Every investor who wants to buy stocks or bonds electronically or paperless needs to know about the depositary. As an investor starting in the stock market, you should know about the role of depository in stock market, types of depositories in India, the role of CDSL and NSDL, and the difference between CDSL and NSDL Demat account.
Role of depository in stock market
The shareholders and company that issues the shares are linked by the depository. The depository participants, mostly known as DPs, issue the shares on behalf of the depository. A Depository Participant works as a link between shareholder and company, and therefore it can be a broker, a Bank, any financial institution, or any other entity. If the entity follows the rules of the Security Exchange Board of India or SEBI, it can be a depository partner or DP.
Just like banks look after your deposit in your bank account, a depository is one entity that monitors and protects the investment. A depository can be an entity like a bank or financial institution, or it can be your Demat account.
The role of depository in stock market is to be a trusted link between shareholders and the share issuing company and provide safety and security of the Investments. So you need to understand there are two types of depository in India. One is CDSL, and the other one is NSDL.
So working like a bank that monitors, safeguards, and controls the deposit in your account, is the same as the role of depository in stock market.
The Indian stock market owes the digitization of the stock market to depositories.
Demat account is closely associated with the depository. When you buy or sell in share from your Demat account, depositories matter. So your Demat account is not exactly your depositary, but the BSE and NSE are. They are the ones who have your shares. With the help of a depository, the process of buying and selling share certificates has become very easy. Currently, there is no trouble transferring share certificates from one person to another because of a Demat account.
The depository maintains your Demat account, does the trade settlement, dematerializes share certificates, provides instant liquidity in the market, is beneficial to the company issuing the shares and shareholders or investors, and many other important functions.
The depository also allows on-market and off-market share transfer. The depositories reduce the burden of holding any physical security/assets. The depositories provide the most important thing above all: the protection of the investments. In case of any unexpected event such as the demise of Demat of the account holder, there is also a facility for account transformation, also known as the nomination.
Let us see the types of depository in India.
Types of depository in India - CDSL and NSDL
CDSL stands for Central Depository Securities' Limited whereas NSDL stands for National Security Depository Limited. Both of these are depositories for shares, and the role of CDSL and NSDL is to store your mutual funds, shares, and debentures along with other securities.
The role of CDSL and NSDL depositories is to unify the stock trade as one. In India, these depositories are in the form of security exchange. As you know, India has two Stock Exchanges; one is the Bombay Stock Exchange(BSE), and the other is the National Stock Exchange (NSE). When we talk about CDSL, the Bombay Stock Exchange works as a CDSL. And if we talk about NSDL then the NSE is India's NSDL.
Now you know the basic details about depositories and their types and the role of CDSL and NSDL. Now, let us understand the difference between CDSL and NSDL Demat account.
The difference between CDSL and NSDL Demat account is as follows,
● Investors should know that depositories are governed by the Security Exchange Board of India, most popularly known as SEBI.
● NSDL first came in 1996, whereas CDSL came in 1999.
● The national securities depository Limited (NSDL) works for NSE, and CDSL central depository for Securities Limited works for BSE in India. The traders are free to take the facilities from both.
● Only BSE CDSL while NSDL is promoted by NSE, Unit Trust of India, and backed by IDBI Bank Limited.
● NDSL and CDSL Demat accounts have minor differences in digits. NSDL offers 14 digit accounts. CDSL office 16 digit Demat account.
● According to the current counting, the number of depositories registered with NSDL is Ram 278. CDSL, on the other hand, has around 599 that is nearly 600 depositories.
So, the above points cover the difference between CDSL and NSDL Demat account, but the role of CDSL and NSDL is the same as investment in dematerialized form or simply in electronic form.