Rights & Obligations under the Depositories Act, 1996

Topic 29 — Rights & Obligations of Depositories, DPs, Issuers & Beneficial Owners [Sections 9-16] | SEBI Law Officer

Chapter III of the Depositories Act (Sections 9 to 16) defines the rights and obligations of each participant in the depository ecosystem — the depository itself, depository participants (DPs), issuers (listed companies), and beneficial owners (investors). This is the most substantively important chapter of the Act — it determines who has what rights against whom, what obligations are owed, and what liabilities arise from failures. These provisions are tested directly in SEBI Law Officer and Judiciary examinations through both MCQs and descriptive questions.

1. Section 9 — Rights and Obligations of Depositories

Section 9: Notwithstanding anything contained in any other law for the time being in force, a depository shall— (a) be deemed to be the registered owner for the purposes of effecting transfer of ownership of security on behalf of a beneficial owner; and (b) not have any voting rights or any other rights in respect of securities held by it. The beneficial owner shall be entitled to exercise all rights in respect of the securities held by a depository.

Section 9 creates the fundamental legal structure of the depository system:

Depository as registered owner (for transfer purposes): The depository is treated as the registered owner ONLY for the purpose of effecting transfers — not for any other purpose.
Depository has NO voting rights: Despite being the 'registered owner', the depository cannot exercise any voting rights or other shareholder rights. ALL rights vest in the beneficial owner.
Beneficial owner exercises all rights: The investor/beneficial owner exercises voting rights (through e-voting or proxy), receives dividends, participates in rights/bonus — all as if they were the registered owner.

2. Section 10 — Rights of Beneficial Owners

Section 10: The beneficial owner shall be entitled to all the rights and benefits and be subject to all the liabilities in respect of his securities held by a depository.

Section 10 is the fulcrum of the Depositories Act — it ensures that the investor does not lose any rights by holding securities in demat form. Rights and liabilities that vest in the beneficial owner:

Right/Liability	How Exercised in Demat System
Voting rights	Via e-voting (NSDL/CDSL platforms) or physical proxy — based on holdings as of record date
Dividend	Paid directly to bank account linked to demat account — via Electronic Clearing Service (ECS/NACH)
Bonus shares	Credited directly to demat account
Rights issue	Rights entitlement credited to demat account; investor can subscribe or renounce
Sale of securities	Transfer through Delivery Instruction Slip (DIS) or through exchange trading
Pledge	Beneficial owner can pledge demat securities as collateral
Tax (capital gains, STT)	Same as physical holders — STT collected by exchange; capital gains tax on sale
Liability	Beneficial owner is liable for calls on partly paid shares; other liabilities as a shareholder

3. Section 11 — Pledge and Hypothecation

Section 11(1): Subject to such regulations and bye-laws as may be made in this behalf, 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.

Key aspects of pledge under Section 11:

Previous approval of depository: The beneficial owner must obtain the depository's approval before creating a pledge — the depository records the pledge in its system.
Pledge creation procedure: Pledgor (borrower) instructs DP to mark securities as pledged; pledgee (lender) confirms acceptance; depository records the pledge — entire process is electronic.
Pledge invocation: On default by the pledgor, the pledgee can invoke the pledge — the depository transfers the securities to the pledgee's account without any physical movement.
Hypothecation distinguished: Pledge = possession transferred to pledgee (electronically). Hypothecation = no possession transfer — pledgor retains control but pledgee has a charge.

⚠️ Section 11(2) — Depository's Liability for Pledge

Section 11(2) provides that any failure to create a pledge or hypothecation as intimated to the depository shall make the depository liable to the beneficial owner or pledgee for any loss caused by such failure. The depository is strictly liable for its own system failures in the pledge creation process.

4. Section 12 — Freeze & Unfreeze of Demat Accounts

Section 12: A beneficial owner may, with the previous approval of the depository, opt to freeze or unfreeze his account maintained with a participant in such manner and subject to such conditions as may be specified in the regulations made by the Board.

Account freeze prevents any debits (transfers out) from a demat account — useful in situations such as:

Investor travelling abroad and wanting to prevent unauthorised transfers.
Suspicion of fraud or compromise of login credentials.
SEBI enforcement action — SEBI can direct depository to freeze accounts as part of investigation/enforcement.
Court order — courts can direct freeze through SEBI or directly.

Two types of freeze:

Debit freeze: No transfers OUT of the account. Credits (incoming securities) are still permitted.
Full freeze: No debits OR credits — complete lock on account.

5. Section 13 — Obligations of Issuer

Section 13: Every issuer shall furnish to the depository a list of all beneficial owners and the number of securities held by each beneficial owner as on the record date fixed for the purpose of any corporate action.

Issuer obligations under the Depositories Act:

Furnish beneficial owner list: The issuer must provide the depository with a complete list of beneficial owners and their holdings as on the record date for each corporate action (dividend, bonus, rights issue, AGM voting).
Execute corporate actions: The issuer (through its R&STA) must execute corporate actions based on the beneficial owner list — paying dividends, issuing bonus shares, etc.
Inform depository of certificate cancellation: When a physical certificate is surrendered for dematerialisation, the issuer must inform the depository (Section 8).
Convert information into electronic form: On request from the depository, the issuer must provide its register of members in electronic form.

6. Section 14 — Rights of Depositories

Section 14: A depository shall have the right to recover charges as specified in its bye-laws from the participant.

