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4A detailed guide to understand depository & depository participantsMar-31-2020

A detailed guide to understand depository & depository participants

Blog by – Mr. Dhruv Ajmera
The stock trading world has a lot of technical terms that one needs to be well-versed with before they start exploring it. A lot of it can get very confusing, if not understood from scratch and with ease.

This article will explain two key terminologies and the difference between the two of them. Now, what are these two terms? These are: Depository and Depository participant, respectively.

Let’s get to it then! A Depository is a place or an entity, that aids an investor to buy and sell (trade) financial securities, like bonds and stocks, in a paper-less or dematerialised fashion.

So, what does it really do? A Depository is a link between the listed companies on our indices (Sensex and Nifty 50) and the agents or brokers, who ultimately sell the securities to investors. The securities are issued to investors via Depository participants.

Depository participants (DPs)  are essentially the agents of the Depository. They are the mediators between the investors and the Depository. Banks, brokers, stock trading platforms, online stock trading companies and other financial institutions eligible as per SEBI (Securities and Exchange Board of India) norms, are different kinds of Depository participants. An act called Depositories Act governs the relationship between a Depository and a Depository participant once they have made an agreement under the act.

There are two Depositories in India that provide the indices a link to investors: National Securities Depository Limited (NSDL) and Central Securities Depository Limited or CDSL. All the securities being traded are kept there in a dematerialised or electronic format.

How does this entire system function?
While it sounds complicated, it is actually quite simple. Any investor needs to have a depository account. These accounts are commonly called Demat accounts, which is short for dematerialised accounts. All the Depository partners or DPs provide the facility of opening a demat account.

Let’s go through what a Demat account is. These accounts convert the securities being traded from tangible paper to an electronic or dematerialised format, and thus the apt name for the account.

It is like money in a bank account. It isn’t tangible, but it exists securely in a dematerialised manner. Because of this, the risk of holding physical securities is majorly reduced. Damages are reduced as the investors do not have to continuously look after the paperwork and they don`t have to worry about losing it either. It reduces the paperwork in general. Another silver lining is the amount of paper that gets saved!

This entire digitised system was implemented in the year 1988 in India. There were two great things that were immediate results of this action. There were more and more people investing, since the process became easier. The other benefit was the fact that foreign investors became a lot more confident due to this setup as there were lesser and lesser chances now for anything to be fraudulent or get lost in the rather long process that existed previously.

What is the process through which a Demat account, a Depository and a DP fall into sync?

The keen to-be investor approaches their preferred Depository participant. This could be a bank, an online stock trading company, or other stock trading platforms and brokers. These are to be registered with SEBI, NSDL as well as the CSDL.

The biggest and the main function of these DPs is to be an efficient intermediary between the Depository and the investor.

An associate from the DP gives the investor an application form. A filled form, along with certain documents like address proof, Aadhaar card, and PAN card are required to finish this step.

Once that is done, a minimum balance is asked for, in the form of a cheque. This gets your stock investment journey kick-started.

From this point onwards, the DP buys and sells shares and stocks under the investor’s credentials, which then gets saved to their Demat account in an electronic form.

Depository participants charge a minimal brokerage for this entire process. Now that you know why, it seems only fair. Doesn’t it?

While stock trading platforms seem daunting because of the plethora of information one has to process, it is easier done one step at a time. With this article, you have learnt enough about Depositories, Depository participants and Demat accounts to go and kick-off your investment journey and get your Demat account today itself! Start investing slowly and smartly. In the process, you could also have a look at online stock trading companies, since they are very easily approachable.

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