Powers and Functions of the Securities and Exchange Board of India

(SEBI) under the Depository Act: A Comprehensive Review

JYADITYA DOGRA

BA.LLB 3A

Mr. Abhishek Dwivedy

18April2023
Abstract:

The Securities and Exchange Board of India (SEBI) is the regulatory authority responsible
for overseeing the securities market in India. In recent years, SEBI has played a crucial role
in maintaining transparency, investor protection, and the efficient functioning of the market.
One significant legislation that empowers SEBI is the Depository Act, which governs the
operation and regulation of depositories in India. This research paper aims to provide a
comprehensive review of the powers and functions of SEBI under the Depository Act.The
paper begins by exploring the historical background and rationale behind the enactment of
the Depository Act, highlighting the need for a robust depository system to facilitate
electronic holding and transfer of securities. It then delves into an in-depth analysis of the
powers vested in SEBI under the Act.The research examines SEBI's role in granting
registration and regulation of depositories, ensuring compliance with the operational and
financial requirements, and setting standards for the governance and risk management
framework of depositories. The paper also evaluates SEBI's authority in overseeing the
depository participants and their obligations in safeguarding the interests of investors.
Additionally, it explores SEBI's enforcement powers, including the imposition of penalties
and the authority to conduct inspections and investigations.The research highlights SEBI's
responsibility in promoting investor education and awareness regarding the benefits and risks
associated with depository services. The study analyzes SEBI's initiatives to enhance
transparency, efficiency, and accountability within the depository system, including the
establishment of grievance redressal mechanisms.To provide a comprehensive understanding,
the research paper reviews regulatory developments related to SEBI's exercise of powers
under the Depository Act. It also presents a comparative analysis of SEBI's powers in the
context of international best practices.The findings of this research paper contribute to a
better understanding of the regulatory framework governing depositories in India and the
significance of SEBI's role in ensuring the smooth functioning and integrity of the depository
system. The analysis can serve as a valuable resource for policymakers, market participants,
and researchers interested insecurities market regulation, investor protection, and the
evolving role of SEBI in the digital era.

Keywords:

SEBI,Depository Act,Securities market,Investor protection,Governance framework,Risk

management,Depositories,Electronic holding,Regulatory authority,Transparency.
Introduction:

The Securities and Exchange Board of India (SEBI) plays a pivotal role in ensuring the
integrity and efficient functioning of the securities market in India. With the rapid growth of
the Indian financial market and the increasing participation of investors, it has become
imperative to establish a robust regulatory framework to protect investor interests, promote
transparency, and facilitate seamless transactions. One crucial legislation that empowers
SEBI in achieving these objectives is the Depository Act.The Depository Act was enacted to
establish a comprehensive framework for the operation and regulation of depositories in
India. Depositories serve as central institutions that facilitate the electronic holding and
transfer of securities, replacing the traditional paper-based system. This transition to a
dematerialized form of securities has brought significant advantages, including increased
efficiency, reduced transaction costs, and enhanced accessibility for investors.SEBI, as the
regulatory authority responsible for overseeing the securities market, plays a vital role in
implementing and enforcing the provisions of the Depository Act. The Act grants SEBI
extensive powers and functions to ensure the smooth operation of depositories and protect
investor interests. Understanding the powers and functions of SEBI under the Depository Act
is essential for comprehending the regulatory landscape surrounding depositories in
India.This research paper aims to provide a comprehensive review of the powers and
functions of SEBI under the Depository Act. It explores the historical background and
rationale behind the enactment of the Act, highlighting the need for a robust depository
system to support the growth of the securities market. By analyzing the powers vested in
SEBI, the paper seeks to shed light on SEBI's role in granting registration, setting operational
and financial requirements, and establishing governance and risk management frameworks
for depositories.The research paper examines SEBI's authority in overseeing depository
participants and their obligations in safeguarding the interests of investors. It also evaluates
SEBI's enforcement powers, including the ability to impose penalties, conduct inspections,
and investigations.The paper will also discuss SEBI's initiatives in promoting investor
education and awareness about the benefits and risks associated with depository services.
Additionally, it will highlight the establishment of grievance redressal mechanisms to address
investor concerns effectively.By reviewing relevant case laws, regulatory developments, and
international best practices, this research paper aims to provide a comprehensive
understanding of the regulatory framework governing depositories in India and the crucial
role played by SEBI in ensuring their efficient functioning. The findings of this study will
contribute to existing literature on securities market regulation, investor protection, and the
evolving role of SEBI in the digital era.

