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Depositories, Factoring

A depository is a facility such as a building, office, or warehouse in which something is deposited for storage or safeguarding. It can refer to an organization, bank, or institution that holds securities and assists in the trading of securities. The term can also refer to a depository institution that accepts currency deposits from customers.

A depository institution provides financial services to personal and business customers. Deposits in the institution include securities such as stocks or bonds. The institution holds the securities in electronic form also known as book-entry form, or in dematerialized or paper format such as a physical certificate.

Institutions involved in Depository process

To have a better understanding of depository process, it is essential to study the institutions interacting in a depository system.

  1. The central depository,
  2. Share registrar and transfer agent; and
  3. Clearing and settlement corporations are the three institutions participating in the depository process.
  4. Central depository: The central depository keeps securities on behalf of the investor and maintains records in electronic form. The statement given by the depository is the evidence of the ownership of shares.
  5. Share registrar and transfer agent: The ‘registrar’ is an institution which controls the issuance of securities. The transfer agent retains the names and addresses of the owners of registered securities.
  6. Clearing house: The depository interacts with the clearing house during the share transfer process. When the clearing house confirms that all funds have been received, the depository will then transfer securities from the delivering person to the receiver.

11 Most Important Functions of “Depository System”

The depository system functions as under:

  1. The system envisages setting up of one or more depositories to hold securities of investors in the electronic form.
  2. The depository functions through its agents, who are called Depository Participants (DP).
  3. The investor, who wants to avail the services of the Depository, has to open a beneficiary account with the Depository through a DP. The account known as the “Demat” account can be opened with more than one DP also.

4 After opening the demat account, the investor is required to dematerialize the securities held by him in the physical form. To dematerialize the securities, the investor has to fill the Dematerialization Request Form (DRF) and submit the same to the DP along with the security certificate.

The DP through the Depository will intimate the company/issuer and surrender the security certificate. The process known as ‘dematerialization’ takes about 30 days.

  1. The issuer/company on receipt of the intimation shall cancel the security certificate and substitute the name of the Depository as the registered owner of the security.
  2. The Depository on being intimated by the company/issuer enters the name of the investor in its record as the beneficial owner of the security.
  3. Whenever any rights, bonus or dividend is announced by a company for its particular security, the Depository would furnish all the details of the investors having electronic holdings of that security on the record date. The disbursement of the rights, dividends etc are, thus done by the company based on the information provided.
  4. In case of sale of the security under this mode, the investor/transferor (the client) has to intimate the DP through issuing a Delivery Instruction Slip (DIS) duly signed and containing the details of the security transaction.

In case of purchase, the client will send the intimation to the DP giving details of the security purchased. The Depository on receiving the information through the DP will register the transfer of securities in the name of the transferee in its record.

  1. DP will also make book entries in the account of the investor to record sale/purchase of securities.
  2. DP is required to send statement of accounts to the clients at regular intervals, and update the account after each transaction.
  3. The client/ investor has to pay charges to the Depository and the DP for availing the services.

FACTORING

Factoring is a financial transaction and a type of debtor finance in which a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. A business will sometimes factor its receivable assets to meet its present and immediate cash needs. Forfaiting is a factoring arrangement used in international trade finance by exporters who wish to sell their receivables to a forfaiter. Factoring is commonly referred to as accounts receivable factoring, invoice factoring, and sometimes accounts receivable financing. Accounts receivable financing is a term more accurately used to describe a form of asset based lending against accounts receivable. The Commercial Finance Association is the leading trade association of the asset-based lending and factoring industries.

Factoring is not the same as invoice discounting (which is called an assignment of accounts receivable in American accounting – as propagated by FASB within GAAP). Factoring is the sale of receivables, whereas invoice discounting (“assignment of accounts receivable” in American accounting) is a borrowing that involves the use of the accounts receivable assets as collateral for the loan. However, in some other markets, such as the UK, invoice discounting is considered to be a form of factoring, involving the “assignment of receivables”, that is included in official factoring statistics. It is therefore also not considered to be borrowing in the UK. In the UK the arrangement is usually confidential in that the debtor is not notified of the assignment of the receivable and the seller of the receivable collects the debt on behalf of the factor. In the UK, the main difference between factoring and invoice discounting is confidentiality. Scottish law differs from that of the rest of the UK, in that notification to the account debtor is required for the assignment to take place. The Scottish Law Commission is[when?] reviewing this position and seeks to propose reform by the end of 2017.

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