NISM Series II-A · Chapter 11: Depository Services

L1 · Foundation

Depository Services

What a depository is and the two operating in India, dematerialisation and the categories of eligible securities, fungibility and the ISIN, the tripartite agreement with its duties on each party, depository participants and who may become one, designated depository participants for FPIs, and the investor's position as beneficial owner.

18 min read · Worth 6% of the paper · Written from pages 127–132 of the official NISM workbook · Updated 18 September 2026

What this chapter covers

Chapter 11 carries 6 marks out of 100 — 6% of the paper.

Learning Objectives: After studying this chapter, you should know about the role of depository in the public issue of shares: Dematerialisation · Constituents of depository system · Investor Interface with the Depository

What a depository is

A depository is an institution that offers the service of holding the securities of the investors in electronic form. Its services can be compared to that of a bank which holds the depositors' funds and facilitates the conduct of fund related transactions.

Similarly, a depository allows the investors to hold their securities in electronic rather than physical form and provides services related to transaction in securities.

Like a bank, but for shares instead of money.

The law and the institutions: The Depositories Act was passed in 1996 which allow companies and investors to issue, hold and transact in securities through a depository. There are currently two depositories operational in India, National Securities Depository Ltd. (NSDL) & Central Depository Services (India) Ltd. (CDSL).

And the timing is flexible: the securities can be dematerialised at the time of issue or subsequently.

The fourth sample question tests exactly that — it is false that shares can be dematerialised only at the time of a public issue.

For public issues, demat is compulsory: SEBI (Issue of Capital and Disclosure Requirements) Regulations require all issues by public limited companies to be only in dematerialised format.

11.1 Dematerialisation

Companies are required to apply to a depository for dematerialising their securities. The executive committee of the depository will evaluate the eligibility of the securities for admission.

The company applies; the depository's executive committee decides.

Eligible securities

Under the SEBI (Depository and Participants) Regulations the categories of securities eligible for dematerialisation are:

Shares, scrips, stocks, bonds, debentures, debenture stock, Indian Depository Receipts, Electronic Gold Receipts or other marketable security of any incorporated company or other body corporate.

Units of a mutual fund, rights under a collective investment scheme, venture capital funds, certificates of deposit, commercial paper, money market instruments, government securities and unlisted securities.

Note that unlisted securities and government securities are both included.

What happens to the paper

Under the Depository Act, the physical securities that are dematerialised are required to be destroyed by the R&T agent and a credit entry is made in the electronic records of the depository.

Destroyed, not preserved — which is the first sample question.

Fungibility

The dematerialised securities are fungible. This means that once a share certificate is dematerialised, it does not have a distinctive identity in terms of share certificate number or distinctive numbers or folio numbers.

The fifth sample question inverts this — it is false that certificate numbers, distinctive numbers and folio numbers are preserved. Fungibility means precisely that they are not.

So how is a holding described? The investor's ownership of the security is described in terms of number of shares held.

The ISIN

In the depository, the dematerialised securities are identified in terms of the ISIN (International Securities Identification Number) and the number of shares.

The ISIN is a unique 12 digit number allotted to each security in conformity with the ISIN Standard. The first two digits identify the country. For example, for India it is IN. The next 9 alpha-numeric characters are the basic numbers that identify the company and the specific security of the company. The last digit is the check digit.

Position	Content
First two digits	Identify the country — for India it is IN
Next 9 alpha-numeric characters	Identify the company and the specific security of the company
Last digit	The check digit

Twelve in all — 2 + 9 + 1.

Recall from Chapter 10 that the registrar obtains it — liaising with the Depositories on behalf of the Company for obtaining the International Securities Identification Number (ISIN).

11.2 Constituents of the depository system

The services of the depository such as electronic transaction in securities, is provided in conjunction with the constituents of the system namely the Issuing Company/ R&T agent and the depository participants.

