Depository in simple term means an institution which holds our securities in a dematerialised (electronic) form. Depository is an institution which holds your Shares, Government Bonds, Mutual funds etc on your behalf in electronic form which can be accessed online via internet.
While a Bank holds all your Fixed Deposits, Cash and Recurring Deposits, a Depository holds all your Shares, other securities, Government Bonds etc. – all in electronic format.
Retail investor cannot open a DEMAT account directly with the Depository (NSDL or CDSL). Retail investors can open account with Depository Participant.
It’s the same as retail investors cannot open bank account with RBI – only with banks.
Bank-Depository – An Analogy
| Bank | Depository |
| Holds funds in an account | Holds securities in an account |
| Safekeeping of money | Safekeeping of securities in electronic format |
| Transfer possible from one investor to another | Transfer possible from one investor to another |
There are Depositories formed to facilitate this process. There are 2 Central Depositories in India
- Central Depository Services India Limited (CDSL) – https://www.cdslindia.com/index.html
- National Securities Depository Limited (NSDL) – https://nsdl.co.in/
Depository Participant:
A DP is an agent of the depository through which it interfaces with the investor and provides depository services.
Depository participants enable investors to hold and transact in securities in the dematerialized form (electronic form). Demat securities are held by depositories, where they are admitted for dematerialization after the issuer applies to the depository and pays a dematfee.
Depository participants (DPs) open investor accounts, in which they hold the securities that they have bought in dematerialized form. Brokers and banks offer DP services to investors. DPs help investors receive and deliver securities when they trade in them. While the investor-level accounts in securities are held andmaintained by the DP, the company level accounts of securities issued is held and maintainedby the depository. In other words, DPs act as agents of the Depositories.
Declaration of dividend / bonus / rights:
When a company declares dividend / rights or bonus shares, the depository will prepare the record of investors as on the record date and submit it to the Registrar of Company. The dividend will be sent by the registrar after calculating the dividend payable to each investor directly.
When a company declares bonus shares, the Registrar will calculate the bonus entitlement and advise the depository about the number of shares to be credited to each existing shareholder (account-holder).
In case of Rights-offer; based on the records of the depositories the Registrar will prepare a letter of offer and send it to the investor. The Registrar will advise the depository the number of shares to be credited to each account on the basis of the application and allotment. Based on this advice, the investor’s DEMAT account will be credited by the depository.