What Is A Depository? How Does A Depository System Work?

What Is A Depository? An Overview

Over the last few years, Indian people are turning to the stock market to grow their money because traditional investments are no longer giving inflation-beat returns. However, investing in the stock market is not enough, they also need to learn the stock market and its various terminologies to make profits. As a smart investor, it is important to learn depository meaning in stock market and the function of depository. In this article, we are going to learn about what are depositories, who is depository, depository functions

What are Depositories?

In the past years, people held cash in their hands but with the advent of banks, people started depositing cash in banks and receiving interest against them. In the same way, depositories hold securities and safeguard them.

A depository is a company where an asset is held and stored safely on behalf of other investors. It is an institution that offers safety and administration services for securities. They are also responsible for maintaining the records of the ownership of securities and should be able to transfer these securities as required. Moreover, it provides liquidity in the stock market, safeguards the deposited cash, invests in various securities, and lends to people. 

The SEBI (Securities and Exchange Board of India) is the watchdog of the Indian stock market and protects the interest of investors. They ensure that there is fair trade happening in the market. They are also responsible for examining, registering, and controlling the depository. A depository can start its operations only when SEBI permits them. 

Key Takeaways

• A depository is an entity that holds securities such as stocks in an electronic form. It removes the burden of storing them physically. 
• A depository acts as a bridge between the companies and the investors. 
• A depository holds the securities on behalf of the investors and gives back to them whenever they want.
• The main function of a depository is to cause an investor to trade securities.

Functions of A Depository

The depository acts as a connection between public companies and investors

A depository acts as a link between the companies and the investors as they issue financial securities. The depository participants are associated with depository participants who are responsible for issuing securities to the investors.

Removes the risk of theft and the burden of holding shares physically

Before the advent of the Demat account and depository, investors used to buy physical share certificates and hold them. But with the advent of depository, traders and investors can store securities in dematerialized form. It eliminates the risk of theft, loss, or forgery of documents while transferring securities as they are transferred in electronic form. The buyers and sellers do not have to worry about whether the securities are transferred successfully or not.

Reduces Paperwork

When the securities are transferred electronically from one investor to another, there is less involvement in paperwork, which increases the speed of transferring shares. Depository plays a crucial role in the digitization of the stock market.

Provision of Loans

A depository's main job is to hold the securities safely and send them back to the customer whenever they need them. The depository earns interest by lending deposits to businesses or other people in the form of mortgages. 

What Are NSDL and CDSL?

In India, NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited) are two major depository institutions. They are controlled by SEBI. NSDL was established in 1996 and it is the oldest depository in India. CDSL was established in 1999. The depository acts the same way as banks. Banks hold deposits whereas depository holds various securities such as mutual funds, stocks, and bonds in electronic form.  

• There are two leading stock exchanges in India: NSE (National Stock Exchange) and BSE (Bombay Stock Exchange).
• NSE has NSDL and BSE has CDSL. 
• The promoters of NSDL are NSE, IDBI Bank, and the Unit trust of India. Whereas the promoters of CDSL are BSE, HDFC, BOB, BOI, and SBI. 
• In terms of Demat account numbers, Demat accounts opened with CDSL have 16-digit Demat account numbers and Demat accounts opened with NSDL have two alpha digits and 14 numeric digits. 
• 599 DPs (Depository participants) are registered with CDSL and 278 DPs are registered with NSDL. 1.95 crore Demat accounts are held with NSDL and 2.11 crore Demat accounts are held with CDSL. 

How Does the Depository System Work?

If you want to buy and sell shares of publicly listed companies, the first thing you need to do is open a Demat account. When you buy shares of a company, they are credited to your Demat account and when you sell the shares of a company, they are debited from your Demat account. The main role of a Demat account is to enable you to buy and sell shares. However, it acts as a middleman. In reality, the shares are held by the depositories such as CDSL and NSDL. Moreover, they provide data on investors to the companies when they give dividends to their shareholders. 

Depositories provide various other services including maintenance of Demat accounts, trade settlement, share transfers, provide safekeeping, off-market transfers, dematerialization and rematerialization, liquidity to markets, and transmission. 

Depository participants or DPs registered themselves with depositories. In other words, DPs act as an agent. A DP is a broker that you choose to open your Demat account with. DP provides you with a trading platform where you can buy and sell securities. 

For instance, you want to buy shares of a company ABC at Rs. 100. So, you placed a buy order from your Demat account. After trading + two working days, you will receive the shares. Here, the depository transfers the ownership of shares to you. And after a month when the share price of the company rises, you decide to sell them. So, you will place a sell order and after that, the shares will be debited from your account. After T+2 days, you will receive the full amount and the ownership will be transferred from you to the next buyer by the depository. 

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To conclude, the depository system in India has simplified the investment journey in the stock market. They provide security of transactions and provide delivery of shares to investors whenever they need. Hence, digitization in the stock market has reduced fraudulent transactions. Now, investors can trade in the stock market from any part of the world.