Said a SEBI circular, "in view of the increase in volumes in dematerialised trading on account of more scrips added to the compulsory demat list and increase in investor preference for dematerialisation, it is now felt necessary that the clearing houses/corporations of all the stock exchanges should be connected to all the depositories for effective and prompt clearance and settlement of the trade in dematerialised securities." The stock exchanges which had earlier signed up with National SecuritiesDepository Ltd (promoted by the National Stock Exchange and institutions) will now have to tie up with CSDL as well.

The SEBI directive that demat shares will have to be cleared by the depositories within two hours will force both the CSDL and NSDL to have efficient links with the clearing corporations of the exchanges. ``Any buy/sell order will have to be transferred by the depositories within two hours without going to the registrars. This will speed up share transfers and foreign investors prefer such a system,'' said a CSDL official.

The two SEBI directives are expected to help the Central Securities Depository - promoted by the Bombay Stock Exchange - to kick off operations and widen its base. NSDL had earlier maintained that transfer of shares from one depository to another have to go through the registrar of the company. On the other hand, CSDL had maintained that shares can be directly transferred from one depository to another without going to the registrar. CSDL can kick off only if direct sharetransfer between the depositories takes place. With the SEBI now directing for direct share transfer between depositories, the BSE-promoted CSDL will be in an advantageous position.

Without naming CSDL, the SEBI circular said, "Under regulation 31 of SEBI (Depository and Participants) Regulations, 1996, every depository is required to maintain continuous electronic means of communication with the clearing houses and clearing corporations of the stock exchanges. This is necessary for the effective, prompt and accurate clearance and settlement of trade in dematerialised securities. You are, therefore, required to establish connectivity of your clearing house/clearing corporation with all the depositories registered with SEBI in the form of continuous electronic means of communication to enable speedy and smooth settlement of transactions in dematerialised securities."

Market analysts say that the SEBI's move will force all the investors to go through the demat route to buy or sell their shares. Thus, thesmaller exchanges which were providing a platform to the investors to continue trading in physical shares, will have no other option but to go for the demat route. At present only nine stock exchanges have signed up with the depository. These are: National Stock Exchange, Bombay Stock Exchange, Bangalore Stock Exchange, Chennai SE, Calcutta SE, Delhi SE, Ludhiana SE, OTCEI and, the Inter-Connected Stock Exchange (ICSE).

NSDL was the only depository which had stipulated that an exchange must have a trade guarantee fund of adequate corpus before being allowed to connect to the depository. SEBI had said the investors would be able to trade in only demat shares of some select stocks at those exchanges which had signed up for connectivity with the depository.