Presentation on theme: "DEPOSITORY PARTICIPANTS AUDIT"— Presentation transcript:
1DEPOSITORY PARTICIPANTS AUDIT BY SAMRISH BHANJA(FCS, LLB)PROPRITOR,B SAMRISH & CO
2Introduction & Historical Background In the past when there was just a handful of investors the system of settlement based on physical delivery of paper certificates was probably adequateBut with the increase in number of listed entities the clearing and settlement mechanisms had been encumbered by the huge volumes of paperwork related to processing of share certificates.Need for the introduction of scripless was felt for the settlement to improve the efficiency of the markets and eliminate various problems brought about by dealing in physical certificates.Thus The Depositories Act was passed by both the Houses of Parliament in August, 1996.
3Concept of Depository System According to section 2(e) of the Depositories Act, 1996, “Depository means a company formed and registered under the Companies Act, 1956 and which has been granted a certificate of registration under section 12(1A) of the Securities and Exchange Board of India Act, 1992”.A Depository Participant (DP) is an agent appointed by the Depository i.e. —National Securities Depository Ltd (NSDL) and/or Central Depository Services Ltd (CDSL) and is authorized to offer depository services to all investors. An investor has to open his account through a DP only. Thus, the DP is basically the interface between the investor and the Depository. PNB is a DP of both Depositories (NSDL as well as CDSL.).
4The Depositories Act, 1996The depositories legislation as per the Statement of Objects and Reasons appended to the Depositories Act, 1996 aims at providing for:A legal basis for establishment of depositories to conduct the task of maintenance of ownership records of securities and effect changes in ownership records through book entry;Dematerilisation of securities in the depositories mode as well as giving option to an investor to choose between holding securities in physical mode and holding securities in a dematerialized form in a depository;Making the securities fungible;Making the shares, debentures and any interest thereon of a public limited company freely transferable; andExempting all transfers of shares within a depository from stamp duty.
5Constituents of depository system There are basically four participant:The DepositoryThe Depository ParticipantThe Issuing CompanyThe Investor
7Who is depository?Depository facilitates holding of securities in the electronic form and enables securities transactions to be processed by book entry by a Depository Participant (DP), who as an agent of the depository, offers depository services to investors
8Features of depository system in India In the depository system, the apex body is the Depository..A depository can be compared with a bankDepository services through depository participants.FungibilityRegistered Owner/ Beneficial Owner (two types of owner)
9NATIONAL SECURITIES DEPOSITORIES LIMITED NSDL is the first and largest depository in India, and established in August 1996It has 267 depository Participants (as on )Address:Trade World, a Wing, 4th &5th FloorsKamala Mills CompoundLower ParelMumbai website: nsdl.co.in
10PROMOTERS OF NSDL Industrial Development Bank of India Limited Unit Trust of IndiaNational Stock Exchange of India Limited
11SHAREHOLDERS OF NSDL State Bank of India Oriental Bank of Commerce CitibankStandard Chartered BankHDFC Bank LimitedThe Hongkong and Shanghai Banking Corporation LimitedDeutsche BankDena BankCanara BankUnion Bank of India
12CENTRAL DEPOSITORY SERVICES (INDIA) LIMITED This is the second depository in India.This was formed and registered in 1999.It has 455 DPs as onAddress:Phiroz Jeejeebhoy Towers16th Floor, Dalal StreetMumbai website:
14Who Is Depository Participant: A Depository Participant (DP) is an agent of the depository through which it interfaces with an investor.A DP can offer depository services only after it gets proper registration from SEBI.A DP is just like a Branch of a Bank.
15Who can be Depository Participant? In terms of the Depositories Act, 1996, SEBI (Depositories & Participants) Regulations,1996, only the following entities are eligible to become a Depository Participant:Financial Institutions,Banks, including approved foreign bankCustodians,Stockbrokers,A clearing corporation or a clearing house of a stock exchangeA non-banking finance company,A registrar to an issue or share transfer agent
16Types of ownershipIn the depository system, the ownership of securities dematerialized is bifurcated in to:REGISTEREDOWNERBENEFICIALOWNER
17Benefits of depository system/holding securities in dematerialized form Depository system provides benefits to:The investors, andThe issuers.
