1. DEPOSITORY PARTICIPANTS AUDIT
BY SAMRISH BHANJA(FCS, LLB)
PROPRITOR,
B SAMRISH & CO

2. Introduction & 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 adequate
But 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.

3. Concept 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.).

4. The Depositories Act, 1996
The 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; and
Exempting all transfers of shares within a depository from stamp duty.

5. Constituents of depository system
There are basically four participant:
The Depository
The Depository Participant
The Issuing Company
The Investor

7. Who 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

8. Features of depository system in India
In the depository system, the apex body is the Depository..
A depository can be compared with a bank
Depository services through depository participants.
Fungibility
Registered Owner/ Beneficial Owner (two types of owner)

9. NATIONAL SECURITIES DEPOSITORIES LIMITED
NSDL is the first and largest depository in India, and established in August 1996
It has 267 depository Participants (as on )
Address:
Trade World, a Wing, 4th &5th Floors
Kamala Mills Compound
Lower Parel
Mumbai website: nsdl.co.in

10. PROMOTERS OF NSDL Industrial Development Bank of India Limited
Unit Trust of India
National Stock Exchange of India Limited

11. SHAREHOLDERS OF NSDL State Bank of India Oriental Bank of Commerce
Citibank
Standard Chartered Bank
HDFC Bank Limited
The Hongkong and Shanghai Banking Corporation Limited
Deutsche Bank
Dena Bank
Canara Bank
Union Bank of India

12. CENTRAL DEPOSITORY SERVICES (INDIA) LIMITED
This is the second depository in India.
This was formed and registered in 1999.
It has 455 DPs as on
Address:
Phiroz Jeejeebhoy Towers
16th Floor, Dalal Street
Mumbai website:

13. A Bank-Depository Analogy

14. Who 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.

15. Who 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 bank
Custodians,
Stockbrokers,
A clearing corporation or a clearing house of a stock exchange
A non-banking finance company,
A registrar to an issue or share transfer agent

16. Types of ownership
In the depository system, the ownership of securities dematerialized is bifurcated in to:
REGISTERED
OWNER
BENEFICIAL
OWNER

17. Benefits of depository system/holding securities in dematerialized form
Depository system provides benefits to:
The investors, and
The issuers.

19. Scope of Internal Audit
Evaluating the adequacy of internal controls
Suggesting ways to reduce the costs and promote efficiency
Assessing the compliance with the applicable laws and regulations
Assist management in decision making
Backbone of a sound corporate governance system
CA Rajkumar S. Adukia

20. Need for Internal Audit
Increased complexity of businesses
Enhanced compliance requirements
Focus on risk management and internal controls to manage them
Unconventional business models
Intensive use of information technology
Stringent norms mandated by regulators to protect investors
An increasingly competitive environment
CA Rajkumar S. Adukia

21. What is an opportunity?
Every event has two exhaustive classification namely
Opportunity
Risk
CA Rajkumar S. Adukia

22. Listing of Broad Opportunities in Internal Audit
Internal Controls Auditing
Internal Audit Functions/Requirements Under Various Laws
Enterprise Risk Management – The ERM Role
Audit of Compliance of Standards on Internal Audit
Monitoring XBRL Implementation and Reporting Results
Audit of IFRS Convergence
Forensic Audit
CA Rajkumar S. Adukia

23. Listing of Broad Opportunities in Internal Audit
Fraud Detection
Internal Audit and Corporate Governance
Internal Audit Of Management Functions
Stock Audit/Credit Audit
Internal Audit of Compliance with Commercial Laws
Due Diligence
Social Audit
CA Rajkumar S. Adukia

24. Listing of Broad Opportunities in Internal Audit
Environmental Audit
Corporate Social Responsibility (CSR) Audit
ISO 9000 Audit
Cyber Audit
Industry Specific Internal Audit Programs
Assurance Services
Internal Audit of Tendering Process
Audit of Sustainability Initiatives and Integrated Reports
CA Rajkumar S. Adukia

25. Account Opening Agreement to be executed under stamp & signature of DP
Agreement to be executed before opening an account
Agreement to be executed under stamp & signature of DP
Printed agreement with printed name of DP and signed
Agreement not signed by DP or BO
No agreement
Agreement not produced for verification at the time of inspection
Account to be opened based on Account Opening Form
Single form for multiple accounts of same exchange for a CM
Stamp duty document by sharmila

