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What is Depository System and its functions in Indian stock market?
What is Depository System and its functions in Indian stock market?
A capital market is a market where investors buying and selling of securities take place. Capital markets can be divided into two types: primary and secondary markets. The depositories function as an intermediary between buyers and sellers and store shares safely in a digital form.
What is Depository?
A depository in the stock market is an apex organization or unit in the depository system. A depository’s meaning in the stock market is similar to a bank where depositors or investors can deposit or withdraw money or securities. In the same manner, an investor can deposit and withdraw his shares in a depository.
Functions Of Depository
1). Serves as a link between public companies and investors/shareholders.
Depository connects the link between shareholders and public firms with the help of agents like stockbrokers also known as Depositories Participants (DPs). The transfer secure transfer of shares between companies and shareholders is managed by these DPs.
2). Eliminates risk related to owning physical financial securities.
The depositories made transferring of shares safely in a digital form and removed the associated risks such as theft or loss involved in holding and transfer of tangible financial securities.
3). Allows the provision of loans of mortgages to interested parties.
A financial institution known as a depository holds securities for customers and returns them upon request. The depository makes the most of its income by lending money to other people and businesses in the form of loans and mortgages, additionally, the depositors receive interest on their balances.
4). Reduced paperwork and accelerates the process of transferring securities.
Depositories enable faster transfer of shares and reduce the amount of paperwork related to the completion of the trade, and transfer of shares from an investor account to another account.
Features of depository
- A depository system is an institution that holds securities.
- In the stock market, depository participants are the medium through which depositories interact with investors.
- SEBI's certificate is required for Depository Participants (DPs) to offer their services.
- It is mandatory for an investor to open a depository account with any DP called a Demat account.
- Depositories with the help of DPs control the electronic transfer of securities and settlement of transactions.
- Depositories can hypothecate dematerialized securities against bank loans.
- Depositories issue receipts of bonus shares in an electronic form.
- A Depository in the stock market offers a nomination facility in the Demat account.
Depositories in India
In India, there are mainly two Depositories which are Central Depository Services Limited(CDSL) and National Securities Depository Limited(NSDL).
Differences between NSDL and CDSL
What is Depository System?
The stock market is a platform that facilitates the buying and selling of shares whereas all the shares of registered companies are held in the dematerialized(electronic) form in the depositories. A depository system is the process of allotment and transfer of securities in electronic form.
In the depository system, the depository is the apex body which can be compared to putting money in the bank and facilitating the transfer of ownership with the help of simple account transfers. It is a paper-free method of transfer of shares that does away with all the hassles and risks associated with the transfer of certificates.
What are Depository Participants and its role in the depository system?
In order to invest in the stock market, it is mandatory to open a Demat account by stock brokers, and these stock brokers are called Depository Participants such as Groww, Zerodha, and other registered Sebi brokers. If you are interested to open a Demat account, then know how to open a Demat Account.
Depository Participants help you open a Demat account in the depositories by collecting the required information about an investor and submitting it to the depositories. Then a depository will open a Demat account by the name of the investor which will be maintained by the depository participants like Zerodha, Groww, Angel One, and many more.
Here, the depository is the registered owner, and the investor is the beneficial owner. The registered owner is the owner of the namesake and enjoys no rights and benefits of a shareholder. On the other hand, a beneficial owner has the rights and benefits of a shareholder.
In the case of Secondary Markets: The shares once issued in the market are traded in the secondary market where investors can buy and sell these shares at the market price. Get to know in detail about what are stock exchanges and list of stock exchanges in India.
From the Investors point of view: In the secondary market, when a buy order is placed by an investor at a certain price through their Demat accounts and similarly a sell order is placed by another investor at the same price, their match will be made by the Stock Exchanges as the Depository participants of both buyers and sellers are linked to the stock exchanges.
Now, the same order will be placed on the depositories as all the shares of the registered companies are stored with them. Once the orders are placed, the exchange of shares takes T+1 settlemet cycle which is known as the clearing and settlement period where T is the date of placing the order.
What is a Global Depository Receipt?
The companies also have access to global emerging markets with the help of global depository receipt. A global depository receipt means a negotiable financial instrument that can be traded in the domestic stock exchanges to raise funds from international markets.
Only those Indian companies with a sound financial record of the last three years can issue global depository receipts. The depository bank can convert global depository receipts into shares and trade them in the domestic markets.
What is an Indian Depository Receipt?
Indian depository receipt is the Indian replica of the Global depository receipt. An Indian depository receipt is a financial instrument through which foreign companies can get listed on the Indian stock exchange and Indian investors can take advantage of the global competitive companies.
Conclusion
In the past, shares were bought and sold in physical form. There were operational challenges such as loss and theft of share certificates, therefore to overcome such issues, shares were stored in the dematerialized form to ensure convenience. The capital market and the depositories are regulated by SEBI. Know in detail, What is SEBI and its role in capital markets.
Although both the depositories offer the same facilities different depository participants levy different charges, so it is always advisable to do thorough research and then choose the best-suited platform according to your needs.
FAQ
Ques 1. what is Isin?
Ans- In the security market International Securities Identification Numbers (ISINs) are 12-digit alphanumeric codes that uniquely identify securities. In each country, the National Numbering Agency (NNA) is responsible for allocating ISINs.
Ques 2. Depository vs Repository?
Ans- Depository and repository are two words that are often used interchangeably, but they have slightly different meanings depending on the context in which they are used.
A depository is a place where something is deposited or stored, often with the intention of it being retrieved later.
A repository, on the other hand, is a place where things are stored and preserved for safekeeping or future use. It often implies a collection or archive of items that have value or significance, such as historical documents, art, or artifacts.
In summary, a depository is a place where things are stored temporarily, while a repository is a place where things are stored for safekeeping or future use, often as part of a collection or archive.
Ques 3. What is the difference between depository and bank?
Ans- A bank is a financial institution that accepts deposits from customers and provides loans and other financial services. Banks are regulated by central banks and must follow strict regulations to ensure the safety and soundness of the financial system. They offer a wide range of services such as checking and savings accounts, loans, credit cards, investment advice, and wealth management.
A depository, on the other hand, is a specialized financial institution that holds securities and other assets on behalf of its clients. Depositories are typically used by investors to hold securities such as stocks, bonds, and mutual funds. Depositories do not offer banking services such as checking accounts, loans, or credit cards, and they are not typically regulated by central banks but rather by securities regulators.
In summary, the key difference between a depository and a bank is that a depository holds securities and other assets, while a bank holds deposits and offers a wide range of financial services.
Ques 4. How does a depository make money?
Ans- In addition to holding securities securely, a depository is responsible for sending them back to their customers when needed. In the form of mortgages, the depository earns interest by lending deposits to businesses or other individuals.
