Depositories
Shares and bonds are being issued by companies for quite some time. Ten years back, all these were issued in the form of physical certificates that the investor had to keep safe and then forward to the buyer once sold. This process was highly time consuming and gave rise to issues like fake securities and bad deliveries. All these reasons and the improvement in technology gave rise to depositories and the electronic mode of holding securities.
A depository resembles a bank; however incase of a depository the deposits are securities, such as shares, debentures, bonds and government securities, in electronic form. A depository functions as a bank- both are common houses that hold assets of the participating members and provide services to clients.
Comparison of a Depository with a Bank
| Depositories | Banks |
|---|
| Hold securities in an account | Hold funds in an account |
| Transfer securities between accounts on the instruction of the account holder | Transfers funds between accounts on the instruction of the account holder |
| Assist in transfer of ownership without having to handle securities | Assist in transfers without having to handle money |
| Facilitates safekeeping of shares | Facilitates safekeeping of money |
Benefits of having a Depository are as follows:
- Holds securities in electronic form, thus reducing paperwork
- Applies for IPOs and other public offerings
- Transfers securities in an immediate manner
- Risks that are associated with physical certificates such as bad delivery and fake securities are absent
- Reduces transaction cost
- Eases nomination facility
- Direct transmission of securities by the DP to avoid correspondence with companies
- Records any corporate actions automatically
Depositories in India
There are 2 depositories in India –
- The National Securities Depository Limited [NSDL]
- Central Depository for Securities Limited [CDSL]
Facilities offered by NSDL and CDSL
- Dematerialization i.e. converting physical certificates into their electronic form
- Rematerialization i.e. converting securities in DeMat form into physical certificates
- Assisting in repurchase / redemption of mutual fund units
- Electronic settlement of trades in stock exchanges connected to NSDL
- Pledging or hypothecation of the dematerialized securities against loan
- Electronic credit of securities allotted in public issue, rights issue
- Receipt of non-cash corporate benefits such as bonus, in electronic form
- Freezing of DeMat account to avoid debits from the account
- Nomination facilities for DeMat accounts
- Services related to change of address
- Effective transmission of securities
- Other facilities such as holding debt instruments in the same account or availing stock lending / borrowing facility
Depository Participants
Services provided by NSDL and CDSL are carried out through their agents known as Depository Participants [DPs]. DPs are appointed by depositories after an approval from SEBI. According to SEBI regulations, 3 categories of entities such as banks, financial institutions, and SEBI registered trading members qualify for becoming DPs
Presently, there are 327 DPs in India. Few of them are:
- Bank of India
- Bank of Baroda
- Kotak securities
- Motilal Oswal
- Reliance Capital
- UTI
- Yes Bank
Selecting DPs
Few important factors while selecting a DP are:
- Convenience: Distance from office or residence
- Comfort: Reputation of the DP, past association with the organization, whether the DP is in a position to give the specific service you may need
- Cost: The service charges levied by DP and the kind of services offered.
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