Record Of Depository Is Prima Facie Evidence For Shares In Depository Form

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Section 46 of the Companies Act talks about the certificate of shares and that such certificate of shares are the prima facie evidence of the title of the person to such shares. Under clause 4 of this section it has been mentioned that in case a share is held in a depository form then the record of the depository will be the prima facieevidence of the interest of the beneficial owner i.e. where previously share certificate was held to be the evidence now the record of depository will act as the prima facie evidence. To understand this clause more appropriately we need to first understand the basic concepts like what is depository, how do we hold shares in depository form and who is a beneficial owner and then we will be able to understand the ratio behind this section.


Depository has been defined in Section 2(1)(e) of Depositories Act, 1996. It is an entity that facilitates the paperless purchase and sale of securities such as shares. The procedure pertaining to depositories is primarily controlled by the SEBI’s regulations and bye laws, as well as the depositories’ powers under the Depositories Act. A scheme for establishing depositories has been established to record ownership details in book entry forms. Investors in shares are given the option to continue with the existing system of ownership and transfer through share certificates or to come under the depository mode. A depository serves as a conduit between listed companies that issue shares and shareholders. Each depository has to register itself with SEBI and to obtain from it a certificate for commencement of business. It issues these shares through depository participants, or DPs, who are the agents of these depositories. Such agency can be conferred on banks, financial institutions, or large corporate brokerage firms or any other business that meets SEBI’s norms.

A shareholder who joins a participant, his shares gets dematerialized from the physical form of certificate of shares. His name will be entered in a book showing him as a beneficial owner. In the company’s records the depository will be shown as the registered member. But all the benefits of shareholding will remain vested in the individual shareholders. A shareholder also has the right to withdraw from this scheme after joining it through rematerialisation of shares where his shares are again converted into physical form by the depository. His share certificate will be restored to him and his name is brought back to the register of members.

In India, there are currently two operational depositories i.e. NSDL & CDSL. The Depository Act of 1996 cleared the path for the formation of NSDL (National Securities Depository Ltd) and CDSL (Central Securities Depository Ltd). The National Stock Exchange, Industrial Development Bank of India, and Unit Trust of India are among the sponsors of NSDL, while the Bombay Stock Exchange, State Bank of India, and Bank of India are among the sponsors of CDSL.

Need and advantages of depository

With the introduction of collateral-based payment systems, the depository system provides a less risky settlement as well as more profits from increasing trading volume, which is made feasible by NCDS systems with lower operational costs per transaction and lower risk. Since money is not held in reserve for lengthy periods of time, cash flow is enhanced. This system has also opened up opportunities for the growth of retail brokerage firms and the development of more sophisticated custodial services for smaller investors. NCDS, registrars, and other intermediates now communicate in a consistent manner. It’s also possible to build up pledges without transferring real scrip, so enhancing overall trading activity, liquidity, and profitability.

Furthermore, the loss of physical scrip and speedier settlements has caused reduction in financial loss and decrease in registration delay. Despite the fact that India has a vibrant capital market that dates back over a century, the paper-based settlement of transactions has resulted in substantial challenges such as bad delivery and delayed title transfer. The Depositories Act of August 1996 paved the way for the establishment of the National Securities Depository Limited (NSDL), India’s first depository. This repository, which was encouraged by national agencies responsible for the country’s economic growth, has since developed a national infrastructure of international standards that handles the majority of trade and settlement in the Indian capital market in dematerialized form.

A depository’s one of the main advantages is that it removes the risk associated with holding the securities in physical form. Previously, the buyer always had the fear of whether the shares had been successfully transferred to his account and that no theft, damage, or loss had occurred further there was also a risk of forgery and counterfeit due to bad deliveries. But after the depository system was introduced such risks were eliminated to a great level because the shares were held and transferred electronically. There was also a decrease in the amount of paperwork required in trading, which sped up the process of transferring shares. Foreign investors felt more confident trading in the Indian market because of the depository system, since there were many fewer incidents of forgery, delays, and dishonest share transfers. New instruments and services provide more alternatives for investment, as well as quicker delivery of benefits and rights as a result of business actions. Shareholder rights are also better protected as a consequence of more timely information from the issuer and lower transaction costs due to increased efficiency.


The system keeps track of shareholder’s names and addresses up to date. There will also be cost reductions on future issues due to lower printing and distribution expenses. It might also lead to higher registrar and transfer agent efficiency, as well as improved communication with shareholders, such as expressing the advantages of corporate activities and providing informative notices. Furthermore, the opportunity to attract international investors will be enhanced without having to bear the costs of issuance in foreign markets.

What is record of Depository

According to Section 6 of the Depositories Act, 1996 after the issuer receives the receipt of the share certificate he is supposed to cancel this certificate and make a record in its entries with the depository’s name as the registered owner of that security and inform the depository of the same. A depository shall, on receipt of such information, enter the name of the person referred to in its records, as the beneficial owner. This record is known as the record of depository. Shares in a depository record are not required to be given their distinctive numbers as in case of physical certificate.

