In this article, let’s look at the role of repositories and their functions. We will also address frequently asked questions, such as the differences between CDSL and NSDL and whether investors can directly open a demat account with them.
Role of Depository
A depository is an organization that holds securities (such as stocks, bonds, debentures, government securities, investment 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 deposits is similar to that of banks, as they hold securities in an account similar to how banks hold funds in an account. Depositories also facilitate the transfer of securities between accounts as per the instruction of the demat account holder, similar to how banks transfer funds between accounts as per the instruction of the account holder.
In addition, 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 is 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 more than a century of history, has faced challenges due to paper-based trade settlement, leading to issues such as poor delivery and delayed title transfers. The Depositories Act of August 1996 laid the foundation for the establishment of NSDL in India, while Central Depository Services was founded in 1999.
National Securities Depository Limited or NSDL is supported by key entities including the National Stock Exchange, Industrial Development Bank of India, and Unit Trust of India, while 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: All you should know about the annual maintenance on them
According to 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 of approximately 612 registered depository participants.
According to the statistics available at BSE and NSE, 99.9% of transactions are done electronically, significantly reducing the likelihood of errors, thus empowering young Indians to transact 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 to outperform 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 to this day, the shares trade at ₹1,706 per
Also Read: Demat account: How to choose the right deposit participant?
Frequently Asked Questions
Can demat account be opened directly with NSDL and CDSL?
Demat account cannot be opened directly with NSDL and CDSL. The demat account should be opened only through a depository participant (DP).
What are the protection measures available to investors in the event of DP bankruptcy?
In a depository system, investment accounts are trusted by the depository. Therefore, if a depository participant (DP) becomes bankrupt, the DP’s creditors cannot access the properties registered in the names of the DP’s customers. In such a scenario, investors have the option of transferring their holdings to an account maintained with another DP.
Who is a Beneficial Owner (BO)?
All the benefits of the dematerialized shares are given to the actual investor because the depository holds the securities in a fiduciary capacity on behalf of the investors who have opened a demat account with the depository. Therefore, the real investor is the “Beneficial Owner” (BO) of the securities.
How can I use the depository services?
A depository interfaces with investors through its agents, called DPs. If investors want to avail these services offered by the depository, he or she will have to open a BO account with DP.
Is it possible to pledge securities held in demat mode?
Yes. Securities held in demat mode can indeed be pledged. In addition, the process to pledge securities in dematerialized form is very convenient for both the pledger and the pledgee.
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Published: 14 Mar 2024, 18:42 IST