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DEPOSITORY PARTICIPANTS AUDIT

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

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DEPOSITORY PARTICIPANTS AUDIT

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  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

  6. 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

  7. 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)

  8. 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 13.12.08) • Address: Trade World, a Wing, 4th &5th Floors Kamala Mills Compound Lower Parel Mumbai 400013 website: nsdl.co.in

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

  10. 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

  11. 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 4.08.08 • Address: Phiroz Jeejeebhoy Towers 16th Floor, Dalal Street Mumbai website: www.cdslindia.com

  12. A Bank-Depository Analogy

  13. 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.

  14. 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

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

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

  17. 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

  18. 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

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

  20. 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

  21. 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

  22. 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

  23. Account Opening • 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

  24. 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)

  25. 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

  26. 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

  27. 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

  28. 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

  29. 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

  30. 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

  31. 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 1950/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

  32. Account Opening 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

  33. Account Opening 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

  34. 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

  35. Account Opening • 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

  36. 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

  37. Account Modification • Change in address • Individuals • 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

  38. Account Modification • Change in signature of the BO • Individuals • 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

  39. 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

  40. The sample selection • 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)

  41. 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

  42. 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

  43. 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.

  44. 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.

  45. Account Closure • Closure initiated by BO • Closure initiated by DP

  46. 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

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

  48. Initiated by BO • 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

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