Powers and Functions of Depository Act

The Depository Act grants certain powers to depositories, which are central institutions
responsible for holding and maintaining securities in electronic form. These powers enable
depositories to perform their functions effectively and ensure the smooth operation of the
electronic securities holding and transfer system. The key powers of depositories under the
Depository Act include:

Holding and Maintenance of Securities:

Depositories play a crucial role in holding and maintaining securities in electronic form on
behalf of investors. As custodians of securities, they ensure the safekeeping and accurate
record-keeping of ownership details. This power to hold and maintain securities
electronically brings several advantages to investors and the overall securities market.

1. Accurate Record-Keeping: Depositories maintain comprehensive electronic records of

securities ownership. Each investor's holdings are recorded electronically, providing a
transparent and easily accessible view of their investments. This eliminates the need
for physical certificates and reduces the risks associated with loss, theft, or damage of
paper-based securities.

2. Facilitating Electronic Transfer: The power of depositories to hold securities in

electronic form enables seamless and efficient transfer of ownership. Investors can
easily transfer their securities electronically without the need for physical delivery or
cumbersome paperwork. This simplifies the process, reduces transaction costs, and
accelerates settlement cycles.

3. Eliminating the Risks of Physical Securities: By holding securities in dematerialized

form, depositories mitigate the risks associated with physical securities. The chances
 of loss, theft, forgery, or damage to certificates are eliminated, enhancing the security
and reliability of the securities holding system.

4. Fostering Investor Convenience: Depositories provide a convenient platform for

investors to access and manage their securities holdings. Investors can view their
holdings, monitor transactions, and receive statements electronically, enhancing
convenience and enabling better portfolio management.

5. Streamlining Corporate Actions: Depositories facilitate corporate actions such as

dividends, interest payments, and bonus issues on behalf of investors. They ensure
that the benefits and entitlements arising from securities are accurately credited to the
respective investor accounts. This streamlines the process, reduces paperwork, and
enhances the efficiency of corporate actions.

6. Enhancing Market Efficiency: The power of depositories to hold securities

electronically contributes to the overall efficiency of the securities market. It enables
faster and more efficient settlement of transactions, reduces paperwork and associated
costs, and promotes liquidity by facilitating easy transferability of securities.

7. Promoting Transparency: Depositories maintain accurate and transparent records of

securities holdings. This transparency ensures that the ownership details are readily
available and can be easily verified. Investors can have confidence in the integrity of
the system, promoting trust and transparency in the securities market.

Overall, the power of depositories to hold and maintain securities in electronic form is
a key component of the modern securities market infrastructure. It offers numerous
benefits, such as improved security, convenience, efficiency, and transparency for
investors. By acting as custodians of securities and enabling electronic transfers,
depositories play a vital role in facilitating smooth and secure transactions in the
securities market.
Dematerialization Of Securities

Under the Depositories Act, dematerialization of securities is a pivotal provision that aims to
replace physical certificates with electronic records. Dematerialization refers to the process of
converting physical securities, represented by paper certificates, into electronic form. Here's a
detailed explanation of dematerialization of securities under the Depositories Act:

1. Elimination of Physical Certificates: The Depositories Act recognizes the

inefficiencies and risks associated with physical securities certificates, such as the
potential for loss, theft, forgery, and cumbersome paperwork. Dematerialization
eliminates the need for physical certificates, replacing them with electronic
records.

2. Conversion of Physical Certificates: Investors holding physical certificates can

approach a depository participant (DP), who acts as an intermediary between the
investor and the depository. The investor submits the physical certificates to the
DP, who verifies their authenticity and initiates the dematerialization process.

3. Opening of Demat Accounts: To facilitate dematerialization, investors need to

have a demat account with a depository. Upon receiving the physical certificates,
the DP helps the investor open a demat account by completing the necessary
documentation and obtaining the investor's consent for dematerialization.

