Bye-Laws
Also written Bye-laws of the Depository
The depository's own rulebook governing its operations, its participants, issuers and beneficial owners, which must conform to the Depositories Act and be approved by SEBI before it takes effect.
In plain language
A depository does not simply follow the Depositories Act on its own reading of it. It writes down its own detailed rules, called its Bye-Laws, and those rules govern its day-to-day operations.
The Bye-Laws cannot say whatever the depository likes. They must be in conformity with the Depositories Act, 1996 and the regulations made under it. SEBI has to approve them before they become effective. Only once approved do the Bye-Laws become the working rulebook for depositories, DPs, issuers and beneficial owners alike.
How it works
Bye-Laws sit below the Depositories Act and the SEBI (Depositories and Participants) Regulations, 2018 in India's legal framework for depositories, but above almost everything else — the form of the DP-depository agreement, the tripartite agreement with issuers, the pledge request form and dozens of operational procedures are all fixed in a depository's Bye-Laws or its Business Rules.
Before SEBI grants a certificate of commencement of business to a new depository, one of the conditions it checks is that the Bye-Laws of the depository have been approved by the Board of SEBI. A depository is also required, before it can start functioning, to have a minimum net worth of Rs 100 crore, alongside its approved Bye-Laws.
Because NSDL and CDSL are separate companies, each maintains its own Bye-Laws, and the two sets are not identical — the workbook repeatedly flags places where NSDL and CDSL Bye-Laws prescribe different net worth figures, different timelines or different procedures for the same operational step.
A worked example
When a stockbroker applies to become a Depository Participant of CDSL, the eligibility conditions it must meet — for example, a minimum net worth of Rs 5 crore, against Rs 3 crore at NSDL for the same category — come not from the Depositories Act itself, which sets no such figure, but from CDSL's own Bye-Laws.
Similarly, the format of the Pledge Request Form, the DP-ID numbering convention and the deadline by which a DP must redress a beneficial owner's grievance — thirty days as a SEBI condition of registration, but with additional Bye-Law detail on how that grievance must be logged and escalated — are all fixed by Bye-Laws rather than by the Act.
Why NISM asks about it
Chapter 2, section 2.3, lists Bye-Laws as one part of the legal framework governing depositories, alongside the Depositories Act, the SEBI (Depositories and Participants) Regulations, 2018 and the depository's own Operating Instructions. The term then recurs through almost every later chapter, wherever a form, a timeline or a procedure is said to be "as prescribed in the Bye-Laws".
Expect a question on what SEBI checks before granting a certificate of commencement of business — Bye-Law approval is one of the eleven listed conditions — and on the fact that Bye-Laws need SEBI's approval before they take effect.
Common exam traps
- Bye-Laws need SEBI approval before they are effective — a depository cannot simply adopt and enforce its own Bye-Laws unilaterally.
- NSDL and CDSL each have their own Bye-Laws, and the two are not identical. Many of the paper's NSDL-versus-CDSL contrasts — net worth figures, form names, timelines — trace back to differences between the two depositories' Bye-Laws rather than to any difference in the underlying Act.
- Bye-Laws sit below the Depositories Act and SEBI Regulations in the legal hierarchy; they cannot override either.
Check yourself
1.Which statement about a depository's Bye-Laws is correct?
- a)They are framed by SEBI and handed to the depository to adopt
- b)They take effect when the depository's Board approves them, and are filed with SEBI for information
- c)They must conform to the Depositories Act and the regulations made under it, and need to be approved by SEBI before becoming effective
- d)They must be approved by the stock exchanges whose trades the depository settles
Show the answer
Answer: (c) They must conform to the Depositories Act and the regulations made under it, and need to be approved by SEBI before becoming effective
Section 2.3.6 states: "A depository is required to make Bye-Laws governing its operations. The Bye-Laws have to be in conformity with the Depositories Act and the regulations made thereunder, and need to be approved by SEBI before becoming effective."
Three points: the depository writes them, they must conform to the Act and regulations, and SEBI approval comes before they take effect. This matches the commencement-of-business checklist, where SEBI checks that "Bye-Laws of the depository have been approved by Board of SEBI".
