Depository Participants (DPs) play a crucial role in facilitating the seamless and efficient trading and settlement of securities. DPs serve as intermediaries between investors and the central securities depository, providing a range of services related to holding and transacting securities in electronic form. This comprehensive article delves into the functions, regulations, and significance of DPs in the Indian financial landscape.
What is a depository?
A depository, in the financial context, is a specialised financial institution responsible for holding and safeguarding financial assets in electronic or dematerialised form. A depository holds various financial instruments such as bonds, mutual funds, stocks, and other securities in electronic form.
In the case of India, there are two primary depositories: NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited). These depositories play a crucial role in the securities market by eliminating the need for physical certificates and enabling electronic book-entry transfers.
To interact with a depository, individuals do not directly open accounts with NSDL or CDSL. Instead, they do so through entities called depository participants. These participants, often banks or financial institutions, act as intermediaries between the investor and the depository. When you open an account with a depository participant, you gain indirect access to the services provided by the main depository.
Investors are required to pay certain charges known as DP (Depository participant) charges to open an account with a depository participant. These charges cover the costs associated with maintaining and managing electronic records of financial assets and ensuring the security of these assets.
The depository is a critical infrastructure in the financial system that facilitates the safekeeping and electronic transfer of various financial assets, and it operates through depository participants to provide access to individual investors.
What are depository participants?
A depository participant (DP) is a registered intermediary between the depository and investors in India. They are agents who are registered with a depository and fulfil the minimum net worth criteria as instructed by the Securities and Exchange Board of India (SEBI) and the respective depositories. DPs play a significant role in facilitating the trading process by connecting investors to the depositories in India. They maintain investor-level accounts for securities, while all company accounts of securities are managed by the depository.
Types of depositories
In India, there are two depositories, namely the National Securities Depository Limited (NSDL) and the Central Depository Services Limited (CDSL). Both NSDL and CDSL are government-registered share depositories that offer similar services of storing and trading securities in electronic form.
NSDL:
NSDL is the oldest depository in India, established in 1996. It offers depository services to investors, issuers, and intermediaries in theIndian securities market. NSDL provides services such as dematerialisation of securities, rematerialisation, pledge and hypothecation of securities, and electronic settlement of securities trades. It has more than 2 crore active customers and 278 depository participants.
CDSL:
CDSL, on the other hand, was established in 1999. It provides convenient, dependable, and secured depository services to the Indian securities market. CDSL offers services such as dematerialisation of securities, rematerialisation, transfers between depositories, off-market transfers, lending of securities, nomination services, collateral, and mortgage of securities. It has 599 depository participants registered with it.
Role and functions of depository participants
- Intermediary between investors and depositories: DPs act as a link between investors and depositories in India. They help investors in opening accounts with the registered depository, facilitate transfer of securities, and settle trades done on the exchange connected to the depository.
- Dematerialisation of securities: DPs help investors convert physical securities into electronic form, which is called dematerialisation. This process eliminates the need for physical certificates and reduces the risk of theft, forgery, and loss of certificates.
- Rematerialisation of securities: DPs also help investors convert electronic securities back into physical form, which is called rematerialisation. This process is useful when investors want to sell their securities in physical form or transfer them to another account.
- Pledge and hypothecation of securities: DPs facilitate the pledge and hypothecation of securities by investors. Pledge is the process of using securities as collateral for a loan, while hypothecation is the process of pledging securities without transferring ownership.
- Portfolio management: DPs offer portfolio management services to investors, which include tracking their investments, providing regular statements, and managing their portfolios.
- IPO intermediation: DPs also act as intermediaries in Initial Public Offerings (IPOs) by accepting applications from investors and submitting them to the registrar of the issue.
Depository participant vs. stockbroker
Criteria |
Stockbroker |
Depository participant (DP) |
Primary function |
Facilitates buying and selling of securities on behalf of clients. |
Connects investors to the depository, holds, and maintains investor-level Demat accounts for securities. Manages trading activities. |
Role in trading |
Executes trades, provides market analysis, and investment advice. |
Facilitates the movement of securities, manages Demat accounts, and ensures the settlement of trades by connecting investors to the depository. |
Account type |
Provides trading accounts for buying and selling securities. |
Provides Demat accounts for holding securities in electronic form. |
Interaction with depositories |
Interacts with depositories for trade settlement and clearance. |
Directly interacts with depositories (for example, NSDL, CDSL) to manage Demat accounts and facilitate the transfer of securities. |
Ownership of assets |
Facilitates ownership and transfer of securities in the market. |
Safeguards and facilitates the transfer of ownership of securities held in dematerialised form through Demat accounts. |
Regulatory oversight |
Regulated by the Securities and Exchange Board of India (SEBI). |
Regulated by SEBI and acts as an agent of the depository for maintaining Demat accounts. |
Charges |
Charges brokerage fees for buying/selling securities. |
Charges DP charges for maintaining Demat accounts and facilitating the transfer of securities. May also charge other account-related fees. |
Focus area |
Primarily focused on securities trading and investment services. |
Primarily focused on facilitating the safekeeping and transfer of securities in electronic form. |
Handling of investor accounts |
Manages investor accounts related to trading activities. |
Manages investor-level Demat accounts and liaises with depositories for the transfer and settlement of securities. |
Difference between depository and depository participant
In the context of securities trading and settlement, the terms "depository" and "depository participant" represent distinct entities, each serving a unique function within the system. Here's a breakdown of the key differences between a depository and a depository participant:
Aspect |
Depository |
Depository Participant (DP) |
Definition |
A centralised institution responsible for holding and maintaining securities in electronic form. |
An intermediary appointed by a depository to offer depository services to investors. |
Primary role |
Custodianship of securities, electronic settlement, corporate actions processing. |
Opening demat accounts, settlement of trades, providing account services. |
Examples |
National Securities Depository Limited (NSDL), Central Depository Services Limited (CDSL). |
Various brokerage firms, banks, financial institutions appointed by depositories. |
Regulation |
Regulated by the Securities and Exchange Board of India (SEBI). |
Regulated by the depository and SEBI. |
Functions |
Hold securities in electronic form, facilitate settlement of trades, process corporate actions. |
Facilitate opening of demat accounts, settle trades, provide account statements. |
Direct interaction |
Investors typically don't interact directly with the depository. |
Investors interact directly with DPs for demat account-related services. |
Interface |
Acts as the central entity for securities holding and processing. |
Acts as the interface between investors and the central depository. |
Conclusion
While stockbrokers facilitate the buying and selling of securities, depository participants play a pivotal role in connecting investors to depositories like NSDL and CDSL, managing Demat accounts, and overseeing the secure transfer of securities. This dynamic partnership underscores the importance of a well-integrated system, where each entity contributes uniquely to the overall efficiency and transparency of the trading process, ultimately benefiting investors and fostering a robust financial ecosystem in India.
