Securities in Depositories to be in Fungible Form

Section 9 of the Depositories Act, 1996 is one short sentence with enormous structural consequences: all securities held by a depository shall be dematerialised and shall be in a fungible form. Strip a share of its certificate number, its distinctive numbers and its folio, and what remains is a pure unit of value, identical to every other unit of the same class, recorded only as an electronic balance against the investor's name. That single design choice is what makes settlement instantaneous, what kills the old menace of bad deliveries and forged transfers, and what forces a careful re-reading of who actually owns a share once it enters the depository system. This chapter unpacks the meaning of fungibility, its statutory scaffolding, the carve-out in Section 9(2) disapplying parts of the company law, and the leading Supreme Court treatment in PTC India Financial Services Ltd. v. Venkateswarlu Kari (2022). For the wider scheme, begin with the introduction, object and scheme of the Act and the Depositories Act hub.

The Text and Anatomy of Section 9

Section 9 is deceptively terse. Sub-section (1) provides that all securities held by a depository shall be dematerialised and shall be in a fungible form. Sub-section (2) carves out an exception from the then-prevailing company law: nothing contained in sections 153, 153A, 153B, 187B, 187C and 372 of the Companies Act, 1956 (1 of 1956) shall apply to a depository in respect of securities held by it on behalf of the beneficial owners. The provision therefore does two distinct things in two breaths. First, it fixes the form in which a depository may hold securities: dematerialised (no paper) and fungible (interchangeable). Second, it switches off a cluster of Companies Act provisions that would otherwise have made nonsense of the depository model.

The word "shall" in sub-section (1) is mandatory. Once securities are held by a depository, there is no option to hold them in paper or to preserve their individual identity within the depository's records. This must be read alongside Section 7 of the Act, under which an issuer entering the depository system must dematerialise the relevant securities, and Section 8, which preserves the investor's freedom at the front end to opt to receive a physical certificate or to hold through a depository. The choice lives at Section 8; once the investor chooses the depository route, Section 9 governs the form in which those securities exist. The interaction of these provisions is developed in the chapter on the services of a depository.

What "Fungible" Actually Means

Fungibility is a property borrowed from the general law of movables. A fungible good is one in which any unit is, in law and in commerce, the perfect substitute for any other unit of the same kind and quality, so that obligations can be discharged by tendering equivalent units rather than the very same identified thing. Money is the textbook example: a depositor who pays a hundred-rupee note into a bank account has no right to demand back the exact note bearing the same serial number; she is entitled to a hundred rupees. Section 9 imports precisely this logic into the world of securities.

In the paper era, a share was an individuated chattel. Each certificate carried a certificate number, and each share carried a distinctive number, so that share number 1,001 was, as a matter of record, a different thing from share number 1,002 even though both conferred identical rights. Transfers had to be matched certificate-by-certificate; lost certificates required duplicates; forged or stolen certificates poisoned the chain of title. Once a security is dematerialised and held in fungible form under Section 9, all of that individuating apparatus is dissolved. The investor's holding becomes a number, a balance of so many units of a class of security, against which credits and debits are made. The investor who deposits 100 shares and later withdraws or transfers 100 shares has no claim to the identical shares she put in; she is entitled to 100 equivalent units. This is why fungibility and dematerialisation are stitched together in the same sub-section: dematerialisation removes the paper, and fungibility removes the individual identity that the paper used to carry. The connection to defined roles in the system is taken up in definitions: depository, participant and beneficial owner.

Dematerialisation and Fungibility Distinguished

Students routinely conflate the two limbs of Section 9(1), but they are conceptually distinct and it is worth being precise. Dematerialisation is the conversion of a physical certificate into an electronic record; it answers the question "in what medium does the security exist?" The answer is: as a book entry, not as paper. Fungibility answers a different question, "are the units distinguishable from one another?" The answer under Section 9 is: no. One can, in theory, imagine an electronic record that still tracked distinctive numbers, recording that an investor holds shares numbered 1,001 to 1,100. Such a record would be dematerialised but not fungible. Section 9 forecloses that possibility by insisting on both attributes at once.

