What Are Depositories in the Stock Market

1. What Is Depository?

• Depositories are financial entities that hold your securities in an electronic or dematerialized (DEMAT) format. In general, a depository serves as a custodian. It can hold any type of security.
• In India, there are two central depositories: Central Depository Services India Limited (CDSL) is a subsidiary of National Securities Depository Limited (NSDL). Companies used to provide share certificates to shareholders before the Indian stock market was computerised in the late 1990s. In the hands of their owners, these share certificates offered assurance and were safe.
• Following the introduction of electronic or screen-based trading in India, the National Stock Exchange established NSDL (National Securities Depository Limited) in 1996 under the Depositories Act (1996). The Central Depository Services India Limited, or CDSL, was founded in February 1999.
• How does NSDL vary from CDSL? There isn’t much of a distinction. The National Stock Exchange, IDBI Bank Ltd., and Unit Trust of India are all partners in NSDL. The Bombay Stock Exchange, on the other hand, backs CDSL.

How Do They Work?

• When you issue a purchase order with a broker, the broker processes it and instructs the depositary (NSDL/CDSL) to transfer the stated number of shares to your Demat account. If you have a trading account, you may have noticed that NSDL and CDSL send you a “monthly statement” that lists all of your trades and transactions for the previous month. The depositary keeps track of all the demat accounts it manages as well as the transactions that occur under them.

2. How Is a Depositary Similar To A Bank?

A depository is a place where something is kept for storage or protection, or an institution like a bank or a savings association that accepts monetary deposits from consumers. A depository is a company, bank, or other entity that holds securities and facilitates their trading.

How Is A Depository Similar To That Of A Banking System?

1. As a bank keeps the money safe. Similarly, a depository system keeps the securities safe.
2. As in a bank, funds are held in accounts having unique numbers. Similarly, in a depository system, securities are held in accounts having unique IDs.
3. Like a bank, there is no physical handling of securities during allotments, transfers, etc.
4. In a bank, the transfer of funds between accounts is done. Similarly, in a depository system, the transfer of securities between accounts is done.
5. Hence, the depository system is very similar to the banking system.

3. Services Provided By A Depository

• Opening a Demat account;
• Dematerialization, i.e. converting physical securities into electronic form;
• Rematerialization, i.e. converting electronic securities balances held in a BO account into physical form;
• Maintaining record of securities held by the beneficial owners in the electronic form;
• Settlement of trades by delivery or receipt of securities from/in BO accounts;
• Settlement of off-market transactions between BOs;
• Receiving electronic credit in respect of securities allotted by issuers under IPO or otherwise on behalf of demat account holders;
• Receiving non-cash corporate benefits such as allotment of bonus and rights shares or any other non-cash corporate benefits given by the issuers in electronic form on behalf of its demat account holders;
• Pledging of dematerialized securities & facilitating loans against shares;
• Freezing of the demat account for debits, credits, or both

Benefits Of Availing Depository Services

• The benefits are enumerated below
  • A safe and convenient way to hold securities;
  • Immediate transfer of securities;
  • No stamp duty on transfer of securities;
  • Elimination of risks associated with physical certificates such as bad delivery, fake securities, delays, thefts etc.
  • Reduction in paperwork involved in the transfer of securities;
  • Reduction in transaction cost;
  • No odd lot problem, even one share can be traded;
  • Nomination facility;
  • Change in address recorded with DP gets registered with all companies in which investor holds securities electronically eliminating the need to correspond with each of them separately;
  • Transmission of securities is done by DP eliminating correspondence with companies;
  • Automatic credit into Demat account of shares, arising out of bonus/split/consolidation/merger etc;
  • Holding investments in equity and debt instruments in a single account.

4. Who Is A Depository Participant?

• A Depository Participant (DP) is a depository’s agent or licensed broker. A depository is an entity or organisation that keeps and offers services in connection with an investor’s securities through a depository participant. It keeps electronic copies of the investors’ securities, such as shares, debt instruments, debt instruments, bonds, mutual fund units, and so on. It serves as a conduit between corporations that issue stock and their shareholders.
• The depository cannot be contacted directly. A person can open and maintain a Demat account using the DP. They serve as an intermediary between the depository and the clients. An agreement between two parties.
• In India, a Depository Participant (DP) is referred to as a Depository Agent. They act as go-betweens for the depository and the clients. Under the Depositories Act, the relationship between the DPs and the depository is governed by an agreement between the two parties. In a strictly legal sense, a DP is an entity that has been registered as such with SEBI under Section 12A of the SEBI Act, sub-section 1A. A DP can only offer depository-related services after receiving a certificate of registration from SEBI, according to the Act’s regulations. According to SEBI, there were 288 NSDL DPs and 563 CDSL DPs registered as of 2012.

Does One Need To Keep Any Minimum Balance Of Securities In His Account With DP?

• NO, the investor does not have to maintain a minimum balance for this purpose.

5. What Is An International Securities Identification Number (ISIN)

• An ISIN (International Securities Identification Number) is a 12-digit alphanumeric identifier that identifies a particular security. The National Numbering Agency of each country is responsible for allocating ISINs (NNA).
• A ticker symbol, which identifies a stock at the exchange level, is frequently confused with an ISIN. IBM common stock, for example, is traded on around 25 different trading exchanges and platforms, with varying ticker symbols depending on where it is exchanged, according to ISIN Organization. However, each security in the IBM stock market has just one ISIN. 1 The ISIN code is the only widely recognized common securities identification number. ISINs are used for a variety of purposes, such as clearing and settlement.
• All foreign securities issuers are encouraged to utilize the ISIN numbering method, which is now widely recognized across the globe.

6. What Is A Custodian?

• A custodian, often known as a custodian bank, is a financial organisation that safeguards customers’ securities from theft or loss. Stocks and other assets may be held by the custodian in either electronic or physical form.
• Custodians are often huge and renowned companies that are in charge of the security of assets and securities worth hundreds of millions or billions of dollars. A custodian may be appointed to handle the assets of a minor child in another way. Custodians are frequently used by investment advice firms to secure the funds they manage for their clients.
• Account maintenance, transaction resolution, dividend and interest payment collection, tax support, and foreign exchange management are among the services that most custodians provide. Custodian prices differ depending on the services that the client requires. Many companies charge quarterly custody fees based on the number of people they have in their custody.
• If necessary, a custodian may be able to assert custody of the assets, which is commonly done in combination with an executor. This permits the custodian to make payments or make changes to the client’s investments under the client’s name.

7. Can Electronic Holdings Be Converted Into Physical Certificates?

Yes. The process is called rematerialisation. If one wishes to get back his securities in the physical form he has to fill in the RRF (Remat Request Form) and request his DP for rematerialisation of the balances in his securities account.

The Process Of Rematerialisation Is Outlined Below: –

• Request rematerialisation.
• The depository participant intimates the depository regarding the request through the system.
• The depository confirms the rematerialisation request to the registrar.
• The registrar updates accounts and prints certificates.
• Depository updates accounts and downloads details to depository participants.
• Registrar dispatches certificates to investor