Depository Participant Registration

Introduction

A Depository Participant (DP) serves as the agent or registered stockbroker of a depository. A depository is an institution that holds the securities of investors through the depository participant while offering related services. It securely holds various securities like shares, debentures, Government securities, bonds, and mutual fund units in an electronic form. Essentially, the DP acts as an intermediary between the companies issuing shares and their shareholders.

Direct contact with the depository is not allowed; instead, individuals interact with the depository through the DP to open and maintain a De-mat account. The DP facilitates the connection between the depository and investors, governing their association through a contractual agreement. As per the Depositories Act, 1996, a DP is defined as a person registered under Section 12 of the Securities Exchange Board of India (SEBI) Act, 1992. According to Section 12 of the SEBI Act, no DP is permitted to engage in buying, selling, or dealing with securities unless they are registered with SEBI.

Depositories and depository participants are both regulated by SEBI on the basis of guidelines established by them. Only once the NSDL and CDSL have recommended that the DP be registered with SEBI will it be effective.

Depository Types

The Depository Act of 1996 established two depositories in India, namely the National Securities Depository Limited (NSDL), which is supported by the National Stock Exchange, Industrial Development Bank of India, and Unit Trust of India, among others. The Central Depository Services Limited (CDSL), which is promoted by the Bombay Stock Exchange, State Bank of India, and Bank of India, among others, is the other depository.

Services Available Through Depository

• The process of transforming investor physical certificates into an equivalent number of securities in electronic form is known as dematerialization (often abbreviated as "De-mat").
• Re-materialization, also referred to as Re-mat, is the process of changing securities held in a de-mat account from electronic to physical certificates.
• Changes in beneficial ownership and the transfer of securities
• Settlement of transactions made on exchanges linked to the Depository
• Securities pledged and released for loans against shares
• Benefits from corporate activity are transferred immediately to the customer's De-mat and Bank accounts.

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  Primary Purpose Of Depository

It serves as a conduit between shareholders and listed corporations that issue shares. Depository Participants, or DPs, are companies affiliated with listed companies that act as its representatives when issuing shares. A DP is a bank, financial institution, broker, or other business that satisfies the requirements set forth by SEBI and is in charge of carrying out the final transfer of shares from the depository to investors. At the conclusion, the depository sends a confirmation to the investor.

Depository Is Required

The risk of keeping physical securities is eliminated by using a depository. Since the depository system was implemented, the risks of damage, loss, or theft have been considerably decreased because the shares are held and transferred electronically. They further reduce the amount of paperwork associated with trading and speed up the transfer of shares.

Eligibility Criteria for Depository Participants (DPs)

The Depositories Act, 1996, and SEBI (Depositories & Participants) Regulations, 1996 specify the entities eligible to become a Depository Participant. The following entities qualify as DPs:

1. Public Financial Institutions.
2. Scheduled Banks, including Foreign Banks approved by the Reserve Bank of India (RBI).
3. State Financial Corporation established under the State Financial Corporations Act, 1951.
4. Institutions engaged in granting financial services, jointly or severally, promoted by the entities mentioned above.
5. Custodian of Securities holding a Certificate of Registration under the SEBI Act, 1992.
6. Clearing House or Clearing Corporation of a Stock Exchange.
7. Stock Broker holding a Certificate of Registration under the SEBI Act, 1992.
8. Non-Banking Financial Company (NBFC) with a net worth of not less than Rs. 50 lakh.
9. Registrar of Issue and Transfer Agents with a minimum net worth of Rs. 10 crore.

Additional eligibility criteria set by NSDL and CDSL for DP registration:

For NSDL:

1. Stock Brokers must have a minimum net worth of Rs. 3 crores for registration under NSDL.
2. Under the eligibility criteria for becoming a Depository Participant (DP) with NSDL, a stock broker must have a minimum net worth of ₹3 crore. However, if the stock broker's net worth is lower than ₹3 crore but higher than ₹1 crore, they have the option to become a Limited Participant of the Depository. The Depository may impose restrictions on their business operations and may specify a limited period for this arrangement.

For Non-Banking Financial Companies (NBFCs) and registrars to an issue or share transfer agents, the minimum net worth requirement specified in the SEBI Regulations will be applicable for their DP registration.

For CDSL:

To become a Depository Participant (DP) with CDSL, the applicant must fulfill the eligibility criteria laid down under Regulation 19, sub-regulations (a) to (d) of the SEBI (Depositories and Participants) Regulations, 1996, and the admission criteria as enumerated in CDSL Bye-Law 5.2. The net worth requirements for stock brokers to become CDSL DP are as follows:

1. The minimum net worth requirement for a stock broker to become a CDSL DP is 2 crores (INR).
2. A stock broker with a net worth of not less than 1 crore (INR) may be admitted as a CDSL DP under the category 'Limited Depository Participant,' subject to the condition that they increase their net worth to at least 2 crores (INR) to be at par with existing stock broker DPs in terms of net worth requirement. Until the DP increases its net worth to at least 2 crores (INR), the DP under the 'Limited DP' category will be allowed to open only up to 5000 accounts. The computation of net worth is done according to the operating instructions issued by CDSL from time to time.

Registration Procedure

For NSDL

1. Submit an application in Form E to NSDL along with the required documents.
2. Provide Board Resolution authorizing the applicant to become a Participant and a Net Worth Certificate.
3. Furnish relevant information about the applicant in Form A.
4. Submit additional information as required by SEBI.
5. If the applicant and subsidiaries are registered with a stock exchange or CDSL, provide a status report from the respective entity.
6. Include the business history of the applicant, background of promoters and directors, core business areas, and track record.
7. Pay the application fee and entry fee.
8. The application will be reviewed and approved by the Member Committee of NSDL.
9. After approval, install the necessary infrastructure, hardware, and software, followed by a pre-activation on-site inspection by NSDL.
10. The applicant will be activated as a Participant in a pilot environment for testing purposes.
11. Upon SEBI approval and payment of fees, enter into an agreement with NSDL as a DP and become operational.

For CDSL

1. Submit an application in Form E to CDSL along with the required annexures.
2. Provide details of directors, shareholding pattern, history, and activities of the applicant.
3. Furnish information about entities in which directors/promoters are also involved.
4. Submit a duly notarized copy of the Memorandum and Articles of Association, showing permission to carry out DP activities.
5. Include Board Resolution for joining as DP and Net Worth Certificate.
6. Provide the last three years' annual reports and previous year's Balance Sheet.
7. Detail the experience and background of key personnel handling DP functions.
8. Pay the application fee and processing fees.
9. CDSL will scrutinize the application and request further documentation if required.
10. Procure hardware and establish connectivity with CDSL. Ensure trained staff with relevant certifications.
11. CDSL will forward the application to SEBI for approval.
12. Upon SEBI approval and payment of fees, the applicant receives a Certificate of Registration as a DP of CDSL.
13. Enter into an agreement with CDSL as a DP and receive a unique DP-ID number for account creation.