Question

Explain the advantages of the Depository System to the companies.

Explain the advantages of the Depository System.

Answer 1

Advantages to Investors:

1. Safety:
   The depository system is the safest and most secure way of holding securities. The entire system functions under the Depository Act and is monitored by SEBI.
   E.g.: the investor can keep his account in a ‘freeze/lock' mode to avoid/prevent unexpected debit or credit by giving instructions to the depository participant.
2. Updates and Intimation:
   The DP regularly sends a statement to the investor which provides the status of holdings and transactions. Depository too provides such a statement occasionally.
3. Risk Elimination:
   All risks associated with physical certificates like delays, loss, theft, bad deliveries, etc. are totally eliminated with the depository system.
4. Easy Transfer of Shares:
   i. The efforts that we required earlier in filing transfer forms and lodging of documents are not required
   ii. Also, the stamp duty levied on the transfer of physical shares is not applicable.
   iii. Processing time in the transfer of securities is reduced and neither the securities nor the cash is held up for an unnecessarily long time.
5. The facility of Nomination:
   The depository system allows individual investors to avail of the nomination facility. In case of the death of the investor, the securities are transferred to the account of the person who has been nominated by the investor.
6. Automatic Credit:
   The account of the investor is automatically credited/debited in case of a change initiated by the company which impacts the securities. This is called ‘Corporate Action’. Payment of dividends, issue of bonus shares, offering of rights shares, early redemption of debentures, mergers, and acquisitions, etc. are a few examples.
7. No Concept of 'Lots':
   In the physical mode, it was compulsory to buy shares in certain lots i.e. lot 10, lot 100, etc. This system of ‘lots’ has been abolished with the depository system. The market lot is one share for dematerialized securities.
8. Security Against Loan:
   Banks and financial institutions also provide loans against dematerialized securities as collateral (security).

Advantages to Companies:

1. Up-to-date Information:
   The up-to-date information about investors is provided by the depository.
2. Reduction in Costs and Efforts:
   Costs, efforts, and time involved in printing and distribution of certificates in cases of new issues, bonuses, transfers, etc. saved.
3. Better Investor-Company Relationships:
   The complaints arising out of loss of certificates, signature differences, long lapses of time in executing requests, etc. are substantially reduced. It leads to better communication with investors and increased goodwill for the company.
4. International Investments:
   Under a depository system, better and quicker services can be provided and this attracts investments from abroad.