The practical payoff of fungibility is enormous. Because units are interchangeable, the depository can net and settle vast volumes of trades by simple debits and credits to electronic balances, without ever having to identify which particular share is moving. Bad deliveries, mismatched certificate numbers, and the long tail of objection-and-rectification that plagued the physical settlement system simply cease to exist. The depository system's speed and finality are not incidental features bolted on later; they are a direct consequence of the fungibility commanded by Section 9.

It also helps to see what fungibility is not. Fungibility does not mean that a share of Company A is interchangeable with a share of Company B, nor that an equity share is the equal of a preference share or a debenture. Fungibility operates strictly within a class of identical securities; the relevant equivalence is between one unit and another unit of the very same security carrying the very same rights. Two demat shares of the same fully paid equity class are interchangeable precisely because, once stripped of distinctive numbers, there is nothing left to tell them apart, no premium, no defect, no priority. The pool is fungible because its contents are genuinely identical, not because the law has chosen to ignore real differences. This is why Section 9 speaks of securities being held "in a fungible form" rather than merely deeming dissimilar things to be the same: the dematerialised unit is, by construction, a perfect substitute for its siblings.

The Abolition of Distinctive Numbers

Fungibility under Section 9 did not operate in a vacuum; it required corresponding surgery on company law, which historically obsessed over the individual identity of every share. Under the Companies Act, 1956, every share had to bear a distinctive number. The shift to fungible dematerialised holdings made that requirement incoherent for depository-held securities. The Companies Act, 2013 completed the alignment: under the proviso to Section 45 of the 2013 Act, nothing in this section shall apply to a share held by a person whose name is entered as holder of beneficial interest in such share in the records of a depository. In other words, while distinctive numbers survive for shares held physically, they are expressly abandoned for shares held in dematerialised, fungible form through a depository, which is exactly the regime Section 9 contemplates.

This is the legal mechanism by which a share "loses its name and number" once it enters the system. The investor no longer owns share number such-and-such; she owns a quantum of a class of security. The records that matter are not certificate registers but the register of beneficial owners maintained by the depository. For the front-end paperwork this displaces, see the chapter on surrender of the certificate of security.

Section 9(2): The Companies Act Carve-Out

Section 9(2) disapplies sections 153, 153A, 153B, 187B, 187C and 372 of the Companies Act, 1956 to a depository in respect of securities it holds on behalf of beneficial owners. The reference points back to the 1956 Act because the Depositories Act was enacted in 1996, well before the recast of company law in 2013. The provisions disapplied dealt, broadly, with the prohibition on entering notices of trusts on the register (s.153), with trustees and beneficial interests and the requirement to disclose them (ss.153A, 153B, 187B, 187C), and with restrictions on a company's investment in other companies (s.372). Left to operate, these would have collided head-on with the depository model, where the depository is the registered holder while the beneficial interest sits with the investor.

The point of the carve-out is structural. The depository is, by design, a registered owner that holds for the benefit of others, an arrangement the old company law either prohibited or burdened with disclosure machinery built for a paper world. Section 9(2) clears that machinery away so that the depository can do its job. Under the Companies Act, 2013, the corresponding modern provisions, including those on the register of members and beneficial interest, are similarly adapted so as not to defeat dematerialised holdings, and the depository system is now woven directly into Sections 29 and 45 of the 2013 Act. The thread running through all of this is that beneficial ownership, not registered ownership, is where the economic rights reside, a theme picked up in the next section.

Registered Owner versus Beneficial Owner

Fungibility is only half the story; the other half is the bifurcation of ownership that the depository system creates. Section 10 of the Act provides that the depository shall be deemed to be the registered owner for the purpose of effecting transfer of ownership of security on behalf of a beneficial owner, that as registered owner the depository shall not have any voting rights or any other rights in respect of the securities held by it, and that the beneficial owner shall be entitled to all the rights and benefits and be subjected to all the liabilities in respect of those securities. The depository is, in substance, a registered owner stripped of every beneficial incident; the investor is a beneficial owner stripped of the registered-holder label but vested with every economic and governance right.