19Scope of Internal Audit Evaluating the adequacy of internal controlsSuggesting ways to reduce the costs and promote efficiencyAssessing the compliance with the applicable laws and regulationsAssist management in decision makingBackbone of a sound corporate governance systemCA Rajkumar S. Adukia
20Need for Internal Audit Increased complexity of businessesEnhanced compliance requirementsFocus on risk management and internal controls to manage themUnconventional business modelsIntensive use of information technologyStringent norms mandated by regulators to protect investorsAn increasingly competitive environmentCA Rajkumar S. Adukia
21What is an opportunity?Every event has two exhaustive classification namelyOpportunityRiskCA Rajkumar S. Adukia
22Listing of Broad Opportunities in Internal Audit Internal Controls AuditingInternal Audit Functions/Requirements Under Various LawsEnterprise Risk Management – The ERM RoleAudit of Compliance of Standards on Internal AuditMonitoring XBRL Implementation and Reporting ResultsAudit of IFRS ConvergenceForensic AuditCA Rajkumar S. Adukia
23Listing of Broad Opportunities in Internal Audit Fraud DetectionInternal Audit and Corporate GovernanceInternal Audit Of Management FunctionsStock Audit/Credit AuditInternal Audit of Compliance with Commercial LawsDue DiligenceSocial AuditCA Rajkumar S. Adukia
24Listing of Broad Opportunities in Internal Audit Environmental AuditCorporate Social Responsibility (CSR) AuditISO 9000 AuditCyber AuditIndustry Specific Internal Audit ProgramsAssurance ServicesInternal Audit of Tendering ProcessAudit of Sustainability Initiatives and Integrated ReportsCA Rajkumar S. Adukia
25Account Opening Agreement to be executed under stamp & signature of DP Agreement to be executed before opening an accountAgreement to be executed under stamp & signature of DPPrinted agreement with printed name of DP and signedAgreement not signed by DP or BONo agreementAgreement not produced for verification at the time of inspectionAccount to be opened based on Account Opening FormSingle form for multiple accounts of same exchange for a CMStamp duty document by sharmila
26Account Opening Proof of Identity & Proof of Address Observations: No POIPANCARD given does not match. Any other POI obtained if PANCARD is not there or it mismatches.Comment whether the account is freezed for debit, if no PANCARD or it mismatchesNon-compliance pointed should be as per SEBI guidelines onlyBank statement obtained as proof of address(comm.807,967)Stamp duty document by sharmila
27Account Opening ‘In Person verification’(comm.978 ) Applicable for accounts opened after October 22,2007DPs to do In Person verification of the applicants at the time of opening of demat accountsAuthorized official of DP should personally verify the photograph(s) affixed on the AOF and proof of identity document
28Account OpeningDP to affix a stamp “In Person verified “on proof of identity document having verified ‘in person’Also required to verify valid original proof of identity documents with the copies and affix “verified with originals” stampAuthorized official doing in person verification and verification of documents with original should sign under the DP stamp
29Account Opening Methodology Type of documents Validity of documents Signature of DP official and stampStamp of In Person verified and verified with original affixed on a valid POI document (SEBI specified) and signed by the authorized official of the DP under DP stampVerify with the documents that only authorized official of DP has signed,check the authority of the person doing the same
30Account Opening Proof of permanent address for joint holders(comm.888) Additional Documents to be collected from different type of BOs(comm.887,932)Body Corporate & Corporate CM :certificate of IncorporationPOA- Document registered with registering authority or bank statement or agreement for sale or leave license agreement or acknowledged copy of income tax returnOCB:Declaration from the OCB that it meets with the guidelines issued by RBI/Ministry of finance
31Account OpeningAdditional Documents to be collected from different type of BOs(contd…)OCB(contd):Certificate from overseas auditors in form OAC-1Statement of A/c from the bankRegistered Society:POA –Document registered with registering authority or bank statement or agreement for sale or leave license agreement or acknowledged copy of income tax return
32Account OpeningAdditional Documents to be collected from different type of BOsBanksCertificate of Incorporation or copy of RBI registration certificate in case of scheduled/co-operative banksPOA -Proof of address – document registered with registering authority / agreement for sale/ leave and license agreement / acknowledged copy of income tax returnMutual fundsSEBI Registration Certificate clearly indicating the address of the mutual fund
33Account OpeningAdditional Documents to be collected from different type of BOsPublic Trust /Charitable Trust and trust capable of holding property in its name (Registered Trust /Public trust)Certificate of Registration of Trust under the Public Trust Act /Public trust Act of relevant state or Societies Registration Act,1860PANCARD of trustProof of addressProof of registered office address evidenced by document registered with registering authority or bank statement or agreement for sale or leave license agreement or acknowledgement copy of income tax return
