What is A Depository Participants – How it works ?


Today we will discuss about Demat shares. Depositary Participants and the procedure and processes involved in getting the physical securities converted into electronic form. When we have currency notes with us we either hold it in physical form or deposit it in the Bank. But for all practical purposes cash in hand and bank balance is treated as "Physical" only in as much as the cash at Bank is any time encashable

Today we will discuss about Demat shares. Depositary Participants and the procedure and processes involved in getting the physical securities converted into electronic form. When we have currency notes with us we either hold it in physical form or deposit it in the Bank. But for all practical purposes cash in hand and bank balance is treated as "Physical" only in as much as the cash at Bank is any time encashable. Here we get interest from the Bank for safe keeping of our cash. But in the case of demat shares which is also held by a Depositary Participant (DP) we have to pay safe keeping charges to the DP. More on this topic when we discuss discuss DP and demat shares.

Need for converting shares held in physical form to dematerialisation (demat) form arose when the demerits of holding the shares in physical form became more pronounced in the 1900s in the Indian share market like Bad delivery of shares due to signature difference of transferor and the delay in getting back such shares. This coupled with the FIIs preference to have the shares in demat (electronic) form, and as a measure to improve the archaic practices followed by Indian markets, Depository is created. This depository or better known as a Securities"Bank" where the physical securities are kept in electronic form and withdrawal and receipt of securities can be done as in the case of banks accounts.

Presently, there are Two Depositories in India. National Security Depository Ltd (NSDL) was set up in 1996 by UTI, SBI,NSE and IDBI. This was followed by Central Depository Services Ltd., (CDSL). Let us see how the depositories work ? The activities are carried out through its Business Partners viz Depository Participants, Corporates, Registrar and Transfer Agents, and Clearing House or Clearing Corporations. The investors who have their initial point of contact through a Demat account is the Depository Participant who are linked to NSDL. A Depository Participant (DP) can be a bank, financial institution or a broker. The NSDL has established well over the years and trading in physical form is almost non existent now.


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