Depository and Depository Participant – Eligibilities, Benefits, Process & more
Know everything about Depository Services & Depository Participant here. Understand how both of these work in the entire buy & sell process of shares.
Stock trading is a complex process; yet if you are a trader, all you need is a couple of accounts, and you are good to go.
But what you should know is that several entities work on the background, making your everyday trading experience seamless. One of such entities is the Depository (DA). In India, there the two DAs – NSDL and CDSL.
In this article, we will first try and understand the Depository and the participants. Then, we will explore who can be one.
Of course, we will dive deep in its core functions, and finally, we will learn about the Demat accounts and what role does it plays while you do online trading.
About Depository & Depository Participant
The depository is where the financial securities are held in a dematerialized form. The depositories are responsible for the maintenance of ownership records and facilitate trade on behalf of traders within the dematerialized securities.
On the other hand, a Depository Participant is an agent of the depository and they could be stated as an intermediary between the investors and the depositary itself.
The relationships between the participants and the depository will be bound by an agreement signed under the depositories act. A Depository Participant is expected to be registered with SEBI under its act.
According to the provisions of the act, the Depository Participant is allowed to provide related services only after the certification of registration is issued.
The two major depositories in India are National Securities Depository Ltd (NSDL) and Central Securities Depository Ltd (CDSL).
Few Largest Depository Participants in India are ICICI Direct, Zerodha, Angel Broking. All major Banks & Stock Brokers are acting as DP in India.
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Eligibilities of a Depository Participant (DP)
Now let’s talk about the entities that get to be a part of the depository participants.
Any financial unit that can pass the eligibility criterion of the SEBI norms for coming up with Demat-related services would be able to work as a DP.
Here are a few examples:
- Public monetary Institutions
- State fiscal Corporations
- Banks and vaults
- Non-banking Fiscal Companies
- Stock Brokers
- Registrar & Transfer representative
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Significance of Depository Participants
Since the Depository Participants work behind the curtains, you may not know in what ways they influence the stock market operations.
So, we have gathered some of the crucial functions of the DPs:
Converts the financial assets: The stock exchange is a digital market place where you can trade with another stock trader.
Therefore, it is a part of the process that converts the assets that you own into a digital form. You can see the status on your Demat account of all the stocks, bonds, and other forms of assets that you own.
So, the job of a DP is to materialize and dematerialize those assets, which allows you to trade, in the first place.
Keep a track of your belongings: A Demat account, which is a service of the DPs allows you to keep an eye on all the stocks, bonds, or any financial asset you own.
Additionally, you can see the status of your settled trades by linking up a BO account.
Trade settlement outside Stock Exchange: One of the most pivotal services that a DP provide is the settlement of share trading outside the realm of the Stock Market.
Of course, it will reflect on your Demat account, but there is probation if you think you can settle the price without the involvement of the Stock Exchange.
Choosing Correct Depository Participants
Now, as you should have the basic knowledge of a DP, and you know a bit about Demat accounts, you should now figure out how you can find the correct Depository Participants.
However, before we discuss that, here are the possible categories of DPs that you can open a Demat account from:
- Stock Broking Agencies or Individual Brokers
- State Financial Corporations
- Non-banking Financial Companies
- Public Financial Institutions
- Registrar & Transfer Agents
Now, check out a few points we have prepared for you to figure out how to choose the correct DP:
The institution should be technology-driven
Stock Exchange has gone entirely digital since 1996. Today, there are tools to do complex calculations in seconds. So, it would be best if you choose a DP which has a knack to deliver those services.
Therefore, we suggest you should compare the one you fancy with some other DPs to ensure the best features for the best price you pay.
Check Fees Structure
What you should know is everybody that you will deal with, while doing stock trading, they want to earn money. Therefore, in each step, there are numerous fees involved.
Prior to the Brokerage fees, there are transaction fees, Stamp Duty fees, the AMC for the Demat accounts, and various other costs as well.
So, while you are choosing a DP, make sure you compare the entire fees structure of multiple institutes before opting.
Check Customer Reviews
While the point of views can be subjective, it would be best you check the reviews provided by the existing customers.
We also suggest to check out the detailed reviews of each segment like how well the Trading platforms are, how much variety is there in the products and services they are offering.
