Depository system of India

Spread the love

Background:

The earlier settlement system on Indian stock exchanges was very inefficient as it was unable to take care of the transfer of securities in a quick/speedy manner. Since the securities were in the form of physical certificates; their quick movement was again difficult. This led to settlement delays, theft, forgery, mutilation, and bad deliveries and also to added costs.

To wipeout these problems, the Depositories Act 1996 was passed.  It was formed with the purpose of ensuring free transferability of securities with speed, accuracy & security. It has been able to do so by:

  • Making securities of public limited companies freely transferable, subject to certain exceptions.
  • Dematerializing the securities in the depository mode.
  • Providing for maintenance of ownership records in a book entry form.

What is Depository?

  • A depository is an institution or a kind of organization which holds securities with it in De-Mat form. In this, trading is done among shares, debentures, mutual funds, derivatives, F&O, and commodities.
  • It is a company that maintains a record of investors dematerialized, shareholding in individual accounts, which are known as the demat account.

Depositories in India

Fundamentally, there are two sorts of depositories in India.

  •     National Securities Depository Limited (NSDL)
  •     Central Depository Service (India) Limited (CDSL).

These are regulated by SEBI and are governed by the Depositories Act, 1996

NSDL:

  • National Securities Depository Limited (NSDL) is an Indian Central securities depository based in Mumbai. 
  • It was established on 8 November 1996 as the first electronic securities depository in India with national coverage.
  • It was established based on a suggestion by a national institution responsible for the economic development of India .

CDSL:

  • The second depository Central Depository Services Limited (CDSL) has been promoted by Bombay Stock Exchange and Bank of India.
  • It was formed in February 1999.
  • Both depositories have a network of Depository participants (DPs) which are further electronically connected to their clients. So, DPs act as a link between the depositories and the clients.

What are the Depository Participants?

  • Depository Participant (DP) is described as an Agent (law) 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 sub section 1A of Section 12 of the SEBI Act.

Who can become Depository Participant?

  • SEBI (D&P) Regulations, 1996 prescribe a minimum net worth of Rs. 50 lakh for stockbrokers, R&T agents and non-banking finance companies (NBFC), for granting them a certificate of registration to act as DPs.
  • If a stockbroker seeks to act as a DP in more than one depository, he should comply with the specified net worth criterion separately for each such depository.
  • No minimum net worth criterion has been prescribed for other categories of DPs; however, depositories can fix a higher net worth criterion for their DPs.

Services provided by Depositories:

  • Dematerialization (usually known as demat) is converting physical certificates of Securities to electronic form
  • Rematerialisation, known as re-mat, is reverse of demat, i.e. getting physical certificates from the electronic securities.
  • Transfer of securities, change of beneficial ownership
  • Settlement of trades done on exchange connected to the Depository
  • Pledging and Unpledging of Securities for the loan against shares
  • Corporate action benefits directly transfer to the Demat and Bank account of the customer