Section 3 of the Depositories Act, 1996 is the threshold provision of the entire statute: a registered depository may already hold a SEBI certificate of registration, yet it cannot lawfully act as a depository until it separately obtains a certificate of commencement of business. Tucked into a single section forming the whole of Chapter II, Section 3 converts an abstract licence into an operational permission, and it does so only after SEBI is satisfied that the applicant has "adequate systems and safeguards to prevent manipulation of records and transactions." This chapter unpacks the text of Section 3, the two-stage architecture it sits within, the SEBI (Depositories and Participants) Regulations that flesh it out, and the case law that has shaped how the depository system is policed once business has commenced.
Where Section 3 Sits in the Scheme of the Act
The Depositories Act, 1996 (Act 22 of 1996) is a compact statute of barely thirty sections, deemed to have come into force on 20 September 1995. Its long title is modest — "An Act to provide for regulation of depositories in securities and for matters connected therewith or incidental thereto" — but its effect was transformative: it gave statutory backing to the dematerialisation of securities and the move away from paper share certificates. The Act is organised into six chapters. Chapter I (sections 1–2) deals with the short title and definitions. Chapter II consists of a single section — Section 3 — and is titled "Certificate of Commencement of Business." Chapter III (sections 4–17) sets out the rights and obligations of depositories, participants, issuers and beneficial owners; Chapter IV governs enquiry and inspection; Chapter V deals with penalties; and Chapter VI contains miscellaneous provisions.
That Parliament gave the certificate of commencement of business an entire chapter to itself signals its gatekeeping importance. Nothing in Chapters III to VI can be triggered until a depository has crossed the Section 3 threshold, because the obligations in those chapters all presuppose an entity that may lawfully "act as a depository." The provision is best understood as the operational hinge of the statute: registration under the scheme and object of the Act brings an entity into existence as a depository in name; Section 3 lets it begin functioning in substance. For a fuller orientation to the legislative design, see our chapter on the Depositories Act hub.
The Bare Text of Section 3
Section 3, carrying the marginal heading "Certificate of commencement of business by depositories," reads as follows. Sub-section (1) lays down the core prohibition: "No depository shall act as a depository unless it obtains a certificate of commencement of business from the Board." The "Board" is, by Section 2(b), the Securities and Exchange Board of India established under Section 3 of the SEBI Act, 1992.
Sub-section (2) deals with form: "A certificate granted under sub-section (1) shall be in such form as may be specified by the regulations." This delegates the prescription of the certificate's form to the regulations framed by SEBI under Section 25 of the Act.
Sub-section (3), with its proviso, is the substantive heart of the section: "The Board shall not grant a certificate under sub-section (1) unless it is satisfied that the depository has adequate systems and safeguards to prevent manipulation of records and transactions: Provided that no certificate shall be refused under this section unless the depository concerned has been given a reasonable opportunity of being heard." Two distinct commands are packed into this sub-section — a positive standard of satisfaction (adequate systems and safeguards) and a procedural safeguard for the applicant (the audi alteram partem proviso). Each is examined below.
Two Stages: Registration Under SEBI Act and Commencement Under the Depositories Act
A recurring examination trap is the assumption that registration and commencement of business are the same thing. They are not. The architecture is deliberately two-stage. The first stage is registration: by the definition of "depository" in Section 2(e), a depository is "a company formed and registered under the Companies Act, 1956 ... and which has been granted a certificate of registration under sub-section (1A) of section 12 of the Securities and Exchange Board of India Act, 1992." So the depository must first incorporate as a company and then secure a certificate of registration from SEBI under Section 12(1A) of the SEBI Act.
The second stage is commencement of business under Section 3 of the Depositories Act. Even a fully registered depository remains barred from acting as a depository until it separately obtains the certificate of commencement of business. The two certificates serve different functions: registration recognises the entity as eligible to be a depository in the abstract; the certificate of commencement of business is the operational green light granted only once SEBI has verified that the systems are actually in place. The SEBI (Depositories and Participants) Regulations, 2018 (which replaced the 1996 Regulations) carry forward this bifurcation, requiring a depository to maintain a net worth of not less than Rs 100 crore and to satisfy SEBI as to its infrastructure before commencement is permitted. This staged design echoes the gatekeeping logic that runs through the Act's treatment of the agreement between depository and participant, where access to the system is similarly conditioned on prior approval.
The Substantive Standard: Adequate Systems and Safeguards
The operative condition in Section 3(3) is SEBI's satisfaction that the depository has "adequate systems and safeguards to prevent manipulation of records and transactions." This is not a formality. The depository system is, at bottom, an electronic ledger: ownership of securities is evidenced not by paper but by entries in the records of the depository. If those records can be manipulated, the entire edifice of investor confidence collapses. Section 3(3) therefore makes the integrity of the record-keeping system a precondition to operation rather than an afterthought to be policed only later.