34Account Opening Private Trust Additional Documents to be collected from different type of BosPrivate TrustPAN card of the trustRecognized Funds/trusts /other Similar entitiesCategories :Employees PF, recognized by PF commissioner under PF Act, 1952,employees Gratuity fund under payment of gratuity act,1972,superannuation fund formed under guidelines issued by income tax dept.,venture capital funds registered with SEBI,ESOP trust formed pursuant to SEBI guidelines
35Account Opening Certificate of registration Additional Documents to be collected from different type of BosRecognized Funds/trusts /other Similar entities(contd..)Accounts of the above Funds/trusts /other Similar entities should be opened as they are recognized either with Income tax Act or SEBIDocuments :Certificate of registrationTrust deed and rules and/or charter defining their constitution and providing for management thereofList of members on the Board of trustees/Governing bodyCertified true copy of resolution passed by Board of trustees/Governing body
36Account OpeningNames of the authorized signatories,designation and their specimen signatures duly verified by the managing trusteeOne passport-size photograph of all authorized signatories with signature across photographPAN card of Fund/Trust/EntityPOA of registered office address evidenced by document registered with registering authority or bank statement or agreement for sale or leave license agreement or acknowledgement copy of Income Tax return
37Account Opening cannot have joint holders cannot appoint nominee HUF accountcannot have joint holderscannot appoint nomineeObservations :-comments given in the report/against checklist point ‘No’‘There is no account’Disproportionately large no. of a/csSame name, Same address,Same bank account details,Same Pan card detailsObservations:-comments given in the report N.A. ,No such accountsNominationNomination form signed by all joint holdersOnly individuals to appoint nominees and be appointed as nomineeA minor, represented by guardian, can be appointed as nomineeTwo witness to sign the nomination formNomination register to be maintainedNomination registration number ( as per register) to be noted on the nomination formDetails to be captured in CDAS
38Account ModificationOn Account opening & Modification in bank details ,Obtaining of bank details and proof made mandatory(comm.887)Proof of bank account details :Photocopy of cancelled cheque having name of the account holderPhotocopy of bank statement having name and address of the BO and not more than 4 months oldPhotocopy of bank passbook having name and address of the BOLetter from bank
39Account Modification Individuals Corporates Change in address Proof of address - verified with original by DP officialCorporatesCertified true copy of Form 23Latest transaction statement received from the DPVerified with originalConfirmation letter to be sent to BO at old as well as new address
40Account Modification Individuals Change in signature of the BO Reason for change of signatureBO to visit personally with valid proof of identityBO to affix new signature in the presence of a DP officialIf BO cannot come personallyModification form / letter to contain old and new signatureNew signature – attested by the BO’s banker
41A/c Modification Change in signature of the BO Corporates Certified true copy of Board ResolutionFresh list of authorized signatoriesBank – a letter on the letter head of the bankRequest for simultaneous change in address and signatureNormally should not be acceptedAbundant caution to be exercised
42The sample selection all categories of BOs DPA5 reportThe sample should cover :all categories of BOsBOs with pin codes other than Main DP addressBOs with nomineesMinor BOs ( on the basis of date of birth)
43The methodology POI and POA Type of documents Validity of documents Signature of DP official and stampNecessary documents as prescribed by CDSLDocuments as per Operating InstructionsEnsure completeness and accuracyPAN verificationFlag verification(comm.789)Verified with original
44What is new? Communiqué no. 796 – New Demat rejection code New Checklist point added –2.1(b)Whether DP has a system of inward of Demat request (DRF) received which clearly gives information about date of receipt of DRF from BO
45Discrepancies observed in Inspection Reports Whether Demat request received from Bos are sent to the issuer/RTA within seven days- As informed by the DP.In case of demat rejection –whether there is a system in place to analyze the demat rejection –NADetails of dispatch maintained by the DP – Date of dispatch is not mentioned.
46Common Violations Observed in Inspections The procedure to affix a stamp "surrendered for dematerialization along with DP name, DP ID and BO ID" on the certificates submitted for demat is not followed while processing some demat requests.The time limits prescribed for processing of demat requests received from BOs are not adhered to in all cases.
