The Depositories Act, 1996 provides for regulation of depositories in securities and for matters connected thereto. The Act which initially came into force as an ordinance viz. The Depositories Ordinance, 1995, was designed to provide a legal framework for establishment of depositories to record ownership details in book entry form.
The Act also made consequential amendments in the Companies Act, 1956; the Securities and Exchange Board of India Act, 1992; the Indian Stamp Act, 1899; the Income tax Act, 1961; and the Benami Transactions (Prohibition) Act, 1988.
The Depositories Act, 1996 provides a legal framework for establishment of depositories to facilitate holding of securities including shares in the demat form (electronic form) and to effect transfer of securities through book entry.
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The Act establishes the depository system in India by providing for setting up of one or more depositories to enable the investors to hold securities in non-physical form (known as dematerialized form) and to affect transfer of securities by way of book entries in accounts maintained by the depository.
Every depository is required to be registered with the Securities and Exchange Board of India (SEBI) and will have to obtain a Certificate for commencement of business on fulfillment of the prescribed conditions.
Investors opting to join the system are required to be registered with one or more participants who are the agents for the depository. Investors have the choice of continuing with the existing securities certificates or opt for the depository mode.
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The depository system envisages a deposit of securities by various investors with the depository. Once the securities are lodged with the depository, their transfer would be through book entry transfers in accounts maintained by the depository. Thus the main function of a depository is to dematerialize the securities and enable their transaction in book entry form.