Bhaskar Joshi AmarpaliInstitue of management studies
Presented by-: Bhaskar Joshi
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
primarily by IDBI, the Unit Trust of India and the National Stock
Central Depository promoted by the Stock Exchange, Mumbai.
Depository System: How it 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
Advantages of the Depository System
Share certificates, on dematerialization, are cancelled and the same will not
be sent back to the investor. The shares, represented by dematerialized share
certificates are fungible and, therefore, certificate numbers and distinctive
numbers are cancelled and become non-operative.
It enables processing of share trading and transfers electronically without
involving share certificates and transfer deeds, thus eliminating the paper
work involved in scrip-based trading and share transfer system.
Transfer of dematerialized securities is immediate and unlike in the case of
physical transfer where the change of ownership has to be informed to the
company in order to be registered as such, in case of transfer in
dematerialized form, beneficial ownership will be transferred as soon as the
shares are transferred from one account to another.
The investor is also relieved of problems like bad delivery, fake
certificates, shares under litigation, signature difference of transferor and the
There is no need to fill a transfer form for transfer of shares and affix share
There is saving in time and cost on account of elimination of posting of
The threat of loss of certificates or fraudulent interception of certificates in
transit that causes anxiety to the investors, are eliminated.
Disadvantages/Problems of the Depository
Lack of control: Trading in securities may become uncontrolled in case of
Need for greater supervision: It is incumbent upon the capital market regulator
to keep a close watch on the trading in dematerialized securities and see to it
that trading does not act as a detriment to investors. The role of key market
players in case of dematerialized securities, such as stock brokers, needs to be
supervised as they have the capability of manipulating the market.
Complexity of the system: Multiple regulatory frameworks have to be
confirmed to, including the Depositories Act, Regulations and the various Bye
Laws of various depositories. Additionally, agreements are entered at various
levels in the process of dematerialization. These may cause anxiety to the
investor desirous of simplicity in terms of transactions in dematerialized
Current regulations prohibit multiple bids or applications by a single person.
But investors open multiple demat accounts and make multiple applications to
subscribe to IPOs in the hope of getting allotment of shares.
Some listed companies had obtained duplicate shares after the originals were
pledged with banks and then sold the duplicates in the secondary market to
make a profit.
Promoters of some companies dematerialized shares in excess of the company’s
Certain investors pledged shares with banks and got the same shares reissued as
There is an undue delay in the settlement of complaints by investors against
depository participants. This is because there is no single body that is in charge
of ensuring full compliance by these companies.
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
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.
Who is Depository Participant?
A Depository Participant (DP) is an agent of the depository.
They are the intermediaries between the depository and the investors.
The relationship between the DPs and the depository is governed by an
agreement made between the two under the Depositories Act.
In a strictly legal sense, a DP is an entity who is registered as such with
SEBI under the provisions of the SEBI Act.
As per the provisions of this Act, a DP can offer depository related services
only after obtaining a certificate of registration from SEBI.
Conditions to be a depository participant:
In terms of the Depositories Act, 1996, SEBI Depositories& Participants)
Regulations,1996, only the following entities are eligible to become a
Public Financial Institution
Banks including Foreign Banks
State Financial Corporation
An Institution engaged in providing financial services promoted
by above mentioned jointly and severally
Custodian of Securities
Clearing Corporation or Clearing House of a Stock Exchange
Non Banking Financial Company
Registrar & Transfer Agents
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.