Depositories are institutions that holds your shares/securities in electronic or dematerialized(DEMAT) form. Broadly speaking, a depository acts as a custodian. It may store any form of securities. One can store shares, ETFs, bonds, debentures, certificates of deposits, Government Securities(GSecs), and much more. There are two central depositories in India:
- National Securities Depository Limited(NSDL)
- Central Depository Services India Limited(CDSL)
Before the Indian stock market was completely digitized in the late 1990s, companies issued share certificates to shareholders. These share certificates provided assurance and were safe in the hands of their respective owners. After electronic or screen-based trading was introduced in India, there was a question. Who would keep a record of all the shares? Who would know what was bought or sold to whom? This is when the National Stock Exchange came up with NSDL or National Securities Depository Limited in 1996 through the Depositories Act(1996). ‘
In February 1999, the Central Depository Services India Limited or CDSL was established. It is backed by the Bombay Stock Exchange(BSE). CDSL is a listed stock on the National Stock Exchange and you can learn more about it here.
How different is NSDL from CDSL? There isn’t much difference really over there. NSDL is promoted by the National Stock Exchange, IDBI Bank Ltd., and Unit trust of India. CDSL on the other hand is backed by the Bombay Stock Exchange.
How Do Depositories Work?
When you place an order with a broker to buy shares, the broker processes the order and prompts the depositary(NSDL/CDSL) to transfer the specified amount of shares to your Demat account. If you have a trading account then you would have noticed that you receive a ‘monthly statement’ from NSDL and CDSL which shows all the trades and transactions you have made in a particular month.
The depositary maintains a record of all the demat accounts registered under it and the transactions that took place under them. The broker over here is known as ‘Depository Participant’ or DP. In India, Every depository participant should be registered with at least one of the two depositories. Brokers like Zerodha and Upstox are registered with CDSL whereas Sharekhan and Kotak Securities are registered with both NSDL and CDSL. Each broker has a unique DP number assigned by the depository they are connected to.
NSDL and CDSL aren’t materially different. They serve the same purpose, which is to ensure that electronic transactions of securities take place safely. Virtually there is no incentive to choose one over the other. They act as a custodian of shares and ensure that transactions across the markets run smoothly and efficiently.
It is not shares of Reliance and other listed companies which are stored in your Demat account. You can store shares of any listed, unlisted, private or public limited company. Even the shares of an unlisted company like Flipkart can be stored in your Demat account and is done by their promoters.
You can also store other securities including bonds, units of mutual funds, Government securities, Commercial papers, Certificate of deposits etc. Thus, an investor can hold almost all his securities in one account with a depository like CDSL.