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A depository is very similar to a bank. A bank provides multiple services, the most important one being the facility to deposit and store money. Just like a bank, a depository provides multiple services, with the most important one being the demat account service. Opening a demat account enables investors and traders to store equity and other securities in an electronic form. There are multiple securities you can store in the dematerialised form. They are:
- Equity, i.e. shares or stocks of a company
- Bonds and Debentures
- Sovereign Gold Bonds
- Exchange Traded Funds
- Government Bonds
- Mutual Funds
- Tax-Free Bonds
- Certificates of Deposits
Table of Contents
What Is a Depository?
Before the introduction of the depositories and demat accounts, trading was done with physical securities. This meant share certificates were traded with sellers, or shareholders would send their shares to the company’s registrar with a transfer form, and the buyer received freshly issued share certificates after submitting the transfer form. Shares would have to be delivered to the buyer through the post, which posed multiple risks.
There were numerous issues associated with physical shares, such as:
- Share certificates could get lost in the postal system.
- Shares could get damaged during the postal process.
- Share transfers could get rejected due to disparities in signatures.
- It was easy to forge new shares.
- Trading without actually owning shares could be carried out quickly.
To eradicate these and many other issues, the Demat account was introduced with the help of depositories.
What Are the Benefits of a Depository?
The introduction of the depository has led to multiple benefits for India and its traders. Here are the benefits that you, as a trader, can avail of.
● Security
The introduction of the Demat account has led to an improvement in security when compared to the trading and storage of physical securities. The chance of losing certificates during transit is eliminated, and securities are directly deposited into the demat account. Storage no longer becomes an issue, eradicating the fear of theft. The introduction of the depository means safety to all securities as everything is in electronic form.
Apart from this, depositories also take security measures to ensure all traders’ and investors’ investments are safe and no malpractices occur. These practices include:
- Inspection of activities carried out by DP.
- End to End encryption of transactions carried through them
- Taking up insurance policies for losses incurred due to negligence, errors, or omissions.
● Ease of Transfer
Initially, the transfer of ownership of shares was a lengthy and tedious process. It would take approximately two weeks as the settlement period was T+14 days. Now, it has been brought down to T+2 days. This means it would only take two working days from buying to receive shares or selling to receive the money. This reduction in time has been possible due to the electronic transfer of securities and the Indian postal system not being involved in the transfer process.
● Cost Reductions
Physical shares have multiple charges, such as postage charges, stamp duty, etc. The elimination of paper certificates, postage services, etc., has reduced costs in total, which has also led to a reduction in brokerage charges.
● Reports and Updates
With the help of a depository, all data is readily available to you and the authorities. Depositories are mandated by the Securities and Exchange Board of India to share regular reports of all securities present in their owner’s account via email or SMS. This ensures that all account holders are updated regularly. An account holder must also receive information when a security is bought and sold, giving the Demat account holder complete knowledge about the holding or any changes made to their account.
● No Updation Issues
Previously, if you had invested in more than one company and had to update information like a change of residential or postal address or bank account changes, you had to contact each company individually. For any update of details, you would have had to send a courier of all your documents to them, and they would then make the necessary changes in their record. Depositories have expedited this process, where modifications are done in your Demat account and will be reflected in all the concerned companies whose shares you own. Find out how to generate and use TPIN in a Demat account.
What Are the Services Provided by a Depository?
There are multiple services a depository provides that traders and investors alike can make use of.
● Demat Account
This is the most popular service and is used by investors to store securities in a safe manner.
● Dematerialisation Service
This lets the individuals convert all physical assets, like bonds, ETFs, shares, etc., into electronic form for storage in the Demat account.
● Rematerialisation Services
This service enables you to convert securities stored in the Demat account into physical securities.
● Transfers between Depositories
This service enables Demat account holders to transfer securities from one account to another, which can be in the same depository or a different one.
● Off-Market Transfers
Off-market transfers are those trades that don’t involve any clearing houses for the transactions. Depositories enable this service to allow buyers and sellers to trade in equity without being involved in the stock market.
● Lending of Securities
This service involves a holder of a security, typically shares or bonds, transferring them to a borrower and being used by them. The borrower must pay the borrower’s fee or collateral to the lender.
● Nomination Services
This service enables customers to add a nominee to their accounts. This ensures that if something ever happens to the holder, the nominee will be informed and have a position in the account.
● Collateral and Mortgage of Securities
This service lets an account holder pledge their shares as collateral, with the owner borrowing a certain percentage of the value as a loan. This enables the investor to get the required cash without selling their valuable assets.
Functions of a Depository
Apart from the various services provided, there are certain functions that depositories carry out, and understanding them will help you know the meaning of depository.
● Transactions
All securities transactions on the share market occur with the depositories’ help, ensuring a seamless transfer of ownership. This process is carried out quickly, with shares and money exchanging hands in a short period of time.
● Corporate Actions
Depositories help out companies when they have to issue dividends, bonus shares, etc. They also assist in e-voting services and other functions that a depository carries out effortlessly.
● Pledging of shares
Multiple investors tend to take loans against their shares by pledging them. Depositories tend to provide a collateral account where shares are held until the time when the borrowed money is repaid.
Depository in India
After understanding the depository meaning, knowing the depositories in India will help you decide whom to open a Demat account with and use their services.
● National Securities Depository Limited (NSDL)
NSDL is the oldest depository in India and began providing various services in 1996. They were the first depository to provide electronic trading services and primarily cater to the National Stock Exchange (NSE). They have more than two crore active customers, with about 276 DP.
● Central Depository Services India Limited (CDSL)
CDSL came into existence in 1999 to provide a secure and dependable depository service. It has grown to be the largest depository in India, with over five crore Demat accounts and over 500 depository participants.
Depository Participants (DP)
To avail of any services provided by depositories, one can not directly approach them. Instead, an investor must make use of a DP. A depository participant is an entity with a membership with a depository and enables its customers with different services. A depository participant can be anyone:
- A bank
- A non-banking financial company (NBFC)
- A stockbroker
Some DPs provide additional services like trading accounts, portfolio management, trade suggestions, etc.
Conclusion
Understanding what a depository is will benefit you drastically in using all the services it provides. A DP will assist you in opening a Demat account and make use of all the features, giving you a hassle-free trading experience.