Depository Services

The Depositories Act 1996 introduced the depository service system in India. Under the depository system, physical securities are converted into electronic form through the process of dematerialisation.

The constituents of the depository system are:

  1. Depository
  2. Depository Participants (DP)
  3. Issuing Company
  4. Investors

Depository is like a bank in which an investor can deposit and withdraw his shares. Depository Participant (DP) is an agent of the depository. Investors interact only with DPs. Any financial institution can become DP after registration with SEBI. The company whose shares are to be transacted in electronic form must be registered with a depository.

Investors who want to get securities in electronic form opens a Demat Account. Demat account is the abbreviation of dematerialised account. Demat account refers to an account which an Indian citizen must open with the DPs to trade in listed securities in electronic form. From this account one can hold shares of various companies in the dematerialised or electronic form.

The services provided by a depository are termed as Depository Services. The name of two depositories in India are NSDL (National Securities Depository Ltd.) and CDSL (Central Depository Services Ltd.).

Services Provided by Depository

  1. Dematerialisation (demat) that is converting physical certificates to electronic form.

  2. Rematerialisation (remat) that is getting physical certificates from the electronic securities. This is the reverse of demat.

  3. Transfer of securities.

  4. Settlement of trade.

Working of Depository System

Investor must submit Demat Request Form (DRF) along with the certificate to DP (Depository Participant). DP submits the DRF and share certificates to the issuing company and intimates the depository. The company verifies the DRF and share certificates. Then, the company confirms the dematerialisation to the depository.

Depository informs the same to DP. DP then credits investor’s Demat account with the shares. DP sends a statement of account to the investor.

Benefits of Depository Services

Depository services are beneficial because of the following reasons:

  1. Sale and purchase of shares and stocks of any company on any stock exchange is facilitated by depository services
  2. Saves time
  3. No paperwork
  4. Lower transaction costs
  5. Ease in trading
  6. Transparency in transactions
  7. Physical presence of investor is not required in stock exchange
  8. Risk of loss and mutilation of security certificate is eliminated