Prior to the introduction of Depository System in India, the companies used to issue physical share certificates. The Indian share market followed open outcry system, where investors buy and sell shares physically. The physical share certificates represent the shares’ ownership in a company. This system was also known as Scrip-based Trading System.
With the advent of globalization and evolution of information technology, the Depository System was introduced in India in 1996. The Depository system was first introduced in Germany in 1947.
In Depository System, the securities of investors are held in the electronic form with the depository. Since this system dispenses the movement of securities in physical form, therefore it is also called Scripless Trading System. It makes the financial market more systematic and disciplined.
Table of Contents
Depository system is a system in which the securities of investors are held in the electronic form with the depository. It eliminates the voluminous and cumbersome paper work involved in the scrip-based system The transfer of securities takes place by means of book entries on the ledger of the depository. The depository holds the securities of investors at the request of the investors through a registered depository participant. It holds securities like shares, bonds, debentures, mutual funds, government securities etc.
A Demat account is like a bank account that shows the securities holding of an investor. It holds securities of investors in digital form. An investor can open Demat account with depository through depository participant. SEBI has made it mandatory for all the public limited companies to have their securities in demat mode only.
Dematerialisation is the process by which physical certificates of securities of an investor are converted to an equivalent number of securities in electronic form.
Rematerialization is the process of converting securities held in electronic form in a demat account back in physical certificate form.
The prominent functions of depository system are:
There are five parties involved in Depository System:
The Depository is an institution which maintains an electronic record of ownership of securities. It is company that has been formed and registered under the Indian Companies Act, 2013 & has been granted a certificate of registration by SEBI, subsequent to registration under the Depositories Act, 1996. It is an institution alike bank for securities where the dematerialized physical securities are traded and held in custody. Thus, depository is a custodian of its client’s securities. It interfaces with its investors through its agents called depository participants.
The legal ownership of securities is with depository, but the beneficial ownership is with investor. The depository name is registered in the ownership register maintained by the company. Thus, instead of name of several owners, the name of depository figures in the register of company.
A Depository Participant (DP) is an agent of the depository through which it interfaces with the investor and provides depository services. DP is the intermediary between the investor and the depository. The relationship between the depository and the DP will be of a principal and agent.
The depository holding the securities maintains ownership records in the name of each DP, DP in return as an agent of depository, maintains ownership records of every beneficial owner (investor) in book entry form.
The following entities can register themselves as depository participant with SEBI:
A demat account can be opened only though a depository participant of depository. It cannot be opened directly with depository.
The investor whose securities are held in electronic form in a demat account opened with a depository through a Depository Participant is called as ‘Beneficial Owner’ (BO). All the benefits as a result of the holding the securities are given to such beneficial owner.
Issuer means any entity such as a corporate / state or central government organizations issuing securities which can be held by depository in electronic form
An RTA is an agent of the issuer. RTA acts as an intermediary between the issuer and depository for providing services such as dematerialization, rematerialization, initial public offers (IPO) and corporate actions.
The Government of India enacted the Depositories Act 1996 to start depository services in India. According to this act, the Depository means:
The important advantages of depository system are:
In India, a depository has to be promoted as a corporate body under Companies Act, 1956. It is also to be Registered as a depository with SEBI. The minimum net worth stipulated by SEBI to operate as depository is Rs.100 crores. There are two SEBI registered depositories in India:
When physical shares are converted into electronic form, the depository becomes ‘Registered owner” in the books of the company and actual investor’s name is removed from books of the company. However, the actual investor is the “Beneficial Owner” (BO) of the securities. All the benefits of the dematerialized shares are given to the actual investor since the depository holds the securities in a fiduciary capacity on behalf of the investors who have opened a demat account with the depository.
Following services are provided by a depository to the investors through its depository participant:
Download as PDF
SBI Clerk Course 2023
ECGC PO Course 2023
SIDBI Grade A Course 2023
RBI Assistant Course 2023
SSC CHSL Course 2023
DSSSB JE Electrical 2023
Punjab Civil Services 2023
ESIC Deputy Director 2023