Depository and Depository Participants- Meaning, Benefits and Services

What is a Depository?

A depository is simply defined as a place where things are stored. In financial terms, depository refers to an institution or an organization which holds securities in De-Mat (Dematerialized) Form for all shares, debentures, mutual funds, derivatives, F&O’s and commodities.

 

US Depository

DTCC also known as the Depository Trust & Clearing Corporation or the Depository Trust Company is authorized to act as a Depository for the US Financial Markets. DTCC is the world’s largest post-trade financial services company consisting of five clearing corporations and one depository providing clearing and settlement services to the financial markets in the US.

 

Indian Depository

In India there are two depositories namely NSDL and CDSL.

 

NSDL: National Depository System Limited was the first and largest depository in India. The enactment of Depositories Act in August 1996 lead to the establishment of NSDL which started by dematerializing securities, in order to settle trades via a computer system and not through paper form of trading which was time consuming and caused a lot of problems. NSDL aims at achieving that ‘Every Indian should not only become an ‘Investor’ but a ‘Prudent Investor’ indeed which is conveyed through their tag line; Technology, Trust and Reach.

 

CDSL: Central Depository System Limited on the other hand came into existence in the early 1999 as the second Indian central securities depository based in Mumbai. It works on holding and maintaining securities both in certified and uncertified form. CDSL was set up with the objective of providing convenient, dependable and secure depository services at affordable cost to all market participants.

 

Some of the other world known depositories are Shanghai Securities Central Clearing & Registration Corporation and The Shenzhen Securities Central Clearing Co. Ltd. of China; Hong Kong Monetary Authority and Hong Kong Securities Clearing Company Limited in Hong Kong; Japan Securities Clearing Corporation and Japan Securities Depository Center in Japan; CREST a.k.a. Certificateless Registry for Electronic Share Transfer in the UK and The Central Depository (Pte) Ltd. of Singapore.

 

Benefits of a depository

The benefits of participation in a depository are:

• Immediate transfer of securities
• No stamp duty on transfer of securities
• Elimination of risks associated with physical certificates such as bad delivery, fake securities, etc.
• Reduction in paperwork involved in transfer of securities
• Reduction in transaction cost
• Ease of nomination facility
• Change in address recorded with DP gets registered electronically with all companies in which investor holds securities eliminating the need to correspond with each of them separately
• Transmission of securities is done directly by the DP eliminating correspondence with companies
• Convenient method of consolidation of folios/accounts
• Holding investments in equity, debt instruments and Government securities in a single account; automatic credit into demat account, of shares, arising out of split/consolidation/merger etc.

 

It is often seen that the role of a depository is often compared to a bank in the sense that:

 

BANK	DEPOSITORY
Holds funds in an account	Holds securities in an account
Transfers funds between accounts on the instruction of the account holder	Transfers securities between accounts on the instruction of the account holder.
Facilitates transfers without having to handle money	Facilitates transfers of ownership without having to handle securities.
Facilitates safekeeping of Money.	Facilitates safekeeping of shares.

 

 

What is a Depository Participant?   

A depository participant or DP’s are described as an agent in the principal agent relationship for the depository which means it acts as an intermediary between the depository and the investors.

In India, only an entity registered with SEBI act as such under the SEBI Act to deliver the services of depository participants, only and after it has obtained the certificate of registration.

 

 Services of Depository Participants

 

• CORE SERVICES

1) Account Opening facilities for an investor.

2) Dematerialization of securities.

3) To give effects to transfers in demat accounts in case of trade of securities.

4) Settlement of Off- market trade. Such are the trades which are settled between two parties without the involvement of the stock exchange or the clearing corporation. In this case a Delivery Instruction Slip is to be submitted by the transferor to the DP.

5) Transmission and Nomination of electronic securities.

 

• SPECIAL SERVICES

1) Pledge and Hypothecation of securities. DP’s may provide loan facilities to their investors/clients against their securities held by them.

2) Stock lending and Borrowing as approved intermediary of SEBI.

3) Non- monetary corporate benefits/ actions for investors.

4) Allotment in case of Public Issues of IPO in demat form. Once the allotment has been made for an IPO, Depository participants ensure that the applicants to whom the shares have been allotted can actually see the shares allotted to them in their trading panel on the day the share is listed in the secondary market.

5) Distribution of cash corporate benefits only for govt. securities.

 

• OTHER SERVICES

1) Rematerialisation at the option of investor.

2) Facility to operate demat account through Internet.

3) Account freezing and defreezing facility.

4) Daily updating the data base of all beneficial accounts.

5) To issue Transaction Statements/ Holding statements at regular intervals.

 

• HIDDEN SERVICES

1) To maintain records of all the transactions entered between Depository and investors for a period of five years.

2) To preserve details of securities dematerialized and rematerialized on behalf of Beneficial Owners (BO).

3) To maintain records of instructions received from beneficial owners and statement of account provided to beneficial owners.

4) To maintain records of approval, notice, entry and cancellation pledge hypothecation.