Amendment of Depositories Act,1996

The Report in respect of the proposed amendments to the Depositories Act, 1996. ( Draft of the Depositories Act (Amendment) Bill, 1998 is appended hereto for ready reference ).

The Committee has devoted considerable time to the discussion in respect of the proposed amendments to the Depositories Act. 1996.

The Committee is firmly of the view that the Depositories Act,1996 should provide for compulsory dematerialisation in certain category of cases. The committee has formulated two categories of cases where there should be compulsory dematerialisation . These categories are specified in section 8 (1) and 8 (2) of the amended Bill. The Committee has recommended that SEBI should be empowered to specify the securities in respect where of transactions shall be permitted only in dematerialsed form by issue of a notification at appropriate time.

The committee is firmly of the opinion that the relationship between the depository and the participant does not amount to relationship of principal and agent. The relationship between depository and participant is a special relationship governed by the statute and it does not fit in the traditional mould of principal-agent relationship. The Committee has therefore recommended omission of the words " as agent " from section 4(1) of the Act.

The Committee has specially provided that the depository shall also enter into an agreement with the issuer and the issuer should not be entitled to resile from the said agreement without obtaining prior leave from the depository.

The committee is firmly of the view that the beneficial owner of securities held by him in the depositories should have right of nomination as provided in section 10 of the amending Bill.

There has been a serious controversy in respect of mode and manner for creation of pledge or hypothecation of securities held by the beneficial owner in a depository.

At one stage, the Committee was of the view that the depository should be required to issue a certificate in favour of the beneficial owner certifying number of shares held by the beneficial owner in the depository and such a certificate could be deposited with the pledgee bank. The Committee has reached a conclusion that the existing system of pledgee in respect of securities in depositories is working well. The Committee has therefore, recommended insertion of sub clause (1)(a) in Section 12 of the existing Act so as to take care of the special procedure required to be followed in case of pledge of securities held in a depository.

The Committee is of the view that the depository should not be liable for the loss caused to the beneficial owner as a result of fraud or negligence of the participant. The depository should be liable for the loss caused to the beneficial owner as a result of fraud or negligence of the depository and the depository should not be exposed to vicarious liability, where it is not at fault.

The Committee has recommended that the appeal against the order passed by SEBI should lie to the Securities Appellate Tribunal and not to the Central Government. The Committee has recommended that the foras constituted under this Act should have exclusive jurisdiction to deal with the matters entrusted to them under the Act and even the consumer forum should not have parallel jurisdiction to deal with the subject matter.

The Committee has examined in considerable detail the provisions relating to levy of stamp duty levied at present on transfer of debentures and other securities held in depositories. Parliament has exclusive competence to legislate on the subject of stamp duty in respect of transfer of shares or debentures ( entry 91 list 1). The Indian Stamp Act, provides for payment of stamp duty on debentures in certain category of cases. The Committee has therefore, recommended that part - I of the schedule to the Depositories Act, 1996 providing for incorporation of section 8A of Indian Stamp Act be further amended by substituting the word " shares" with the word "securities" in sub clause (c) and sub clause (d) of Section 8 and 9 of Indian Stamp Act,1899. The Committee is firmly of the view that no stamp duty should be levied at this stage of transfer of shares or other securities held in a depository. The Committee is of the view whenever there is a transfer of securities into physical form (rematerialising), no stamp duty should be leviable in such cases as well. The Committee is firmly of the view that the stamp duty levied at the stage of issue of securities should be made uniform. The Committee has also recommended that pending dematerialisation, the securities of an investor entrusted should be held in trust by the participant.