The phrase "systems and safeguards" is read expansively in practice. It covers the technological architecture (servers, databases, disaster-recovery and business-continuity infrastructure), the internal controls (audit trails, reconciliation processes, access controls), and the governance structures (fit-and-proper directors, segregation of functions). The reference to preventing manipulation of both "records" and "transactions" makes clear that SEBI looks not only at static data integrity but at the integrity of the processes by which entries are created and altered — the very processes that later govern registration of transfer of securities with the depository under Section 7 and the holding of securities in fungible form under Section 9. Because Section 9(1) requires that all securities held by a depository be dematerialised and in fungible form, the systems that track fungible holdings must be tamper-proof from day one, which is exactly what the Section 3(3) standard is designed to ensure.
The Proviso: A Statutory Right to Be Heard Before Refusal
The proviso to Section 3(3) provides that no certificate shall be refused "unless the depository concerned has been given a reasonable opportunity of being heard." This is a statutory codification of the principle of natural justice — audi alteram partem — in the specific context of a refusal of commencement. Its placement is significant. The opportunity of hearing attaches only to a refusal; the Act does not, by Section 3 itself, mandate a hearing before grant (an applicant has no grievance when granted what it sought).
The proviso reflects the settled constitutional position that a quasi-judicial decision visiting civil consequences on a party must be preceded by a fair hearing, a principle anchored in the line of authority running from A.K. Kraipak v. Union of India and Maneka Gandhi v. Union of India. Because refusal of a certificate of commencement of business is fatal to a depository's ability to function, it plainly carries civil consequences, and the legislature has put the natural-justice requirement beyond argument by writing it into the statute. The proviso also has a practical evidentiary effect: an order of refusal that records no opportunity of hearing is vulnerable to being set aside on judicial review, independent of the merits of SEBI's satisfaction on systems and safeguards.
Form of the Certificate and the Role of the Regulations
Section 3(2) leaves the form of the certificate to be "specified by the regulations." The regulations in question are the SEBI (Depositories and Participants) Regulations — originally the 1996 Regulations and, since October 2018, the SEBI (Depositories and Participants) Regulations, 2018, framed under Section 25 of the Depositories Act read with the SEBI Act, 1992. These regulations prescribe the application process, the conditions of registration, the minimum net worth (Rs 100 crore for a depository), the shareholding and governance norms, and the form in which the certificate of commencement of business is issued.
The regulation-making power is itself constrained: under Section 27 of the Act, every regulation made by SEBI must be laid before each House of Parliament, preserving a measure of legislative oversight over what is, in form, delegated legislation. The interplay between the bare section and the regulations is a classic example of skeletal primary legislation fleshed out by subordinate rule-making — the Act fixes the principle (no commencement without a certificate; certificate only on adequate systems), while the regulations supply the operational detail. Candidates should be careful to attribute the Rs 100 crore net worth figure and the specific application forms to the regulations, not to Section 3 itself, which is silent on quantum.
Section 3 in Practice: NSDL and CDSL
The real-world operation of Section 3 is best seen in the histories of India's two depositories. The National Securities Depository Limited (NSDL), promoted by the IDBI, the Unit Trust of India and the National Stock Exchange, became India's first depository: it obtained its certificate of commencement of business from SEBI in 1996, ushering in dematerialised trading on the Indian securities market. The Central Depository Services Limited (CDSL), promoted by the Bombay Stock Exchange, received its certificate of commencement of business from SEBI in February 1999.
These two grants illustrate the staged process in action: in each case incorporation and SEBI registration preceded the certificate of commencement, and the certificate issued only after SEBI satisfied itself that the depository's systems were operational and secure. The fact that there are only two depositories in India — each a heavily regulated market infrastructure institution — underscores how high the Section 3 threshold is in practice. Once across that threshold, each depository proceeds to discharge the statutory functions in Chapter III, beginning with offering services of the depository to investors through participants.
Consequences of Acting as a Depository Without a Certificate
Section 3(1) is cast as a prohibition — "No depository shall act as a depository unless it obtains a certificate of commencement of business." Acting as a depository without that certificate is therefore unlawful and exposes the entity to the penal and remedial machinery of the Act. Under Chapter V, Section 20 deals with offences, and Section 21 with offences by companies. Under Chapter IV, Section 19 empowers SEBI to issue directions in the interest of investors or the orderly development of the securities market, and to prevent the affairs of any depository being conducted in a manner detrimental to investors.
