It is imperative to have a demat account, a trading account and a bank account in order to invest in the stock markets. The demat account is run by the depository, the trading account is operated by a depository participant or broker and the bank is responsible for operating the bank account.
The money is transferred from the bank account to the trading account by the investor to buy shares. After this, the actual transaction takes place through the exchange and the demat account is used to credit specific securities for the money invested by the investor.
Since the securities are in electronic or dematerialized form, they cannot be transferred to a physical locker. The securities that change hands on the stock exchange are stored by the depositories. They are the vault that keeps the securities but is not involved in direct engagement with the investor or the companies issuing the securities. There are two major depositories in the Indian context:
National Securities Depository Limited (NSDL)
Central Depository Services (India) Limited (CDSL)
Advantages of a depository system
A depository system makes the process of participating in the capital market easier and hassle-free. It enables the dematerialisation of the securities which leads to a paperless share market, unlike the older days.
The ease of exchange is another important advantage of the depository system. Dematerialisation makes it possible to identify the securities of the same class which in turn improves interchangeability. This helped in lowering the actual cost of exchange and boosted the speed of trade.
The depository system has also ensured that the transfer of securities between depositories is conducted through a secured electronic system and there is no extra cost levied for the transfer. Though the final settlement takes 2 days more than the day of the trade, the transfer of the shares happens immediately.
Depository Participant (DP)
The entities that are registered with SEBI are allowed to act as a link between the depositories and investors are known as the depository participants. It includes institutions like banks and brokers.
In other words, it is the agent or the registered stockbroker of a depository (NSDL, CDSL). A person registered under Section 12 of the Securities Exchange Board of India (‘SEBI’) Act, 1992 is defined as a depository participant according to the Depositories Act, 1996.
Stock Brokers with a minimum net worth of Rs. 3 crores are eligible to be registered under NSDL and those with a minimum net worth of Rs. 2 crores are eligible to be registered under CDSL.
The name of the broker registered as the depository participant with SEBI is filled in the box for DP name. Along with the DP name, the ID of the depository participant is also mentioned. This ID is assigned to the DP by the depository that he/she is registered with. It has been observed over the years that typically the first eight digits of the emat account form the DP ID.
Filling out an IPO application becomes easy with the knowledge of the roles and responsibilities of the depository and the depository participants. Further, this also ensures that the investor is not scammed by a fake party acting as a depository participant.