7. What are the rights and obligations of Depositories? ( Financial Market Operations 2024 Bcom-V )
Meaning of Depository
A Depository is an institution that holds financial securities such as shares, bonds, and debentures in electronic (dematerialised) form on behalf of investors.
It works just like a bank, but instead of keeping money, it keeps securities safely and allows easy transfer and settlement of these securities through electronic entries.
In India, the two main depositories are:
- NSDL (National Securities Depository Limited)
- CDSL (Central Depository Services Limited)
A depository removes the need for physical certificates and makes trading faster, safer, and more convenient.
Rights and Obligations of Depositories — Thorough Answer
Introduction
A depository is an entity that holds securities in electronic (dematerialised) form and facilitates their transfer, settlement and servicing through intermediaries called Depository Participants (DPs). Depositories play a central role in modern securities markets by enabling book–entry transfers, reducing paperwork and improving efficiency. Their legal framework (bye-laws and statutory provisions) grants them specific rights and imposes obligations designed to protect investors and ensure integrity of the settlement system.
A. Rights of Depositories
1. Right to Appoint Depository Participants (DPs)
Depositories have the right to authorise and enter into agreements with DPs who act as their agents to provide services to investors. DPs perform account opening, transaction processing and client servicing on behalf of the depository. rights and obligations of Depositories
2. Right to Admit Securities for Dematerialisation
A depository may determine which securities can be held in electronic form and lay down conditions for admitting an issuer’s securities for dematerialisation and electronic transfer.
3. Right to Maintain Electronic Records and Effect Book-Entry Transfers
Depositories are entitled to maintain centralised electronic records of beneficial ownership and to register transfers, pledges, freezes and other changes via book-entry instructions without movement of physical certificates. rights and obligations of Depositories
4. Right to Process Corporate Actions
Depositories have the right to receive corporate action information (dividends, bonus, rights, buybacks, etc.) from issuers/registrars and to facilitate routing entitlements and communications to beneficial owners through DPs.
5. Right to Levy Fees and Charges
Depositories may charge fees for services they provide (account maintenance, dematerialisation, transaction processing, etc.) within the fee structure and limits set out in their rules and regulatory norms.
B. Obligations of Depositories
1. Obligation to Maintain Accurate and Timely Records
Depositories must keep complete, correct and up-to-date electronic records of beneficial ownership and must provide periodic account statements to investors that reflect holdings and transactions. rights and obligations of Depositories
2. Obligation to Operate through Registered DPs Only
A depository must provide services to investors only through registered and authorised DPs and ensure that DPs comply with on-boarding, KYC, and other regulatory requirements.
3. Obligation to Ensure Proper Dematerialisation Procedures
During dematerialisation, the depository must ensure physical share certificates are surrendered and handled as prescribed; it must coordinate with issuers/registrars to convert physical holdings into electronic form correctly.
4. Obligation to Reconcile and Maintain Robust Systems and Controls
Depositories are required to maintain secure IT systems, disaster recovery, reconciliation procedures and internal controls to prevent errors, unauthorised transfers and operational failures. rights and obligations of Depositories
5. Obligation to Cooperate with Market Infrastructure and Issuers
They must coordinate with stock exchanges, clearing corporations, registrars, custodians and issuers to ensure smooth settlement, corporate action processing, and regulatory compliance. rights and obligations of Depositories
6. Obligation to Safeguard Beneficial Owners’ Rights
Depositories must ensure that economic rights (dividends, interest) and voting rights of beneficial owners are preserved and that beneficial owners can exercise those rights via the depository infrastructure.
7. Obligation to Maintain Confidentiality and Data Protection
Depositories are responsible for protecting investor data, maintaining confidentiality of records and ensuring secure handling of personal and transaction information.
C. Liabilities and Accountability
1. Liability for Negligence or Default
Depositories are liable for losses caused to investors due to their negligence, failure to follow bye-laws or systems breakdowns. They must have procedures for redressal and may be subject to regulatory penalties. rights and obligations of Depositories
2. Regulatory Supervision and Compliance
They are required to comply with regulatory directives, periodic inspections, reporting obligations and to implement SEBI/authority circulars and changes in law.
D. Operational Duties and Services
1. Account Servicing — Opening and maintaining demat accounts through DPs, issuing account statements, and handling client instructions.
2. Transaction Processing — Processing debit/credit instructions, pledges, hypothecation, freeze/unfreeze and settlement reconciliation.
3. Corporate Action Execution — Facilitating allotment of rights, bonus shares, dividends and mapping entitlements to beneficial owners.
4. Transfer Facilitation — Enabling fast, safe transfer of securities between accounts without physical certificate movement.
5. Investor Grievance Redressal — Providing mechanisms for complaints, claim resolution and liaising with regulators when required. rights and obligations of Depositories
E. Rights of Beneficial Owners (that Depositories must respect)
Beneficial owners retain economic and voting rights even though securities are held electronically; depositories must ensure these rights can be exercised, that holdings are correctly reflected, and that transfers occur only on valid instructions. rights and obligations of Depositories
Conclusion
Depositories hold a mix of important rights that allow them to run a centralized electronic ownership and transfer system, while simultaneously bearing significant obligations to ensure record accuracy, system integrity, investor protection and regulatory compliance. These rights and duties together underpin the safety, efficiency and credibility of the dematerialised securities market. rights and obligations of Depositories
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Note:- 👉 Important questions of Financial Market Operations
- Previous years questions papers of Financial Market Operations of Gndu
- Types of mutual fund
- Functions of SEBI
- Recent trends in the Indian money market
- Roles and functions of the secondary market