Registration of Depositories & Depository Participants

Topic 27 — Depositories Act Sections 3 to 8: Registration, Conditions, Agreement & Eligibility | SEBI Law Officer

Sections 3 to 8 of the Depositories Act govern the registration of depositories and depository participants — the two key categories of entities that operate the electronic securities holding infrastructure. Registration is mandatory and subject to prescribed conditions. SEBI, as the regulatory authority, grants, renews, suspends, and cancels registrations. Understanding the registration framework — who can register, the conditions to be met, and the agreements required — is foundational to understanding the Depositories Act.

1. Section 3 — Certificate of Commencement of Business

Section 3(1): No depository shall act as a depository unless it obtains a certificate of commencement of business from the Board [SEBI].

Section 3 imposes a two-stage requirement for depositories:

Stage 1 — Registration with SEBI: The entity must first obtain a certificate of registration from SEBI under Section 12(1A) of the SEBI Act. This requires satisfying SEBI's eligibility criteria.
Stage 2 — Certificate of Commencement of Business: Even after registration, the depository cannot begin operations until it obtains a separate Certificate of Commencement of Business from SEBI under Section 3.
Purpose of two stages: Registration certifies that the entity meets eligibility criteria; commencement certificate certifies that the depository has the operational infrastructure, technology, and systems in place to safely begin operations.

2. Section 3(2) — Conditions for Certificate of Commencement

Section 3(2): The Board may grant a certificate of commencement of business to a depository if the depository— (a) has been duly incorporated as a company; (b) has complied with regulations made by the Board; and (c) has the technical and operational capability for commencement of business.

Three conditions must all be satisfied:

Condition	Explanation & Application
(a) Duly incorporated as a company	The entity must be a company incorporated under the Companies Act. NSDL: incorporated as a limited company with NSE, IDBI, UTI as promoters. CDSL: incorporated with BSE and major public sector banks as promoters.
(b) Complied with SEBI regulations	Must comply with SEBI (Depositories and Participants) Regulations — now the SEBI (Depositories and Participants) Regulations, 2018. Includes: minimum net worth (₹100 crore), corporate governance norms, DPA agreement conditions.
(c) Technical and operational capability	Must demonstrate: adequate technology infrastructure; secure electronic records system; business continuity plan; disaster recovery site; trained personnel; tested connectivity with exchanges and clearing corporations.

3. Section 4 — Agreement between Issuer and Depository

Section 4: Every issuer, intending to make use of the services of a depository, shall enter into an agreement with that depository in such form as may be agreed upon between the depository and the issuer.

The issuer-depository agreement is the contractual foundation for dematerialisation of a company's securities. Key contents of this agreement:

The issuer agrees to allow its securities to be held in dematerialised form.
The issuer agrees to recognise the depository as the registered holder of dematerialised securities.
The depository agrees to maintain the record of beneficial ownership.
Procedures for corporate actions — dividends, bonus, rights — to be routed through the depository.
The issuer appoints a Registrar & Share Transfer Agent (R&STA) who interfaces with the depository.

⚠️ Listed Companies Must Dematerialise

SEBI has mandated that all securities of listed companies must be in dematerialised form for trading on stock exchanges. A listed company that has not entered into an agreement with a depository cannot have its securities traded on exchanges. The issuer-depository agreement under Section 4 is therefore effectively mandatory for all listed companies.

4. Section 5 — Agreement between Depository and Participants

Section 5: A depository shall enter into an agreement with one or more participants as its agent.

Section 5 establishes the agency relationship between the depository and its participants (DPs). The depository-participant agreement must specify:

The scope of services the DP will provide to beneficial owners.
The DP's obligation to maintain accurate records of demat accounts.
The DP's obligation to execute transfer instructions promptly.
Standards for customer service, response times, and grievance redressal.
The DP's indemnity to the depository for losses caused by the DP's acts.
Conditions for termination of the DP agreement.

5. Section 6 — Registration of Participants

Section 6(1): No person shall act as a participant unless he has obtained a certificate of registration from the Board.

Registration of DPs is governed by SEBI regulations. Eligibility criteria for DP registration:

Category	Eligible Entities
Banks	Scheduled commercial banks (public and private sector) — most common category of DPs
Financial Institutions	IDBI, NABARD, NHB, SIDBI, other SEBI-notified FIs
Stock Brokers	SEBI-registered stock brokers with adequate net worth — must be member of an exchange
Clearing Members	Members of a clearing corporation — for settlement-related DP operations
NBFCs	Non-Banking Financial Companies meeting prescribed net worth criteria
R&STAs	Registrars & Share Transfer Agents — registered under SEBI regulations

Key conditions for DP registration:

Minimum net worth as prescribed by SEBI (varies by category — banks have different requirements than brokers).
Must have adequate infrastructure — office space, hardware, trained personnel.
Must pass SEBI's 'fit and proper' person criterion.
Must have an operational agreement with at least one depository.
Must not have been subject to regulatory action/conviction for securities fraud.

6. Section 7 — Agreement between Participant and Beneficial Owner

Section 7: Every participant shall enter into an agreement with each beneficial owner before opening a demat account for him.

