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Things To Know About Depositories

Created on 11 Feb 2021

Wraps up in 5 Min

Read by 1.7k people

Updated on 10 Sep 2022

The Reserve Bank of India (RBI) regulates the money flow in the Indian economy. It is a bank, sure, but can you open an account with the RBI? No, right? Similarly, the Securities and Exchange Board of India (SEBI) regulated the financial and securities market. You cannot open an account with SEBI either.

So now you must be wondering how you trade in the securities market. This is where the concept of depositories and depository participants arises.

In todays article, we will be discussing the depositories and depository participants.

Let's get started.

What is a depository?

The need for a depository system was felt to reduce the excessive paperwork involved in the traditional share trading system, significantly reducing the time gap between the confirmations from buyers and sellers, and bring down the extensive documentation requirements. 1992 saw many traders making severe mistakes and discovering a host of blunders in the Indian Securities. This was when the depositories came into being.

In layman's terms, a depository is a financial entity that keeps your shares and stocks in safekeeping like banks hold your money and protect it from damage, theft, or loss. Depositories are essential financial firms in the world of online stock trading that allows you to sell stocks or shares in a quick and paperless way through your demat account.

Depositories keep shares, stocks, bonds, equities, and other such financial instruments of the investor in the dematerialized and fungible form, eliminating the need of going through lengthy paperwork otherwise required in trading of derivatives, equities, futures & options , mutual funds, currency , commodities, IPO and much more!

In India, the depository system is regulated by the SEBI, which forms policies related to online share trading to avoid fraud or mishandling, under the Depositories Act, 1996

What is a depository participant?

Depositories fixed the problem with lengthy paperwork and significantly reduced frauds and unauthorized transactions. The introduction of the system spiked the number of investors in the stock market, also attracting many foreign traders. The surge gave rise to handling a massive number of demat accounts (along with their records and information). This was when the need to establish depository participants came in.

Like we discussed earlier, we cannot transact with RBI directly. Alike, we cannot tap the depositories now either. We engage a stockbroker (registered with the depository) who coordinates and keeps our shares, stocks, bonds, debentures , mutual funds, etc., in an electronic (Demat) mode.

Thus, the registered stockbroker or the financial broker who acts as a link between the investor and the depository is known as the depository participant. 

Analogy

Depository Participant

A bank account with a bank keeps the money safe

A Demat account with a depository participant keeps the shares, stocks, bonds, debentures, mutual funds, etc. safe

To provide services to the clients, depository participants must be registered (or have an agreement) with SEBI under section 12 of the SEBI Act. Depository participants are therefore answerable to the SEBI.

Depository participants maintain a detailed record of every investor, along with the buying and selling of every product. In addition to this, depository participants are responsible for organizing conferences, meetings and sending emails to the depositories on investors' behalf.

Let's understand the structure of the depository system

The depository system stands on four pillars to perform its designated functions:

Central depository

An essential part of the depository system that keeps all the securities (shares, stocks, bonds, debentures, mutual funds, etc.) of an investor electronically.

Share Registrar Transfer Agent (RTA)

The primary duty of RTA is to maintain the investor records (after the issuer makes the securities available to the public). RTAs also handle and monitor the movement (buying and selling) of securities.

Clearing and Settlement Corporation

Clearinghouses are the designated intermediaries between the buyers and sellers of securities in the financial market. For a detailed discussion, refer to our previous article on clearinghouses.

Depository participant

A depository participant is a registered stockbroker who acts as a link between the investor and the depository.

                           

                                           

Active depositories in India

The Depositories Act, 1996 authorizes the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) to arrange their depositories. 

The NSE has set up the National Securities Depository Limited (NSDL), which the UTI and IDBI promote.

The NSDL website's data says that more than one and a half crore investor demat accounts are registered.

NSE was the first stock exchange to initiate a system through which an investor receives the stock payment on the third day (T + 2) once the sale allows the trading transactions' smooth functioning.

The BSE has set up the Central Depository Securities Limited (CDSL).

The data on the CDSL website says that there are more than two crore investor demat accounts registered.

 

Active depository participants in India

There are quite a few stockbrokers in India working under the direction of depository participants adhering to SEBI guidelines. These stockbrokers have agreements with the NSDL or the CDSL or even both to maintain the investor records in the dematerialized form. Some of the well-known depository participants in India inter-alia include:

  • Zerodha
  • Sharekhan
  • Angel broking
  • India Infoline
  • ICICI Securities
  • Motilal oswal
  • Reliance Securities
  • Upstox
  • Anand Rathi

Requisites of becoming a depository participant

The contention that you have to be a stockbroker to become a depository participant is wrong. Anyone can become a depository participant by signing an agreement with the SEBI complying with the SEBI guidelines. Following people or sectors or organizations can become depository participants:

  • Stockbrokers
  • Public Financial Institutions (PFIs)
  • Banks - Foreign Banks in particular
  • Custodians
  • State Financial Institutions
  • (Even a) Non-Banking Finance Company (NBFC)
  • RTAs (Registrar and Transfer Agents)

Let's talk about the advantages and disadvantages of the depository system

Advantages

Disadvantages

  • The depository systems' primary benefit is the significant reduction in the risks associated with the physical certificates, such as mutilation, damage, theft, or loss.

  • Paperless transactions occur because the depositories convert the shares, stocks, bonds, and mutual funds into an electronic form.

  • Depositories facilitated fast, efficient, and quick buying and selling of shares and securities by way of reducing lengthy documentation procedures.

  • Some companies are still refrain from deploying the depository services that break the demat transaction chain.

  • Many investors are still unaware of the depository system's benefits and thus fail to reap its advantages.

  • SEBI is slow in plugging the loopholes in the selling of stocks and securities in the demat form.

 

Closing remarks

One thing is clear from our discussion today - that the depository system is a critical step in assuring the safety of shares, stocks, and securities across various trading platforms in the market. We understood how the depositories and depository participants work in tandem to provide quick and paper-free transactions safe from any risk of theft, loss fraud. 

However, investors must thoroughly check a depository participant or a stockbroker before opening a Demat account with them. 

Stay Positive, Test Negative!

Happy Investing.

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