The depository, the issuer company and the registrar and transfer agent enter into a tripartite agreement that lays down the role and responsibilities of each party.

Three parties — depository, issuer and R&T agent.

The depository's responsibilities

The depository shall assign a unique identity code to the dematerialised security.

The depository shall give the list of beneficial owners periodically to the issuer/R&T agent.

The depository will provide the details of beneficial owners as on the record date for a corporate action.

The depository shall give information sought by the issuer such as pending dematerialisation requests or information about beneficial owners within a specified period on the payment of a prescribed fee.

Any complaint received from a beneficial owner will be resolved within a period of 21 calendar days.

The 21-day figure comes from the SEBI (Facilitation of Grievance Redressal Mechanism) (Amendment) Regulations, 2023 w.e.f. August 18, 2023 — the same limit Chapter 6 applies to R&T agents.

The issuer / R&T agent's responsibilities

The issuer/R&T agent shall enable continuous electronic connectivity with the depository and will ensure that the hardware, software and other system requirements, specified by the depository, is used for the operations.

The issuer/R&T agent will give appropriate notice to the depository of any fresh issues and other corporate actions such as dividends and bonus.

The issuer/R&T agent will abide with the 15 days and 30 days limit for processing requests for dematerialisation and rematerialisation of securities respectively.

Fifteen days to dematerialise; thirty days to rematerialise.

The issuer/R&T agent will be responsible for the destruction, cancellation and mutilation of certificates received for dematerialisation.

The issuer/R&T agent will be responsible for any liability undertaken by the depository according to the bye-laws laid down.

Any complaint received from a beneficial owner will be resolved within a period of 21 calendar days.

Both sides carry the same 21-day grievance limit.

Depository participants

The investor's interface with the depository happens through an entity called the depository participant (DP). The DPs are appointed by the depository to act as their agents or contact points for the investor.

The investor has to open a demat account through the DP to avail of the services offered by the depository.

The second sample question asks where an investor opens a demat account — with a depository participant.

KYC is the DP's charge: DP will ensure that all KYC (Know Your Client) norms are followed and the KYC's are regularly updated.

And there is a PAN-Aadhaar consequence: where eligible demat account holders fail to link their PAN with Aadhaar within the specified time period, such demat accounts will become KYC non-complaint (i.e. inoperative PAN) and will have restrictions on Debit and Credit transactions.

Both debit and credit transactions are restricted.

Who may become a DP

DPs are appointed by the depository with the approval of SEBI. The SEBI (Depositories and Participants) Regulations, 2018 lays down the eligibility criteria to become a DP. The following categories are eligible to become DPs:

Banks, including foreign banks operating in India · Financial Institutions · Non-banking Finance Companies · Stock brokers · R&T Agents · Custodians · Clearing Corporations

Seven categories — and note that R&T agents are among them.

Net worth: SEBI has prescribed minimum net worth requirements for stock brokers, NBFCs and R&T agents to act as DPs. However, there is no net worth requirements for other categories of persons to act as DPs.

Three categories carry a net worth requirement; the rest do not.

And for stock brokers it governs volume: the extent of business that a stock broker can undertake, in terms of the value of the securities held in dematerialised form for beneficial owners, is a multiple of the net worth of the stock broker.

The depository may go further: the depository can prescribe a higher net worth requirement for the participants.

Designated Depository Participants

SEBI (Foreign Portfolio Investors) Regulations, 2019 states that Designated Depository Participants (DDPs) would grant registration to FPIs on behalf of SEBI and also carry out other allied activities in compliance with the Regulations and other guidelines, circulars, issued thereunder.

A DDP registers FPIs on SEBI's behalf.

Each FPI shall engage a DDP before making investment in Indian securities market. At all times the DDP and the Custodian of securities (Custodian) of the FPI shall be the same entity.

Same entity — DDP and custodian.

