Depository System, Need, Benefit, Organization

Depository System in India refers to the infrastructure that facilitates the holding and trading of securities in electronic form. Before its establishment, securities were physically exchanged, which was cumbersome and prone to risks like theft and forgery. The system fundamentally changed how securities are held and transactions are executed, improving speed, safety, and efficiency in the financial markets. India has two main depositories: the National Securities Depository Limited (NSDL) and the Central Depository Services Limited (CDSL). These organizations hold securities such as stocks, bonds, and other financial assets in electronic form, or “demat” accounts, on behalf of investors, eliminating the need for physical certificates and streamlining the trading and settlement processes, thereby significantly reducing transaction time and costs.

Need of Depository System:

1. Dematerialization:

One of the primary functions of depositories is to convert physical securities into electronic form, known as dematerialization. This process reduces the risks associated with the physical handling of securities, such as loss, theft, or damage.

2. Account Maintenance:

Depositories maintain Demat accounts for investors, which are similar to bank accounts but hold securities instead of money. These accounts allow investors to hold and manage their portfolios of securities efficiently.

3. Facilitation of Trading and Settlement:

Depository system plays a crucial role in the trading and settlement of securities transactions. It ensures that the transfer of securities between accounts is done seamlessly and securely post-transaction on the stock exchange.

4. Corporate Actions Processing:

Depositories handle corporate actions on behalf of companies. This includes activities like distributing dividends, interest payments, and managing rights and bonus issues directly to investors’ demat accounts.

5. Pledging and Hypothecation:

Investors can pledge or hypothecate securities held in demat form to avail loans from banks and financial institutions. The depository system manages the records of such transactions to ensure security and transparency.

6. Electronic Credit in IPOs:

When investors subscribe to Initial Public Offerings (IPOs) and other public issues, depositories ensure the electronic credit of securities to investors’ demat accounts, eliminating the need for issuing physical certificates.

7. Maintenance of Records:

Depositories maintain up-to-date records of all holdings and transactions in investor accounts, providing a comprehensive and clear audit trail that is crucial for both regulatory compliance and investor confidence.

8. Inter-depository Transfers:

Securities can be transferred between depositories (from NSDL to CDSL and vice versa) depending on investor preference or broker affiliation, ensuring flexibility and convenience for the investor.

Benefits of Depository System:

1. Elimination of Physical Certificates:

Depository system reduces the need for physical handling of securities, eliminating risks associated with loss, theft, or damage of certificates. This dematerialization ensures a safer and more secure way of holding securities.

2. Quick Transfer and Registration of Securities:

Transactions in dematerialized securities are processed much faster compared to physical securities. This speed and efficiency are crucial during trading, resulting in quicker settlements and more dynamic market participation.

3. Reduction in Transaction Costs:

Handling and dealing with physical documents incurs significant costs, which are drastically reduced in a demat environment. Lower transaction costs benefit all market participants, especially small investors.

4. Convenience:

The depository system offers unparalleled convenience as transactions can be conducted from anywhere via online platforms. This convenience increases market accessibility for a broader range of investors.

5. Improved Accuracy and Reduced Paperwork:

By automating the transaction processes, the likelihood of errors associated with manual paperwork is significantly reduced. This leads to improved accuracy in records and transactions.

6. Seamless Handling of Corporate Actions:

Corporate actions like dividends, splits, bonus issues, and rights offerings are automatically updated and applied to the investor’s account, reducing the administrative burden on investors and ensuring they receive all entitled benefits promptly.

7. Ease of Pledging Securities:

Investors can easily pledge electronic securities as collateral to secure loans. The depository system streamlines this process, making it more efficient and less cumbersome than pledging physical securities.

8. Enhanced Transparency and Corporate Governance:

Depository system helps enhance transparency in the financial markets. Accurate record-keeping and immediate updates of shareholdings and transactions help improve overall market governance and investor confidence.

Organizations of Depository System:

1. National Securities Depository Limited (NSDL):

Established in 1996, NSDL was the first electronic securities depository in India, setting up the framework for the dematerialization of securities in the country. It is backed by institutions of national stature such as the National Stock Exchange (NSE), the Industrial Development Bank of India (IDBI), and the Unit Trust of India (UTI). NSDL allows the holding and transacting of securities in electronic form and facilitates the seamless transfer of ownership through depository participants.

2. Central Depository Services (India) Limited (CDSL):

CDSL was set up in 1999 and is the second electronic securities depository in India. It was promoted by the Bombay Stock Exchange (BSE) along with a cross-section of several leading Indian and foreign banks such as State Bank of India, Bank of Baroda, HDFC Bank, Standard Chartered Bank, and others. Like NSDL, CDSL provides services related to the holding, trading, and settlement of securities in electronic form. It also ensures the security and integrity of the transfer process.