In recent times, there has been a noticeable increase in investors turning towards the stock market and other securities to enhance their wealth. If you are actively investing in the stock market, it is essential to acquire a comprehensive understanding of the dynamics of the stock market and various terminologies associated with it. One such crucial aspect of the stock market is the depository. Therefore, it is imperative to comprehend its meaning and operational functions.
What is a depository?
A depository is an organisation that holds your securities (shares, debentures, bonds, government securities, etc.) in electronic form through a registered depository participant. These institutions play a crucial role in the functioning of financial markets by facilitating the efficient transfer and settlement of securities transactions.
As an investor, you interact with depositories through Depository Participants (DPs), such as brokerage firms, banks or financial institutions. These DPs are authorised by the depositories to offer depository services. You can open a Demat account with a DP only if it is registered with a depository. A Demat account enables you to hold your securities in electronic form, eliminating the need for physical share certificates.
Depositories also facilitate various corporate actions, such as dividends, bonus issues, rights offerings and mergers. They ensure seamless communication between issuers, investors and other market participants.
Types of depositories
In India, there are two major depositories - the NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited). Both of these depositories are regulated by the Securities and Exchange Board of India (SEBI).
You can open a Demat account with either of the two depositories, as both offer the same Demat and settlement services.
Benefits of a depository
- No risk of theft: By allowing you to hold securities in dematerialised form, a depository mitigates the risk of theft or misplacement of your shares.
- Time-saving: Earlier, the transfer of securities typically spanned from a fortnight to a month. This long process involved filling out a form and mailing it to the SEBI. However, the introduction of depositories has significantly reduced this timeframe.
- Increased efficiency: Engaging in online trading via a depository has minimised the need for manual efforts, paperwork and brokerage charges.
- Secure: Depositories prioritise the safety of individual investors by conducting periodic reviews of DPs. Additionally, transactions conducted through your depository are secured with end-to-end encryption.
- Convenience: Depositories in India offer the convenience of storing securities across various asset classes, including equities, bonds, mutual funds, and more. Prior to their establishment, investors were required to hold their securities in physical form, which was a tedious task.
Role of a depository
1. Dematerialisation: A depository primarily converts physical securities (paper certificates) into electronic form through a process called dematerialisation. This eliminates risks like theft, loss and forgery.
2. Electronic settlement: Depositories facilitate electronic trade settlement by ensuring smooth transfer of securities between buyers and sellers. After a trade on a stock exchange, the depository transfers ownership of securities from the seller's Demat account to the buyer's Demat account.
3. Centralised record keeping: A depository keeps an electronic record of all the securities you own, including holdings, transactions and relevant details. This centralisation simplifies tracking and managing securities, cutting down on administrative hassles.
4. Transfer and pledging of securities: You can easily transfer securities from your Demat account to others via depositories. You can also use your securities as collateral for loans by creating a pledge for the lender.
5. Corporate actions: Depositories play a vital role in managing corporate actions like dividends, bonuses, rights issues and mergers. They ensure investors promptly and accurately receive the benefits and entitlements linked to their holdings.
6. Reduction of settlement risks: Depositories remove paper securities and simplify settlements, cutting settlement, counterparty and systemic risks in the stock market.
7. Interoperability: Depositories collaborate with stock exchanges and clearing corporations to ensure seamless settlement and interoperability among market participants. This integration allows trades from various exchanges to settle smoothly through the depository.
How does a depository function?
To engage in buying and selling shares of publicly listed companies, your first step is to open a Demat account with a registered DP, also called a brokerage house. While the DP facilitates these transactions, it functions as an intermediary and acts as a link between you and the depository. The depository performs multiple functions, as discussed in the earlier sections.
Consider opening a Demat account with a reputed brokerage house like Axis Direct. It offers a 3-in-1 Savings, Trading and Demat Account for a seamless banking experience. Make the most of their many investment choices and professional investment advice.
Also Read: What Is A Demat Account? All You Need To Know
FAQs
1. What is the difference between a bank and a depository?
A bank account is used to deposit funds or cash while a depository holds your securities, like shares, mutual funds, bonds, etc., through your Demat account.
2. How many depositories are there in India?
In India, there are two primary depositories: the National Securities Depository Limited (NSDL) and the Central Depository Services Limited (CDSL).
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
Mutual Fund investments are subject to market risk, read all scheme related documents carefully. Axis Bank Ltd is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Purchase of Mutual Funds by Axis Bank’s customer is purely voluntary and not linked to availment of any other facility from the Bank. T&C apply.