Additional rights of depositories:

Right to make bye-laws governing operations (subject to SEBI approval under Section 26).
Right to discipline participants — suspend or terminate DP agreements for non-compliance.
Right to recover losses from participants who cause the depository harm through negligence or fraud.
Right to demand indemnities from participants for losses caused to beneficial owners.

7. Section 15 — Obligations of Depositories, Participants & Issuers — Summary

Party	Key Obligation	Legal Basis
Depository	Maintain accurate electronic records of all beneficial owners and their holdings	Section 9, 14, Regulations
Depository	Process corporate actions accurately and promptly	Section 13 (read with issuer obligation)
Depository	Maintain confidentiality of beneficial owner information	SEBI (D&P) Regulations 2018
DP	Open demat accounts only after executing agreement with beneficial owner (Section 7)	Section 7
DP	Execute transfer instructions accurately and within prescribed time	SEBI (D&P) Regulations 2018
DP	Send account statements to beneficial owners at prescribed intervals	SEBI Circulars
DP	Maintain confidentiality of client holdings and transactions	SEBI (D&P) Regulations 2018
Issuer	Furnish beneficial owner list on record date for corporate actions	Section 13
Issuer	Process rematerialisation requests within prescribed time	SEBI (D&P) Regulations 2018
Beneficial Owner	Give accurate instructions to DP for transfers	DP-BO Agreement
Beneficial Owner	Pay charges as per DP-BO Agreement	Section 7, DP-BO Agreement

8. Section 16 — Liability of Depositories and Participants

Section 16(1): Without prejudice to the provisions of any other law for the time being in force, any loss caused to the beneficial owner due to the negligence of the depository or the participant, shall be indemnified by the depository and the participant, as the case may be.

Section 16(2): 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.

Section 16 creates a strict liability regime for the depository system:

Depository liable for its own negligence: If the depository's system failure or error causes loss to a beneficial owner — e.g., wrong transfer, failure to credit bonus shares — the depository is liable.
Participant liable for its own negligence: If a DP's error or fraud causes loss to a beneficial owner — e.g., executing unauthorised transfer instructions — the DP is liable.
Depository's right of subrogation: If the depository pays compensation to the beneficial owner for a DP's negligence (Section 16(2)), the depository can recover that amount from the DP. This ensures the ultimate responsibility rests with the negligent party.

9. Landmark Case

📖 Karvy Stock Broking Ltd. v. SEBI SAT Order, 2020

Facts: Karvy (a registered DP) had pledged client securities held in their demat accounts with Karvy without the investors' consent — raising loans using client assets. SEBI issued an emergency order deregistering Karvy.

Held: SAT upheld SEBI's order. The DP's obligation to the beneficial owner is fiduciary in nature. Client securities cannot be pledged without explicit, informed, written consent of the investor. Karvy's actions constituted misuse of client assets — a fundamental breach of the DP-BO agreement and Section 16 obligations. SEBI was right to act under Sections 11 and 11B SEBI Act.

Ratio: A DP's obligation to beneficial owners is fiduciary. Unauthorised use of client demat assets is a fundamental violation of the Depositories Act and SEBI regulations. SEBI can take emergency action including deregistration to protect investor assets.

10. Model Examination Questions

Q1. Discuss the rights and obligations of depositories and participants under the Depositories Act, 1996, with reference to liability under Section 16.

Rights, Obligations & Liability [Sections 9-16]

Model Answer — Section 9: The depository is the registered owner ONLY for transfer purposes — it has NO voting rights or other shareholder rights. ALL rights vest in the beneficial owner. Section 10: The beneficial owner has ALL rights (dividends, voting, bonus, rights) and ALL liabilities as if they were the registered owner. Obligations of Depositories: maintain accurate electronic records; process corporate actions; maintain confidentiality; compensate for negligence (Section 16(1)). Obligations of DPs: execute agreement with each BO before opening account (Section 7); execute transfer instructions accurately; send account statements; maintain client confidentiality. Obligations of Issuers: furnish beneficial owner list on record dates for corporate actions (Section 13); process dematerialisation and rematerialisation requests. Section 16 Liability: The depository and DP are separately liable for their own negligence causing loss to the beneficial owner. If the depository compensates a beneficial owner for DP negligence, it can recover from the DP (Section 16(2) — subrogation). In Karvy v. SEBI (SAT 2020), SAT held that the DP-BO relationship is fiduciary — client securities cannot be pledged without explicit consent. SEBI's emergency deregistration of Karvy was upheld.

🎯 EXAM POINTERS — Topic 29: Rights & Obligations

Section 9: Depository = registered owner FOR TRANSFER PURPOSES ONLY — NO voting rights, NO other rights.
Section 10: Beneficial owner has ALL rights + ALL liabilities — dividends, voting, bonus, rights, capital gains liability.
Section 11: Pledge requires PREVIOUS APPROVAL of depository — creation + invocation entirely electronic.
Section 11(2): Depository liable for losses if it fails to create/record a pledge as instructed.
Section 12: Beneficial owner can FREEZE/UNFREEZE account — debit freeze or full freeze.
Section 13: Issuer MUST furnish beneficial owner list to depository on RECORD DATE for each corporate action.
Section 16(1): Depository and DP separately liable for their OWN NEGLIGENCE causing loss to BO.
Section 16(2): Depository can RECOVER from DP if it compensated BO for DP's negligence — subrogation right.
DP-BO relationship is FIDUCIARY — client securities cannot be pledged without explicit investor consent (Karvy case).
Karvy v. SEBI (SAT 2020): SEBI can take emergency deregistration action to protect investor assets from misuse by DP.

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