Basics of depository and depository participant

In this article we discussed about Depository, who regulates depository in India, functions of a depository , benefits of depository system, difference between a depository &  custodian, models of depository, depository participant and its characteristics, difference between  dematerialisation & rematerialisation, rights of depository participant and finally added with objective questions for refresher.



Depository is an organization where the securities of the shareholders are held in electronic form at the request of the shareholder through the medium of a Depository Participant. In the following article we are going to learn more about depository and depository participant.

Definition of Depository: Depository means a company formed and registered under the companies act, 1956 and it has been granted a certificate of registration under section 12(1A) of SEBI Act, 1992.

Two Depositories are regulated in India:

1.      National Securities Depository limited (NSDL)

2.      The Central Depository Services (India) Limited (CDS)

Functions of Depository:

1.      Services to investors

2.      Services to Participants in the capital market such as clearing members, stock exchanges , investment institution, banks and issuing corporate

3.      Account opening

4.      Dematerialization

5.      Rematerialization

6.      Settlement of trades

7.      Advanced facilities like pledging, distribution of non- cash corporate actions, distribution of securities to allot tees in case of public issues etc.

Benefits of Depository System:

1.      This system will eliminate paper work as the book entry system does not need physical movement of certificates for transfer process.

2.      The risk of bad deliveries, fraud and misplaced, mutilated and lost share certificates will not exist.

3.      The electronic media will shorten settlement time and hence the investor can save time and increase the velocity of security movement.

4.      Investors will be able to change portfolio more frequently.

5.      The capital market will be more transparent as the trading, clearing and settlement mechanism have to be highly automated and interlinked with the depository among themselves.

6.      The market will be highly automated and efficient due to the usage of computing and telecommunication technology for the back office activities for all the capital market players.

Difference between Depository and Custodian :


It a part from keeping the shares in e-form , manages the shares on behalf  of investor

It function is merely ‘safe keeping’ of shares. It handle Huge – paper work.


It is a institution or can be called as an organization itself.

It is an in term diary.


There is a separate Act i.e. Depositories Act – 1956, a part from SEBI (depositories and participant ) Reg . 1996

There is no separate Act and it is regulated by SEBI (Custodian of Securities) Reg. 1996


Models of Depository :

1.      Dematerialization: It is a process of conversion of physical share – certificate into electronic – form . So, when a shareholder uses the dematerialization facility, company take back the shares, through depository – system and equal number of shares are credited in his account in e-form.

2.      Immobilisation : It is a process of storing of physical share certificates, with depository for safe custody. In this model the original share certificates, can be withdrawn, as it is lodged in depository method.

Meaning of Depository Participant and its characteristics:

Depository Participant (DP): is the representative or agent of the investor  in the depository system providing the link between the Company  and investor through the Depository

Characteristics of depository participant:

1.      Acts as an Agent of Depository

2.      Directly deal with customer

3.      Functions like Securities Bank

4.      Account opening

5.      Facilitates dematerialization

6.      Instant transfer on pay – out

7.      Credits to investor in IPO, rights, bonus

8.      Settles trades in electronic segment

Difference between dematerialization and remateriaisation :



Re – materialisation


It is a process of conversion of physical shares certificates into electronic form. So, under dematerialization facility, company take back the shares, through depository – system and equal number of shares are credited in account in e-form.

It is a process of conversion of electronic shares into physical shares. When a beneficial – owner opt out of a depository, he will inform about it, to the company, through depository. The company will issue fresh share – certificate to the beneficial – owner, within 30 days from the date of request.


In this, physical share certificates converted into e- records.

In this, e- records are converted into physical – shares certificate.


Firstly shares are dematerialize, so it is primary and principal

Firstly shares are dematerialize then it is rematerialize, so it is secondary and supporting function of depository.

Use of form

In this process it requires “Dematerialization Request Form”

In this process it requires “Rematerialisation Request form” (RRF)


Rights and Obligations of Depositories and its constituents  :

1.      Every depository has to enter into an agreement  with the issuer  in respect of securities  to become eligible to held the securities in demat form.

2.      Every depository is to maintain the following records and documents :

(a)    Records of securities dematerialised and rematerialised

(b)   Names of the transferor, transferee, and the dates of transfer of securities

(c)    A register and an index of beneficial owners

(d)   Details of holding of the securities of the beneficial owners as at the end of every day.

(e)    Records of instruction received from and sent to participants, issuers’ agents and beneficial owners,

3.      Details and the maintenance of records and documents should be intimated to Board.

4.      All the records and documents should be preserved for minimum 5 years.

Following is some objective questions  and  answers as  refresher :

1.      According to which section, an account has to be opened with the Depository through a Depository Participant to utilize the services offered by a Depository?

(a)    Section 12(1A)

(b)   Section 2(e)

(c)    Section 2(10)

(d)   Section 3


2.      A shareholder has to open an account with a Depository to hold his securities in electronic form.

(a)    True

(b)   False

Note: To utilize the services offered by a Depository, the investor has to open an account with the Depository through a Depository Participant.


3.      A Depository and a Custodian both perform the same function of safekeeping of securities but a Depository can legally beneficial ownership, which a Custodian cannot.

(a)   True

(b)   False


4.      Introduction of Depository Services has made transaction in securities faster and economical and less risky.

(a)   True

(b)   False


5.      Dematerialization is simple and cost effective.

(a)   True

(b)   False


6.      A bank transfers securities between accounts whereas a Depository transfers funds between accounts.

(a)    True

(b)   False


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