Depository

Depository

A depository is an entity that holds securities (shares, bonds, mutual funds, etc.) in an electronic or dematerialized form and facilitates their smooth transfer between buyers and sellers. The depository eliminates the risks associated with physical securities such as theft, forgery, and mutilation.

Depositories in India

India currently has two SEBI registered depositories:

• National Securities Depository Limited (NSDL): It was established in 1996.
• Central Depository Services (India) Limited (CDSL): It was established in 1999.

Legal Framework

• Depositories operate under the Depositories Act, 1996.
• They are regulated by the Securities and Exchange Board of India (SEBI) under the Depositories Act, 1996.

Role of a Depository

• Dematerialisation: Converts physical securities such as paper share certificates into electronic form, reducing risks of loss, theft, forgery and damage.
• Electronic Settlement: Facilitates settlement of trades by enabling the electronic transfer of securities between the Demat accounts of buyers and sellers.
• Centralised Record Keeping: Maintains electronic records of investors’ securities holdings and transactions, making securities easier to track and manage.
• Transfer and Pledging of Securities: Facilitates transfer of securities between Demat accounts and allows investors to pledge securities as collateral for loans or other permitted purposes.
• Facilitating Corporate Actions: Helps issuers process corporate actions such as bonus issues, rights issues, mergers and other entitlements, and facilitates the credit of securities-related benefits to eligible investors.
• Reduction of Settlement Risks: Electronic holding and transfer eliminate risks associated with physical certificates and make the settlement process faster, safer and more efficient.
• Interoperability: Depositories work with stock exchanges and clearing corporations to facilitate smooth clearing and settlement across the securities-market infrastructure.

Depository Participants

• Depository Participants (DP) are intermediaries between depositories and investors (e.g., banks, stockbrokers).
• DPs handle account opening, securities transfer, pledging, and grievance redressal.
• SEBI regulates both NSDL and DPs.

Thus:

• NSDL/CDSL = Depository
• DP = Intermediary between Investor and Depository

Who can become a Depository Participant?

Public financial institutions, scheduled commercial banks, foreign banks operating in India with the approval of the Reserve Bank of India, state financial corporations, custodians, stock-brokers, clearing corporations/clearing houses, NBFCs and Registrar to an Issue or Share Transfer Agent complying with the requirements prescribed by SEBI can be registered as DP.

Dematerialisation of Securities (Demat)