4. Credit of Electronic Securities: Once the dematerialization process is initiated, the

DP informs the depository, which then credits the equivalent number of electronic
securities in the investor's demat account. The investor's ownership is reflected in
the electronic records held by the depository.

5. Transferability of Electronic Securities: Electronic securities held in demat

accounts are freely transferable. Investors can transfer their securities
electronically through a process called delivery instruction slip (DIS), which
involves instructing the DP to transfer securities from their demat account to
another investor's demat account.
 6. Benefits of Dematerialization: Dematerialization offers several advantages to
investors and the securities market as a whole. It enhances the speed and
efficiency of securities transactions, reduces transaction costs, eliminates the risk
of physical certificate-related issues, and provides a centralized and secure system
for holding and transferring securities.

7. Investor Convenience: Dematerialization brings convenience to investors by

eliminating the need to handle and store physical certificates. Investors can access
their demat accounts online, view their holdings, receive electronic statements,
and conveniently manage their securities portfolios.

8. Regulatory Framework: The Depositories Act establishes the regulatory

framework for dematerialization, outlining the rights, obligations, and
responsibilities of depositories, depository participants, and investors. It ensures
compliance with prescribed standards, safeguards investor interests, and promotes
transparency and efficiency in the dematerialization process.

Dematerialization of securities has significantly transformed the Indian securities market,

facilitating seamless and secure electronic transactions, enhancing investor confidence, and
reducing the risks associated with physical certificates. By enabling the conversion of
physical securities into electronic form, the Depositories Act has played a pivotal role in
modernizing the securities market infrastructure and promoting a more efficient and
transparent system for holding and transferring securities.

Transfer of Securities

Depositories play a crucial role in facilitating the electronic transfer of securities between
investors. They provide a seamless and secure mechanism for transferring ownership rights
without the necessity of physical movement of securities. Here's a further explanation of the
transfer of securities facilitated by depositories:

1. Electronic Book-Entry Transfers: Depositories maintain electronic registers that

record the ownership of securities in dematerialized form. When an investor
wishes to transfer securities to another party, they initiate the transfer process by
 submitting a delivery instruction to their depository participant (DP). The delivery
instruction specifies the details of the transfer, such as the type and quantity of
securities and the recipient's demat account details.

2. Settlement Process: The depository receives the delivery instruction and validates
the details provided. Once verified, the depository updates the ownership records
by debiting the securities from the transferor's demat account and crediting them
to the transferee's demat account. This process is commonly referred to as a book-
entry transfer, as it involves updating the electronic registers without physical
movement of securities.

3. Online Transfer Mechanism: Depositories provide online platforms and interfaces

that enable investors and DPs to initiate and monitor the transfer process.Investors
can submit delivery instructions electronically, eliminating the need for manual
paperwork and physical interaction. The online transfer mechanism enhances
convenience, speed, and accuracy in executing securities transfers.

4. Immediate and Automated Settlement: Electronic transfers facilitated by

depositories result in immediate and automated settlement of securities
transactions. Unlike physical transfers that may involve delays in physical
delivery and manual verification, electronic transfers through depositories ensure
quick and efficient settlement, reducing the settlement cycle.

5. Security and Risk Mitigation: The transfer of securities through depositories

enhances security and mitigates risks associated with physical transfers. Since the
transfer occurs in electronic form, the chances of loss, theft, or damage to physical
certificates are eliminated. The electronic records maintained by depositories offer
increased transparency and accuracy, reducing the risk of errors or fraudulent
activities.

6. Compliance and Regulation: The transfer of securities through depositories is

subject to compliance with regulatory requirements. Depositories operate under
the oversight of the Securities and Exchange Board of India (SEBI) and adhere to
the rules and regulations governing securities transfers. This ensures that transfers
 are conducted in a compliant and transparent manner, safeguarding the interests of
investors.

7. Audit Trail and Transaction History: Depositories maintain a comprehensive audit

trail and transaction history of securities transfers. This allows for easy tracking
and verification of the transfer process, providing a transparent and reliable record
of ownership changes. Investors can access their transaction history and verify the
details of securities transfers through their demat account statements.

