Operating Instructions
The 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.
In plain language
A depository does not run on just the Depositories Act and SEBI's regulations. It also writes its own rulebook. This covers the day-to-day mechanics of how DPs, issuers and investors work with the system. The workbook calls this the depository's Operating Instructions.
Chapter 2 lists Operating Instructions as one layer of the legal framework. It sits below the Depositories Act, SEBI's regulations, and the depository's SEBI-approved Bye-Laws. Sometimes the workbook says a form or a step is "as specified in the Operating Instructions." That means each depository — NSDL and CDSL separately — has written its own detailed rule for that step.
How it works
Chapter 2, section 2.3, lists the legal framework governing depositories as: the Depositories Act, 1996; SEBI (Depositories and Participants) Regulations, 2018; Bye-Laws of the Depository approved by SEBI; Operating Instructions of the depository; and the Prevention of Money Laundering Act, 2002.
The form and content of the Rights and Obligations document a DP gives every client, for instance, is specified by "SEBI and the DP Operating Instructions" together — not by the Bye-Laws alone. Later chapters cite Operating Instructions for concrete, depository-specific procedural detail: for example, CDSL's Operating Instructions specify that the DP, not the client, must carry out defacement and mutilation of a certificate surrendered for dematerialisation.
The workbook does not give a single definition of exactly what must be in the Operating Instructions or how often they are revised — it treats them as the practical, procedural layer beneath the Bye-Laws.
A worked example
A DP wants to know exactly how it must mark a physical certificate before sending it for dematerialisation. The Depositories Act, 1996 does not say. SEBI's (Depositories and Participants) Regulations, 2018 do not say. The depository's Bye-Laws set the broad framework for admission and processing.
It is the depository's Operating Instructions — CDSL's, in this case — that spell out the precise requirement: the DP itself, not the investor, must deface and mutilate the certificate, marking it "Surrendered for Dematerialisation" with the DP name, DP-ID IN300450, and Client-ID 10234567, before forwarding it onward.
An investor who submits a certificate already marked in this way finds it is not simply accepted — the Operating Instructions require the DP to have done this itself.
Why NISM asks about it
Chapter 2, section 2.3, lists Operating Instructions as one of five components of the depository's legal framework. The term then recurs through later chapters — account opening documentation, defacement and mutilation — wherever the workbook flags a depository-specific procedural rule rather than a statutory one. Expect a question naming all five components of the legal framework, and Operating Instructions as the source of a depository-specific procedural detail.
Common exam traps
- Operating Instructions are distinct from Bye-Laws. Bye-Laws are the depository's SEBI-approved rules of general application; Operating Instructions are its own detailed procedural manual.
- NSDL and CDSL each issue their own Operating Instructions — a rule sourced to one depository's Operating Instructions does not automatically apply at the other.
- The Rights and Obligations document's form and content trace to both SEBI and the DP's Operating Instructions — not to Operating Instructions alone.
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.Before forwarding security certificates to the Issuer or its R&T Agent for dematerialisation, how must they be mutilated?
- a)By tearing off the bottom right corner
- b)By punching two holes at the top of the certificates using a normal office perforator
- c)By stamping them "Cancelled" across the face
- d)No mutilation is required, only defacing
Show the answer
Answer: (b) By punching two holes at the top of the certificates using a normal office perforator
The certificates are mutilated by punching two holes at the top of the certificates by using a normal office perforator.
That is distinct from defacing, which is done as well: the security certificates are marked with the words "Surrendered for Dematerialisation" with DP name and BO ID, and the DP must ensure they bear the DP name, DP ID and Client ID. The workbook explains why in one line: this is a precautionary measure to prevent misuse of share certificates by anyone.
One further point that is frequently tested: as per CDSL Operating Instructions, the DP should deface and mutilate the certificates, and not the client.
3.The Rights and Obligations document is a standard document whose form and contents are specified by:
- a)RBI
- b)SEBI
- c)The Department of Company Affairs
- d)The individual DP
Show the answer
Answer: (b) SEBI
The form and contents of the Rights and Obligations document are specified by SEBI and DP Operating Instructions of the depository in which the DP is registered.
And again: the standard format of the Rights and Obligation document is provided by SEBI and forms a part of the depository participant operating instructions.
What it does: the Rights and Obligation document sets out in contractual form the nature of services to be provided, rights and obligations of the DP as well as the client, and the fees/charges payable for the services.
How it is executed: the Rights and Obligation document and the acknowledgement needs to be made on a plain paper and has to be signed by (a) Sole holder in case of single holding; or (b) All joint holders in case of joint holding, or (c) Constituted attorney (authorised signatories) in the case of corporate/registered trust accounts.
The investor's obligation: the investor while opening an account has to submit an acknowledgement of receipt of the copy of the Rights and Obligations document to the DP.
One exemption: FPI clients registered with SEBI and who have entered into an agreement with the DP directly or through their constituted attorney, are not required to submit acknowledgement of Rights and Obligations document.
And a useful detail: the schedule of fees to be charged by the DP to the Client should form a part of the Rights and Obligation document.
It also carries the standing instruction clause that enables clients to give standing instructions to DPs, at the time of opening the account itself, for receiving securities to the credit of their accounts.
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.
- 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.
- 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.