Depositories in Capital Markets
The depository is the service which holds the securities or shares of investor who are basically trading in the capital market in the electronic form and help them to trade their securities electronically. For the expansion and enhancement of market efficiency, which is one of the core features of a mature capital market, an effective and fully developed securities depository system is essential. The need to create a depository was realized in India after the large-scale irregularities in securities transactions in 1992 revealed the limits of the prevailing system of settlements. But with the establishment of the Depositories in Capital Markets, the scenario of the stock market was totally changed.
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Function / Features:
The financial institutions, banks, stockbrokers, and other organizations that provide this service are called Depository Participant (DP). The investors who open the Demat Account for the trade of the security with such institutions are called Beneficial Owner (BO). All these activities are mainly regulated by SEBI (Security Exchange Board of India) in India. When the securities are traded the Depository Participant also transfers the ownership of the security through electronic mode. All these service providers act as a nominee of the investor, who keeps the securities or share on their behalf. The main function of the depository is to transfer the share on behalf of investors and to collect dividends, bonuses, and shares on the behalf of investors electronically. Other than this following are the key functions of the depository:
- All the shares/securities are maintained in the class or in the form that they all are identical in nature and they can interchange and exchange electronically.
- Another function is that the transferability of shares is made free and this takes place electronically which the help of a book-entry system.
- There is no stamp duty when you transfer for share electronically. But on the other hand, if you transfer your share physically you have to pay stamp duty.
- You transfer for a share in any quantity you want according to the balance in your account and no of share you purchase there is no such obligation for the same
- As said before there were many risks involved in the transfer of share before 1996 but today we can say that their no or very minimum risk involve today.
Importance of depository:
The importance of depositories is embraced by all the parties involved in it like an investor, the stock market, and companies whose shares are listed in the share market. Following are the various reasons citing the importance of Depositories in Capital Markets:
- Depositories have reduced the trading cost along with the time for transferring of share has been reducing and the risk associated with the transfer of securities has also been reducing.
- Compare to the old method of transferring share today the settlement cycle is made faster.
- Any investors can transfer and registrar their securities immediately.
- Now the system has been made digitalized so the chances of error and bad delivery are reduced.
- Any kind of dividend and interest can be securely transferred to the investor account.
- Because of electronic transfer of share is made any investor can transfer his in any part of the country.
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Depositories in India:
In India there 2 depository service that are National Securities Depository Limited (NSDL) and Central Depository Service India Ltd. (CDSL)
- National Securities Depository Limited (NSDL) was registered by the Security Exchange Board of India (SEBI) on June 7, 1996. It has its minimum net worth of Rs.100 crores and it is India’s first depository to facilitate trading and settlement in the dematerialized form. It deals with the National Stock Exchange (NSE). As per RBI guidelines institutional, investors, financial institutions, and banks have a minimum portfolio of securities of Rs. 10 crores have to settle all their transactions through the depository. Non-Banking Financial Companies (NBFCs) and agents are required to have a minimum net-worth of Rs. 60 lakhs and depository participant (DP) has to pay an admission fee of Rs. 25,000 to NSDL and deposit Rs. 10 lakh as security with NSDL.
- Central Depository Service India Ltd. (CDSI) had started their operation in February 1999 with some leading banks such as State Bank of India, Bank of India, Bank of Baroda, HDFC Bank, Standard Chartered Bank, Union Bank of India, and Centurion Bank to promote Bombay Stock Exchange (BSE). It is India’s second center securities depository service.
Author: Charmi Mehta
About the Author: Charmi Mehta is currently pursuing an MBA with a specialization in Finance from the Department of Business Administration, Bhavnagar. Charmi is very much interested to work with data and its analysis and she is also fascinated by the financial market.