The term Depository refers to a provision or an institution that allows currency deposits to customers to store & safeguard their valuable assets. A depository can be a financial institution, bank, a safe house in which securities are kept and customers are assisted in trading of the same. The paramount thing that depositories do is providing security and liquidity in the market, money deposited is utilized for safekeeping, to lend to others, investment in other securities, and offering a funds transfer system. A depository has an obligation to return the deposit in the same condition when requested.
Registrar and Transfer Agents (RTAs) are the participants of the depositories and are also known as depository participants or DP’s. So, these RTA’s in depositories can be a financial institution, a broker, or any SEBI authorized entity who understands the online share transfer process.
Elimination of risk of holding physical assets. For instance, Consumers are provided with a place to deposit money into time and demand deposit accounts by banks & other financial institutions. A time deposit account can be explained as an interest-bearing account that has a particular date of maturity just like a certificate of deposit (CD). Funds are kept in the Demand deposit account till the time need of withdrawing them doesn’t arise just similar to a savings account. Securities such as stocks and bonds are forms of deposits & are kept in an electronic form known as book-entry form or paper format such as a physical certificate by institutions.
Creates liquidity in the market. Consumers keep their money with depositors having faith in such institutes that it is safe & it will be returned to them at the time of need. Moreover, banks provide interest on the deposits over time. Further, banks lend money in the form of mortgage & business loans & generate more interest than paid by them.
Since trading in genuine share is ensured in the Depository system, more activity in the capital market is promoted.
Spike in foreign investments. Overseas investors, with the introduction of the depository system, feel more confident in investing in the Indian market as the cases of forgery, delay & unscrupulous transfer of shares have declined drastically.
Working of Depository System in India
Depository, an organization holds assets of investors like shares, debentures, bonds, government securities, mutual funds etc electronically through a registered Depository Participant. Besides, the depository system provides transaction-related services in securities also. National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL) are the two depositories which are registered with SEBI. The minimum net worth stipulated by SEBI for a depository is Rs 100 crore.
The Depository System comprises of below four constituents.
2- Depository Participant
4- Investors/Beneficial owners
Depository Participant (DP) serves as an agent of the institution through which it interfaces with the investor and provides depository services. As soon as an investor hands over his securities to DP his account is credited. Without any physical movement of scripts or transfer deeds, his account is updated for sale & purchase. In this system, the investor’s share certificates are dematerialized (demats). It is a process of conversion of investor’s securities into electronic data. Registered securities are handed over to DP & forwarded to respective Companies who after dematerialization cancel them & credit investor’s depository account & these appear as balance in their accounts. The issuer maintains a register of registered owners of the securities, the depositories. These demat securities can be converted back to paper certificates & names of investors are kept in records as beneficiary owners. As per the statistics available at BSE and NSE, 99.9 percent of transactions take place in dematerialized mode only. Therefore, given the convenience of trading in dematerialized mode, it is recommended to have a beneficial owner (BO) account for trading at the exchanges. The depository system diminishes the hardships earlier faced by the consumers & it also offers a process called rematerialization, a process of conversion of electronic shares to the paper form.
An additional trading window facilitates small investors in physical mode, by providing a time facility to sell physical shares which are in the compulsory demat list. The buyer of these shares needs to demat shares before selling them further.
An investor needs to be approach a DP & account opening form needs to be filled, with supporting documents serving as proof of identity (POI) & proof of address (POA) as specified by SEBI. At the time of opening the account, the PAN card needs to be shown in the original.
The introduction of the depository system will make revolutionary changes in the present system & will take away many of its maladies, make the trading faultless, act as a solution & make the Indian capital market a high yielding market. This system is expected to deliver the much-awaited custodial services to not only Indian stakeholders but foreign investors as well.