Tripartite agreement

An investor cannot dematerialise shares of a company that has never agreed to be in the depository system. Something has to bind the company, its registrar and the depository to one set of rules first. That something is the tripartite agreement.

Three parties sign it: the depository, the issuer (the company), and the R&T Agent the issuer has appointed to maintain its shareholder records. It has to be signed before the issuer or its R&T Agent is admitted to the depository system — not afterwards, and not once demat requests start arriving.

Where the issuer keeps its registry in-house with no R&T Agent, there is no third party, so the agreement is between the issuer and the depository alone.

The agreement is what turns a company into a scrip a DP can accept a demat request for. Once it is executed, the depository allocates the ISIN, the issuer establishes electronic connectivity, and the security appears on the list of eligible securities.

Some operative terms worth knowing by number:

• The issuer or R&T Agent furnishes a list of its authorised officials within 15 days of executing the agreement, and communicates any addition or deletion within 15 days of the change.
• The issuer must inform the depository about pari passu dates for new shares on the next day the same information goes to the stock exchanges.
• Corporate action information — book closure, record dates, dividend and interest payment dates, AGM dates, redemption, conversion, call money, amalgamation, sub-division, consolidation — goes to the depository on the next day it is communicated.
• A copy of the latest back-up of the database, plus incremental back-ups, is maintained at a designated remote site, and an audit team designated by the depository may inspect the systems.

The agreement is per depository. An issuer that wants its shares held in both NSDL and CDSL signs two agreements.

A company coming to the main board issues 2 crore equity shares of face value Rs 10, a paid-up capital of Rs 20 crore, and appoints an R&T Agent.

A shareholder holding 1,500 shares walks into a DP the week before the agreement is signed. The DP cannot accept the DRF: the ISIN does not exist yet, so the security is not "available for dematerialisation". At Rs 10 face value and a market price of, say, Rs 240, that is Rs 3,60,000 of holding stuck in paper for no reason other than a contract not yet executed.

Now take a 7.26% Government of India dated security instead. No tripartite agreement is signed at all, and none is needed — the Central Government as issuer is outside the requirement, and the RBI, not NSDL, allots the ISIN.

Chapter 3 (Depository and its Business Partners), section 3.3, and again in Chapter 11 for government securities. The examinable point is almost always the exception: no tripartite agreement is required where the depository itself is the issuer, or where the State or Central Government is the issuer. Questions also ask who the three parties are, and what the agreement has to be signed before.

• Government securities need no tripartite agreement. Nor do securities issued by the depository itself. This exception is the single most tested line in the section.
• It is signed before admission, not after. An issuer cannot start dematerialising and paper the agreement later.
• No R&T Agent means no third party — the agreement is then bipartite, between issuer and depository.
• One agreement per depository. Signing with NSDL does not admit the scrip to CDSL.
• The agreement obliges the issuer to push corporate action information to the depository on the next day. Investors often assume the depository discovers record dates on its own; it does not.
• Do not confuse this with the Rights and Obligations document, which governs the DP and the beneficial owner, or with the DP-depository agreement. Three different documents, three different pairs of parties.