be specified by the regulations. Under the Depository Act, 1996 depository means a company formed and registered under the Companies Act, 1956, and which has been granted a certificate of registration by SEBI under sub-section (1A) of Section 12 of the Securities and Exchange Board of India Act, 1992).(Section 2(1) (e))

Work of Depository-
The word ‘depositary’ is defined as “the party of the institution (company) receiving a deposit. A depository holds securities (like shares, debentures, bonds, Government Securities, units etc.) of investors in electronic form. Besides holding securities, a depository also provides services related to transactions in securities. It acts as a trustee of the owner since the securities are entrusted with him in trust. He is also the agent of the owner of the securities.

Thus a Depository facilitates holding of securities in the electronic form and enables securities transactions to be processed by book entry by a Depository Participant (DP), who is an agent of the depository, offers depository services to investors. According to SEBI guidelines, financial institutions, banks, custodians, stockbrokers, etc. are eligible to act as DPs. The investor who is known as beneficial owner (BO) has to open a demat account through any DP for dematerialisation of his holdings and transferring securities.

Under the depository system - securities are deposit by the various investors with the depository in demat form (e- form). This would take the form of a transfer by the holder of securities in favour of depository. Once the shares are lodged with the depository, their transfer would be through book entry transfers in accounts maintained by the depository. Thus the main functions of a depository are to dematerialize the securities and enable their transaction in book entry form.
Rights of Depositories

Right to get certificate
Right to become a registered Owner (Section 10(1, 2))
Power to make rules or byelaws

Ø  A depository has to get enter into an agreement with participant or its agent for dematerialisation of shares.Every depository has a right to get certificate of commencement of business from SEBI.

Ø  Under this Act after dematerialisation of share depository shall be registered owner in the registerof issuer (company) for the purposes of effecting transfer of ownership of security on behalf of a beneficial owner.But the depository as a registered owner, shall not have any voting rights or any other rights in respect of securities held by it.
Ø  A depository shall make bye-laws consistent with the provisions of this Act and the regulations.
Obligation of depository
Obligation of depository to register name of Investor as Beneficial owner in its record
Obligation to maintain the record
Obligations of depository to furnish information and records (Section 13)
Liabilities of Depositories to indemnify loss in certain cases (Section 16)
Duty of depository to register the transfer of security- (section 7)

Ø  A depository shall, on receipt of information of issuer (company), enter the name of the person (investor) as the beneficial owner, in its records.

Ø  Every depository, before commencing business of dematerialisation of shares,must havean adequate systemfor reviewing, monitoring and evaluating the depository’s controls, systems, procedures and safeguards to prevent manipulation of records and transactions. It is required to get certificate from SEBI.

Ø  It should conduct an annual inspection of these procedures and forward a copy of the inspection report to SEBI.

Ø  Every depository shall maintain a register and an index of beneficial owners in the manner provided in the Companies Act, 1956.

Ø  Every depository shall furnish information about the transfer of securities in the name of beneficial owners to the issuer, at such intervals and in such manner as may be specified by the bye-laws.
Ø  The depository is also required to ensure that the integrity of the automatic data processing systems is maintained at all times and take all precautions necessary to ensure that the records are not lost, destroyed or tampered with.

Ø  In the event of loss or destruction, sufficient back up of records should be available at a different place.

Ø  If any loss caused to the beneficial owner due to the negligence of the depository or the participant, the depository shall indemnify such beneficial owner.Where the loss due to the negligence of the participant is indemnified by the depository, the depository shall have the right to recover the same from such participant.
Ø  Adequate measures should be taken, including insurance, to protect the interests of the beneficial owners against any risks.

Ø  Every depository is required to extend all such co-operation to the beneficial owners, issuers, issuers’ agents, custodians of securities, other depositories and clearing organisations, as is necessary for the effective, prompt and accurate clearance and settlement of securities transactions and conduct of business.
Beneficial owner
Beneficial owner means a person whose name is recorded as beneficial owner with a depository in its record under section 2(1) (a).
Rights of Beneficial Owner
Rights of beneficial owner to get benefits of securities (Section 10(3))
Right to pledge or hypothecation of securities held in a depository (Section 12)
Right to get remat or to get certificate in respect of any security (Section 14)
Right of Beneficial owner to get indemnify or recover loss in certain cases
Right of Beneficial Owner to consider member of company (section 6)
Right to choose -Options to receive security certificate or hold securities with depository (Section 8)

Ø  The beneficial owner shall be entitled to all the rights and benefits in respect of his securities held by a depository.
Ø  A beneficial owner may with the previous approval of the depository create a pledge or hypothecation in respect of a security owned by him through a depository.Any entry in the records of a depository shall be evidence of a pledge or hypothecation.
Ø  A beneficial owner has right to go for remat in respect of any security. If a beneficial owner seeks to opt out of a depository in respect of any security he shall inform the depository accordingly.
Ø  Beneficialowner is entitled to recover loss from depository if it is caused due to the negligence of the depository or the participant, the depository shall indemnify such beneficial owner.
Ø  Every person, subscribing to securities offered by an issuer, shall have the option either to receive the security certificates or hold securities with a depository.
Ø  Where a person opts to hold a security with a depository, the issuer shall intimate such depository the details of allotment of the security, and on receipt of such information the depository shall enter in its records the name of the allottee as the beneficial owner of that security.
Ø  To facilitate the beneficial owner of shares, on whose behalf the depository holds the shares, to be recognized as members, Section 41(3)of the Companies Act, provides that every person holding equity share capital of a company and whose name is entered as a beneficial owner in the records of a depository shall be deemed to be a member of the concerned company.

