Indemnity Bond
The bond a DP executes in favour of the Issuer or R&T Agent when physical certificates confirmed as electronically dematerialised are lost in transit before reaching the Issuer/R&T Agent.
In plain language
Dematerialisation normally works in a fixed order: the DP sends physical certificates to the Issuer or its R&T Agent, and only once they arrive and are checked does the electronic credit go through.
Sometimes the electronic side moves ahead of the paper. The depository may already show that dematerialisation has been set up, but the physical certificates never actually reach the Issuer/R&T Agent — they are lost in transit. Someone has to stand behind that gap, so that the Issuer/R&T Agent is not left exposed. That is what the Indemnity Bond does.
How it works
From Chapter 7, section 7.3.5:
Where the Issuer/R&T Agent has received electronic information about a dematerialisation but the physical certificates have not arrived, the DP first gives the Issuer/R&T Agent proof of dispatch and confirms the certificates were not returned undelivered. If they are genuinely untraceable, they are treated as lost in transit, and the DP executes an Indemnity Bond in favour of the Issuer/RT Agent.
Three distinct scenarios follow:
- If the Issuer/RT Agent had already rejected the original demat request, a fresh demat request with a new DRN is set up, and the executed Indemnity Bond is submitted along with it; the Issuer/RT Agent then dematerialises on the strength of the bond.
- If the Issuer/RT Agent rejected the request for a rectifiable reason, dispatched the certificates back, and they were then lost in transit, an Indemnity Bond is again executed with a new DRN — but here the DP must first obtain the Issuer/RT Agent's prior consent before executing the indemnity.
- If the rejection was for a non-rectifiable reason (fake/forged securities, duplicates already issued, or a court injunction), the Issuer/RT Agent simply retains the documents, and the DP instead obtains a rejection letter — no indemnity route applies here at all.
A worked example
A DP dispatches 750 shares' worth of Mrs Fernandes's physical share certificates to the company's R&T Agent after processing her demat request, and the depository's records show the request as accepted. 3 weeks later, the R&T Agent confirms it never received the certificates, and the DP's courier proof shows they were not returned undelivered either — they are lost in transit.
Because the original request had not been rejected, the DP simply executes an Indemnity Bond in favour of the R&T Agent, and the R&T Agent completes the dematerialisation on that basis, crediting all 750 shares to Mrs Fernandes's demat account.
Contrast this with a second investor whose certificates were rejected for being forged and then went missing on their way back to the DP. Here, no Indemnity Bond helps — the R&T Agent simply retains whatever documentation exists, and the DP obtains a rejection letter instead.
Why NISM asks about it
Chapter 7, section 7.3.5, sets out the Indemnity Bond procedure directly after transmission-cum-dematerialisation. Expect a question distinguishing the three scenarios — fresh DRN alone, fresh DRN with prior consent, and no indemnity at all for non-rectifiable rejections.
Common exam traps
- The Indemnity Bond does not apply to every lost-certificate case. Where the underlying rejection was for a non-rectifiable reason (fake/forged/duplicate/court injunction), there is no indemnity route — the Issuer/RT Agent simply retains the documents.
- Prior consent from the Issuer/RT Agent is needed only in the second scenario — where a rejected-and-returned certificate is then lost — not in the first, more straightforward case.
- The workbook gives no monetary figure or fixed format for the Indemnity Bond itself — its content is not quantified beyond being an indemnity "in favour of the Issuer/RT Agent."
- A new DRN is generated whenever a fresh demat request has to be set up alongside the bond.
Check yourself
1.Certificates sent by a DP never reach the R&T Agent, were not returned undelivered, and are not traceable at the RTA's office. What must the DP do?
- a)Ask the client to apply to the company for duplicate certificates
- b)Provide proof of dispatch and, on the assumption of loss in transit, execute an Indemnity Bond in favour of the Issuer/RTA
- c)Report the loss to SEBI and await directions
- d)Cancel the DRN and refund the client's demat charges
Show the answer
Answer: (b) Provide proof of dispatch and, on the assumption of loss in transit, execute an Indemnity Bond in favour of the Issuer/RTA
The prescribed sequence is: the DP shall provide the Issuer/RT Agent proof of dispatch and also confirm that the certificates are not returned undelivered at their end. If the certificates have not been returned undelivered and are not traceable at the Issuer/RT Agent's office, then it will be assumed that the certificates have been lost in transit. In such a case, the DP shall execute an Indemnity Bond in favour of the Issuer/RT Agent.
