Depository System in India

DEPOSITORY SYSTEM IN INDIA The Indian capital market witnessed an explosive growth between mid Eighties and Nineties.
The total number of companies listed in the stock exchanges had grown by 72.3% from 2729 in 4702 in 1995 and now it has increased to 5085 companies. The market capitalization of the companies listed with stock exchanges had gone up from Rs.21, 000 crores in 1985 to more than Rs.4, 50,000 crores in 1995.The secondary market trading activity also gathered momentum. There has been tremendous growth in secondary market trading at BSE and NSE. This sudden growth had exposed the limitations of the system. The system used was not able to withstand the strain caused by the tremendous growth in the securities market. The entire securities market started experiencing a gridlock, posing obstacles in its growth. Moreover, this sudden growth has also magnified the risks that have always been plaguing the Indian system, viz., credit risk and systematic risk. International institutional investors wanting to invest in India had become apprehensive about the reliability of the trade settlement mechanisms used in the country, which did not match international standards. Era of Scripless and Paperless trading To sort out the above mentioned problems and to restore the investors confidence in the stock market the depository system was set up. It was against this background that the Government of India enacted the Depositories Act in 1996, which an era of scrip less trading and settlement, efficient market infrastructure, investor protection, reduced risks and transparency of transaction in the securities market. Depository Act, 1996 The concept of Depository is known to the world since 1949 when the first depository was set up in Germany. There were 112 depositories in operation by the year 2001. Every depository operates under a countrys specific law and regulation in order to ensure safety, liquidity, rights and liabilities to the security holders.
Depository A depository is an organization where the securities of an investor are held in electronic form. A depository can be compared to a bank. To avail of the services of a depository, an investor has to open an account with the depository through a depository participant, just as he opens an account with the bank. Holding shares in the account is a kin to holding money in the bank. At present, India has only two depositories-National Securities Depository Ltd. (NSDL) and Central Depository Services Ltd (CDSL). NSDL is the first depository in the county, which is promoted by three major financial institutions - Unit Trust of India, Industrial development Bank of India and National Stock Exchange of India Limited. The second depository of the country (CSDL) is set up in 1999 by the Bombay Stock Exchange and Bank of India. However, most of the services offered by both these depositories are similar. Today almost all the companies listed in dematerialized from with NSDL are available with CDSL. Depository participant A depository participant is an agent appointed by the depository and is authorized to offer depository services to all investors. An investor cannot directly open a Demat account with the depository. An investor has to open his account through a DP only. The DP in turn opens the account with the depository. The DP in turn takes up the responsibility of maintaining the account and updating them as per the instructions given by the investor from time to time. The DP generates and provides the holdings statement from time to time as required by the investor. Thus, the DP is basically the interface between the investor and the depository.
The person who holds a Demat account is a beneficiary owner. In case of a joint account, the account holders will be beneficiary holders of that joint account. The Demat account number of the beneficiary holder(s) is known as the BO Id. A DP id is the number of the depository participant allotted by the depository.
Functions of Depository In the depository system, securities are held in depository accounts, which is more or less similar to holding funds in bank account. Transfer of ownership of securities is done through simple account transfers. This method does away with all the risks and hassles normally associated with paperwork. Consequently, the cost of transacting in a depository environment is considerably lower as compared to transacting in certificates. The depository system also allows distribution of dividends Through the RBIs ECS system, whenever the participating company has agreed to such services. Other entitlements such as bonuses, split-ups are also directly affected by the depository into the investors account. The following can be held in the depository (electronic) form Shares (listed or unlisted) ,Stocks ,Bonds ,Debentures ,RBI Relief Bonds ,Government Securities (through a primary Dealer) ,Units of Mutual Funds ,Commercial Paper ,Money Market Instruments etc.
OPENING A DEMATERIALIZATION ACCOUNT (DEMAT A/C) Demat refers to a dematerialized account. Just as we have to open an account with a bank if we want to save your money, make cheque payments etc, we need to open a demat account if we want to buy or sell stocks. So it is just like a bank account where actual money is replaced by shares. We have to approach the DPs to open our demat account. Demat account allows you to buy, sell and transact shares without the endless paperwork and delays. It is also safe, secure and convenient. Individuals, companies, Trusts, Partnership firms, NRIs, HUF, Banks and Institutions are allowed to open a depository account with any depository through a depository participant. The investor would need to execute a standard form giving all his details, bank details, instruction details, nomination details and off-course photograph and signature. Along with this form, the
investor would also have sign an agreement with the depository participant which usually forms a standard part of the account opening process.
ONLINE TRADING The growth of information technology has affected almost all sectors of life. Internet has enabled us to get every information at our doorstep. Like all other sectors Internet has set its feet in the stock markets also. The Stock Market system provides single, nationwide securities. It enables investors in one part of the country to trade at the best quotes with an investor located in any other part of the country through the members of the stock exchange and subsequently clears and settles the trade in an efficient and cost effective manner. The primary objective of the Stock Market is to provide clear opportunity to the investors throughout the country to trade any security irrespective of the size of the order or the broker through whom the order is routed. This provides the facility to execute the buy order at the lowest price in the stock market located anywhere in the country without any extra cost to the investors.

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DEPOSITORY SYSTEM IN INDIA The Indian capital market witnessed an explosive growth between mid Eighties and Nineties.

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