All About Depositories and How They Work?

All About Depository

A Brief Overview of Depository

A depository refers to a recognized entity that assists investors in buying and selling of securities like stocks in an electronic manner. The stocks that are stored in depositories by the investors are more or less similar to funds deposited in bank accounts.

Registrar and Transfer Agents (RTAs) are generally the participants of the depositories and are also referred to as depository participants or DPs. So, these registrar and transfer agents in depositories can be a financial institution, a broker, or any SEBI authorized entity who understands the online share transfer process.

These RTAs are responsible for transferring final shares from the depositories and also provide confirmation to investors at the end of a particular transaction from the depository. RTAs are also required to manage all the meetings, mailing and reporting activities on behalf of investors along with complete record keeping in many situations.

Why is Depository Required?

Firstly, the presence of an authorized depository minimizes or eliminates the risk associated with holding physical securities for the investors.

In the past, the buyers were often worried about whether the shares have been successfully transferred to his/her bank account or not, and also need to make sure that no event of theft, damage or collateral loss has happened during the security transfers. This also required intensive paperwork and consumption of large manpower to regulate the entire system.

However, after the arrival of the depository system, such risks have been minimized to a greater extent due to the availability of electronic share transfer and storage. To further tighten up the things, institutional investors in the Indian market were instructed to mandatorily apply demat or electronic trading in 1998, which has changed the complete scenario and boosted the trading volumes in India.

Therefore, electronic trading along with the presence to depositories has made Foreign investors feel more confident about trading in India as there were minimal incidents of delay, forgery, and untrustworthy transfer of shares.

Depositories Currently Active in India:

As of now, two depositories are operative in India owing to the Depository Act of 1996.

Difference Between NSDL & CDSL

First one is the National Securities Depository Limited (NSDL), which is actively supported by entities like National Stock Exchange, Industrial Development Bank of India and Unit Trust of India. The other depository is the Central Depository Services Limited (CDSL) aggrandized by Bombay Stock Exchange, State Bank of India, and Bank of India.

What is the Name of the Entity which Regulates Depository and its Participants?

The Securities and Exchange Board of India, which is also popularly known as SEBI held the responsibilities of registration, regulation as well as the inspection of the two depositories in India. DPs are also directly answerable to the SEBI at any given point of time. A registrar and transfer agent or DP can only be operative once it gets approval from SEBI in India after getting recommended from NSDL or CDSL.

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