OPENING OF DE-MAT ACCOUNT BY EXEMPTED PF TRUSTS:
De-mat – Dematerialisation is a process by which the investors gets physical certificate converted into electronic balance maintained in his account with the depository participant.
Depository is an Organisation where securities are held in electronic form through the medium depository participants.
DP(Depository participants) is a representative of the depository in the system maintained clients securities accounts.
Advantages of De-mat.
1. No requirement of filling up the transfer deed and lodging for transfer. 2. Immediate transfer on registration of securities as against 3-4 months. 3. Shorter settlement cycle ensure prompt liquidity (transaction plus 5 days). 4. Eliminates bad deliveries.
5. Eliminates cost of wastage of time. 6. Reduction in brokerage.
7. Special concession on stamp duty. 8. Minimum handling of paper. 9. Avoiding cost of courier.
10. Avoidance loss in transaction/mutilation resulting in expenditure. 11. Receives interest direct to depository account as direct credit. 12. Avoid loss towards interest on interest.
13. Safety in holding.
14. Depository is like a bank.
15. Depository can legally transfer ownership to an institution account. 16. DP will intimate the status of holdings.
17. One can dematerialized debt instructions, mutual fund units, Government securities in his De-mat account. It can be held in a single De-mat account. 18. DP(Depository participant) will assist for selling dematerialized securities
and also purchase dematerialized securities.
Transactions in Government Securities:
The Reserve Bank of India has advised that RBI regulated entities will have to hold and deal in debt instructions in the De-mat form. As a result, in due course, entities like PF holding securities in the physical form may be faced with problem of liquidity on account of counter parties un willing to transact in the physical mode. The Reserve Bank of India, therefore, suggested to issue suitable instructions to PF trusts exempted under EPF & MP Act, 1952 to start the process of dematerializing the existing holding in their own interest.
To mitigate the difficulties in making the investments in physical form of securities as pointed out by Reserve Bank of India, Board of Trustees of establishments exempt under relevant provisions of EPF & MP Act, 1952 be allowed to keep the securities in DEMAT accounts with Scheduled Bank under the credit control of the Reserve Bank of India. Further it may be noted that RBI does not control all the brokers/private firms who are entitled to operate as depository participants of NSDL/CSDL. NSDL and CSDL do not open the DEMAT accounts directly, rather they operate through depository participants such as Scheduled Commercial Banks, private companies and brokers. For safe custody of funds exempted provident fund trusts should not be allowed to open DEMAT accounts with brokers/other private fund trusts should not be allowed to open DEMAT accounts with brokers/other private companies acting as depository participants. Accordingly such exempted trusts may open DEMAT account only with Scheduled Commercial Bank.
To encourage securities in DEMAT form, now Reserve Bank of India has stopped to issue Government Stock certificates in physical form. The State Bank of India, the portfolio manager for the EPFO has also desired that whenever securities are to be transferred either to exempted trust or EPFO requisition to transfer securities in DEMAT form should be forwarded alongwith particulars of CSGL account and all scheduled bank with whom CSGL account has been opened.
Consequent to cancellation of exemption, particulars of CSGL Account and of scheduled bank wherein the Employees’ Provident Fund Organisation has opened CSGL account would be furnished alongwith the cancellation order itself.
Henceforth, the securities are to be transferred only in Demat form to the CSGL Account of the Employees’ Provident Fund Organisation.
While transferring the securities the details in respect of securities transferred, date of transfer, date up to which interests have been credited to the Trust Accounts and next due date of interest on securities so transferred, may be intimated to the respective Regional Provident Fund Commissioner immediately.
It is therefore reiterated that the securities held by exempted Provident Fund Trust are to be immediately converted to Demat form. Wherever necessary, CSGL accounts for the purpose may be opened with scheduled banks under the control of Reserve Bank of India.
DEMATERIALIZED MODE:
The Reserve Bank of India has started encouraging holding of Government Securities in the dematerialized mode in the following ways:
All entities having a Subsidiary General Ledger (SGL) account with RBI are allowed to open Constituent Subsidiary General Ledger (CSGL) accounts on behalf of their clients.
Although being non-banks, depositories (NSDL/CDSL) and organizations such as SHCIL have been provided an additional SGL account to open CSGL accounts on behalf of their clients.
The cost of postage incurred by the depositories on remitting interest and redemption proceeds is being reimbursed by RBI so as to encourage dematerialized holding and retail participation in Gilts.
Guidelines have been issued to the banks prescribing the safeguards to be adopted for maintenance of CSGL accounts.
