Background:
The earlier settlement system on Indian stock exchanges was very inefficient as it was unable to take care of the transfer of securities in a quick/speedy manner. Since the securities were in the form of physical certificates; their quick movement was again difficult. This led to settlement delays, theft, forgery, mutilation, and bad deliveries and also to added costs.
To
- Making securities of public limited companies freely transferable, subject to certain exceptions.
- Dematerializing the securities in the depository mode.
- Providing for maintenance of ownership records in a
book entry form.
What is Depository?
- A depository is an institution or a kind of organization which holds securities with it in De-Mat form. In this, trading is done among shares, debentures, mutual funds, derivatives, F&O, and commodities.
- It is a company that maintains a record of investors dematerialized, shareholding in individual accounts, which are known as the demat account.
Depositories in India
Fundamentally, there are two sorts of depositories in India.
- National Securities Depository Limited (NSDL)
- Central Depository Service (India) Limited (CDSL).
These are regulated by SEBI and are governed by the Depositories Act, 1996
NSDL:
- National Securities Depository Limited (NSDL) is an Indian Central securities depository based in Mumbai.
- It was established on 8 November 1996 as the first electronic securities depository in India with national coverage.
- It was established based on a suggestion by a national institution responsible for the economic development of
India .
CDSL:
- The second depository Central Depository Services Limited (CDSL) has been promoted by Bombay Stock Exchange and Bank of India.
- It was formed in February 1999.
- Both depositories have a network of Depository participants (DPs) which are further electronically connected to their clients. So,
DPs act as a link between the depositories and the clients.
What are the Depository Participants?
- Depository Participant (DP) is described as an Agent (law) of the depository. They are the intermediaries between the depository and the investors.
- The relationship between the DPs and the depository is governed by an agreement made between the two under the Depositories Act.
- In a strictly legal sense, a DP is an entity who is registered as such with SEBI under the sub section 1A of Section 12 of the SEBI Act.
Who can become Depository Participant?
- SEBI (D&P) Regulations, 1996 prescribe a minimum net worth of Rs. 50 lakh for stockbrokers, R&T agents and non-banking finance companies (NBFC), for granting them a certificate of registration to act as DPs.
- If a stockbroker seeks to act as a DP in more than one depository, he should comply with the specified net worth criterion separately for each such depository.
- No minimum net worth criterion has been prescribed for other categories of DPs; however, depositories can fix a higher net worth criterion for their DPs.
Services provided by Depositories:
- Dematerialization (usually known as demat) is converting physical certificates of Securities to electronic form
- Rematerialisation, known as re-mat, is reverse of demat, i.e. getting physical certificates from the electronic securities.
- Transfer of securities, change of beneficial ownership
- Settlement of trades done on exchange connected to the Depository
- Pledging and Unpledging of Securities for the loan against shares
- Corporate action benefits directly transfer to the Demat and Bank account of the customer