The electronic transfer of securities facilitated by depositories brings numerous advantages,

including efficiency, speed, accuracy, and enhanced security. It simplifies the process of
transferring ownership rights, reduces paperwork, and eliminates the risks associated with
physical movement of securities. Depositories, as central institutions, ensure the seamless and
secure transfer of securities, contributing to the overall effectiveness and integrity of the
securities market.

Pledges and Hypothecations

Depositories possess the power to create and record pledges and hypothecations of securities
held in electronic form. This provision allows investors to utilize their dematerialized
securities as collateral for loans, financing, and other financial transactions. Here's a further
explanation of pledging and hypothecation facilitated by depositories:

1. Pledging of Securities: Pledging refers to the process wherein an investor pledges

their securities as collateral to secure a loan or credit facility. Depositories enable
investors to create a pledge on their dematerialized securities by marking them as
pledged in the electronic records. This creates a lien or charge on the securities in
favor of the lender or financial institution.

2. Hypothecation of Securities: Hypothecation involves the creation of a charge or

lien on securities without transferring ownership. Investors can hypothecate their
dematerialized securities to obtain financing or credit facilities while retaining
 ownership. The depository records the hypothecation, indicating that the securities
are encumbered.

3. Creation of Pledge/Hypothecation Requests: To create a pledge or hypothecation,

the investor initiates a request through their depository participant (DP). The
request includes details such as the type and quantity of securities, the lender's
information, and the terms of the pledge or hypothecation agreement.

4. Updating Electronic Records: Upon receiving the pledge or hypothecation request,

the DP verifies the details and submits the request to the depository. The
depository updates the electronic records, reflecting the creation of the pledge or
hypothecation and indicating the encumbrance on the securities.

5. Protection of Lenders' Interests: Pledging and hypothecation of securities provide

a mechanism for lenders to secure their loans or credit facilities. By creating a
charge or lien on the dematerialized securities, lenders have a legal claim to the
pledged securities in case of default or non-payment by the borrower.

6. Release of Pledge/Hypothecation: Once the borrower fulfills their obligations,

such as repaying the loan or meeting the terms of the credit facility, the pledge or
hypothecation can be released. The investor initiates a request for the release
through their DP, who updates the electronic records to remove the encumbrance
on the securities.

7. Investor Protection and Transparency: The power of depositories to create and

record pledges and hypothecations promotes investor protection and transparency.
Investors can easily track their pledged or hypothecated securities through their
demat account statements, ensuring transparency in the encumbrance status of
their securities.

8. Regulatory Compliance: The pledging and hypothecation of securities are subject

to regulatory compliance and oversight. Depositories operate in accordance with
the regulations and guidelines set by the Securities and Exchange Board of India
 (SEBI) to ensure proper documentation, disclosure, and protection of investors'
interests.

By enabling the pledging and hypothecation of securities, depositories provide investors with
increased liquidity and flexibility in utilizing their dematerialized securities as collateral. It
enhances access to financing and credit facilities while offering lenders a secured form of
collateral. Depositories' power to create and record pledges and hypothecations contributes to
the development of efficient and robust financial markets.

Facilitation of Corporate Actions

Depositories, under the powers granted by the Depository Act, play a crucial role in
facilitating various corporate actions. This includes activities such as dividend distributions,
interest payments, bonus issues, rights offerings, mergers, acquisitions, and other corporate
restructuring events. Depositories ensure that investors receive the benefits and entitlements
arising from these corporate actions in a seamless and efficient manner. They disseminate
information about corporate actions to investors, verify eligibility based on record dates, and
credit the benefits directly to investor accounts. By streamlining the process and centralizing
information, depositories enhance transparency and ensure equitable distribution of benefits
to securities holders.

Voting Rights and Participation in Meetings

The Depository Act empowers depositories to facilitate the exercise of voting rights by
securities holders and their participation in meetings conducted by companies. Depositories
enable investors to cast their votes electronically and ensure that these votes are accurately
counted and reported to the companies. They also facilitate the participation of securities
holders in general meetings, including annual general meetings (AGMs), through electronic
means. By providing a secure and efficient voting mechanism, depositories enhance investor
engagement, corporate governance, and shareholder democracy.