26. Account Opening Proof of Identity & Proof of Address Observations:
No POI
PANCARD 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 mismatches
Non-compliance pointed should be as per SEBI guidelines only
Bank statement obtained as proof of address(comm.807,967)
Stamp duty document by sharmila

27. Account Opening ‘In Person verification’(comm.978 )
Applicable for accounts opened after October 22,2007
DPs to do In Person verification of the applicants at the time of opening of demat accounts
Authorized official of DP should personally verify the photograph(s) affixed on the AOF and proof of identity document

28. Account Opening
DP 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” stamp
Authorized official doing in person verification and verification of documents with original should sign under the DP stamp

29. Account Opening Methodology Type of documents Validity of documents
Signature of DP official and stamp
Stamp 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 stamp
Verify with the documents that only authorized official of DP has signed,check the authority of the person doing the same

30. Account 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 Incorporation
POA- Document registered with registering authority or bank statement or agreement for sale or leave license agreement or acknowledged copy of income tax return
OCB:
Declaration from the OCB that it meets with the guidelines issued by RBI/Ministry of finance

31. Account Opening
Additional Documents to be collected from different type of BOs(contd…)
OCB(contd):
Certificate from overseas auditors in form OAC-1
Statement of A/c from the bank
Registered 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

32. Account Opening
Additional Documents to be collected from different type of BOs
Banks
Certificate of Incorporation or copy of RBI registration certificate in case of scheduled/co-operative banks
POA -Proof of address – document registered with registering authority / agreement for sale/ leave and license agreement / acknowledged copy of income tax return
Mutual funds
SEBI Registration Certificate clearly indicating the address of the mutual fund

33. Account Opening
Additional Documents to be collected from different type of BOs
Public 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,1860
PANCARD of trust
Proof of address
Proof 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

34. Account Opening Private Trust
Additional Documents to be collected from different type of Bos
Private Trust
PAN card of the trust
Recognized Funds/trusts /other Similar entities
Categories :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

35. Account Opening Certificate of registration
Additional Documents to be collected from different type of Bos
Recognized 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 SEBI
Documents :
Certificate of registration
Trust deed and rules and/or charter defining their constitution and providing for management thereof
List of members on the Board of trustees/Governing body
Certified true copy of resolution passed by Board of trustees/Governing body

36. Account Opening
Names of the authorized signatories,designation and their specimen signatures duly verified by the managing trustee
One passport-size photograph of all authorized signatories with signature across photograph
PAN card of Fund/Trust/Entity
POA 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

37. Account Opening cannot have joint holders cannot appoint nominee
HUF account
cannot have joint holders
cannot appoint nominee
Observations :
-comments given in the report/against checklist point ‘No’
‘There is no account’
Disproportionately large no. of a/cs
Same name, Same address,Same bank account details,Same Pan card details
Observations:
-comments given in the report N.A. ,No such accounts
Nomination
Nomination form signed by all joint holders
Only individuals to appoint nominees and be appointed as nominee
A minor, represented by guardian, can be appointed as nominee
Two witness to sign the nomination form
Nomination register to be maintained
Nomination registration number ( as per register) to be noted on the nomination form
Details to be captured in CDAS

38. Account Modification
On 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 holder
Photocopy of bank statement having name and address of the BO and not more than 4 months old
Photocopy of bank passbook having name and address of the BO
Letter from bank

39. Account Modification Individuals Corporates Change in address
Proof of address - verified with original by DP official
Corporates
Certified true copy of Form 23
Latest transaction statement received from the DP
Verified with original
Confirmation letter to be sent to BO at old as well as new address

40. Account Modification Individuals Change in signature of the BO
Reason for change of signature
BO to visit personally with valid proof of identity
BO to affix new signature in the presence of a DP official
If BO cannot come personally
Modification form / letter to contain old and new signature
New signature – attested by the BO’s banker

41. A/c Modification Change in signature of the BO Corporates
Certified true copy of Board Resolution
Fresh list of authorized signatories
Bank – a letter on the letter head of the bank
Request for simultaneous change in address and signature
Normally should not be accepted
Abundant caution to be exercised

