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Learn about the hands behind the swift settlement of your stock market transactions.
Have you ever wondered who regulates and maintains digital securities? How are these securities protected from misuse and fraud? That is where the role of depositories becomes essential.
What is a depository in the stock market?
Depositories hold shares, bonds and other financial securities in digital form, facilitating trade between two entities. These depositories are financial institutions that maintain demat accounts of all investors across financial markets.
Understanding the working of depositories
When you trade in shares and bonds, you get a certificate or document mentioning your ownership, but you do not get the exact number of units you purchase. So, where are your assets saved? That’s where a Demat account is needed.
The shares you purchase are transferred to your demat account, and the shares you sell are debited from your demat account. Brokerage firms allow investors to open demat accounts with them, which are managed by the two depositories in India – NSDL and CDSL.
Consider an example to understand the working of depositories and depository participants:
XYZ Ltd lists itself on the stock exchange and stores its shares with depositories. You want to buy 200 shares of XYZ Ltd. You get in touch with a brokerage firm to open your demat account and place an order to buy 200 shares. These brokerage firms are depository participants who mediate between companies, depositories and investors.
So, your brokerage firm passes the order to the depository to credit 200 shares to your demat account.
When you place a sell order, the depository takes them from your demat and transfers them to the buyer’s account.
NSDL
NSDL stands for National Securities Depository Limited.
Established in 1996, NSDL is the first depository in India. The NSDL is specifically meant to handle transactions of securities listed on the National Stock Exchange (NSE). So, the NSDL is responsible for the custody and settlement of trades on the NSE. As of 31 October 2023, NSDL had 283 depository participants with a total demat custody value of ₹349.58 lakh crores.
CDSL
CDSL stands for Central Depository Services Limited.
Like NSDL is for NSE, CDSL is the depository for the Bombay Stock Exchange. It was founded in 1999 and is larger than NSDL with respect to the number of depository participants and demat accounts held.
As of 31 October 2023, CDSL had 662 depository participants with a total demat custody value of ₹49.9 lakh crores.
Features of NSDL and CDSL
- Both NSDL and CDSL are depositories governed by the Securities and Exchange Board of India (SEBI).
- NSDL associates with demat accounts trading on NSE. The demat account number for NDSL 14-digit numeric code, with IN as the prefix. So, NSDL demat numbers are 16 characters, alpha-numeric codes.
- CDSL deals with BSE. The demat number is a 16-digit numeric code. Though similar in their roles, the primary difference between NSDL and CDSL is the market they deal with and the format of their demat accounts.
- Investors do not get to choose between demat accounts with the two depositories. It depends on the depository participant. However, if the brokerage firm has a tie-up with both, the investor can make a choice.
Functions of NSDL and CDSL
- The primary function of depositories is to dematerialise securities. It is the process of transforming tangible securities into computerised formats and storing them in the investor’s demat accounts.
- The reverse of dematerialising securities is to rematerialise them. So, if investors wish to hold securities as physical certificates instead of digital shares, the depositories help in converting them.
- Depositories also help in the fulfilment or settlement of stock market transactions. A transaction is deemed settled when parties exchange securities for cash.
- NSDL and CDSL maintain records of all securities listed on the NSE and BSE.
- NSDL and CDSL help in the safekeeping of securities in electronic forms, eliminating the risk of theft of physical copies. Also, their role in the settlement of transactions helps in avoiding counterparty defaults.
- NSDL and CDSL are critical during the case of mergers, acquisitions, employee stock option plans, organisational restructuring, and other corporate actions that do not involve cash but require the transfer of shares.
Bottomline
NSDL and CDSL are two depositories in India that monitor the activities of all brokerage firms and demat accounts. Analysing the role of every participant in financial market transactions is essential for investors to understand how the market functions.
FAQs
CDSL and NSDL are both depositories in India that hold securities electronically. The key differences are their promoters and the stock exchanges they primarily serve. NSDL is promoted by NSE, among others, while CDSL is promoted by BSE. NSDL was established in 1996 and CDSL in 1999.
No, a demat account and a depository are not the same. A demat account is an account held by an investor to store securities in electronic form, whereas a depository is an institution like CDSL or NSDL that holds these securities and facilitates their trade.
A depository is an institution that holds financial securities in electronic form and facilitates their trade. In contrast, a repository stores information, data, or knowledge and can be physical or digital, such as a library or a database.
In an IPO, the depository details refer to the investor’s demat account information, where the allotted shares will be credited. The depository could be either NSDL or CDSL, and the details include the DP name, DP ID, and client ID.
A stock exchange is a marketplace for buying and selling securities, while a depository holds these securities in electronic form and facilitates their safekeeping and transfer during transactions. The stock exchange provides the platform for trade, and the depository ensures the trade’s settlement.