The term depository, in stock market parlance, refers to a facility where one can deposit or store securities. A bank, organization, or institution can act as a depository in this scenario. These institutions help investors and traders hold their assets in a secure and safe manner. Depositories also provide broader services, including assistance in securities trading, apart from holding them on an investor’s behalf.
A depository is a key market participant that offers security and liquidity. They also offer lending services through the cash held by them. Any investor or trader who has participated in the stock markets may have come across the term depository participants.
Here, we will explain the meaning of depository participants and other factors around it, like eligibility, services provided, etc.
What are depository participants?
There are two depositories in India:
These are government organizations that come under the regulation of the Securities and Exchange Board of India (SEBI). The NSDL mainly caters to the NSE or National Stock Exchange and CSDL provides services for the BSE or Bombay Stock Exchange. The depositories mainly look after the exchange and settlement of securities.
Since stock markets involve numerous investors against only two depositories, it is not practical for investors to directly reach out to the institutions. This gives rise to the need for an intermediary, like a depository participant. A depository participant acts as an intermediary that connects the depository and the numerous investors.
What is the role of a depository participant?
Depository participants help investors in opening an account with the depository. A Depository Participant (DP) is a registered agent or stockbroker of a depository. DPs maintain the investor-level accounts for securities while all company accounts of securities are managed by the depository.
Eligibility criteria for depository participants
As per SEBI guidelines, to become CDSL DP, the minimum net worth of an institution should be Rs. 2 crores. If a broker has a minimum net worth of Rs. 1 crore, then it is qualified to be a ‘Limited Depository Participant’ with a pre-condition that the net worth will be raised to at least Rs. 2 crores. Such brokers can open a maximum of 5000 accounts.
Listed here are the entities that can act as registered depository participants in India, provided they meet the eligibility criteria:
- Stock broker with a Certificate of Registration under the SEBI Act, 1992.
- Custodian of Securities
- Banks (also Foreign banks)
- State Financial Corporations
- Public Financial Institution
- Clearing Corporation
- Clearing House of a Stock Exchange
- An institution that offers financial services and is promoted by any of the above-mentioned
Services offered by depository participants
Apart from holding securities on behalf of investors, Depository Participants offer various other services, including the below-mentioned:
- Demat account opening
- Trade settlement through the delivery of securities
- Dematerialization – conversion of physical securities into digital form
- Rematerialization – conversion of digital securities into physical format
- Electronically maintaining a record of securities held by an investor
- Supporting off-market transactions and settlements
- Extending loans against securities
- Pledging of securities
- Demat account freezing
What are the regulations surrounding depository participants?
Any organization that wants to function as a Depository Participant in India must register itself under the below-mentioned three laws:
- SEBI Act, 1992 (section-12) (Sub Section-1A)
- Depository Act, 1996
- SEBI (Depositories and Participants ) regulations, 1996
Depository participants earn through the fees charged to clients for services rendered, like account opening, securities transfer, pledging of securities, etc. Some DPs may also levy annual maintenance charges. To trade via major exchanges like NSE and BSE in India, an investor or trader will require the help of a Depository Participant. It is important to invest via a depository participant that is registered with either of the two depositories in the country.
The current minimum charges levied by depository participants per transaction are Rs. 5. These can go up to Rs. 25 in some cases.
Yes, an investor can request account closure with one depository participant and open an account with another by requesting a transfer of securities from one Demat account to another.
Yes, an investor can have multiple Demat accounts with the same or different Depository participant, provided he/she meets all the KYC norms.
Depository participants provide transaction statements to investors once every month.
To open a Demat account easily, you can download the Fisdom app on your smartphone. This app allows an entirely online KYC process which is very easy to complete, followed by Demat and trading account opening process.