Depository: Meaning, Types, and Role

Last Updated: 27 Dec 2024

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.Find out all about it in this guide.

Depository Meaning

A depository is a space where an asset is held for storage and safety. An example of a depository may be a bank, financial institution, or organisation aiming to hold assets in dematerialised 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 investor transactions.

Depository Benefits

In financial terms, a depository is an entity that holds financial securities in a dematerialised form. Earlier, securities were issued and transacted in physical form. Depositories maintained manual records on a leaf of paper for transferring securities. 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.

Depository Types

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.

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

Role of Depositories

Depositories are indispensable in modern financial systems, ensuring the smooth functioning of securities markets. Below is a detailed explanation of their essential roles:

• Dematerialisation : Depositories’ fundamental role is to convert physical securities (paper certificates) into electronic form, a process referred to as dematerialisation. This eliminates risks and inefficiencies associated with physical certificates, such as theft, loss, forgery, and transfer delays. Investors can securely hold their securities in a demat account, which functions similarly to a bank account for financial securities.
• Electronic Settlement: Depositories facilitate the electronic settlement of trades by ensuring the seamless transfer of securities between buyers and sellers. When a transaction is executed on a stock exchange, the depository efficiently and securely transfers the ownership of the securities from the seller’s demat account to the buyer’s demat account.
• Centralised Record-Keeping: Depositories maintain a centralised electronic record of all securities investors hold. This record includes details of holdings, transactions, and other pertinent information. Centralisation simplifies the tracking and management of securities, reducing administrative complexities for investors.
• Transfer and Pledging of Securities : Through depositories, investors can easily transfer securities between accounts. Furthermore, they can pledge their securities as collateral to secure loans by creating a pledge in favour of the lender, streamlining the collateral management process.
• Corporate Actions: Depositories play a pivotal role in managing corporate actions such as dividend payments, bonus shares, rights issues, and mergers. They ensure investors receive their entitlements promptly and accurately, eliminating manual errors and delays.
• Reduction of Settlement Risks: By eliminating physical certificates and streamlining the settlement process, depositories significantly minimise settlement risks, counterparty risks, and systemic risks within the stock market, fostering a more stable and efficient trading environment.
• Interoperability: Depositories collaborate with stock exchanges and clearing corporations to enable smooth settlement and interoperability between market participants. This integration ensures that trades executed on one exchange can be settled seamlessly through the depository, irrespective of the exchange on which they were traded.

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 Capital Services Limited that offers highly competitive prices and unique features is simple:

• Visit the IIFL markets mobile app. Click on Open a trading account» Enter Basic details.
• You will receive a one-time password (OTP) on the mobile number.
• You will also receive a link on your registered email ID. Enter the OTP received using your registered email ID.
• After verifying the OTP, you must complete the online Account Opening Form.
• Your Relationship Manager will then contact you for the necessary documentation.
• Once the documentation 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 overemphasised, and each investor must maintain a Demat account for investing.

Frequently Asked Questions

Can I convert delivery to Intraday?

Yes, you can convert your delivery order to intraday. However, you should do it on the same day and before the closing of the market.

How do delivery traders make money?

Delivery traders make money by buying securities at a lower price and selling them after the credit of the securities in their Demat account. It is usually done after T+2 days.

Can we sell shares in delivery?

Yes, you can sell shares in a delivery order whenever you want. However, as the shares are credited after T+2 days, you can only sell them after the credit.

What is a depository in demat?

A depository in the demat system is an institution that electronically holds securities like shares and bonds on behalf of investors. It facilitates the safe custody of these securities, their transfer, and other related services, eliminating the need for physical certificates and streamlining transactions in financial markets.

How many depositories are there in India?

India has two depositories: the National Securities Depository Limited (NSDL) and the Central Depository Services Limited (CDSL). These entities are regulated by the Securities and Exchange Board of India (SEBI) and provide dematerialisation services, ensuring the efficient handling and settlement of securities transactions across the country.