The DP-beneficial owner agreement (account opening form + agreement) governs the demat account relationship. It must specify:

Terms and conditions for opening and maintaining the demat account.
Schedule of charges and fees — annual maintenance charges (AMC), transaction charges.
Investor's rights to access account statements, raise disputes, and freeze/unfreeze accounts.
The DP's obligations — maintaining accurate records, executing instructions promptly, sending account statements.
Procedure for closure of the demat account — transfer of securities to another DP or remat.
Governing law and dispute resolution — arbitration clause; jurisdiction.

7. Section 8 — Surrender of Certificate of Security

Section 8: If a beneficial owner seeks to get his securities dematerialised, he shall surrender the certificate of such securities to the issuer in such manner as may be agreed upon. On receipt of such surrender, the issuer shall cancel the certificate and substitute in its records the name of the depository as the registered owner in respect of such securities and inform the depository accordingly.

Section 8 describes the dematerialisation trigger:

Step	Action under Section 8
Investor surrenders certificate	Physical certificate surrendered to the issuer (via DP and R&STA)
Issuer cancels certificate	The issuer cancels the physical certificate — it ceases to have legal effect
Issuer substitutes records	Issuer (through R&STA) replaces investor's name with DEPOSITORY's name as registered holder
Issuer informs depository	Depository is informed of the substitution — updates its records to show the investor as beneficial owner

✅ Key Effect of Section 8

After the Section 8 process: (i) The PHYSICAL CERTIFICATE is cancelled and has no legal effect. (ii) The DEPOSITORY becomes the registered owner in the company's books. (iii) The INVESTOR becomes the beneficial owner in the depository's electronic records. (iv) All rights (dividends, voting, bonus) flow to the investor through the depository via Section 10.

8. SEBI (Depositories and Participants) Regulations, 2018

The SEBI (Depositories and Participants) Regulations, 2018 (consolidated version) govern: (i) registration of depositories and DPs; (ii) conditions for registration; (iii) rights and obligations; (iv) code of conduct; (v) inspection and enforcement. Key provisions:

Minimum net worth for depositories: ₹100 crore.
Minimum net worth for DPs: varies by category — banks typically exempt from net worth requirement.
SEBI can impose conditions on DP registration certificates.
DPs must submit periodic returns to SEBI and the depository.
SEBI can suspend or cancel DP registration for violations — after mandatory inquiry.

9. Landmark Cases

📖 IL&FS Securities Services Ltd. v. SEBI SAT Order, 2012

Facts: Challenge to SEBI's suspension of a DP's registration for non-compliance with investor grievance redressal norms and inadequate record maintenance.

Held: SAT upheld SEBI's suspension order. The DP's registration is a privilege — it carries the continuous obligation to maintain investor records accurately and redress grievances promptly. Failure to meet these obligations justifies suspension. SEBI must follow natural justice before suspension.

Ratio: DP registration is a privilege carrying continuous obligations. Investors' demat accounts are the DP's primary responsibility. Failure to maintain records and redress grievances is sufficient ground for regulatory action — including suspension of registration.

10. Model Examination Questions

Q1. Describe the procedure for registration of a depository under the Depositories Act, 1996. What are the conditions for obtaining a Certificate of Commencement of Business?

Registration of Depositories — Section 3

Model Answer — Registration of a depository under the Depositories Act is a two-stage process. Stage 1: Registration with SEBI under Section 12(1A) of the SEBI Act — the entity must be incorporated as a company, meet SEBI's eligibility criteria (minimum net worth ₹100 crore, fit and proper criterion, corporate governance standards), and comply with SEBI (Depositories and Participants) Regulations, 2018. Stage 2: Certificate of Commencement of Business under Section 3(1) — SEBI grants this certificate only if the depository has: (a) been duly incorporated as a company; (b) complied with SEBI regulations; and (c) demonstrated technical and operational capability. Operational capability includes: secure technology infrastructure, business continuity plan, disaster recovery, trained personnel, tested connectivity with stock exchanges and clearing corporations. Without the commencement certificate, even a registered depository cannot begin operations. Currently, only two depositories have obtained both — NSDL (1996) and CDSL (1999). Participants (DPs) require separate registration under Section 6 — eligible entities include banks, FIs, stock brokers, and clearing members meeting SEBI's prescribed criteria.

🎯 EXAM POINTERS — Topic 27: Registration of Depositories & DPs

Section 3(1): Depository CANNOT act without Certificate of Commencement of Business from SEBI.
TWO-STAGE process: (1) SEBI registration under Section 12(1A) SEBI Act; (2) Commencement certificate under Section 3.
Section 3(2): THREE conditions for commencement — (a) incorporated as company; (b) SEBI Regulation compliance; (c) technical/operational capability.
Section 4: Issuer MUST enter agreement with depository — mandatory for dematerialisation of company's securities.
Section 5: Depository-DP agreement — DP is AGENT of depository.
Section 6: DP registration with SEBI mandatory — eligible: banks, FIs, stock brokers, clearing members, NBFCs.
Section 7: DP must enter agreement with EACH beneficial owner BEFORE opening demat account.
Section 8: Dematerialisation — investor surrenders certificate → issuer cancels it → depository becomes registered owner → investor becomes beneficial owner.
SEBI (Depositories & Participants) Regulations 2018: minimum net worth for depositories = ₹100 crore.
IL&FS Securities v. SEBI (SAT 2012): DP registration is a privilege — continuous obligation to maintain records and redress grievances.

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