47Account ClosureClosure initiated by BOClosure initiated by DP
48Initiated by BO Duly filled ACF/Letter from BO Signatures of all BOs In case of transfer of holdings –Duly filled in instruction slipTransaction statement for the quarterAccount closed / to be closedProof of despatchFinal statement of account showing zero balance
49Initiated by BO Power of Attorney holder cannot close Procedure for transfer to be initiated within 2 days from date of receipt
50Initiated by BO Non responding issuers / RTAs BO to submit Closure with pending dematNon responding issuers / RTAsBO to submitA letter in prescribed format requesting rejectionA letter giving details of DRN details duly signed and stamped by the DPDP to follow up with Issuer?RTA for rejection
51Withdrawal of DPOption to BOsTransfer to another DPRematerialise
52Shifting of account New account in the same order of names Documents to be submittedACFInstruction slip – duly filledUnused debit instruction slipsClient master report – stamped and signed by new DPVerification of names and order of names
53Initiated by DP Non payment of dues Violation of agreement with the DP Reasons such as :-Non payment of duesViolation of agreement with the DPTransfer to another DP/ Main DP due to closure of branch / Main DPNotice of 30 days specifying the reasonsProof of despatch and copy of the notcie to be maintainedNo response – DP can initiateTransaction statement – as per ‘closure initiated by BOs’
55New ArrivalsCommuniqué no Safeguards regarding issuance/ use/ execution of DIS and bookletsIssue only one booklet containing not more than 20 slips for individual account holder and not more than 100 slips for non-individual account holder, at a time.In case of the booklet reported lost/ stolen/ not traceable by the BO, the unused DIS of the said booklet must be cancelled.Subsequent issue of DIS booklet to the BO should be only after BO has used not less than 75% of the slips contained in the previous DIS booklet
56New ArrivalsNot to issue more than 10 loose DIS to one BO in a financial year (April to March).The loose DIS should be signed in the presence of an authorised DP official.DP should mandatorily verify with the BO before acting upon the DIS , in case of dormant account whenever all the ISIN are transferred at a time.To record the details of the process, date & time of verification (on DIS under his sign) of the transaction where BO has 5 or more ISINs and all such ISINs are transferred at a time.
57New Arrivals Communiqué no. 847- Future-dated transactions DPs were instructed to exercise care while entering future-dated transactions so as to prevent error, especially in the future date of the transaction as transaction with execution date greater than 10 days from the date of entry/ upload on the CDSL system will fail.
58New ArrivalsCommuniqué no dated – Cautionary note in delivery instruction slip:“Blank & Signed DIS should not be left with your DP/ Broker”- Rider should be added to DIS.As and when new stock are ordered.
59Common violations in DP operations 1. The inventory control mechanism for instruction slip booklets is not proper.Physical inventory of instruction slip booklets is not tallied with the inventory records at prescribed intervals.Some of the DIS issued to BOs do not have pre-stamped BO ID and/or pre-printed serial number.
60Common violations in DP operations 4. Some delivery instruction booklets are issued to the BOs without keeping requisition slip (which forms part of the earlier issued instruction slip booklet and has pre-printed instruction slip serial number range of the booklet), on record.5. The instruction slip numbers are not verified, at the time of receipt from BO, against the issue details. 6. In some cases, instructions are executed by the DP on the basis of instruction slips which are not signed by all joint holders or which are not signed as per the ‘mode of operation’. In some cases, the instructions are executed in spite of prima-facie mismatch of signatures.
61Discrepancies in the inspection report As explained/ informed by DP in case of:Inventory controlIssue of first DISProcedure to be followed in case of issue of DIS without requisition slipDormant accountFax indemnityBlocking of DIS
62New ArrivalsCommuniqué No. 956 dated Supervision of branches of Depository Participants:To keep record of identification documents (including photo-identification) of all persons engaged in DP operations(1) at their main office(2) at all live-connected branches, and(3) at back office connected branches
63New ArrivalsTo maintain documentation at the main office regarding the scope of activity of each branch (live or back office). This document should include the following aspects:(1) Services being provided by each branch(2) Authorization levels of each type of transaction i.e.- maker/ checker- limits based on value of transaction.(3) Record-keeping policy, including exception reportingmechanism, maintenance of registers, agreements, inventoryof instruction slip booklets, reconciliation procedures (if anydocuments are forwarded to the main DP)
64New ArrivalsTo ensure that all live connected branches as well as back office connected branches display the types of services provided by each of them. The display board/ chart should be prominently visible to the clients. The DO’S and DONT’S should also be displayed similarly.
