What is a Depository in Share Market
What is Depository?
A depository is an entity or an organization where the shares are held in demat form with the purpose of storage and safety.
Let’s understand the term ‘depository’ with the analogy of the banking system. It can be compared with a bank, which holds the funds for depositors.
Bank holds funds in savings and current accounts
Depository holds shares in demat accounts
Transfers funds between accounts on the instruction of account holder
Transfers shares between accounts on the instruction of demat account holder
Facilitates transfer without having to handle money
Facilitates transfer of ownership without having to handle shares
Facilitates safekeeping of money
Facilitates safekeeping of shares
So, I think that the answer to the question – what is a depository in the share market? – is clear to you now. Let’s understand the various other concepts related to the depository.
Depositories in India
At present 2 depositories which are National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL) are registered with SEBI.
- Works for Bombay Stock Exchange (BSE).
- Established in 1999
- Promoted by BSE, SBI (State Bank of India), and BOI (Bank of India).
- Demat accounts opened with CDSL have a 16-digit demat account number along with all numeric digits.
- Works for National Stock Exchange (NSE).
- Established in 1996
- Promoted by NSE, IDBI (Industrial Development Bank of India), and UTI ( Unit trust of India).
- Demat accounts opened with NSDL have a 16-digit demat account number including 2 alphanumeric digits – IN – at the beginning which is followed by 14 numeric digits.
Role of Depositories
- A depository is also a financial intermediary i.e. it acts as a link between the other stock market entities like stock exchanges, clearing houses, etc.
- Investors do not need to panic about the maintenance of physical share certificates; they can invest in huge volumes from anywhere in the world.
You can avail the services of a depository by opening a depository account (Demat account) with a depository participant (usually a broker).
Both the terms 'depository account' and 'depository participant' are explained later in this article.
The following are the services that a depository provides through a depository participant:
- Demat account opening.
- Dematerialization i.e. converting physical shares into electronic form.
- Rematerialization, i.e. converting shares in demat account into physical form (i.e. into share certificate).
- Maintaining a record of shares held by the investors in the demat account.
- Settlement of trades by delivery or receipt of securities from/in demat accounts.
- Settlement of off-market transactions between demat account holders.
- Receiving electronic credit in respect of shares allotted by issuers during public issues like IPO and FPO, on behalf of demat account holders.
- Receiving non-cash corporate benefits through corporate actions such as allotment of bonus shares and rights shares on behalf of its demat account holders.
- Giving loans to investors (who have a demat account) against the shares as collateral.
- Freezing of the demat account for debits, credits, or both.
What is a Depository Participant (DP)
A depository participant is an intermediary between the depository and the investor.
A DP can be a stockbroking firm, bank, or any financial institution. But generally, you will see a broker as a depository participant.
A DP can offer depository-related services only after getting registered with SEBI and any of the depositories. The connection between a DP and the depository is governed by an agreement made between the two under the depository act.
A Depository Participant or a broker purchases shares in your name and stores them in your Demat account and charges a minimum brokerage.
What are DP Charges
DP (Depository Participant) charges is the fee that you pay to your broker when you sell the shares from your demat account. You’ve not levied DP charges when you buy shares, this charge is only levied when you sell the shares.
Let’s understand through some examples, how DP charges are levied when you sell the shares:
- DP charges have nothing to do with the number of shares being sold. For example, Whether you sell 1 share or 100 shares of a particular company or stock; the same DP charge will be levied on you.
- For the same stock, DP charges are levied only once a day. For example, you own 100 shares of Reliance stock. You have decided to place a sell order of 40 shares and then sell them; Your broker will levy DP charges for those 40 shares. Later that same day, you also sold those remaining 60 shares; But this time, the second time when you sold 60 shares, the broker will not levy you DP charges.
DP charges vary from broker to broker. Although, the depositories have fixed the DP charges; like CDSL charge 5.50 rupees and NSDL charge 4.50 rupees on a per stock – per day basis. But these are the brokers who charge more; they pay the depositories and keep the difference.
For example, Zerodha charges Rs. 13.5 + 18% GST.
What is a Depository account?
A depository account is generally known as a Demat account. But according to the definition, a depository account is an account that you open with a depository participant which is usually a broker.
You open a Demat account with a broker; it can be interpreted as you opening a depository account with a depository participant.
A depository account or a demat account is also known as BO (Beneficial Owner) account.
Depositories are the entities where the shares are held in dematerialized form. These are also the financial intermediaries as they work for the stock exchanges.
In India, only 2 depositories are registered with SEBI which are NSDL and CDSL. The agents of the NSDL and CDSL which acts as an intermediary between the depository and the investor are known as Depository Participant (DP).
Depository Participants are generally the brokers with whom you open your demat and trading account. Apart from brokerage, they also levy DP charges.