However, you should, of course, check the overall quality experience of a DP and then decide.
You may wonder how you could know about the level of Customer Support until you get the service. But we are suggesting you contact the pre-sales team and do your research.
Ask them questions to figure out how they are operating. You should only avail their service once you are fully satisfied that they can resolve your issues if and when arises.
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Rematerialization and Dematerialization
A DP permits shareholders & brokers to intermingle with the electronic trading organization.
The process of securities conversion from physical form to similar amount of shares in electronic form is called dematerialization.
While, the process of obtaining physical certificate of the securities that are already in electronic form is rematerialization.
If the shares are dematerialized, the independent identity will be lost along with the distinctive number while during rematerialization, shares will have distinctive number.
The former involves paperless trading while the latter focuses on physical trading.
In dematerialization, the securities account will be with the Depository Participant while it will be under the maintenance of the company in case of rematerialization.
What are the benefits of availing Depository Services?
The major benefit of having Depository services is that it is convenient for the trader to hold securities and work on the immediate transfer of securities.
The stamp duty will not be required and risks that are associated with physical certificates are eliminated.
The paperwork is reduced and so is the transaction cost. The trader will not have any sort of odd-lot issues considering even a single share can be traded.
The nomination facility becomes easier and the change in address once recorded with DP will be registered with all the companies in which the investor has securities. This thereby eliminates the need for the trader to correspond all of them consecutively.
DP will be responsible for the securities transmission thereby eliminating the correspondence required from the trader to the companies.
The credit process is automatic and will be taken to the Demat account of shares. The trader can hold the investment in equity and debt instruments within one account.
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How to open a Demat account with a DP & Depository?
According to SEBI, you need a Demat account so as to hold and swap over securities electronically. You can get an account open with either of the 2 available depositories (NSDL or CDSL) via a DP.
For opening a Demat account, everything you necessitate to do is:
- Search for a rundown of respectable and approved depository members in India and locate the best, experienced one for your speculation/exchanging needs.
- Get in touch with the DP to get a proper sequence on how you can open an account with them.
- Most DPs would require you to fill an online form and present a few documentations to open the records.
- They usually ask for ordinarily required archives namely Aadhaar Card, Bank report, ID Proof, and a Photograph.
- At that point, the DP confirms your archives and furnishes you with subtleties to get to your account with a depository.
How can one become a Depository Participant or DP?
These various points can be taken into consideration while one is looking for a depository participant that is the best for them:
Since the initial days, the depositories have altered the trading world to an online source which increases the possibility of use and is easy-to-understand.
The DP should also be able to cater to the businesses with the appropriate technology. A DP that distributes a tech-smart solution always has an upper hand over a non-technical one.
Charges for opening an account, along with the annual maintenance charges, brokerage charges applicable for dematerializing shares, and rejection of Demat form should be considered and compared with sheer assiduousness.
The trader must compare other costs by DPs to find the most competitive one along with the supreme quality of service so as to get the best deal out of all the active ones.
Apart from these expenses and innovation, the administration’s quality and fulfillment should be worth the investment.
Check for the processing times, past client audits, client care alternatives, raised/forthcoming complaints with SEBI, and other significant factors completely, to locate the one that offers the most consistent assistance without issues considering the client requirements.
Is a Depository similar to a Bank?
A depository is similar to that of a bank. We can compare it to a bank that houses potential funds for depositors in multiple ways.
If the trader can understand the analogy used in the depository and Bank, it would be easier to understand the idea of depository and its functioning.
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Off Market Transfer
When it comes to this kind of transaction, there is no presence of the clearing corporation or the stock exchanges.
The two parties transact based on mutual agreement, eliminating the use of stock market associates.
Reason for the lack of stock market associates is – when the shares are not traded or listed in any public exchange.
When an investor purchases any financial asset through a DP, the individual entity needs to be able to provide electronic credit of securities that an issuer has selected through primary or secondary market.
Depository and Depository Participant – Conclusion
In India, investors will trade over various stocks on exchanges (NSE and BSE). A Depository Participant is opening up a new perspective of trading and is beneficial from their perspective.
Make sure you invest via a depository participant who is registered with one of the two depositories. The assurance of assistance can be provided via a certificate.
Certificate of registration according to the provisions of the SEBI act proves the association with a depository.
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