To import transparency in Government Securities traded by clients (though CSGL accounts), a special feature has been incorporated in the Negotiated Dealing System (NDS) for reporting and settlement of such trades. Provisions has also been made in the NDS for giving quotes on behalf of clients i.e CSGL account holder.
In the light of some fraudulent transactions, in the guise of Government Securities transactions in physical format by a few co-operative banks with the help of some broker entities, the Reserve Bank of has now proposed the following measures to accelerate the trading in dematerialized form:
All entities regulated by RBI (including financial institutions (FIs),
primary dealers (PBs), cooperative banks, RRBs, local area banks (LABs), non banking financial companies (NBFCs) should necessarily hold their investments in Government securities portfolio in either SGL (with RBI) or CSGL (with a schedule commercial bank/ State Cooperative Bank/PD/FI/sponsor bank (in case of RRBs)
and SHCIL or in a dematerialized account with depositories (NSDL/CDSL).
Only one CSGL or dematerialized account can be opened by any such
entity.
In case the CSGL accounts are opened with a scheduled commercial
bank or state cooperative bank, the account holder has to open a designated funds account (for all CSGL related transaction) with the bank.
In case a CSGL account is opened with any of the non-banking
institutions indicated above, the particulars of the designated funds account (with a bank) should be intimated to that institution.
The entities maintaining the CSGL / designated funds accounts will
be required to ensure availability to clear funds in the designated funds accounts for purchases and of sufficient securities in the CSGL account for sales before putting through the transactions.
No further transactions by a regulated entity should be undertaken in
physical form with any broker with immediate effect.
SUBSIDIARY GENERAL LEDGER (SGL) ACCOUNT:
The Reserve Bank of India has extended the facility of holding Government securities in Subsidiary Ledger Form to all exempted Provident Funds. The Public Debt Offices of Reserve Bank of India has permitted the exempted trust to hold a minimum balance of Rs.10,000/- to open an SGL Account. This facility was allowed in the year 1987.
2. In order to ensure efficient payment and settlement system in respect of transactions in Government Securities, Reserve Bank of India, in consultation with Government of India has introduced the Delivery Versus Payment (DVP) System with effect from 17th July 1995. Under this system, it is obligatory for the SGL Account holders to effect simultaneous fund transfer through their current account with Reserve Bank of India along with the transfer of securities held in the SGL accounts. As such those SGL account holders not having current account with the Reserve Bank of India are not eligible to maintain their SGL accounts with the Reserve Bank of India. Provident Fund Trusts and approved brokers, etc., are not eligible to open current account with the Reserve Bank of India. Accordingly Provident Fund Trusts, etc. have been advised to transfer their existing SGL holdings to SGL Account No.II of a Commercial Bank of their choice or convert their holdings into stock certificates. Commercial Banks have allowed to open additional SGL Account with Reserve Bank of India for transaction in Government Securities on behalf of their clients. Stock Certificates are transferable by just completing the transfer deed and by tendering the same at the Public Debt Office of the Reserve Bank of India for registration. In other words, the holdings in the form of stock certificate do no inhibit the holders from selling, transferring or gifting the same to others. The Stock Certificate holders also enjoy the benefit of receiving half-yearly interest warrants in respect of their holdings to their respective registered addresses without lodging of the original securities with Reserve Bank of India for claiming interest. The level of service available in respect of stock certificates will be the same as in the case of holdings in SGL Account.
3. The exempted establishments may maintain an SGL Account with a Commercial bank and obtain periodical certificate of holding with shall be verified by the Assistant Provident Fund Commissioner / Enforcement Officer. Alternatively, the securities may be kept in the form of Stock Certificates.
CONSTITUENT SGL ACCOUNT:
Subsidiary General Ledger (SGL) account is an account maintained by banks and other select financial institutions with the Reserve Bank of India (RBI). The Public Debt Office (PDO) maintains SGL Accounts of banks, which have a record of their holds of Government of India and State Government Securities. The Public Accounts Department (PAD) of the RBI maintains SGL accounts of banks, which have a record of their holdings of Treasury Bills.
2. Banks are allowed to maintain two SGL accounts from Government Securities (G-Secs) with PDO and two accounts for Treasury Bills (T-Bills) with the PAD. The first account in each case is for the bank’s holdings of G-Secs and T-Bills on its own account. The second account in each case is for G-Secs and T-Bills, which the bank holds on behalf of its constituents and is termed the Constituent SGL account. The bank in turn maintains sub-accounts, which have a record of the holdings of G-Secs and T-Bills by each of its constituents.
