The legislation was enacted in August 1996 and National Securities Depository Limited (NSDL) became functional in November 1996. What progress has been made since then? All the major stock exchanges are connected to NSDL now -- 435 companies representing more than 80 per cent market capitalisation have signed up with NSDL. Week after week more than 60 per cent settlements take place in demat form on both NSE and BSE.

The previous two-and-a-half years have shown that India can change, and fairlyquickly. We no longer discuss whether a depository is a feasible proposition or not. We are looking at making further enhancements in the depository environment as also the possibility of value-added services. This would be a good time to look at the gains of the last two-and-a-half years and the work that still remains to be done.

The first gain -- the dematerialisation idea has been almost entirely demystified. A few lakh investors across the length and breadth of the country have had some experience of demat. The word demat has become common parlance in capital market terminology. Secondly, the intermediaries namely, the brokers as also the clearing corporations/stock exchanges have realised the saving as well as the ease of demat settlement. We are coming to a stage where the brokers will increasingly be prepared to carry out transactions only for demat shares. Lenders (banks) may lend money against demat shares only.

The progress of demat owes substantially to the regulatory support from the SEBI,the Government of India and the RBI. This conversion from paper to demat has clearly demonstrated that if there is a meeting of minds among the regulatory authorities, the pace of change can really be quickened.

We have also learnt not to cast any group of entities in a mould and conclude that the entities as a group will be for or opposed to a process.

Let us look at the popular concepts before the advent of NSDL. It was widely believed that corporates would be reluctant to join the depository since the corporates were believed to be indulging in deliberate delays during the transfer process. NSDL's experience has been that while a few corporates have had hesitation in joining NSDL, 435 companies -- representing 80 per cent market capitalisation -- have signed up with NSDL without any regulatory push. Many companies have gone out of the way to propagate demat and offer help in NSDL's efforts.

Retail investors would take a long time to adjust to the depository environment. The speed at which theinvestors have joined the depository and the different areas of the country from which they come has proved this assumption to be incorrect. With 8 lakh investor accounts, about 30 per cent of the shares dematerialised and more than 60 per cent of the settlements happening in demat form, the next logical question is: where do we go from here? We have so far addressed the issue of only equity holdings in demat form. We need to replicate this for debt instruments as well. There are some legislative changes required for this purpose and one can hope that these will be addressed soon. We should ideally be able to progress to a point where an investor can see his entire portfolio in one statement.

Let's see which part of the transactions have been made electronically feasible and what remains paper-intensive. The movement of share certificates along with transfer deeds -- both for the purpose of giving and receiving delivery from the clearing houses of stock exchanges as well as for recording transfer ofownership by the share registrar/corporates -- has been eliminated. However, there are two processes which are still physical and may see conversion to electronic form in the near future.

The statement of account/holding is sent to the investor still in a physical form. While a statement of account on paper will be required by investors for various statutory purposes, investors may not require paper statements on many occasions during the year. They may want only one or two paper statements during the year. It is quite conceivable that the investors would be perfectly happy viewing their transaction and holding statements on the Internet with proper security and passwords etc. In fact, some depository participants have already started providing such a facility. One can expect the use of such a facility to grow. It will eliminate paper statements substantially.

Secondly, the instructions for transactions are still given in the form of a piece of paper called debit instructions. With more security featuresavailable on Internet, the day is not too far when the participants will be in a position to entertain instructions for transactions on the net. This will eliminate substantial volume of paperwork and as investors get more comfortable with the process and as the process becomes more secure, one will see rise in transactions and drop in the use of paper.

There will be a spin-off in the form of greater depth and liquidity. The benefit of the depository is an early settlement of transactions complete with transfer of ownership in a more cost-effective manner compared to the paper mode. This will result in increase in frequency of transactions, greater participation by foreign funds in the Indian market and greater liquidity for the market. We have some early signs of such a phenomenon. More analysis and perhaps more data is needed before a firm conclusion in this area can be reached.

The depository environment enables shares to be pledged with ease. Additionally, the lender has no doubt about the quality ofthe assets being pledged and no anxieties in case the pledged shares have to be sold. The pledge module in NSDL has been extremely popular and we now have more than Rs 2,800 crore worth of shares pledged in NSDL. Just as lending against shares has picked up, lending shares itself is also bound to pick up only in the demat form. A few intermediaries are getting ready to offer these services and one can reasonably hope that with the advent of rolling settlement and derivative trading, stock lending will pick up. This should give investors an opportunity to earn while their stocks are idle.

While these efforts to demat the existing shares are going on, one needs to ask oneself whether it is necessary to create paper at all? We are obviously referring to shares being in demat form at the issue stage itself. Different firms have tried this at the time of their bonus issues, stock splits, mergers, amalgamation and primary isues. The process is becoming more popular. There is all round saving in this and we canexpect that by the end of year 2000 demat will be the dominant mode in public issues.

The author is Managing Director, National Securities Depository Limited