What is a depository?

The number of retail investors has increased tremendously over the last few years, driving the stock market volume by a significant margin. However, investors who are entering the market know that it is vital to know the stock market to make profits and mitigate losses. An investor should learn about a depository and its effect on the stock market operations among various stock market jargon.

A depository refers to a space where an asset is held for storage and safety. An example of a depository may be a bank, financial institution, or organization aiming to hold assets in dematerialized form. They interact with their clients through DPs (Depository Participants), also called stockbrokers. A depository provides security and liquidity to the held assets and ensures smooth transactions for the investors.

Understanding a Depository: How do they benefit the financial market?

In financial terms, a depository means an entity that holds financial securities in a dematerialized form. Earlier, securities were issued and transacted in physical form. For transferring securities, depositories maintained manual records on a leaf of paper. With the advent of technology, securities are stored in an electronic format with a depository. The depository is also responsible for maintaining ownership records and facilitating the trading of such securities.

Types of depositories

In India, the Depository Act of 1996 regulates the establishment and operation of a depository. SEBI is the governing body and regulates the functioning of any depository. NSDL and CDSL are the two major depositories in India.

National Securities Depository Limited (NSDL) is promoted by the National Stock Exchange, Industrial Development Bank of India, and Unit Trust of India. Furthermore, the Central Depository Services Limited (CDSL) is promoted by the Bombay Stock Exchange, State Bank of India, and the Bank of India.

Benefits of a Depository

Depositories have multiple benefits, which include:

Ease of transfer

1. Holding security on an investor’s behalf

A depository acts as a guardian to maintain and safeguard the securities on behalf of the investors. It allows investors to remain worry-free about holding securities themselves and spending time on its maintenance.

2. What is the role of a depository?

The primary role of a depository is to facilitate the transfer of securities held by an owner. On the execution of a trade, the depository directly transfers the securities from the account of the seller to the buyer. Such electronic transmission improves the speed and efficiency of the transaction and reduces any margin for error.

Depository services play the following roles in the process of stock market operations.

1. Serves as a link: A depository acts as an intermediary. It intimates investors about transfer in ownership, periodic holding of investors, corporate action, and more. Similarly, companies can maintain shareholding data accurately based on the information provided by the depositories.
2. Create liquidity in the market: Depositories offer mortgages or loans against securities held by investors which may be further utilized for the purchase of other securities. The liquidity offered by a depository to its clients is also referred to as margin. Further, depositories also lend the securities to other institutions and businesses and earn revenue from the same.
3. Invest on the go: With the introduction of a depository, investors can invest in huge volumes from anywhere in the world. Investors may invest in IPOs, ETFs, and trade on a large scale with a depository.

How does a Depository function in India?

A depository participant (DP) acts as a depository agent and links the investor and the depository.

To avail of depository services, an investor must open a Demat account using a demat account app.

Opening a Demat account with IIFL that offers highly competitive prices and unique features is simple:

1. Visit www.indiainfoline.com or the IIFL markets mobile app. Click on open a trading account» Enter Basic details.
2. You will receive a one-time password (OTP) on the mobile number.
3. You will also receive a link on your registered email id. Enter the OTP received on your registered email id.
4. After verifying the OTP, you need to fill out the online Account Opening Form.
5. Your Relationship Manager will then contact you for the necessary documentation.
6. Once the documentation process is completed, and the forms are received at HO, the account will be opened within 24 hours.

Currently, it is almost impossible to transact in listed securities without a Demat account, even more so without a depository. The benefits of a depository cannot be overemphasized, and each investor must maintain a Demat account for investing.