Unit study guide · NISM Series VI
Introduction to Depository
12 questions in this unit
What this unit covers
- Which difficulty of physical certificates is most directly reduced by holding securities in demat form?
- An investor wants an electronic record of ownership in admitted shares and bonds, not an interest-bearing cash deposit. Which institution performs the central securities-recording function through its participants?
- For securities held through a depository, who is treated as registered owner for the limited purpose of effecting transfers?
- Who normally retains the voting rights attached to ordinary shares held in a demat account?
- Two investors each hold fully paid shares of the same class under the same ISIN. Why does an electronic transfer not require matching the original certificate numbers?
- A demat statement shows 600 shares under an ISIN. Which information is the statement primarily evidence of?
- A beneficial owner proves loss caused by a DP’s negligence within section 16 of the Depositories Act. What does that provision contemplate?
- Under the Depositories Act, depository bye-laws regulating its operations are made subject to whose previous approval?
- Why must a depository and an issuer/RTA exchange and reconcile securities information?
- A shareholder converts 250 paper shares into 250 demat shares in the same ownership. What changes solely because of this conversion?
- A client’s company securities are held through DP A. Must the client open a different demat account for every additional issuer admitted to that depository?
- A BO authorises transfer of 40 existing shares to another BO. Which description fits the depository’s core role?
Key ideas
From the practice bank · 1
Which difficulty of physical certificates is most directly reduced by holding securities in demat form?
Electronic book-entry holdings remove the need to keep and deliver individual paper certificates. That directly addresses paper-related risks such as loss and forgery. It does not insure against a poor investment outcome, issuer default or tax liabilities. Safer recordkeeping and safer investment performance are different ideas. Remember: Depository infrastructure reduces certificate and transfer frictions, not all investment risk.
Hint Common mistake: Equating an electronic holding with a guaranteed investment.
VI-009From the practice bank · 2
An investor wants an electronic record of ownership in admitted shares and bonds, not an interest-bearing cash deposit. Which institution performs the central securities-recording function through its participants?
A securities depository maintains electronic holdings and supports changes to those holdings through its participants. The everyday word deposit should not cause confusion with a bank cash deposit. A demat account records securities units and their status. Interest, where relevant, arises from the underlying security’s terms rather than from keeping it in the depository. Remember: Identify the asset being recorded before choosing the relevant infrastructure provider.
Hint Common mistake: Assuming “depository” is another word for an ordinary savings bank.
VI-010From the practice bank · 3
For securities held through a depository, who is treated as registered owner for the limited purpose of effecting transfers?
The Act keeps two kinds of ownership apart. One is limited registered ownership. The other is beneficial ownership. The depository is deemed the registered owner, but only to carry out transfers. The beneficial owner has the rights tied to the securities. That owner also bears the liabilities tied to them. This limited registration does not make the depository the real investor. Remember: Limited registered ownership facilitates book-entry transfer. It is not beneficial ownership.
Hint Common mistake: Assuming that whoever is registered for transfers also holds the investor's full ownership rights.
VI-011From the practice bank · 4
Who normally retains the voting rights attached to ordinary shares held in a demat account?
The beneficial owner remains the investor entitled to the rights attached to the shares. The depository’s registered-owner status is limited to transfer facilitation and does not grant it voting rights. A DP may provide access to services, but servicing an account is not the same as acquiring the customer’s shareholder rights. Remember: Electronic custody does not surrender the investor’s corporate rights.
Hint Common mistake: Confusing the entity maintaining records with the person entitled to vote.
VI-012From the practice bank · 5
Two investors each hold fully paid shares of the same class under the same ISIN. Why does an electronic transfer not require matching the original certificate numbers?
Fungibility means equal units of the same admitted security can replace each other. This is how the depository record treats them. So a holding is known by its security and its quantity. The identity of each old paper certificate is not kept. Different classes of security, or different ISINs, must still be kept apart. Remember: Interchangeability applies within the same security, not across unrelated ISINs.
Hint Common mistake: Thinking loss of certificate numbers means loss of the ownership trail.
VI-013From the practice bank · 6
A demat statement shows 600 shares under an ISIN. Which information is the statement primarily evidence of?
The statement is an ownership and transaction record. It helps the investor verify quantity, credits, debits and restrictions reflected in the system. It does not promise a sale price, dividend or freedom from a court or regulatory restriction. Quantity and available quantity may also differ where some units are pledged or frozen. Remember: Read balances together with their status. A statement is not a performance guarantee.
Hint Common mistake: Using total holdings as proof of unrestricted sale availability.
VI-014From the practice bank · 7
A beneficial owner proves loss caused by a DP’s negligence within section 16 of the Depositories Act. What does that provision contemplate?
Section 16 provides for indemnification, which means making good a loss. It covers a loss caused by negligence of the depository or a participant. Negligence means not taking proper care. Suppose a participant caused the loss and the depository made it good. The depository can then recover the amount from that participant. This protection comes from the law and rests on negligence. It is not general insurance against an investor’s trading losses. Remember: Distinguish a negligence claim from a loss caused by market movement.
Hint Common mistake: Promising depository compensation for any investment that performs badly.
VI-015From the practice bank · 8
Under the Depositories Act, depository bye-laws regulating its operations are made subject to whose previous approval?
The Act lets a depository make bye-laws, which are its detailed working rules. The bye-laws must fit the Act and the regulations. They also need SEBI’s previous approval. This ties the working rules to the supervision set up by law. So a depository’s own rule-making has limits. It cannot be used to set aside investor rights or regulatory directions. Remember: Operational bye-laws sit below the Act and regulations and require regulatory approval.
Hint Common mistake: Treating a depository’s operating rules as unregulated private preferences.
VI-016From the practice bank · 9
Why must a depository and an issuer/RTA exchange and reconcile securities information?
An electronic holding must correspond to securities validly recorded by the issuer. Information exchange and reconciliation help identify differences in balances or processing, including dematerialisation and corporate actions. They protect record integrity rather than determining market prices or allowing a service provider to alter entitlements at will. Remember: Reconciliation is a control over completeness and accuracy across connected records.
Hint Common mistake: Assuming one successful system entry proves all connected records agree.
VI-017From the practice bank · 10
A shareholder converts 250 paper shares into 250 demat shares in the same ownership. What changes solely because of this conversion?
Dematerialisation converts the existing holding into electronic form. With the same owner and quantity, there is neither a sale to the DP nor a new issue merely because the form changes. The issuer cancels the surrendered physical representation and confirms the corresponding electronic credit, avoiding double representation. Remember: Conversion of form must not be mistaken for creation or transfer of ownership.
Hint Common mistake: Adding the demat credit to the still-visible paper certificate as if both remain valid holdings.
VI-018From the practice bank · 11
A client’s company securities are held through DP A. Must the client open a different demat account for every additional issuer admitted to that depository?
A demat account can hold multiple admitted securities, with each security tracked separately. Convenience at the account level does not merge the legal identity or balance of different issuers. The account holder should still check the correct ISIN, quantity and holding status for each line item. Remember: One account can contain many securities without losing security-level identification.
Hint Common mistake: Confusing a demat account identifier with an ISIN.
VI-019From the practice bank · 12
A BO authorises transfer of 40 existing shares to another BO. Which description fits the depository’s core role?
The depository system effects authorised ownership movements through debit and credit entries, subject to controls and available balances. It is not the commercial counterparty setting the price or promising a return. It also does not decide how the new beneficial owner will exercise shareholder rights. Remember: Distinguish infrastructure that records a transaction from parties that decide its commercial terms.
Hint Common mistake: Treating an accepted transfer instruction as an endorsement of the investment.
VI-020