With the rapid digitization of the investing industry, demat accounts have become the go-to platform for investors to store and trade their securities in a hassle-free, secure, and cost-effective manner. Central to the functioning of demat accounts is a concept called ‘deposits’ or ‘depositories.’ In this article, we will delve into the role of depositories in demat accounts, and gain a deeper understanding of the functioning of the entire system.
In simple terms, depositories are entities that hold securities (stocks, bonds, mutual funds, etc.) electronically, eliminating the need for physical storage of certificates. These entities facilitate the transfer of securities between investors and ensure secure and timely settlements. Central Depository Services Limited (CDSL) and National Securities Depository Limited (NSDL) are two major depositories operating in India.
Types of Depositories
There are two types of depositories:
A national depository is responsible for holding securities in electronic form. NSDL is the only national depository in India.
International depositories hold securities of foreign companies or governments in electronic form. Euroclear and Clearstream are two major international depositories.
Role of Depositories in Demat Accounts
Depositories play a crucial role in the functioning of demat accounts. Here are a few aspects of the role of depositories in demat accounts:
Account Opening and Maintenance
Investors looking to open a demat account must do so through a depository participant (DP) who acts as an intermediary between the investor and the depository. The DP verifies the investor’s details and opens an account on the investor’s behalf with the depository. Once the account is opened, the depository acts as a custodian and holds the investor’s securities securely.
Depositories maintain a centralized database of investor holdings and enable investors to monitor their investments in real-time through online access. The depository issues a unique identification number, known as the Demat Account Number (DPID), to each investor, which is used to track their investments.
Depositories facilitate seamless transfers of securities between investors. For instance, if an investor wants to gift their shares to a family member, they can do so by electronically transferring the shares to the recipient’s demat account. This is a safer and more convenient mode of transfer than the physical transfer of share certificates.
Additionally, securities can be easily transferred from one DP to another DP, or from one depository to another depository, without the need for physical movement of shares. This ensures quick settlement and reduces the risk of fraud and errors.
Depositories play a crucial role in recording and processing corporate actions such as bonus issues, stock splits, dividends, and rights issues. When a corporate action is announced, the depository updates its records with the relevant details and informs the investors holding those securities to take necessary actions.
For instance, if a company announces a bonus issue, the depository updates the investor’s demat account with the new shares and notifies them of the same. Similarly, if a company announces a rights issue, shareholders are informed of the issue and given the option to subscribe or renounce the shares.