Why the other options are wrong:
- "Framed by SEBI" — the depository makes its own Bye-Laws. SEBI approves them.
- "Effective on Board approval, filed with SEBI for information" — the workbook requires SEBI approval before becoming effective, not after.
- "Approved by the stock exchanges" — exchanges have no approving role over a depository's Bye-Laws.
Where they sit in the legal framework: Depositories Act, 1996 → SEBI (D&P) Regulations, 2018 → Bye-laws of Depository approved by SEBI → Operating Instructions of the depository.
2.A Depository Participant has to be registered with:
- a)The depository
- b)The stock exchanges
- c)SEBI
- d)The Ministry of Corporate Affairs
Show the answer
Answer: (c) SEBI
SEBI. A Depository Participant is described as an agent of the depository and is a registered entity with SEBI under section 12(1A) of the SEBI Act 1992. And a DP can offer depository related services only after obtaining a certificate of registration from SEBI.
Option A is the natural wrong answer and worth understanding rather than just rejecting. The DP does have a formal relationship with the depository — the relationship between the DPs and the depository is governed by an agreement made between the two, under the Depositories Act 1996, the SEBI (D&P) Regulations 2018 and the Bye-laws. But an agreement is not a registration.
So: agreement with the depository, registration with SEBI. Keep the two words apart and this question, which appears in the workbook's own review set, is free.
3.How often must a DP get an internal audit of its depository operations done, and by whom?
- a)Annually, by a practising chartered accountant only
- b)Half-yearly, by a practising chartered accountant, a company secretary or a cost accountant
- c)Quarterly, by the depository's own audit team
- d)Half-yearly, by a SEBI-empanelled auditor only
Show the answer
Answer: (b) Half-yearly, by a practising chartered accountant, a company secretary or a cost accountant
As per the Bye-Laws, a DP has to get an internal audit done of the depository operations on a half-yearly basis by a practising chartered accountant or a company secretary or a cost accountant.
All three professions qualify — option A wrongly narrows it to chartered accountants, and option D invents an empanelment requirement.
Option C confuses this with the depository's own inspection rights. The depository may carry out an inspection of the applicant's office and facilities at the admission stage, and may authorise persons to enter the premises of an Issuer or R&T Agent during regular business hours, but the internal audit is the DP's own obligation, procured from an outside professional.
Related obligations to hold alongside it: the DP should reconcile its records with its depository on a daily basis, and the Compliance Officer must submit a Compliance Certificate at half-yearly intervals.
Where this is taught
Free preparation for NISM Series VIRelated terms
- Certificate of registrationThe SEBI registration without which a depository cannot deal in securities, no entity may act as a DP, and no FPI may invest. It is valid unless SEBI suspends or cancels it.
- Depository participantThe SEBI-registered agent through whom an investor reaches a depository — NSDL and CDSL cannot open investor accounts themselves, so every demat account is opened and operated through a DP.
- Tripartite agreementThe agreement signed by the depository, the issuer and the issuer's R&T Agent before that issuer's securities can be admitted for dematerialisation — it is the contract that makes a scrip demat-eligible.
- Certificate of commencement of businessThe second SEBI approval a depository needs before it can operate — granted within a year of registration, only once SEBI is satisfied the depository's systems, safeguards and Rs 100 crore net worth are adequate.
- Cancellation of certificateSEBI's power to permanently withdraw a Depository Participant's certificate of registration, used only for fraud, conviction for moral turpitude, or repeated defaults of the kind that could otherwise trigger suspension.
- Operating InstructionsThe depository's own detailed operational rulebook, listed in Chapter 2's legal framework beside the Depositories Act and SEBI regulations, and invoked for procedural specifics like defacement and account forms.
- Rights and Obligations documentThe document a DP must hand every client, and get an acknowledgement for, before acting for them — its form and content set jointly by SEBI and the DP's own Operating Instructions.
- Transposition cum dematerialisationThe combined procedure letting an investor reorder joint holders' names to match a certificate and dematerialise it into the same account, instead of opening a fresh account for the different name sequence.