Legislative comment
Section 16 of depositories Act, 1996
H. Mohamed Abduul Raaziq
BC0150015
Introduction:
The word ‘depositary’ is defined as “the party of the institution (eg bank or trust
company) receiving a deposit. One with whom anything is lodged in trust, as ‘depository’ is the
place where it is put. The obligation upon the depositary is that he keeps the thing with
reasonable care and upon request restores it to the depositor.” A depository holds securities (like
shares, debentures, bonds, Government Securities, units etc.) of investors in electronic form.
Besides holding securities, a depository also provides services related to transactions in
securities. It acts as a trustee of the owner since the securities are entrusted with him in trust. He
is also the agent of the owner of the securities.
According to sub-section (1A) of section 12 of the Securities and Exchange Board of
India Act, 1992;"depository" means a company formed and registered under the Companies Act,
1956 and which has been granted a certificate of registration under sub-section (1A) of section
12 of the Securities an Exchange Board of India Act, 1992.
The Depositories Act, 1996 was enacted with the objective of ensuring free
transferability of securities with speed, accuracy, and security, by making securities of public
companies freely transferable subject to certain exceptions by restricting company’s right to use
discretion in effecting the transfer securities and dispensing with the transfer deed and other
procedural requirements under the Companies Act.
Section 16 of depositories act:
Depositories to indemnify loss in certain cases.—
(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, the
depository shall indemnify such beneficial owner.
(2) Where the loss due to the negligence of the participant under sub-section (1) is indemnified
by the depository, the depository shall have the right to recover the same from such participant.
Depositories to indemnify loss in certain cases:
Any loss caused to the beneficial owner due to the negligence of the depository or the
participant, the depository shall indemnify such beneficial owner.
In order to protect the interests of the beneficial owners of the securities handled by the
depository, section 16 of the Act seeks to require the depository to indemnify loss suffered by the
beneficial owner due to the negligence of the depository or the participant. A sine qua non for
claiming the compensation shall be ‘negligence’ on the part of the depository or the participant,
as the case may be. Where 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.
According to Section 18 of the Act the Board, on being satisfied that it is necessary in the public
interest or in the interest of investors so to do, may, by order in writing - (a) call upon any issuer,
depository, participant or beneficial owner to furnish in writing such information relating to the
securities held in a depository as it may require; or (b) authorise any person to make an enquiry
or inspection in relation to the affairs of the issuer, beneficial owner, depository or participant,
who shall submit a report of such enquiry or inspection to it within such period as may be
specified in the order. Further the Board may in the interest of investors and to prevent the affairs
of depository being conducted in a manner detrimental to the investors or the securities market, it
may issue such directions (a) to any depository or participant or any person associated with the
securities market; or (b) to any issuer as may be appropriate in the interest of investors or the
securities market.
The SEBI came out with the Security and Exchange Board of India (Depositories and
Participants) Regulations, 1996 regulating various facets of law relating to depositories. The
rules govern areas such as registration of depository, grant of certificate of commencement of
business, registration of participants, and details regarding rights and obligations of depositories,
participants, issuers, manner of registrat.
If any loss caused to the beneficial owner due to the negligence of the depository or the
participant, the depository shall indemnify such beneficial owner.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.
Before the act how it was regulated:
Ensuring free transferability of securities with speed, accuracy, and security, by making
securities of public companies freely transferable subject to certain exceptions by restricting
company’s right to use discretion in effecting the transfer securities and dispensing with the
transfer deed and other procedural requirements under the Companies Act. Before the Act came
into existence ... transferability of securiteis was tough and thus this act helped.
Case Law:
1. Sate Bank of Hyderabad and Etc. Etc. Vs. Advath Sakru and Another Etc ..
Order him to indemnify the debtor in such manner and to such extent as it may deem
just: provided that, in the exercise of these powers, the court shall not-..... Suit was based on a
mortgage. The defendants therein raised a defence that the plaintiff bank charged compound
interest which is illegal. They have also taken certain other defences which are not relevant
for the purpose of the present discussion. One of the issues framed was whether the rate of
interest charged by, of this court held that notwithstanding the directions of the reserve bank
of india to the banking companies to charge interest on theloans given by them
at certain rates, the courts are empowered to give relief under the provisions of act iv of
1938. His was the view expressed in union bank of India, its jurisdiction to give relief and the
cases where no such mandate is imposed against the court, but a power to re-open on
satisfaction of certain conditions is conferred on the court. In the former case, all pending
matters irrespective of the fact whether they are pending before the trial court, the loan was
an agricultural and not a commercial loan?
Conclusion:
Regulation 26 of the SEBI (Depositories and Participants) Regulations, 1996 states that
depositories, participants, issuers, and issuers agent, in addition to the rights and obligations laid
down in the Depositories Act and the bye laws shall have the rights and obligations arising from
the agreements entered into by them.
Ensuring free transferability of securities with speed, accuracy, and security, by making
securities of public companies freely transferable subject to certain exceptions by restricting
company’s right to use discretion in effecting the transfer securities and dispensing with the
transfer deed and other procedural requirements under the Companies Act. Before the Act came
into existence ... transferability of securiteis was tough and thus this act helped.