65Back office softwareMandatory from 1st April 2007 for DPs with more than 500 accountsMinimum featuresMaker-checkerApproval of verifier required for slips with value of transactions more than Rs.5 lakhsCapture of BO signature and retrieval for verification
66Back office software Minimum features ( contd…) Proper records of instruction slipsInventory controlDetails of serial numbers issued to a BOVerification of issue details with instruction slip serial no. submitted for executionBlocking of serial numbers already usedFacility to block serial numbers – reported as lost/ misplaced
67Back office software Sample selected – bigger clients Matching of statement of transaction from CDAS with backofficeSample selected – bigger clientsGenerate statement of transaction from CDAS and Backoffice for the same period and compareBack office (including web site) is updated regularlyCheck update procedure and frequencyBack up of data residing in back office
68Back office softwareBack office network connected to InternetTry accessing portals – preferably government sitesIf connected to internetCheck from system personnel for installation of firewallsCheck system policy for access rightsBack office network connected to CDSLCheck upload procedureMechanism to ensure integrity of filesCheck system controlsCheck access controls
70Transmission Notarized copy of Death Certificate Transmittee BO with CDSL DPReceipt of intimation of deathNotarized copy of Death CertificateNo execution of any instruction other than transmission request
71Transmission Joint holders Sole holder Nominee Holding > 100000
72Transmission Death of one of the Joint Holders Transmission in favour of surviving joint holdersDuly filled in TRFNotarized copy of death certificateClient master –DPA5 of the surviving joint holders if a/c is with other CDSL DPTransposition form - If a/c in different order of names
73Transmission Death of Sole Holder – Nominee Duly filled in Transmission request form(TRF)Notarized copy of death certificateClient master-DPA5 report of the nominee’s a/c if a/c with other CDSL DP
74TransmissionDeath of sole holder - No nomination – value of holding > 100,000Duly filled in TRF complete all respectNotarized copy of death certificateAny of the following :Succession CertificateLetter of AdministrationProbate of the willIn case of multiple successors- Each successor should submit separate TRF
75TransmissionDeath of sole holder - No nomination – value of holding < 100,000Duly filled in TRF complete all respectNotarized copy of death certificateLetter of suretyLetter of indemnityAffidavit from applicantNo objection letter from legal heirs who are not applicants
76TransmissionStatement of transaction to the transmittee after transmission
77Pledge/ Unpledge PLEDGE : Pledgor & Pledgee must have active accounts in CDSL DPPRF should be complete in all respectsPSN should be recorded on the PRFPledgor DP to send PRF and system generated letter to pledgorCopy of PRF to be kept on recordAcceptance of pledge – on the basis of PRF signed by pledgor DP
78Pledge/ Unpledge Initiated by pledgee – auto unpledge Initiated by pledgor - acceptance by pledgee DPURF should be complete in all respectsInvocationIRF should be complete in all respects
79Rematerialization RRF in duplicate signed by all the holders RRN to be generated on CDAS on the same day or the next working day from the date of receiptRRN noted RRF to be sent to Issuer/RTA within two days of receipt of RRFFollow up with RTA if not honoured within 30 days from the date of receipt of RRF by the RTACorrective action for rejected RRF
80Freeze /Unfreeze BO as safekeeping measure Initiation of FreezeBO as safekeeping measureDP based on instructions received from CDSL or statutory / regulatory authorityCDSL based on instructions received from statutory authorityVerification of signature – BO initiated freezeAcknowledgment letter to be sent to the BO
81Freeze /Unfreeze Freeze/ unfreeze requests received from BOs Records to be maintainedFreeze/ unfreeze requests received from BOsOrders from statutory authoritiescopies of acknowledgement sent to BOsRecord of despatch of acknowledgement copy
82Power of Attorney (POA) Verify signatures of the BOIf POA is granted by all joint holders to one person , POA should be signed by all such holdersCopy of POA – certified as “true copy” by BONotarization at the discretion of the DPIf expiry date is mentioned on POA, the same should be captured in CDASDP to have internal controls for expiry date
83Power of Attorney (POA) DP to have internal controls for expiry datePOA to single entity should not have any clause which is detrimental to the interest of the BODelivery Instruction slips to be issued only to POA holder and not to the BOInstructions to be routed only through the POA holderMerger of balances kept under various accounts to nullify the debit in any other account of the client without taking any further instructions from the constituentLien on the securities of the clients towards realization of the dues including broking related operations.
84BO Grievance BO Grievance Register to be maintained BO grievance report on monthly basis to CDSLResolve the grievance within 30 daysid for grievances(comm.816)
85Transaction statements Main DP to send transaction statements to all BOs including branch BOsTransaction statements to be sent at least once at the end of every month, if there has been any transaction. In any event, such statement has to be sent once at the end of each quarter to all BOsMaker checker concept in all other transaction to check unauthorized transaction
86Records & DocumentsProper filing system and maintenance of details of files for easy retrievalIf records are shifted to a different place – a log of such filesProper records of retrieval
87Records & Documents Separate record for each depository. Maintain records for a minimum period of 10 yearsVerify arrangements made for storage of documentsMaintenance of proper detailsMay check on sample basisCompliance officerEmployee of the DPIntimation of change to the depository
88Records & Documents Concurrent audit of risk prone areas Report on monthly basisAction taken by the DPConcurrent auditor to inform the serious non-compliances to depository