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What is Depository and how does it works?

What is Depository and how does it works?

03, Sep 2020

Money is to Bank while Share is to Depository

A Depository  is an organization like a Central Bank where the securities of an investor are held in electronic form, through Depository participants.

There are two depositories in India – National Securities Depository Ltd (NSDL) and Central Securities Depository Ltd (CDSL). 

Who is Depository participants?

A Depository Participant (NSDL & CDSL) a medium through which the shares are held in the electronic form. They are acting as  a link between the investor and the company through the Depository.

Let’s understand how depository system works?

The Depository system functions largely like the banking system. Let’s understand in simple way:

  • A bank holds funds in accounts whereas; a Depository holds securities / shares in accounts for its clients.
  • A bank transfers funds between accounts whereas; a Depository transfers securities between accounts.
  • In both systems, the transfer of funds or securities happens without the actual handling of funds or securities.
  • Both the banks and the Depository are accountable for safe keeping of funds and securities respectively. The company has to sign an Agreement with NSDL/CDSL (the depositories) and install the necessary hardware/software for operations.

What is the Function of a Depository Participant?

A Depository Participant (DP) acts as trade facilitator. The primary functions of a depository participant are outlined below:

  • Facilitate trades and security transfers seamlessly.
  • Convert paper shares into demat accounts.
  • Keep a record of trade and other equity investment transactions.
  • Make new / follow up security issues and offers available to its investors.

 

Image courtsey: thehindubusinessline.com

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