Understanding Depositories: Functions, Types & Benefits

Depositories are entities that hold shares and securities in a dematerialised form. Dematerialisation is the conversion of physical shares into electronic form. By storing securities digitally, a depository helps protect your investment.

 

Depository Participants (DPs) connect you with these depositories via a Demat account. You must open an account if you want to invest in shares and securities. They offer administrative services and maintain a record of ownership. This facilitates the easy sale and purchase of securities. Demat accounts protect the deposited cash and ensure liquidity in the stock market. 

 

In addition, Demat accounts help protect the deposited cash and ensure adequate liquidity in the stock market.

There are two major types of depositories in India: the National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL). Both are regulated by the Securities and Exchange Board of India (SEBI). 

 

Here are more details about them:

1. National Securities Depository Limited 

NSDL was established in August 1996 under the Depositories Act of 1996. It's primary market is the National Stock Exchange (NSE). The depository has state-of-the-art technology for storage of shares in dematerialised form. 

 

As of April 30, 2024, NSDL has more than 3 crore active trading and Demat accounts. 

2. Central Depository Services Limited

Founded in 1999, it is one of the world’s largest depositories. The primary market for CDSL is the Bombay Stock Exchange (BSE). It was founded to provide easy and convenient securities storage and depository services. As of April 30 2024, the number of active accounts with CDSL has exceeded 11 crores.

These institutions earn interest by lending deposits as loans or mortgages. A depository performs numerous services, including:

• Storage of securities in a dematerialised format

• Facilitating smooth trading of securities through electronic trade settlement

• Keeping records of the securities you hold, their details and the transactions made

• Collaboration with exchanges to simplify the process of buying and selling of securities 

• Serving as a bridge between you and companies listed in the exchange market

Here are some advantages that you get to enjoy:

• No risk of theft or misplacement since securities are held in dematerialised form 

• Depositories allow you to trade quickly through electronic transfers in comparison to the offline process, which could take 15-30 days

• Online trading through depositories means less effort and paperwork, and lower brokerage charges

• Depositories also ensure better safety by periodically reviewing the functioning of DPs

• All transactions carried out through depositories are encrypted end-to-end