NISM Series VI · Unit 2 of 12 · about 10% of the paper
Introduction to depository: NISM Series VI notes and practice questions
Why depositories exist, the law behind them, and how holding securities electronically differs from holding certificates.
What to know in Unit 2
- Problems of physical securities.
- Depositories Act, 1996.
- NSDL and CDSL.
- Beneficial owner and registered owner.
Key terms, examples and exam traps
Depository
A depository is an organisation that holds securities of investors in electronic form and facilitates their transfer through book entries.
Example. An investor's shares are held as electronic records instead of paper certificates.
Exam trap. This statement is false: A depository is a stock exchange that lists new companies.
Problems of physical securities
Physical certificates carry risks of loss, theft, forgery, bad delivery and delay in transfer and paperwork.
Example. A certificate lost in transit has to be replaced with effort and cost.
Exam trap. This statement is false: Physical certificates cannot be lost or forged.
Depositories Act, 1996
The Depositories Act, 1996 provides the legal framework for depositories, dematerialisation and the transfer of securities by book entry.
Example. The Act lets securities be held and transferred without certificates.
Exam trap. This statement is false: The Act applies only to physical securities.
NSDL and CDSL
India has two depositories, National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL).
Example. An investor may open her demat account with a DP linked to either depository.
Exam trap. This statement is false: India has a single depository for all securities.
Beneficial owner
The beneficial owner (BO) is the person whose name appears in the depository's records as the owner of the securities and who enjoys their benefits.
Example. The investor receives dividends and votes on her demat shares.
Exam trap. This statement is false: The depository enjoys the benefits of securities held by BOs.
Registered owner
In the issuer's books the depository appears as the registered owner of dematerialised securities but holds them for the beneficial owner.
Example. The company's register shows NSDL as holder of shares held in demat form.
Exam trap. This statement is false: The registered owner has voting rights over the shares.
Fungibility
Securities held in a depository are fungible, so no distinguishing numbers or certificate marks are kept for individual securities.
Example. Any 10 shares of a company are equal to another 10 shares of the same company.
Exam trap. This statement is false: Each demat share keeps its own distinctive number.
Benefits of the depository system
Holding in demat form saves time, avoids bad delivery, reduces paperwork, allows trading in single-share lots and speeds up transfer.
Example. An investor can sell a single share without any certificate.
Exam trap. This statement is false: Demat holding makes transfers slower than physical holding.
Depository versus bank
A depository holds securities of investors just as a bank holds their money, and transfers move by book entry.
Example. Shares move from one demat account to another like money between bank accounts.
Exam trap. This statement is false: A depository pays interest on securities held with it.
6 practice questions
Read each question and choose your answer before opening the free mock, which shows the correct answer and the reason.
Q1. Which statement best describes “Registered owner”?
- Government securities (G-secs) are debt instruments issued by the central or state governments, and they carry the lowest credit risk.
- In the issuer's books the depository appears as the registered owner of dematerialised securities but holds them for the beneficial owner.
- Securities may be delivered at the usual pay-in time or earlier, called early pay-in, and the DP processes instructions before the deadline.
- SEBI does not permit the transfer of listed securities in physical form, other than for transmission and transposition, so securities must be dematerialised before transfer.
Q2. Which term is described here? The beneficial owner (BO) is the person whose name appears in the depository's records as the owner of the securities and who enjoys their benefits.
- Debt securities
- Beneficial owner
- Buyback
- Demat credit on allotment
Q3. Which statement best describes “Benefits of the depository system”?
- A foreign portfolio investor (FPI) is a registered foreign investor who invests in Indian securities through a demat account with a DP, and who must be registered through a designated depository participant.
- Holding in demat form saves time, avoids bad delivery, reduces paperwork, allows trading in single-share lots and speeds up transfer.
- Rematerialisation converts demat holdings back into physical certificates at the investor's request.
- Government securities (G-secs) are debt instruments issued by the central or state governments, and they carry the lowest credit risk.
Q4. Which statement best describes “Fungibility”?
- Securities held in a depository are fungible, so no distinguishing numbers or certificate marks are kept for individual securities.
- For a BSDA, the annual maintenance charge is nil for holdings up to ₹4 lakh and up to ₹100 plus GST for holdings above ₹4 lakh and up to ₹10 lakh.
- Application Supported by Blocked Amount (ASBA) blocks the application money in the investor's bank account until allotment, instead of debiting it.
- A DP must keep investors' securities separate from its own and cannot use client securities for its own benefit.
Q5. Which statement best describes “Depository versus bank”?
- While securities are pledged, the pledgor continues to enjoy corporate benefits such as dividends, as the pledgor remains the beneficial owner.
- The beneficial owner (BO) is the person whose name appears in the depository's records as the owner of the securities and who enjoys their benefits.
- A nominee may be a minor, with a guardian appointed to act for her.
- A depository holds securities of investors just as a bank holds their money, and transfers move by book entry.
Q6. Which term is described here? A depository is an organisation that holds securities of investors in electronic form and facilitates their transfer through book entries.
- Beneficial owner
- Depository
- Rights issue
- NSDL and CDSL
Frequently asked questions
How much of NISM Series VI comes from Unit 2?
Unit 2 (Introduction to depository) usually carries about 10% of the questions. The whole exam has 100 questions and the pass mark is 60%.
What should I study in NISM Series VI Unit 2?
Problems of physical securities. Depositories Act, 1996. NSDL and CDSL. Beneficial owner and registered owner.
Are these NISM Series VI practice questions free?
Yes. Take the full free mocks to see the correct answer and the reason for every question.
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