What is a Depository in Demat Account
People with Demat account would have often come across the term ‘Depository’ and I am sure many of you would have misunderstood it with depository participants.
Depository and depository participants are two entirely different terms. A depository is a place where investors hold their financial securities in electronic or dematerialized form.
A depository is an organization where the securities of an investor are held in electronic form. It’s like a bank.
In order to avail of the services of a depository, an investor must open an account with the Depository via a depository participant, the same way he/she opens an account with the bank.
Holding shares in the account is similar to holding money in the bank.
What is Depository?
Depositories are part of the Indian capital market and their performance is comparable to that of banking firms. Their roles come into play when the investor decides to invest.
There are two registered SEBI depository agencies in India: National Securities Depository Limited (NSDL) or Central Depository Services (India) Limited (CDSL).
On the other hand, a depository participant (DP) is a depository agent who serves as a middleman or an intermediary between the depository and investor. Before you approach any DP, you must ensure that the DP is registered with the SEBI (Securities and Exchange Board of India). In India, over 100s of DPs are registered with SEBI.
Types of Depository in India
As we mentioned earlier, there are two types of depositories in India- National Securities Depository Limited (NSDL) and Central Depository Securities Limited (CDSL).
1. National Securities Depository Limited (NSDL)
Among the two depositories in India, NSDL is the oldest and largest e-securities depository. It started its operations in 1996 and is based in Mumbai, Maharashtra. It’s the first depository in India that offers trading and settlement of securities in dematerialized or electronic form.
Some of the largest banks and institutions in the country such as UTI, IDBI Bank, and NSE (National Stock Exchange) promote the NSDL.
NSDL holds accounts of over 1.5 crores of active investors. There are about 26,000 service centres of NSDL that covers approximately 1900 cities in the entire country.
The safekeeping in NSDL isn’t restricted or limited to just stocks. Their service comprises stocks, debentures, mutual funds, bonds, commercial papers, etc.
The basic services at NSDL consist of dematerialization, account management, re-materialization, and settlement of exchanges. It also allows transfers between collateral, depositories, lending, off-market transfers, and mortgage of securities.
2. Central Depository Securities Limited (CDSL)
CDSL, another electronic securities depository in India, started its operations in 1999. Like NSDL, CDSL is also based in Mumbai, Maharashtra. It is India's second-largest securities depository that enables an account transfer.
Some eminent financial institutions and banks in India such as the HDBC Bank, SBI, Bank of India, Bank of Baroda, Bombay Stock Exchange, and Standard Chartered Bank promote CDSL.
It serves the same function as NSDL such as holding securities in dematerialized form and allows trading and settlement of securities in dematerialized and e-form.
CSDL offer services to hold stocks, commercial papers, bonds, debentures, mutual funds, certificates of deposit, government securities, etc.
As per the reports, CDSL held approx. 161 branches and approx. 1.10 crore of customer accounts.
Working of a Depository
A depository serves numerous purposes for the general public. Some of them are enlisted below:
1. Knocks Out the Risk Related to Owning Physical Financial Securities
Initially, they eliminate the risk of holding physical assets to the owner. For example, banks and other financial institutions provide consumers with a place where they can deposit money into fixed and demand deposit accounts.
A fixed/time deposit is an interest-bearing account and has a certain maturity date such as a CD (Certificate of Deposit). However, a demand deposit account keeps funds until they are supposed to be withdrawn such as savings or checking account.
Deposits are also available in the form of securities such as bonds or stocks. When such assets are deposited, the depository keeps these deposits in electronic form that also called book-entry form, or in paper or dematerialized format such as physical format.
2. Creates Liquidity in the Market
Depositories are also beneficial in creating liquidity in the market. Customers keep their money in the financial institution with the belief that the company holds it and returns it when the customer wants it back.
3. Acts as a Link Between Investors/Shareholders and Public Companies
A depository serves as a connecting link between the public companies issuing financial securities and the investors or shareholders. Agents lined to depositories, who are known as depository participants mainly issue the securities.
The agents are liable for transferring the securities from the depositories to the shareholders/investors. A DP (depository participant) can be an institution, bank, or brokerage.
4. Less Paperwork and Speeds Up the Process of Transferring Securities
When an investor trade, a depository transfers the ownership of securities from the account of one investor to another. It mitigates the paperwork related to the finalization of trade and speeds up the process of transfer of securities.
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