Government of India Volume I: Analysis and Recommendations

FOUNDATIONS OF CONTRACTS AND PROPERTY
Table of Recommendations 13.4 Depositories
The Commission recommends:
◮ Allowing depositories to store securities, including Government securities and records of other financial services
in electronic format only;
◮ Recognising the title of the consumer and the custody of the depositary from such electronic records;
◮ Allowing depositories to making records of pledge or hypothecation which are legally recognised; and
◮ Allowing depositories to communicate with trading platforms and making changes to records accordingly.
structure in this field consists of regulators focusing on the goal of market integrity and
ensuring that Infrastructure Institutions are performing their functions in this regard adequately.
The requirements placed upon Infrastructure Institutions would have adverse implications
for the costs of setting up new Infrastructure Institutions and the costs incurred
by users of such institutions. Hence, the draft Code envisages a review, conducted by the
Regulator every five years, that examines the balance that has been obtained between
the regulatory objectives and competitive dynamics.
13.5. Special provisions for Infrastructure Institutions
Infrastructure Institutions require special protection in the laws to ensure transactions to
be final. This requires certain classes of such institutions to have certain privileges in law
not available to private parties. The Commission found that the privileges should only
be given to such institutions if they are regulated. These privileges are applicable in the
areas of:
1. Acting as depositories;
2. Settlement;
3. Clearing
13.5.1. Depositories
Securities are intangible property. The only proof of the property is the contract (which is
a written obligation). This creates unique challenges in relation to establishing ownership
of such securities because:
1. Transfer of various types of financial products like shares or debentures can be easily forged (if
they are paper based);
2. Paper based contracts are prone to destruction or loss; and
3. Modern financial systems operate on electronic systems.
The depository system for securities has been an efficient solution to the problems
of securities and their title. Table 13.4 sets out the detailed recommendations of the Commission
in relation to depositories.
13.5.2. Finality of settlements
A multitude of trades result in a multitude of obligations among the members. In an organised
financial system, these are netted to result in consolidated obligations of each
member to the CCP. The settlement so arrived at, must be final as against any claim by any
creditor (including liquidator) of a member outside the closed system of the trading. In
other words, legal certainty of transactions in organised financial trading is achieved only
by making the netted obligations bankruptcy remote to the members of the organised financial
system. Table 13.5 sets out the recommendation of the Commission to protect
settlements on exchanges.
FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION 125