Meaning of Depository
Depository simply refers to holding the securities in a dematerialised form online. It is an office, warehouse or building that does the work of storing the securities & safeguarding them. It facilitates the investor for conducting safe & paperless trading of securities as they don’t need to hold securities in physical form. Depositories keep fair & true record of ownership of all securities of different investors.
There are two types of depository services available that are: NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited). These both depositories are based in Mumbai. Investors in order to avail the services provided by depository need to contact the Depository agent. Depository agents are the intermediary between the depository and the investors.
Depositories interact with their customers through the medium of these depository agents only. Investors are required to open depository account which is known as demat account with any of Depository agent to use depository services. The functioning of both Depository and depository agent is regulated by SEBI (Securities Exchange Board of India).
Important Roles & functions of Depository are discussed below:
Role and Functions of Depository
Quick transfer of securities & funds
Depositories involve trading of securities online electronically using Demat account. Unlike, physical transfer of securities there is no involvement of physical transfer of certificates of securities. Everything is done on a paper-less basis fully digitally. This reduces the overall time involved in the whole process thus enabling the immediate transfer of ownership of securities. Beneficial owner on transfer of securities from one account to another immediately transfer the funds.
Elimination of fraud cases and bad deliveries
Depositories provide assurance to the investors regarding the securities genuineness. Investors are relieved of all cases like bad deliveries, fake or damaged certificates, transferor signature difference, and shares under litigation. Depositories maintain a complete record of all securities after complete verification. There is no involvement of any physical documents for the purpose of trading by investors. Everything is stored & conducted digitally online thereby reducing chances of different kind of frauds.
Reduces Brokerage cost
Depositories reduce the overall brokerage cost required for trading of securities. Investors can avail different benefits when shares are traded in dematerialised form. Brokers charge less amount for dematerialised shares as compared to trading of shares using physical documents. Shares when traded in dematerialised form reduce the cost of handling paper form thereby bringing down the overall trading cost.
Reduces risk of loss & damage of physical certificates
Depositories store & safeguard the securities of its investors. It minimises all chances of theft & damages of share certificates. Investors are not required to hold the certificates of their securities in physical form. All physical certificates are damaged and stored in digital form by depositories. This safeguards the investors & eliminates all chances of theft & damage of share certificates.
Eliminates Stamp Duty
Securities over the depository system are transferred online without the involvement of any paperwork. Investors are not required to fill any physical form and affix stamp for transfer of their securities. Investors are relieved from paying stamp duty while transferring their shares.
Facilitates transfer of dividends & other benefits
Depositories maintain a complete record of ownership of securities in its accounts. It maintains a full record of securities in electronic form. This facilitates proper & fast disbursement of interests & dividends to the different investors. Several non-cash benefits like bonus, right shares are transferred to the investor account directly.
Avoids blank transfers and Benami transactions
Depositories verify all documents of securities properly before dematerialising them. It checks the overall genuineness of securities and performs detailed investigation. All chances of doing blank transfers and doing trading in Benami names are avoided.