TRANSFER OF SECURITIES BETWEEN CONSTITUENT ACCOUNTS:
The transfer of securities through the SGL accounts is done by means of a SGL Transfer Form. The seller of a security instruct this bank to execute a SGL Transfer Form in favour of the buyer of the security’s bank, which gives details of the transactions. This SGL Transfer Form is lodged by the buyer’s bank with the RBI. On receipt of the SGL Transfer Form the RBI debit the seller’s bank’s SGL account and credit’s the buyer’s bank’s SGL account with the face value of the security transacted. Simultaneously the RBI debits the buyer’s bank’s current account and credit’s the seller’s bank’s account with the proceeds of the transaction. This settlement system is known as Delivery-versus-Payment (DVP) and it eliminates settlement risk.
2. All transactions will be carried on receipt of the client instructions. The Settlement paper work, and RBI liaison is done by the concerned banks.
3. The settlement will not take place in the following cases:
SGL Transfer Form improperly executed.
Seller has insufficient balance in SGL Account Buyer has insufficient
balance in Current Account.
Since the bank’s current account with the RBI gets debited in case of
purchase by the bank or by the bank’s constituent, the constituent must have clear funds in its Current / Savings account with the bank to enable the transaction to be put though.
4. The constituent will receive a Debit / Credit advice for both the SGL as well as the Current / Savings account if a transaction is put through on its behalf.
COUPON / REDEMPTION PROCEEDS:
The RBI credits the Coupon and Redemption proceeds for G-Sec/T-Bill to the bank’s Current Account with the RBI. The constituent will receive a credit advice for the amount credited to its Current / Savings account immediately on receipt of the funds from RBI.
2. The present long prevalent scrip-based system has traditionally involved paper work involving stock certificates in paper form and transfer deeds. The process beginning from purchase of securities, getting the securities duly endorsed in the buyer’s name and depositing in safe custody is complex and time consuming.
3. RBI’s Subsidiary General Ledger (SGL) account system essentially aims at eliminating the cumbersome paper work involved in the scrip-based system and also assures risk-free and ‘paperless’ trading.
4. Advantages of holding securities in a Constituent SGL account rather than as Physical stock certificates:
When any trust buys securities via the constituent SGL account, the
Securities are transferred to the name of the trust immediately on confirmation of a valid delivery-versus-payment transaction. If scripts are purchased in physical form the trust will have to wait for over one moth for scripts to be transferred in their name, while the trust has already paid the seller the full consideration. Thus the trust will have to take settlement risk on the seller of the security, who may be a broker or NBFC . The SGL account system has been designed by RBI to eliminate risk of default, which the investor may face while transacting in government securities.
When the trust’s bid is successful at a RBI auction, RBI may directly credit
the securities allotted into the SGL account. Any refund amount will be directly be credited into the trust’s bank account. Thus the trust will be spared the bother of collecting refund and securities from the Reserve Bank.
There is no requirement of filling transfer deeds and lodging the transfer
documents with the RBI, thus saving paper work and time for the trust. To operate an SGL account the trust would have to instruct the bank regarding the execution of a transaction. All the settlement paper work is done between the concerned banks. The client will receive a memo after every transaction.
The bank also allows non-Mumbai trusts to maintain their bank accounts in
their city but purchase securities in Mumbai. This enable a non-Mumbai trust to take advantage of the deeper security market in Mumbai. Additionally, as Treasury bills are only transacted in Mumbai the non- Mumbai trust will also be able to invest in the same.
Since all transactions are by book entry, consolidation, transfer or splitting of
a security between various trusts can be effected easily and quickly.
There is no scope of any risk of loss, theft or fraud with regard to stock
certificate. If securities are maintained in a Constituent SGL account it is not necessary to have a safe custody account for Government Securities and Treasury Bills, thereby saving the safe custody charges.
The Bank provides the statement of holdings on a monthly basis. This will
aid in audit and valuation of the trust’s holding.
The bank will collect interest on SGL holdings on behalf of the constituent
and will credit the constituent’s bank account at no extra cost. As the recent budget has removed tax reduction at source on government securities, the full amount of interest as paid by RBI will be credited to the client’s account. As per the investment guidelines, any interest earned has to be reinvested in similar category of securities. The Bank can also offer quotes for sale of securities to its client for their investments.
NATIONAL SECURITIES DEPOSITORY LTD
The NSDL (National Securities Depository Ltd) provides opening of Demat Account in NSDL system. The Employees’ Provident Fund Organisation has also opened demat account in the NSDL system and has dematerialized and significant part of its non-SLR holdings. All the PF Trusts should be advised to hold their Securities in demat form.
For more details on DP and Demat, Please consult the Website