Depository: Meaning, Types, and Benefits

Banks store money in savings accounts and provide interest on the balance. In the same way, depositories store various assets like shares, bonds, mutual funds, etc. when you invest in the stock market. 

 

There are over 11 Crores active Demat and trading accounts registered with the depositories in India. The depositories are connected with the clients through Depository Participants (DPs). But what is a depository? Read on to find out.

In order to understand what a depository is, you must be familiar with the concept of dematerialisation. Dematerialisation is the conversion of physical shares into electronic form.

 

So, a depository is a financial entity that holds securities like shares, mutual funds, etc. for you in a dematerialised form. A depository also maintains a record of ownership and also facilitates the sale and purchase of securities.

Before we look at the types of depository institutions in India, you must understand how depositories function. The following are some of the functions that a depository performs:

• Depositories serve as a bridge between private investors and companies listed in the exchange market. You can purchase or sell shares issued by a company through a depository facilitated by an agent called Depository Participant (DP).

• A depository also enables the investors to hold their assets in dematerialised form. This eliminates the risk of theft or misplacement of securities held by you.

• Since the entire trading process occurs online, depositories facilitate investors by quickly transferring and transacting the sale and purchase of shares. Moreover, it reduces the paperwork involved in the trade of securities.

• Depositories mainly function as a storehouse of securities that you hold. These institutions also earn interest by lending deposits in the form of mortgages. 

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

 

Here are more details about the types of depositories in India:

1. National Securities Depository Limited

The National Securities Depository Limited (NSDL) was established in August 1996 under the Depositories Act of 1996. It was furnished with state-of-the-art technology to facilitate storage of shares in dematerialised form. 

 

The primary market where NSDL deals is the National Stock Exchange (NSE). As of April 30, 2023, the NSDL has more than 3 Crores active Demat account and trading account.

 

2. Central Depository Services Limited 

Central Depository Services Limited (CDSL) is one of the world’s largest depositories that was founded in 1999. This financial institution was also established to provide investors and traders in India with easy and convenient securities storage and depository services. 

 

The primary market of the CDSL is the Bombay Stock Exchange (BSE). Moreover, as recently as February 2023, the number of active accounts with CDSL has exceeded 8 Crores.

The following are some of the benefits of depository that you get to enjoy for holding your shares in electronic form.

• Since depositories allow you to hold securities in dematerialised form, it eliminates the risk of theft or misplacement of your shares.

• The transfer of securities took somewhere between a fortnight to a month before depositories came into existence. This is because you had to fill out a form and mail it to the SEBI. The electronic transfer process has reduced this time considerably.

• In addition to saving time, online trading done through depositories has also reduced your efforts, paperwork, and brokerage charges.

• Depositories also ensure the safety of individual investors by periodically reviewing the functioning of DPs. In addition, the transaction you carry out through your depository is also end-to-end encrypted.

   

In conclusion, depositories in India provide the facility to store your securities in different asset classes, like equities, bonds, mutual funds, etc. Before the existence of depositories, investors had to hold their securities in physical form.

 

Among the many benefits of depository, it has reduced the time, money, and efforts invested in trade and purchase of shares.