42. The sample selection all categories of BOs
DPA5 report
The sample should cover :
all categories of BOs
BOs with pin codes other than Main DP address
BOs with nominees
Minor BOs ( on the basis of date of birth)

43. The methodology POI and POA Type of documents Validity of documents
Signature of DP official and stamp
Necessary documents as prescribed by CDSL
Documents as per Operating Instructions
Ensure completeness and accuracy
PAN verification
Flag verification(comm.789)
Verified with original

44. What 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

45. Discrepancies 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 –NA
Details of dispatch maintained by the DP – Date of dispatch is not mentioned.

46. Common 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.

47. Account Closure
Closure initiated by BO
Closure initiated by DP

48. Initiated by BO Duly filled ACF/Letter from BO Signatures of all BOs
In case of transfer of holdings –
Duly filled in instruction slip
Transaction statement for the quarter
Account closed / to be closed
Proof of despatch
Final statement of account showing zero balance

49. Initiated by BO Power of Attorney holder cannot close
Procedure for transfer to be initiated within 2 days from date of receipt

50. Initiated by BO Non responding issuers / RTAs BO to submit
Closure with pending demat
Non responding issuers / RTAs
BO to submit
A letter in prescribed format requesting rejection
A letter giving details of DRN details duly signed and stamped by the DP
DP to follow up with Issuer?RTA for rejection

51. Withdrawal of DP
Option to BOs
Transfer to another DP
Rematerialise

52. Shifting of account New account in the same order of names
Documents to be submitted
ACF
Instruction slip – duly filled
Unused debit instruction slips
Client master report – stamped and signed by new DP
Verification of names and order of names

53. Initiated by DP Non payment of dues Violation of agreement with the DP
Reasons such as :-
Non payment of dues
Violation of agreement with the DP
Transfer to another DP/ Main DP due to closure of branch / Main DP
Notice of 30 days specifying the reasons
Proof of despatch and copy of the notcie to be maintained
No response – DP can initiate
Transaction statement – as per ‘closure initiated by BOs’

54. Delivery Instruction Slips

55. New Arrivals
Communiqué no Safeguards regarding issuance/ use/ execution of DIS and booklets
Issue 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

56. New Arrivals
Not 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.

57. New 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.

58. New Arrivals
Communiqué 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.

59. Common 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.
                          

60. Common 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.

61. Discrepancies in the inspection report
As explained/ informed by DP in case of:
Inventory control
Issue of first DIS
Procedure to be followed in case of issue of DIS without requisition slip
Dormant account
Fax indemnity
Blocking of DIS

62. New Arrivals
Communiqué 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

63. New Arrivals
To 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 reporting
mechanism, maintenance of registers, agreements, inventory
of instruction slip booklets, reconciliation procedures (if any
documents are forwarded to the main DP)

64. New Arrivals
To 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.

65. Back office software
Mandatory from 1st April 2007 for DPs with more than 500 accounts
Minimum features
Maker-checker
Approval of verifier required for slips with value of transactions more than Rs.5 lakhs
Capture of BO signature and retrieval for verification

66. Back office software Minimum features ( contd…)
Proper records of instruction slips
Inventory control
Details of serial numbers issued to a BO
Verification of issue details with instruction slip serial no. submitted for execution
Blocking of serial numbers already used
Facility to block serial numbers – reported as lost/ misplaced

67. Back office software Sample selected – bigger clients
Matching of statement of transaction from CDAS with backoffice
Sample selected – bigger clients
Generate statement of transaction from CDAS and Backoffice for the same period and compare
Back office (including web site) is updated regularly
Check update procedure and frequency
Back up of data residing in back office

68. Back office software
Back office network connected to Internet
Try accessing portals – preferably government sites
If connected to internet
Check from system personnel for installation of firewalls
Check system policy for access rights
Back office network connected to CDSL
Check upload procedure
Mechanism to ensure integrity of files
Check system controls
Check access controls

69. OTHER TRANSACTIONS

70. Transmission Notarized copy of Death Certificate
Transmittee BO with CDSL DP
Receipt of intimation of death
Notarized copy of Death Certificate
No execution of any instruction other than transmission request

