The Process of Depository System
Four parties are involved in a depository system i.e. the customer, the depository participant (DP), the depository, and the share registrar and transfer agent. The process of the depository system and the involvement of the four parties as mentioned above are discussed as below:
(a) Account Opening
An investor who wishes to avail the depository services has to apply for opening an account with a depository through a Depository Participant (DP). A depository participant can either be a custodian, a bank, a broker, or an individual. After opening an account, the investor is allotted a client account number. The holder of a demat account is called a ‘beneficial owner’. He has the option of opening more than one demat account either with the same DPs or multiple DPs.
(b) Dematerialization
In order to convert physical shares into electronic one, an investor has to make an application to the depository in a Dematerialization Request Form (DRF). DP forwards the form within seven days to the issuer company or its Registrar and Share Transfer Agent (RTA). The company or its RTA, then, verifies the validity of the security certificates and the fact the person making an application is actually a registered member. After verification, the issuer company or its RTA, on being satisfied, authorizes an electronic credit of security in favour of the investor. Thereafter, the depository also credit the demat account of the investor.
(c) Rematerialisation
An investor having a demat account can apply for withdrawl of balance in his account in a Rematerialization Request Form (RRF). On receipt of the RRF, if the DP is satisfied that there is sufficient balance, will block the balance of the investor to the extent of the rematerialisation quantity and electronically forwards the request to the depository. The depository will then block the balance of the investor to the extent of the rematerialisation quantity and forward the accepted rematerialisation application to the issuer or its RTA. The RTA will confirm that RRF has been accepted. Then, the RTA will dispatch the physical share certificates within 30 days.
(d) Distributing Dividend
A company or its RTA generally informs the depository of various dates such as book closures, redemption or maturity of security etc. This enables the depository to electronically provide to the company a list of the holding of the investors on the day of distribution of dividend. The company will, then, distribute dividend on the basis of the list provided.
(e) Closing an Account
If an investor wants to close his account, he shall make an application in the prescribed format to the DP. The DP may close his account if no balances are there in the investor’s demat account. If any balances exist, then account may be closed either by rematerialisation or transferring his securities to other account either with the same depository participant or with a different depository participant.
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