UNIT 4

• What is depository system and how does it work?

Demat Account
Dematerialization and Rematerialization
Functions
Constituents
Depositories Act 1996
Depositories in India
Registered owner V/S Beneficial owner
What is Depository?
• A depository is an organisation that holds securities (like shares,
debentures, bonds, government securities, mutual fund units, etc.) of
investors in electronic form at the request of the investors through a
registered depository participant. It also provides services related to
transactions in securities.
• Let's say an investor buys some stock in a company through their
brokerage account. After the purchase, these stocks need a place to be
securely stored in electronic form. This is where the depository comes in.
• When the investor buys the stocks, they are electronically transferred to
their demat account, which is provided by their DP. The depository, acting
as a central securities repository, securely holds these stocks on behalf of
the investor.
• Now, when the investor decides to sell their stocks, they instruct their DP
to initiate the sale. The DP then communicates with the depository to
transfer the stocks from the investor's demat account to the buyer's
demat account.
• In this process, the depository ensures the smooth transfer of
ownership of securities between buyers and sellers, maintaining
accurate records of ownership, and facilitating seamless
transactions in the stock market.
• How many depositories exist in India?
• Currently, only two depositories, Central Depository Services
(CDSL) and National Securities Depository Limited (NSDL), are
registered with SEBI. NSDL is promoted by the National Stock
Exchange, Industrial Development Bank of India, and Unit Trust of
India, while CDSL is backed by the Bombay Stock Exchange,
State Bank of India, and the Bank of India.
• India's capital market, with over a century of history, faced
challenges due to paper-based trade settlement, leading to
issues like bad delivery and delayed title transfers. The
Depositories Act of August 1996 laid the foundation for NSDL's
establishment in India, while Central Depository Services was
founded in 1999.
DEMATERIALIZATION PROCESS
Can a demat account be opened directly with a
depository?
• No. A demat account cannot be opened directly with the
depository. It has to be opened only through the DP of
the depository.
• In 1947, this system was introduced for the first time in
Germany.
• It’s a scripless trading system as the securities are kept
in the electronic form.
Benefits of Depository/Depository
system
• 1. Enhanced Liquidity
Depositories make trading quicker and more efficient by
offering a consolidated storage and transfer platform.
This, in turn, increases market liquidity since investors
may purchase and sell assets without the requirement for
physical delivery.
• 2. Decreased Risk of Loss or Theft
• Compared with conventional paper-based systems,
depositories greatly minimize the risk of loss, theft, or
damage by centralizing the custody of assets in a safe
electronic format. It boosts investor trust while reducing
operational risks for market players.
3.Streamlining Trade Settlement
• Depositories optimize the settlement procedure by mechanizing the
exchange of money and securities between buyers and sellers. It leads to
faster and more accurate transaction settlement, lower risks, and
increased market efficiency.
4.Reduced Transaction Costs
Market players save money when trade settlement procedures are
automated and standardized by depositories. Both investors and
depository participants profit from decreased transaction costs due to less
paperwork, less administrative expenditures, and fewer mistakes.
5. Accountability and Transparency
By keeping precise records of the ownership of securities, transactions,
and corporate activities, depositories promote accountability and
transparency in the financial markets.
Investors may quickly obtain information about their investments and
trace transaction history, increasing confidence and trust in the market’s
integrity.
6.Facilitation of Corporate Activities
Depositories are essential in handling corporate
activities, including rights offers, bonus issues, and
dividends on behalf of investors.
It simplifies the delivery of corporate benefits and
assures fast and accurate processing, increasing investor
convenience and lowering administrative responsibilities.
DEPOSITORY PARTICIPANT
• Depository participant refers to a registered
agent/stockbroker of the depository. It acts as an
intermediary between the depository and the investors in
the stock market. In India, all the depository participants are
registered under sub-section 1A of Section 12 of the SEBI
Act, 1992. In order to function as a depository participant
and provide services to investors in the stock market, it is
necessary to obtain a certificate of registration from SEBI.
• A depository participant is like a middleman between the
main depositories and investors. It’s like a bank where you
store your assets instead of money. With a depository
participant, you can open a Demat account to store your
securities
WHAT IS DEMAT ACCOUNT