Where the original request had already been rejected, a fresh demat request is set up by the DP and the Indemnity Bond duly executed is submitted along with a new DRN, and the Issuer/RT Agent shall accept the demat request and carry out dematerialisation on the basis of the Indemnity Bond given by the DP. So the client gets his credit — the DP carries the risk of its own courier.
The limit of the remedy matters: where the rejection was for a reason that cannot be rectified — fake, forged, duplicates already issued, court injunctions — the Issuer/RTA retains the documents, and the DP must obtain rejection letters and hand them to the BO.
2.To help Issuers / RTAs carry out due diligence on physical demat requests, what must a DP enclose with the DRF and certificates?
- a)A copy of the client's latest income-tax return
- b)An indemnity bond from the DP for every request
- c)A duly certified Client Master Report, or a covering letter generated from the NSDL system or the DP's back-office system containing the client's details
- d)The client's original account opening form
Show the answer
Answer: (c) A duly certified Client Master Report, or a covering letter generated from the NSDL system or the DP's back-office system containing the client's details
Issuers / RTAs asked that DPs forward additional details of the client such as address and contact details, status of the account, type and sub-type of the account, PAN of all the holders and the bank account details captured in the demat account. So DPs enclose: "a. A duly certified Client Master Report (CMR) printed either from the NSDL system or from DPs back-office system; OR b. A covering letter generated from the NSDL system or from DPs back-office system which incorporates the aforesaid details."
- A and D are not asked for.
- B misplaces the Indemnity Bond, which the DP executes only when certificates are lost in transit. It is not a routine enclosure.
The papers go to the "address to which physical certificates to be sent" communicated by the depository, with a forwarding letter quoting the DRN, within seven days of accepting them from the client.
3.Mr. Arvind Rao, a sole holder, has died. His registered nominee, Mrs. Leela Rao, asks for transmission. Some of the shares were pledged to a bank for a loan that is still running. What may the Participant require from her?
- a)Only a self-attested copy of the death certificate, completion or updating of her KYC, and a due discharge from the creditor for the loan secured by the pledge
- b)A succession certificate, since a pledge is outstanding
- c)A notarised indemnity bond and No Objection Certificates from all legal heirs
- d)Probate of the will, whatever the value of the holding
Show the answer
Answer: (a) Only a self-attested copy of the death certificate, completion or updating of her KYC, and a due discharge from the creditor for the loan secured by the pledge
The workbook: "For transmission of assets to the registered nominee(s), the participant shall require only the following (a) Self-attested copy of Death Certificate of the deceased investor; (b) due completion, updating or reaffirming of the KYC of nominee/s; (c) due discharge from the creditors if there are subsisting credit facilities secured by a duly created pledge."
The word "only" is what the exam tests. A nominee does not have to produce the legal-heir documents.
- B and D belong to transmission without nomination, where legal heirs submit a Succession Certificate, Probate of Will, Will, Letter of Administration, court decree or Legal Heirship Certificate, as applicable under the Indian Succession Act, 1925.
- C is what accompanies a Legal Heirship Certificate — a notarised indemnity bond and No Objection from all non-claimants.
Once assets pass to the nominee, regulated entities shall facilitate / extend co-operation to transfer assets from the nominee(s) to the legal heir(s) when approached.
Where this is taught
Free preparation for NISM Series VIRelated terms
- DematerialisationConverting securities held as physical certificates into book-entry holdings: the certificates are defaced, mutilated and surrendered to the issuer, and an equivalent quantity is credited to the holder's demat account.
- Registrar and Transfer AgentThe SEBI-registered agency that keeps the investor records of a mutual fund — processing purchases and redemptions, updating folios and unit capital, and issuing account statements.
- DefacingMarking a physical certificate "Surrendered for Dematerialisation" with the DP name, DP-ID and Client-ID, and punching two holes at the top, before it is sent to the Issuer or R&T Agent — a safeguard against misuse.
- DRNThe unique number the DP system generates once a dematerialisation request is entered, used to track that request through the Issuer or R&T Agent until it is confirmed or rejected.
- Objection memoThe document by which an Issuer or R&T Agent flags a defect in a dematerialisation request, giving the DP 15 days to resolve the objection or supply further information before the request can be rejected.
- Transmission cum dematerialisationThe combined procedure letting a surviving joint holder remove a deceased holder's name from a physical certificate and dematerialise it in one step, by submitting the Transmission Form together with the DRF.