Markets regulator Sebi is working on a new policy for orderly winding down of depositories in the events like a depository going bust or voluntary closure of business.
Depositories act like banks for securities and are basically custodians of demat accounts which are required to hold shares and other securities or to trade in them.
An investor needs to open a demat account through any depository participant, which can be a brokerage firm, for dematerialisation of his holdings and transferring securities.
There are two depositories in India — NSDL and CDSL — and they are considered among the most important infrastructure institutions for Indian capital markets.
Together, these two have got nearly 2.4 crore investor accounts, while they also maintain data for foreign investments into equity markets and the overseas investment limits for government and corporate debt securities.
A suggestion for putting in place a policy for orderly winding down of depositories has been made by Sebi’s Depository System Review Committee, which includes Sebi officials as also industry and independent experts.
In its Action Taken Report on recommendations of this panel, the regulator has said that an “appropriate policy in this regard would be framed after examining the need for amendment in applicable laws and regulations.”
The committee observed there is no specific laid-down system or procedure as of now for orderly winding up of depositories.
Such winding-down can occur in cases like voluntary winding up by a depository, a depository going bust due to general business risk, fraud at their end, or a depository being wound up due to regulatory action or court order.
“In Indian depository micro structure, there are two depositories. In the event of failure, disruption or winding up of one depository, all the demat accounts and securities held with stressed depository can be potentially moved to another depository without affecting the interest of investors,” the panel felt.
Consequently, it recommended that there is a need to have a well documented framework for orderly winding down of the depository operations, including making necessary legal provisions in the regulations, rules and Depositories Act.