DEPOSITORIES

What is a Depository

A depository is a facility such as a building, office or warehouse where something is deposited for
storage or safeguarding. It can refer to an organization, bank or an institution that holds and
assists in the trading of securities. The term can also refer to a depository institution that accepts
currency deposits from customers.

Depository is an institution that works like bank

A depository institution provides financial services to personal and business customers. Deposits
in the institution include securities such as stocks or bonds. The institution holds the securities in
electronic form also known as book-entry form, or in dematerialized or paper format such as a
physical certificate.

Function of Depository:

to transfer the ownership of shares from one investor`s account to another investor`s
account whenever the trade takes place. It helps in reducing the paper work involved
in trade, expedites the transfer and reduces the risk associated with physical shares
such as damaged, theft, interceptions and subsequent misuse of the certificates or fake
securities.

Another important function of depository is that it eliminate the risk associated with
holding the securities in a physical form like loss,damage,theft or delay in deliveries
etc.

Parties involved in Depository System:

Depository: facilitates the smooth flow of trading and ensure the investor`s about
their investment in securities
Depository Participant(DP): provides the service of opening a demat account to the
investor.
Investor: individual invested in securities.
Depositories in India:

At present there are two depositories in India-

National Securities Depository Limited (NSDL)

Central Depository Services (CDS)

National Securities Depository Limited (NSDL)

NSDL is the first Indian depository, it was inaugurated in November 1996. NSDL was set up
with an initial capital of US$28mn, promoted by Industrial Development Bank of India
(IDBI), Unit Trust of India (UTI) and National Stock Exchange of India Ltd. (NSE). Later,
State Bank of India (SBI) also became a shareholder.

Central Depository Services (CDS)

Central Depository Services Limited (CDSL), is the second Indian central securities
depository based in Mumbai.[3] Its main function is the holding securities either in certificated
or uncertificated (dematerialized) form, to enable book entry transfer of securities.

These depositories have appointed different Depository Participants (DP) for them. An
investor can open an account with any of the depositories DP. But transfers arising out of
trades on the stock exchanges can take place only amongst account-holders with NSDLs
DPs. This is because only NSDL is linked to the stock exchanges (nine of them including the
main ones-National Stock Exchange and Bombay Stock Exchange).

In order to facilitate transfers between investors having accounts in the two existing
depositories in the country the Securities and Exchange Board of India has asked all stock
exchanges to link up with the depositories. Sebi has also directed the companies registrar and
transfer agents to effect change of registered ownership in its books within two hours of
receiving a transfer request from the depositories. Once connected to both the depositories the
stock exchanges have also to ensure that inter-depository transfers take place smoothly. It
also involves the two depositories connecting with each other. The NSDL and CDS have
signed an agreement for inter-depository connectivity.
Depository Participant:

NSDL carries out its activities through various functionaries called business partners who
include Depository Participants (DPs), Issuing corporates and their Registrars and Transfer
Agents, Clearing corporations/ Clearing Houses etc. NSDL is electronically linked to each of
these business partners via a satellite link through Very Small Aperture Terminals (VSATs).
The entire integrated system (including the VSAT linkups and the software at NSDL and each
business partners end) has been named as the NEST [National Electronic Settlement &
Transfer] system.

The investor interacts with the depository through a depository participant of NSDL. A DP
can be a bank, financial institution, a custodian or a broker. Just as one opens a bank account
in order to avail of the services of a bank, an investor opens a depository account with a
depository participant in order to avail of depository facilities.