The Securities Laws (Amendment) Act, 2004 and later the Securities Laws (Amendment) Act, 2014 substantially strengthened the enforcement architecture by inserting a graded series of monetary penalties in sections 19A to 19G — covering, among other things, failure to furnish information, failure to enter into an agreement, failure to redress investors' grievances, and a residuary penalty under Section 19G for contraventions where no separate penalty is provided. An entity purporting to act as a depository without a certificate of commencement of business would be operating wholly outside the statutory framework and would attract both the offence provisions and SEBI's directional powers. The Section 3 gate is thus backed by real teeth.
Post-Commencement Supervision: NSDL v. SEBI
Obtaining the certificate of commencement of business does not free a depository from SEBI's continuing supervision — it subjects it to that supervision. The point is illustrated by National Securities Depository Ltd. v. Securities and Exchange Board of India, (2017) 10 SCC 1 (also reported as 2017 SCC OnLine SC 256). SEBI had issued an administrative circular reviewing dematerialisation charges and directing that no charges be levied on a beneficial owner who transferred all securities from one participant to another within or across depositories. NSDL challenged the circular before the Securities Appellate Tribunal (SAT).
The Supreme Court held that purely administrative or legislative circulars issued by SEBI under its general powers do not fall within the appellate jurisdiction of SAT under Section 15-T of the SEBI Act — that section is confined to quasi-judicial orders. An administrative circular of the kind in issue could be questioned, if at all, only by way of constitutional judicial review, not by an appeal to SAT. The decision is doubly instructive for the commencement-of-business student: first, it confirms that a depository, once it has commenced business, remains subject to SEBI's regulatory and directional authority over its charges and conduct; and second, it maps the dividing line between SEBI's administrative power and its quasi-judicial power — a line that also matters when distinguishing a grant or refusal of a certificate (a quasi-judicial decision under Section 3, attracting the natural-justice proviso) from a general policy circular.
What the Commenced Depository Does: Fungibility and Beneficial Ownership
Once a depository has crossed the Section 3 threshold and begun operating, the substantive law of the depository system in Chapter III comes alive. The leading modern authority on how that system works is PTC India Financial Services Ltd. v. Venkateswarlu Kari, 2022 SCC OnLine SC 608 (Civil Appeal No. 5443 of 2019, decided 12 May 2022). The case concerned the invocation of a pledge over dematerialised shares held in the depository system. The Supreme Court read the Depositories Act, 1996 harmoniously with the Indian Contract Act, 1872 (Section 28 of the Depositories Act provides that its provisions are in addition to, and not in derogation of, other laws).
The Court held that when a pledgee of dematerialised shares causes itself to be recorded as the "beneficial owner" in the depository's records on invocation of the pledge, that recording is a necessary precondition to a sale but does not itself amount to an actual sale or an appropriation of the shares; the pledgor's right of redemption survives until a genuine sale to a third party. The decision shows the depository's record — the very record whose integrity Section 3(3) safeguards before commencement — doing its statutory work: it is the register of beneficial ownership on which all rights turn. This connects Section 3 to the substantive concept explored in our chapter on definitions of depository, participant and beneficial owner, and to Section 9's requirement that securities be held in fungible form.
Distinguishing the Companies Act 'Commencement of Business'
A frequent source of confusion is the phrase "commencement of business," which also appears in company law. Under the Companies Act, 1956 (and historically the Companies Act, 2013, before the requirement was eased and then reintroduced in modified form), a public company had to obtain a certificate of commencement of business before it could begin operations or exercise borrowing powers. The two concepts are distinct and must not be conflated.
The Companies Act certificate is a general corporate-law requirement attaching to the company as a company. The Section 3 certificate under the Depositories Act is a sector-specific regulatory permission issued by SEBI, attaching to the company in its character as a depository, and granted only on satisfaction of the systems-and-safeguards standard. A depository may have completed every Companies Act formality and still be barred from functioning until it obtains the Depositories Act certificate. In an examination, the safe answer is that "certificate of commencement of business" under the Depositories Act is governed exclusively by Section 3 and the SEBI (Depositories and Participants) Regulations, is granted by SEBI, and is conditioned on adequate systems and safeguards with a built-in right of hearing before refusal — a self-contained regime that owes nothing to the company-law concept of the same name.
Section 3 and the Wider Regulatory Pyramid
Section 3 should be understood as the apex of a three-tiered regulatory pyramid. At the top is the Act itself, fixing the prohibition and the satisfaction standard. In the middle are SEBI's regulations under Section 25 (the SEBI (Depositories and Participants) Regulations), specifying net worth, application forms and conditions. At the base are the bye-laws made by the depository under Section 26, which govern the day-to-day operation of the depository, including the form of the agreement between the depository and its participants under Section 4(2) and the form of the agreement under which an investor avails the depository's services under Section 5.
