Depository System in securities Transaction
Need for Depository System:
The trading in physical segment is full of inefficiencies due to handling of large volumes of Certificates and also involves various other problems like delays in transfer, delay in Settlement, loss in transit, forgerly certificates, stolen certificates, mutilation of certificates, Postal losses, court cases, litigation etc. To overcome these deficiencies, a new system of trading, viz. Depository system was introduced, which facilitates investor to hold Securities in electronic form and to trade in these securities. The first depository set up in India is National Securities Depository Limited (NSDL) and is promoted by IDBI, UTI and NSE.
What is Depository?
Depository is an organisation which holds your securities in electronic (also known as ‘book entry’) form, in the same manner as a bank holds your money. Further, a Depository also transfers your securities without actually handling securities, in the same Day as a bank transfers funds without actually handling cash.
Benefits of Depository System:
- No danger of loss of share certificates since the shares are credited to your Account.
- No possibility of bad deliveries.
- Elimination of all rise associated with physical certificates such as loss, theft, Forgery, mutilation etc.
- No need to affix share transfer stamp as it is a paperless trading.
- No postal / courier charges.
- Less brokerage charges.
- After the settlement, pay in and pay out are on the same day for paperless trading Which means you get your securities and cash immediately.
- Scriptless trading helps allocate corporate benefits faster.
- Facilitates pledging and hypothecation of your securities.
- Eliminates the problem of odd lot shares.
- Facility to lock your account if you are abroad.
Steps involved in joining depository system:
There are 3 steps in which an investor can covert his physical certificate into electronic Form.
- Open an account with one of the participants of NSDL (A participant is a market Intermediary through whom NSDL interacts with the investors).
- Sign an Agreement with the participant.
- Submit Dematerialisation Request form along with share certificate to the Issuer.
How do you open a depository account ?
Choose a participant from amongst the participants (a list of participants is given in Annexure-A) offering depository services and registered with NSDL. Thereafter :
- Fill up an Account Opening Form available with the participant.
- Sign ‘Participant-Client Agreement’.
- Receive your account number which should be quoted in all your Correspondence.
- Your participant will provide you a statement of holdings and statement of Transactions (like a bank pass book) every fortnight giving details of your holdings And transactions in your account.