Certificate of commencement of business
The 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.
In plain language
Registration alone does not let a depository start work. There is a second gate to pass.
SEBI first grants a certificate of registration. Within one year of that, the depository must apply for a second document. This is the certificate of commencement of business. Only after SEBI grants this second certificate can the depository actually begin work.
SEBI does not hand out this certificate automatically. It checks the depository's systems first. It checks the depository's safeguards against fraud. It also asks whether granting the certificate is good for investors.
How it works
SEBI examines eleven specific conditions in Chapter 2, section 2.3.4, before granting a certificate of commencement of business, including: a net worth of not less than Rs 100 crore; Bye-Laws approved by the SEBI Board; automatic data processing systems protected against unauthorised access; a secure electronic network linking the depository, participants, issuers and issuers' agents; standard transmission and encryption formats for that network; controlled and monitored physical and electronic access to premises and data; a detailed operational manual; adequate back-up arrangements at a location different from the depository itself; and adequate insurance to indemnify beneficial owners for loss caused by the wrongful act, negligence or default of the depository, a participant, or any of their employees.
Before granting the certificate, SEBI must also carry out a physical verification of the depository's infrastructure and systems. Only once all of this is satisfied does the depository receive the certificate that lets it actually begin operations.
A worked example
Suppose a new depository, "Bharat Depository Ltd", receives its certificate of registration from SEBI on 1 April. Under the one-year rule, it must apply for its certificate of commencement of business by 31 March the following year.
By the time it applies, Bharat Depository Ltd needs to show a net worth of at least Rs 100 crore, Bye-Laws already approved by the SEBI Board, an operational manual covering every interface with DPs and issuers, insurance to cover losses caused by the negligence of the depository or its DPs, and back-up data storage at a site physically separate from its main office. SEBI then physically inspects these systems before it will issue the certificate — only after that inspection can Bharat Depository Ltd actually open a single demat account.
Why NISM asks about it
Chapter 2, section 2.3.4, lists all eleven conditions SEBI examines, immediately after the shorter section 2.3.3 on the certificate of registration. The two certificates are frequently tested as a pair, with the distinguishing facts being the one-year application deadline and the Rs 100 crore net worth figure.
Expect a question asking within what period a depository must apply for its certificate of commencement of business after receiving its certificate of registration — the answer is one year — and a question on the minimum net worth SEBI checks, which is Rs 100 crore.
Common exam traps
- Registration and commencement of business are two separate certificates. A depository with only the first cannot yet operate.
- The application window is one year from the date of the certificate of registration, not from incorporation or from any other date.
- Rs 100 crore is the depository's own net worth threshold, a different figure from the net worth thresholds SEBI or the depositories set for DPs applying to join the system (Rs 3–5 crore for stockbrokers, Rs 10 crore for R&T Agents, and so on).
- SEBI carries out a physical verification of infrastructure before granting the certificate — this is not a paper-only approval.
Check yourself
1.Within what period must a depository apply to SEBI for a certificate of commencement of business?
- a)Within six months from the date of incorporation
- b)Within one year from the date of receiving the certificate of registration
- c)Within one year from the date of incorporation
- d)Within two years from the date of receiving the certificate of registration
Show the answer
Answer: (b) Within one year from the date of receiving the certificate of registration
A depository that has got a certificate of registration can act and function as a Depository only if it obtains a certificate of commencement of business from SEBI. For this, it must apply to SEBI within one year from the date of receiving the certificate of registration.
The clock starts from the certificate of registration, not from incorporation — which is what options A and C get wrong, and they are designed to catch anyone who remembers "one year" without remembering what it runs from.
The two certificates do different jobs, and this is the link between them:
- Certificate of registration — a depository can deal in securities only after getting a certificate of registration from SEBI
- Certificate of commencement of business — without it, a registered depository still cannot act and function as a Depository
And before commencing operations, depositories should obtain a certificate of registration and a certificate of commencement of business from SEBI — both.
2.What is the minimum net worth prescribed for a depository company?
- a)₹10 crore
- b)₹50 crore
- c)₹100 crore
- d)₹500 crore
Show the answer
Answer: (c) ₹100 crore
A Depository company must have a minimum net worth of ₹100 crore, along with the other prescribed criteria — automatic data processing systems, a network through which continuous electronic means of communication is established, and adequate infrastructure requirements.
The figure is worth learning because it appears twice. It is an eligibility criterion at the outset, and it reappears in the list of matters SEBI examines before granting the certificate of commencement of business: the depository has a net worth of not less than ₹100 crores.
A question can therefore approach the same number from either direction — as a condition of eligibility or as a condition of commencement — and the answer is the same.
Also note that ownership of a depository and shareholding in a depository is as per the SEBI (Depositories & Participants) Regulations, 2018 — a separate matter from net worth.
3.A beneficial owner suffers a loss because of the negligence of his Depository Participant. What is the correct position?
- a)The beneficial owner must recover the loss directly from the DP
- b)The depository indemnifies the beneficial owner, and has the right to recover the loss from that DP
- c)The loss is borne by SEBI's Investor Protection Fund
- d)The depository has no liability, since its agreement is with the DP and not with the investor
Show the answer
Answer: (b) The depository indemnifies the beneficial owner, and has the right to recover the loss from that DP
The rule is stated in two halves and both are tested: the depository should indemnify beneficial owners of securities for any loss caused to them due to the negligence of the DP. Where the loss however, is caused due to the negligence of a DP, the depository shall have the right to recover it from such DPs.
So the investor is made whole by the depository, and the depository's remedy against the DP is a matter between them. Option A leaves the investor to fight his own agent, which is what this obligation exists to prevent.
Option D states a defence that sounds legally respectable — privity of contract — and is exactly what the regulation overrides.
The design is backed at the licensing stage. Before granting the certificate of commencement of business, SEBI examines whether the depository has made adequate arrangements including insurance for indemnifying the beneficial owners for any loss that may be caused to such beneficial owners by the wrongful act, negligence or default of the depository or its participants or of any employee of the depository or participant.
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.
- Bye-LawsThe 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.
- Net worth certificateA chartered accountant-certified statement of an intermediary's net worth, computed from audited books, submitted to the depository in the format its bye-laws prescribe — an annual filing obligation for every DP.
- CDSLCentral Depository Services (India) Limited — one of India's two depositories, promoted by leading Indian banks and the Bombay Stock Exchange, registered in February 1999 and operational from 22 March 1999.