This split is what makes fungibility tolerable. Because the depository holds a fungible pool as bare registered owner, while the rights ride with the beneficial owners recorded in the register, the system can churn identical units without anyone losing their entitlements. The depository's name on the register is a settlement convenience, not a claim of ownership. The definition of "beneficial owner" and its place in the scheme are developed in definitions: depository, participant and beneficial owner.

PTC India Financial Services Ltd. v. Venkateswarlu Kari

The leading modern exposition of these provisions is the Supreme Court's decision in PTC India Financial Services Ltd. v. Venkateswarlu Kari, (2022) 9 SCC 704, decided on 12 May 2022. The case concerned the pledge of dematerialised shares and the question whether the Depositories Act, 1996, read with the SEBI (Depositories and Participants) Regulations, overwrites the law of pledge under the Indian Contract Act, 1872. A pledgee of dematerialised shares had been recorded as the beneficial owner in the depository's records upon invocation of the pledge, and the question was whether that re-classification amounted to an actual sale of the shares, which would have extinguished the pledgor's right of redemption.

The Court, speaking through Khanna J., held that it did not. The recording of the pledgee as beneficial owner in the depository's records on invocation is a step in the enforcement of the pledge, not a sale to a third party; the pledgor's equity of redemption survives until an actual sale is effected, and the pawnee remains bound by the Contract Act's requirements, including reasonable notice before sale under Section 176. Crucially for present purposes, the Court read the Depositories Act and the Contract Act harmoniously: the Depositories Act, being a law about the form and recording of securities, does not override the substantive law of pledge. The depository regime, the Court reasoned, changes the mechanics of how interests in securities are recorded and transferred, not the underlying private-law rights that attach to those securities.

Why PTC India Matters for Section 9

Although PTC India is most often cited for its pledge holding, its deeper significance for Section 9 lies in how it treats the registered-owner and beneficial-owner distinction. The Court took as its premise that the depository is the registered owner only for the limited purpose of effecting transfers and recording, while the beneficial owner holds the rights and bears the liabilities. Reclassifying the pledgee as beneficial owner moves the bundle of beneficial rights, but it does not, by itself, dispose of the security; the fungible pool and the depository's bare registered ownership remain undisturbed.

The decision therefore vindicates the architecture that Section 9 and Section 10 together build. Fungibility means the units are interchangeable; the bifurcation of ownership means the rights attach to the recorded beneficial owner rather than to any identified certificate. Because of these two features, an interest in dematerialised securities can be created, recorded and enforced by entries in the depository's register without ever touching the substantive private law that governs the interest itself. PTC India confirms that the Depositories Act, including its fungibility command, is a procedural and recording overlay, not a substitute for the general law of contract and property.

The reasoning carries a useful lesson about how to argue Section 9 in an examination. A common error is to treat dematerialisation and fungibility as if they dissolve the investor's proprietary and contractual rights into a featureless electronic soup. PTC India shows the opposite: the form in which a security is held is one question, and the rights that attach to it are another. The pledgee in that case acquired the recorded status of beneficial owner, but the substantive pledge relationship, with its equity of redemption and its notice requirements, continued to govern the parties. Fungibility changed how the interest was recorded and could be moved; it did not change what the interest was. The candidate who keeps these two planes separate, the plane of form and recording under the Depositories Act, and the plane of substantive rights under the general law, will navigate almost every Section 9 problem correctly. For the contractual scaffolding that supports these records, see the chapter on the agreement between the depository and the participant.

Fungibility and Corporate Actions

Fungibility raises a practical worry: if the units are interchangeable and identity-less, how do dividends, bonus issues, rights and voting attach to the right people? The answer lies in the register of beneficial owners. Although the units in the fungible pool are indistinguishable from one another, the depository's records show precisely how many units each beneficial owner holds. Corporate actions are processed against that register on a record date: the issuer is given a snapshot of beneficial owners and their holdings, and benefits are distributed accordingly. Fungibility operates at the level of the units; the apportionment of rights operates at the level of the recorded beneficial owner.