Record of Depository vs Certificate of Shares

According to Section 46 of Companies Act in case a person holds a share in physical form then the share certificate (issued under the common seal, if any, of the company or signed by two directors or by a director and the Company Secretary, wherever the company has appointed a Company Secretary) specifying the shares held by any person, shall be said to be the prima facie evidence of the title of the person to such shares. But as it has been seen previously in the article that with the changing times a lot of people have opted for dematerialization of their shares from the physical form where they are supposed to enter into an agreement with the depository and surrenders his share certificate to the issuer, and hence in this case the question arises what will be treated as the proof of their interest and title in the shares.

In this case Section 46(4) of Companies Act comes into picture where record of Depository was given the prima facie evidentiary value of the interest of beneficial owner in the shares. One difference that is seen between the two is that share certificates are the evidence of title i.e. registered ownership of the person but record of depository are the evidence of not title but the beneficial interest i.e. beneficial ownership of the investor. Therefore we can conclude that the record of depository holds a similar value for proving the interest of a beneficial owner in the shares as that of certificate of shares used to hold in proving the title of investor in physical shares.

Beneficial Interest of beneficial owner and Prima facie evidence.

As it has been observed that record of depository is the prima facie evidence of interest of beneficial owner therefore it also need to be understood what is beneficial owner and what is this interest that is being talked about. When an investor holds shares in physical form he is said to be the registered owner of the shares but when he converts these shares into dematerialized form with the depository then the registered ownership gets transferred to the Depository and the Investor is thereby made the Beneficial owner of the shares. Beneficial Owner is basically a person who enjoys the benefits of ownership even though the title is there with someone else. Therefore the title of the share is with the depository but it cannot claim the beneficial rights associated with the shares since the beneficial ownership is with the Investor.

In a similar way the interest which is talked about in this section is the beneficial interest of the BO. Under Section 89 of Companies act two types of interest in shares are identified – Beneficial interest and legal interest. Legal interest is vested with the registered holders of the shares and beneficial interest is the right or expectancy in something as opposed to legal title to that thing. Therefore even though Depositories hold the legal interest in the shares the right in the benefits of those shares i.e. beneficial interest is with the Investor and it is this Beneficial Interest that is proved through record of Depository.

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Now coming towards what being a prima facie evidence: a prima facie evidence means that unless rebutted it would be sufficient to prove a particular proposition, here the proposition is that of beneficial interest of BO i.e. unless something otherwise comes into picture record of depository will be presumed to be the evidence of the beneficiary right of Beneficial owner over the said shares.

Penalty for failure to reconcile records

There are also penalty provisions in the Depository’s Act regarding the record of Depository. According to Section 19E of Depositories Act, 1996, if a depository or participant or any issuer or its agent or any person, who is registered as an intermediary under the provisions of section 12 of the Securities and Exchange Board of India Act, 1992, fails to reconcile the records of dematerialized securities with all the securities issued by the issuer as specified in the regulations, such depository or participant or issuer or its agent or intermediary shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less.

Guidelines regarding need to preserve records by SEBI

SEBI requires depositories and depository participants to keep records and documents for a minimum of eight years in a recent circular released in 2020. SEBI had previously issued a circular in 2019, stating that such documents must be kept for a period of five years. But now the regulator as a corrigendum to it has issued a fresh circular changing the minimum period to 8 years.

Further, the regulator has also instructed the depositories that they must preserve original forms, either in physical form or as an electronic record, if any enforcement agency has taken copies of them during their inquiry

Abuse of record of depository by NSDL

So what can be the cases where something otherwise appears. In the case of NSDL v. SEBI in 2005 it was observed that some of the DPs were found to have opened DEMAT accounts in fictitious/benami names thereby providing wrong information to the depository for record purposes and then raised finances through these fake accounts. This case also gives us an insight of what are the responsibilities of a Depository regarding the records.

It was said in this case that since there is a principal agent relationship between depository and the depository participant the depository are liable for the act of the participants and therefore there existed a default on the part of depositories too. When several demat accounts were opened without obtaining adequate proof of identity or address there should have been a Disciplinary Action Committee to have a control over these depositories’ participants according to laws of NSDL.

However the NSDL took no such action. Even while inspecting NSDL’s procedures for disciplining DPs, it was discovered that NSDL did not impose any sanctions for violations that were immediately corrected after inspection. These all things show that not only DPs failed to comply with provisions but also there was negligence on part of NSDL and it was because of that this scam took place.


Looking up upon all the discussions it can be finally understood why this provision of section 46(4) of Companies Act is so important. It has been seen that there has been a huge responsibility vested on Depository of maintaining the record of Depository along with preserving it for at least 8 years. This responsibility is even backed by the penalty provisions in case the depository is not able to fulfill his responsibility.

Therefore when the act is giving such a responsibility to the depository there is also a need to recognize the reason behind this responsibility. Giving the prima facie evidentiary value to these records of deposits is one of such recognition that makes this responsibility so significant and shows us why record of depository is so important to be maintained as this record is the prima facie proof of all the interests of the beneficial owner. Also as it has been discussed there is a difference of registered ownership and Beneficial ownership of the shares when they are held in demat form, therefore this section acts as a tool to recognize and validate the beneficial interest and ownership of the investors in case the title is with the depositories.