What is Depository Service?

A depository can be defined as an institution where the investors can keep their financial assets such as equities, bonds, mutual fund units etc in the dematerialized form and transactions could be effected on it. In India, there are two depositories namely, the Central Depository promoted by the Stock Exchange, Mumbai. National Securities Depository Limited(NSDL) promoted primarily by IDBI, the Unit Trust of India and the National Stock Exchange.

How Depository Service Works?

  • A depository system carries out its activities through various associates that include depository participants (DP), issuing companies and their share transfer agents, clearing corporation of Stock Exchanges etc. The depository is electronically linked to each of these business partners via satellite links or through leased lines
  • The Depository is electronically linked to DPs, clearing houses of Stock Exchanges, corporate and share transfer agents that are registered under the depository to avail its services etc through VSAT. This integrated system including the electronic links as stated above and the software at NSDL and each business partners end is called the National Electronic Settlement and Transfer System(NEST)

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Structure of Depository Service

  • Central Depository:

Central depository is an organization with which all the shares, belonging to the shareholders are kept and the electronic system takes care of them.

  • Share Registrar:

Share Registrar is an authority who controls the issue of securities. Along with this, the transfer agent arranges for the transfer of securities in the case of buying or selling of securities.

  • Clearing & Settlement Corporation:

This agency settles the transfer of funds between the seller and buyer.

  • Depository Participant (D.P):

He is like a share broker and he trades as per the instructions of the shareholder in and outside the stock exchange. An ID Account number is given by the Depository Participant (D.P) to every shareholder when he/she opens an account for dematerializing the securities. D.P is a representative in the depository system on behalf of the shareholder and he only intimates to the shareholder periodically the securities account held by the customer. As per SEBI regulations, financial institutions, banks, stockbrokers, etc., can be Depository Participants.

Benefits of Depository Services

  • Depository system takes hold of all securities in the country listed in that particular stock exchange
  • Introduction of electronic system enables speedy transactions and accuracy.
  • In a depository system, the security holders can sell and buy securities by which liquidity is brought to the securities
  • Blank transfers are avoided and holding of shares in Benami names is also prevented.
  • Registration/stamp charges for the sale of securities could be easily collected by the government which was evaded under the previous system.
  • Depository promotes more activity in the capital market as trading in genuine share. is ensured under Depository system.
  • Depository avoids use of stationery and prevents delay in registration of transfers.
  • Dividend and interest on securities are properly distributed through this system and in the case of convertible debentures, on the due date, the securities are converted into company shares.
  • Depository acts as collateral security for the raising of loans from any financial institution.

Role of NSDL and CDSL in the capital market

  • NSDL (National security Depository Ltd) and CDSL (Central Depository service Ltd) play an important role in the Indian stock market today.
  • They are promoted mainly by NSE and BSE respectively, provide depository service for electronic trading of securities both equity and debt.
  • These two depositories maintain details of shares and debt instruments in electronic format after dematerialization.
  • The basic activities of these two organization may be compared to that of banks .Just as banks maintains cash deposits and provide all services relating to the electronic settlement of trading in shares and debt instrument.
  • Change of ownership of shares and debenture following buying and selling of these instrument in stock exchanges are reflected in the electronic database maintained by these two depositories.
  • The depositories also provide many services .Appropriate electronic crediting of securities to investors demat accounts after a public issue, right issue, bonus issue or stock splits are also done through them. They also facilitate the purchase and sale of units of mutual fund.

Functions of Depository Services

  • Dematerialization i.e. converting physical securities into electronic form.
  •  Rematerialisation, i.e. converting electronic securities balances in a BO account into physical form.
  • To maintain record of holdings in the electronic form. Settlement of trades by delivering/ receiving underlying securities from/in BO accounts.
  • Settlement of off-market trades i.e. transactions between BOs entered outside the Stock Exchange.
  • Providing electronic credit in respect of securities allotted by issuers under IPO or otherwise.