This layering matters for Section 3 because SEBI's satisfaction as to "adequate systems and safeguards" is assessed against the standards in the regulations and the proposed bye-laws. A depository seeking commencement must demonstrate not only working infrastructure but a coherent set of bye-laws capable of governing participants and protecting beneficial owners — the bye-laws being the instrument through which the abstract statutory duties (to indemnify loss under Section 16, to maintain a register of beneficial owners under Section 11, to allow surrender of certificates under Section 6) are operationalised. Commencement of business is therefore not a single-document event but the certification of an entire functioning regulatory ecosystem.
Exam Pointers and Common Errors
For judiciary and CLAT-PG aspirants, a handful of points repay precision. First, Section 3 is the whole of Chapter II and is the only provision dealing with the certificate of commencement of business; do not attribute the concept to any other section. Second, distinguish registration under Section 12(1A) of the SEBI Act (which makes an entity a "depository" within Section 2(e)) from commencement of business under Section 3 of the Depositories Act — a two-stage process. Third, the statutory standard is "adequate systems and safeguards to prevent manipulation of records and transactions," and the proviso guarantees a reasonable opportunity of being heard only before refusal, not before grant.
Fourth, the Rs 100 crore net worth requirement and the form of the certificate flow from the SEBI (Depositories and Participants) Regulations, not from the text of Section 3. Fifth, remember the two anchor cases: National Securities Depository Ltd. v. SEBI, (2017) 10 SCC 1, on the limits of SAT's jurisdiction over SEBI's administrative circulars, and PTC India Financial Services Ltd. v. Venkateswarlu Kari, 2022 SCC OnLine SC 608, on beneficial ownership and pledge in the depository system. Finally, keep the depository milestones straight — NSDL obtained its certificate of commencement of business in 1996 and CDSL in February 1999 — and connect Section 3 forward to the surrender mechanism, on which see our chapter on surrender of certificate of security under Section 6.
Frequently asked questions
What is the certificate of commencement of business under the Depositories Act, 1996?
It is the regulatory permission granted by SEBI under Section 3 of the Depositories Act, 1996, without which no depository may lawfully act as a depository. Section 3(1) provides that "No depository shall act as a depository unless it obtains a certificate of commencement of business from the Board," and the certificate is granted only when SEBI is satisfied that the depository has adequate systems and safeguards to prevent manipulation of records and transactions.
How is commencement of business different from registration of a depository?
They are two distinct stages. Registration is granted under Section 12(1A) of the SEBI Act, 1992 and is part of the very definition of "depository" in Section 2(e) of the Depositories Act. Commencement of business is a separate, later permission granted under Section 3 of the Depositories Act. A registered depository still cannot operate until it obtains the certificate of commencement of business — registration recognises the entity; commencement lets it function.
What must SEBI be satisfied of before granting the certificate under Section 3?
Section 3(3) requires SEBI to be satisfied that the depository has "adequate systems and safeguards to prevent manipulation of records and transactions." In practice this covers the technological infrastructure, internal controls and audit trails, and governance structures. The SEBI (Depositories and Participants) Regulations add further conditions, including a minimum net worth of Rs 100 crore.
Is a depository entitled to a hearing if SEBI refuses the certificate?
Yes. The proviso to Section 3(3) states that no certificate shall be refused "unless the depository concerned has been given a reasonable opportunity of being heard." This codifies the natural-justice principle of audi alteram partem. The right attaches only to a refusal, which carries civil consequences, and not to a grant. An order of refusal that records no hearing is open to challenge on judicial review.
Does the certificate of commencement of business end SEBI's control over a depository?
No — it begins it. Once a depository commences business it is subject to SEBI's continuing supervision, including the power to issue directions under Section 19 and to impose penalties under sections 19A to 19G. In National Securities Depository Ltd. v. SEBI, (2017) 10 SCC 1, the Supreme Court upheld SEBI's authority to regulate a depository's charges by circular, while clarifying that purely administrative circulars are not appealable to the Securities Appellate Tribunal under Section 15-T of the SEBI Act.
Which depositories in India hold a certificate of commencement of business?
India has two depositories. The National Securities Depository Limited (NSDL) obtained its certificate of commencement of business from SEBI in 1996, becoming India's first depository, and the Central Depository Services Limited (CDSL) received its certificate in February 1999. Both operate as heavily regulated market infrastructure institutions under the Depositories Act and the SEBI (Depositories and Participants) Regulations.