Dematerialisation: A digital revolution in Indian finance

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Source: The post is based on an article Dematerialisation: A digital revolution in Indian finance” published in The Business Standard on 20th September 2022.

Syllabus: GS 3 – Indian Economy –

Relevance: evolution of the securities market in india

News:  The number of dematerialized accounts in India recently crossed 100 million. There is a need to look at the evolution of the system.

History of Dematerialization

1993: The foreign institutional investor (FII) started increasing. However, the system of physical shares resulted in the harassment of domestic investors by bad deliveries and fake certificates.

Due to these issues the Stock Holding Corporation of India proposed for building a depository by immobilising share certificates.

Later NSE proposed to eliminate the physical share certificates with dematerialisation which was about one-sixth the cost of the physical certificates.

This type of depository was first introduced within NSE and it was named as National Securities Depository Ltd (NSDL).

1995: The digital depository required legal reforms which were brought by the Depositories Ordinance in September 1995. The word demat was first introduced in this ordinance.

Later, other reforms were also brought to solve various other issues associated with stocks of the companies, stamp duty, securities, income tax, etc.

What were the transformations brought by the Indian government?

According to the Stamp Act, the revenues from the duty levied on securities are assigned to states.

The stamp duty rates for select instruments are to be decided by the Government of India (GoI) and the balance instruments by states.

Different states have their own stamp duty legislation because of the subject mentioned in the Concurrent List.

This led to differential rate structures on the same instruments across states which required uniformity.

This problem of uniformity of rates was solved in 2019 by amending Ordinance Act of 1995.

How the institutional set-up of securities markets changed in India?

The transformation of the Indian securities markets was led by setting up new institutions.

National Stock Exchange (NSE), National Securities Clearing Corporation (NSCC) and then National Securities Depository Limited (NSDL) came up in the securities market of India.

National Securities Depository Limited is an Indian central securities depository, based in Mumbai. It was established in August 1996 as the first electronic securities depository in India with national coverage.

Moreover, the government has expected the problems of monopoly of a single depository (NSDL).

Therefore, BSE build a competitor to NSDL which was called the Central Depository Services Ltd (CDSL). Today, CDSL has more accounts than NSDL.

These institutions proved to be beneficial for India in many ways.

What were the benefits of these institutions?

These institutions have helped in cutting operational prices with the increase in output volumes.

NSDL helped in designing of the New Pension System.

A Central Recordkeeping Agency was created that stored facts about each pension system participant for decades and supported frictionless transfers from one pension fund manager to another.

NSDL was also the institutional foundation for building the Tax Information Network for the income tax system.

NSDL and CSDL also have various other benefits also such as it can easily store government bonds and securities for issuers (either private or governments) overseas.

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