This is why Section 9's fungibility and Section 10's beneficial-ownership regime must be read together rather than in isolation. The first ensures that the units can be freely netted and settled; the second ensures that, despite the units being interchangeable, every dividend, every vote and every entitlement reaches the correct investor. The depository's duty to maintain accurate records of beneficial owners is therefore the indispensable counterpart to the fungibility it is commanded to maintain, a duty elaborated in the services of a depository.

Fungibility and Rematerialisation

Because securities in a depository are fungible, an investor who later wishes to return to paper, a process known as rematerialisation, does not and cannot get back the very certificates she surrendered when she first dematerialised. She gets fresh certificates for an equivalent quantity of the same security, bearing new distinctive numbers issued by the company. This is the clearest possible illustration of what Section 9 does: it severs the link between the investor and any individuated, numbered piece of property. Entry into the depository is entry into a pool; exit is withdrawal of an equivalent quantity, not a return of the identical thing.

The same logic explains why duplicate-certificate litigation, so common in the paper era, largely vanishes once securities are dematerialised. There is no unique certificate to be lost, forged or duplicated; there is only a balance. The fungibility commanded by Section 9 thus quietly disposes of an entire genre of disputes about whose certificate is genuine and whose chain of title is good, replacing them with the comparatively simple question of what the depository's register shows.

There is a corollary worth stating for completeness. Fungibility does not abolish all risk; it relocates it. In the paper world the investor's anxiety was about the integrity of a specific certificate, its authenticity, its endorsement, its safe custody. In the fungible electronic world the investor's protection depends instead on the accuracy and security of the depository's records and on the integrity of the participant through whom she holds. This is why the statutory scheme surrounds the fungible pool with duties of accurate record-keeping, reconciliation and indemnity, and why the agreements between the depository, the participant and the investor carry so much weight. Section 9 makes the units interchangeable; the rest of the Act exists to ensure that the register against which those units are tracked is trustworthy.

Interaction with the Companies Act, 2013

Section 9 must now be read in the light of the Companies Act, 2013, which has both extended dematerialisation and harmonised company law with the depository regime. Section 29 of the 2013 Act requires that securities of companies making a public offer, and of such other classes of companies as may be prescribed, be issued, held or transferred only in dematerialised form in the manner laid down in the Depositories Act, 1996 and the regulations made under it. The Ministry of Corporate Affairs has since extended compulsory dematerialisation to unlisted public companies and, by amendment, to certain private companies. Each extension widens the universe of securities that exist only as fungible book entries under the Section 9 regime.

Section 45 of the 2013 Act, as already noted, abolishes distinctive numbers for shares held in dematerialised form through a depository, completing the alignment that Section 9 began. The combined effect is that, for an ever-growing category of companies, shares now exist by default as fungible, dematerialised units, and the paper certificate is the exception rather than the rule, a striking reversal of the position that obtained when the Depositories Act was enacted in 1996. The constitutional and policy rationale for this shift is set out in the introduction, object and scheme chapter.

Exam Themes and Common Traps

For judiciary and CLAT-PG candidates, a handful of points recur. First, do not conflate dematerialisation with fungibility; Section 9(1) commands both, but they answer different questions, as explained above. Second, remember that the option to dematerialise lives at Section 8, not Section 9; Section 9 governs the form once the depository route is taken, and is mandatory in its terms. Third, the carve-out in Section 9(2) refers to the Companies Act, 1956, sections 153, 153A, 153B, 187B, 187C and 372, a frequently tested detail; be ready to explain why those provisions had to be switched off.

Fourth, on ownership, the depository is the registered owner with no beneficial rights, and the investor is the beneficial owner with all rights and liabilities, a Section 10 point that examiners love to pair with Section 9. Fifth, the leading authority is PTC India Financial Services Ltd. v. Venkateswarlu Kari, (2022) 9 SCC 704, holding that recording a pledgee as beneficial owner on invocation is not a sale and that the Depositories Act is read harmoniously with the Contract Act. Anchor your answer in the statutory text, then layer the case on top; that is the structure examiners reward. For the broader map, return to the Depositories Act hub.