Issuance and Redemption of Securities

Depositories have the authority to facilitate the issuance and redemption of securities in
electronic form. When companies issue new securities, depositories play a crucial role in
recording and maintaining accurate ownership records. They ensure that the newly issued
securities are credited to the demat accounts of the investors, eliminating the need for
physical certificates. Similarly, when securities are redeemed, depositories facilitate the
process by updating the records and reflecting the redemption in the investor accounts. This
power enables depositories to streamline the issuance and redemption process, enhancing
efficiency and reducing operational complexities.

Inspection, Investigation, and Enforcement

The Depository Act grants depositories the power to conduct inspections, investigations, and
enforcement actions to ensure compliance with regulatory requirements. Depositories have
the authority to examine the books, records, and operations of depository participants and
other entities involved in the securities market. They can investigate any suspected violations,
irregularities, or misconduct related to depository operations. If necessary, depositories can
take enforcement actions, such as imposing penalties or sanctions, to maintain the integrity of
the depository system and safeguard investor interests. These powers contribute to regulatory
oversight and enforcement in the securities market.

Registration and Regulation of Depository Participants: Depositories have the responsibility

to register, regulate, and oversee depository participants (DPs). DPs are intermediaries that
provide depository-related services to investors. Depositories establish eligibility criteria,
conduct due diligence, and grant registration to DPs that meet the required standards. They
also prescribe regulations and guidelines for DPs, ensuring compliance with operational,
financial, and ethical norms. Depositories monitor the activities of DPs, conduct audits, and
take corrective measures when necessary to maintain the integrity of the depository system
and protect investor interests.

Investor Protection and Grievance Redressal

One of the significant powers conferred upon depositories under the Depository Act is the
responsibility to ensure investor protection and provide mechanisms for grievance redressal.
Depositories establish robust systems and processes to address investor complaints, inquiries,
and disputes related to depository operations. They implement measures to safeguard investor
assets, prevent unauthorized activities, and enhance the security of electronic transactions.
Depositories also provide avenues for investors to seek redressal in case of any grievances or
disputes, promoting confidence and trust in the securities market.
These powers granted to depositories under the Depository Act enable them to effectively
carry out their roles as custodians of securities, facilitators of corporate actions, and
protectors of investor interests.

Conclusion
In conclusion, the Powers and Functions of the Securities and Exchange Board of India
(SEBI) under the Depository Act hold significant importance in the Indian securities market.
The Depository Act grants SEBI the authority to regulate and oversee the operations of
depositories, ensuring the efficient and secure functioning of the depository system.The
Powers and Functions under the Depository Act empower SEBI to establish and enforce
regulatory standards, safeguard investor interests, and promote transparency and
accountability in the securities market. By exercising these powers, SEBI plays a crucial role
in maintaining market integrity, investor confidence, and fair practices.SEBI's powers enable
it to ensure the proper holding and maintenance of securities in electronic form, facilitating
seamless transfers and reducing risks associated with physical certificates. This promotes
efficiency, reduces transaction costs, and enhances market liquidity.The Act also empowers
SEBI to regulate corporate actions, such as dividends, bonus issues, and mergers, to ensure
fair treatment of securities holders. SEBI's oversight ensures that investors receive their
entitled benefits and entitlements promptly and accurately, enhancing market efficiency and
investor protection. SEBI's powers enable it to enforce compliance with regulatory
requirements and conduct inspections, investigations, and audits of depositories. This
promotes adherence to established standards, deters fraudulent practices, and maintains
market integrity.The Powers and Functions of SEBI under the Depository Act also address
investor grievances, provide redressal mechanisms, and promote investor education and
awareness. This empowers investors, enhances their understanding of the depository system,
and strengthens their confidence in the securities market.
Overall, the Powers and Functions of SEBI under the Depository Act are of paramount
importance in fostering a robust, transparent, and investor-friendly securities market in India.
They enable SEBI to regulate depositories effectively, protect investor interests, ensure
market integrity, and contribute to the growth and development of the securities market as a
whole.
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