71. Transmission Joint holders Sole holder Nominee Holding > 100000

72. Transmission Death of one of the Joint Holders
Transmission in favour of surviving joint holders
Duly filled in TRF
Notarized copy of death certificate
Client master –DPA5 of the surviving joint holders if a/c is with other CDSL DP
Transposition form - If a/c in different order of names

73. Transmission Death of Sole Holder – Nominee
Duly filled in Transmission request form(TRF)
Notarized copy of death certificate
Client master-DPA5 report of the nominee’s a/c if a/c with other CDSL DP

74. Transmission
Death of sole holder - No nomination – value of holding > 100,000
Duly filled in TRF complete all respect
Notarized copy of death certificate
Any of the following :
Succession Certificate
Letter of Administration
Probate of the will
In case of multiple successors- Each successor should submit separate TRF

75. Transmission
Death of sole holder - No nomination – value of holding < 100,000
Duly filled in TRF complete all respect
Notarized copy of death certificate
Letter of surety
Letter of indemnity
Affidavit from applicant
No objection letter from legal heirs who are not applicants

76. Transmission
Statement of transaction to the transmittee after transmission

77. Pledge/ Unpledge PLEDGE :
Pledgor & Pledgee must have active accounts in CDSL DP
PRF should be complete in all respects
PSN should be recorded on the PRF
Pledgor DP to send PRF and system generated letter to pledgor
Copy of PRF to be kept on record
Acceptance of pledge – on the basis of PRF signed by pledgor DP

78. Pledge/ Unpledge Initiated by pledgee – auto unpledge
Initiated by pledgor - acceptance by pledgee DP
URF should be complete in all respects
Invocation
IRF should be complete in all respects

79. Rematerialization 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 receipt
RRN noted RRF to be sent to Issuer/RTA within two days of receipt of RRF
Follow up with RTA if not honoured within 30 days from the date of receipt of RRF by the RTA
Corrective action for rejected RRF

80. Freeze /Unfreeze BO as safekeeping measure
Initiation of Freeze
BO as safekeeping measure
DP based on instructions received from CDSL or statutory / regulatory authority
CDSL based on instructions received from statutory authority
Verification of signature – BO initiated freeze
Acknowledgment letter to be sent to the BO

81. Freeze /Unfreeze Freeze/ unfreeze requests received from BOs
Records to be maintained
Freeze/ unfreeze requests received from BOs
Orders from statutory authorities
copies of acknowledgement sent to BOs
Record of despatch of acknowledgement copy

82. Power of Attorney (POA)
Verify signatures of the BO
If POA is granted by all joint holders to one person , POA should be signed by all such holders
Copy of POA – certified as “true copy” by BO
Notarization at the discretion of the DP
If expiry date is mentioned on POA, the same should be captured in CDAS
DP to have internal controls for expiry date

83. Power of Attorney (POA)
DP to have internal controls for expiry date
POA to single entity should not have any clause which is detrimental to the interest of the BO
Delivery Instruction slips to be issued only to POA holder and not to the BO
Instructions to be routed only through the POA holder
Merger of balances kept under various accounts to nullify the debit in any other account of the client without taking any further instructions from the constituent
Lien on the securities of the clients towards realization of the dues including broking related operations.

84. BO Grievance BO Grievance Register to be maintained
BO grievance report on monthly basis to CDSL
Resolve the grievance within 30 days
id for grievances(comm.816)

85. Transaction statements
Main DP to send transaction statements to all BOs including branch BOs
Transaction 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 BOs
Maker checker concept in all other transaction to check unauthorized transaction

86. Records & Documents
Proper filing system and maintenance of details of files for easy retrieval
If records are shifted to a different place – a log of such files
Proper records of retrieval

87. Records & Documents Separate record for each depository.
Maintain records for a minimum period of 10 years
Verify arrangements made for storage of documents
Maintenance of proper details
May check on sample basis
Compliance officer
Employee of the DP
Intimation of change to the depository

88. Records & Documents Concurrent audit of risk prone areas
Report on monthly basis
Action taken by the DP
Concurrent auditor to inform the serious non-compliances to depository

89. Thank You!!
CA Rajkumar S Adukia