In Probir Kumar Misra v. RamaniRamaswamy it was held that after the Depositories Act, 1996, such depositors who are holding equity share capital of the company and whose name is entered as beneficial owner are also deemed to be members of the company, thus making them members under the Act.

In the case of Northern Projects Ltd. v. Blue Coast Hotels and Resorts Ltd. it was contended that only persons holding equity shares can be members of the Company in terms of Section 41(3) of the Act. This was rejected by Court and it was stated that Sub-section (3) of Section 41 is therefore only in addition to Section 41(1) and Section 41(2) and not in derogation or substitution of the first two subsections. The word ’shareholder’ and ‘member’ is used in the same connotation under the Act and the Section covers the third category of equity shareholders who are neither subscribers as contemplated by Sub-section (1) nor whose names are entered in the register of members as contemplated under Sub-section (2) of Section 41.

Obligations of beneficial owner
Obligations in respect to securities (Section 10(3))
Obligations of beneficial owner to intimate depository, issuer
Obligations of beneficial owner to intimate about pledge of securities (Section 12)
Duty to inform issuer
Ø  The beneficial owner shall be subjected to all the liabilities in respect of his securities held by a depository.

Ø  Beneficialowner shall intimate the depository.The depository shall, on receipt of intimation, make appropriate entries in its records and shall inform the issuer. Every issuer shall, within 30 days of the receipt of intimation from the depository and on fulfilment of prescribed conditions and on payment of prescribed fees, issue the certificate of securities to the beneficial owner or the transferee, as the case may be.
Ø  Every beneficial owner shall give intimation to the depository about pledge or hypothecation of securities and such depository shall thereupon make entries in its records accordingly.

Ø  If a beneficial owner or a transferee of any security seeks to have custody of such security the depository shall inform the issuer accordingly.
Issuer means any person making an issue of securities (section 2(1)(f) )
Any person, who seeks to avail the services of a depository, has to enter into an agreement with depository (section 5)and shall surrender the certificate of security to the issuer. On receipt of certificate of security, the issuer (company) shall cancel the certificate of security and substitute in its records the name of the depository as a registered owner in respect of that security and inform the depository accordingly.A depository shall, on receipt of information of issuer (company), enter the name of the person referredas the beneficial owner, in its records.
Obligations of issuer
Obligation to arrange copy of record
Duty to record name of registered owner
Every issuer shall make available to the depository copies of the relevant records in respect of securities held by such depository.
Participant (Section 2(1) (g) )  means a person registered as participant by SEBI under sub-section (1A) of Section 12 of the Securities and Exchange Board of India Act, 1992, popularly known as depository participant.  The participant is a person through whom the beneficial owner of the securities would avail the depository service and is the custodial agencies like banks, financial institutions as well as large corporate brokerage firms. Depository Participants includes brokers, banks, insurance companies, Stock Exchange clearing cells, the Reserve Bank of India, financial institutions, institutional managers, fund mangers etc.

Obligation of Participant, depositor and Issuer
Obligation to enter into agreement
Duty to redress investors' grievances
Duty to dematerialisation of shares or issue of certificate of securities in time
Duty to reconcile records

A depository shall enter into an agreement with one or more participants (DPs) as its agent. Any person, through a participant, may enter into an agreement, with any depository for availing its services. The relationship and dealings between the depository and the participant will be governed by an agreement and the participant is an agent of the depository vides Section 4 (1) of the Act.

Ø  If a depository or participant or any issuer or its agent, who isregistered as an intermediary under the provisions of section 12 of SEBI Act, 1992, and isrequired to enterinto an agreement, fails to enter into such agreement, such depository orparticipant or issuer or its agent or intermediary shall be liable to a penalty (sec. 19B).
Ø  If any depository or participant or any issuer, is boundto redress the grievances of the investors within the time specified, on the call of SEBI, if they failsto redress such grievances within the time specified by the Board, such depository or participant or issuer or its agents or intermediary shall be liableto a penalty (sec. 19C).

Ø  Issuer has obligation to dematerialise or issue the certificate ofsecurities on opting out of a depository by the investors, within the timespecified under this Act or regulations.If Issuer  abetsin delaying the process of dematerialisation or issue the certificate ofsecurities on opting out of a depository of securities, such issuer shall be liable to a penalty (sec. 19D).

Ø  Depository or participant or any issuer  has duty to reconcile the records of dematerialised securities with all the securities issuedby the issuer as specified in the regulations, such depository or participant orissuer shall be liable to a penalty .(section 19E)

Regulation 26 of the SEBI (Depositories and Participants) Regulations, 1996 states that depositories, participants, issuers, and issuers agent, in addition to the rights and obligations laid down in the Depositories Act and the bye laws shall have the rights and obligations arising from the agreements entered into by them.

 Prof. Pallavi Gupta, HOD, JEMTEC School of Law

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