In this article, let’s look at the role of a depositories and their functions. We’ll also address common questions, such as the differences between CDSL and NSDL and whether investors can directly open a demat account with them.
Role of a 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.
Also Read: Demat Account: What are the tax implications of transactions?
The function of depositories is similar to that of banks, as they hold securities in an account akin to how banks hold funds in an account. Depositories also facilitate the transfer of securities between accounts at the instruction of the demat account holder, similar to how banks transfer funds between accounts at the instruction of the account holder.
Furthermore, they enable the transfer of ownership without physically handling securities, similar to how banks facilitate transfers without physically handling money.
Also Read: Can I link multiple bank accounts to my demat account?
A broker or a depository participant (DP) cannot offer you a demat account unless they are registered with depositories. It’s important to note that the broker acts as a bridge between you and various agencies.
They must be registered with a depository to provide you with a demat account and also with exchanges such as BSE, NSE, and MCX for trading, as well as with the clearing corporation for clearing and settling trades.
Transition from paper to electronic trade settlement
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.
National Securities Depository Limited or NSDL is endorsed by key entities including the National Stock Exchange, Industrial Development Bank of India, and Unit Trust of India, whereas CDSL is supported by prominent institutions such as the Bombay Stock Exchange, State Bank of India, and the Bank of India.
Also Read: Demat accounts: Everything you should know about the annual maintenance charges on them
As per data provided by the market regulator, the Securities and Exchange Board of India (SEBI), NSDL has 277 registered depository participants as of March 13, 2024, while CDSL boasts approximately 612 registered depository participants.
As per the available statistics at BSE and NSE, 99.9% of transactions are conducted electronically, significantly reducing the likelihood of errors, thus empowering young Indians to trade directly from their mobile phones. Looking ahead, investments in stocks are poised to increase, as investors increasingly view stocks as one of the best asset classes for outpacing inflation.
Difference between NSDL and CDSL
Both NSDL and CDSL provide similar services related to the holding and transfer of securities in electronic form. However, CDSL is a publicly listed company, and as of today, the stock is trading at ₹1,706 apiece.
Also Read: Demat account: How to choose the right depository participant?
FAQs
Can a demat account be opened directly with NSDL and CDSL?
A demat account cannot be opened directly with NSDL and CDSL. The demat account has to be opened only through a depository participant (DP).
What are the protective measures available to investors in the event of a DP bankruptcy?
In a depository system, investor accounts are held in trust by the depository. Consequently, if a depository participant (DP) becomes bankrupt, the DP’s creditors cannot access the holdings registered in the names of the DP’s clients. In such a scenario, investors have the option to transfer their holdings to an account maintained with another DP.
Who is a Beneficial Owner (BO)?
All the benefits of the dematerialised shares are given to the actual investor since the depository holds the securities in a fiduciary capacity on behalf of the investors who have opened a demat account with the depository. Hence, the actual investor is the “Beneficial Owner” (BO) of the securities.
How can I avail the services of a depository?
A depository interfaces with investors through its agents, called DPs. If investors want to avail of these services offered by the depository, he or she will have to open a BO account with a DP.
Is it possible to pledge securities held in demat mode?
Yes. Securities held in demat mode can indeed be pledged. Furthermore, the process for pledging securities in dematerialised form is highly convenient for both the pledgor and the pledgee.
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Published: 14 Mar 2024, 06:42 PM IST