On validity of registration: the FPI needs to have a valid registration as long as it is holding securities or derivatives in India. But as per a recent SEBI amendment, the FPI holding securities or derivatives in India, whose certificate of registration is not valid as on the Commencement Date, is allowed to sell such securities or wind up their open position in derivatives in India within 360 days from the Commencement Date — under the SEBI (FPI) (Amendment) Regulations, 2024 w.e.f. June 3, 2024.

And fees: an FPI is required to pay the registration fees for every period of 3 years, before commencement of the said period.

11.3 The investor's interface with the depository

The Depository Act permits investors to hold and transact in securities in electronic form rather than in physical form.

Advantages of holding in demat form

The risks of loss, mutilation and forgery associated with physical securities are eliminated.

The time taken to transact in securities is reduced.

The cost of transaction, including stamp duty is reduced.

Services such as transfer, transmission, nomination, receipt of benefits, automatic credit of shares arising out of Bonus Issue, Split, Consolidation, Mergers and the like are done faster and more efficiently.

Consolidation of holding across folios and across instruments such as equity, debt and government securities becomes possible.

Opening the account

An investor who wants to hold and transact in securities in the dematerialised form has to first open an account with a DP. There are certain formalities such as proof of identity, proof of address, and PAN card that have to be submitted for opening a demat account.

Two ways securities arrive

Securities applied for in a public offer or in any issue including bonus are credited directly to the investor's DP account mentioned in the application form.

Physical securities held by the investor can be submitted for dematerialisation. Once the securities are dematerialised, it gets credited to the investor's account.

Where ownership sits

In the Records of the Issuer: The investor is the beneficial owner. This means that all the corporate benefits of a shareholder, such as dividends, bonus, rights, voting rights and the like are with the investor. The Depository is the registered owner of the securities.

Beneficial owner — the investor. Registered owner — the depository.

The third sample question tests it — the depository is the registered owner.

In the Records of the DP: Separate accounts have to be maintained for each beneficial owner. Transfer to and from the account of the beneficial owner and all other entries in the account must be supported by instructions from the client. The DP should provide a transaction statement at least on a monthly basis to the clients.

At least monthly.

Rights of the beneficial owner

The investor is the beneficial owner of the securities held in electronic form with the depository through the account with the depository participants. This entitles the investors to:

Transact in the securities as they deem fit.

Receive all entitlements such as dividends, bonus, rights, interest and the like.

Exercise voting rights on the shares held in their account.

Avail facilities such as consolidation, transfer, transposition, nomination, pledge and other transactions as deemed fit.

Receive periodic information, as agreed, from the depository participant about the status of their account.

The chapter's sample questions confirm that physical shares that are dematerialised are destroyed by the R&T agent; that an investor opens a demat account with a depository participant; that the depository is the registered owner of shares held in dematerialised form; that it is FALSE that shares can be dematerialised only at the time of a public issue; and that it is FALSE that fungibility means certificate, distinctive and folio numbers are preserved.

Think of it like this

A depository is a bank for your shares

The workbook makes the comparison itself.

Similarly, a depository allows the investors to hold their securities in electronic rather than physical form and provides services related to transaction in securities.

And the parallel runs further. You do not walk into the Reserve Bank to open an account — you go to a branch. In the depository system that branch is the depository participant. The investor's interface with the depository happens through an entity called the depository participant (DP). The DPs are appointed by the depository to act as their agents or contact points for the investor.

The investor has to open a demat account through the DP to avail of the services offered by the depository.

Two depositories exist in India — National Securities Depository Ltd. (NSDL) & Central Depository Services (India) Ltd. (CDSL) — created by the Depositories Act... passed in 1996 which allow companies and investors to issue, hold and transact in securities through a depository.

What the bank analogy gains the investor: the risks of loss, mutilation and forgery associated with physical securities are eliminated; the time taken to transact in securities is reduced; the cost of transaction, including stamp duty is reduced; services such as transfer, transmission, nomination, receipt of benefits, automatic credit of shares arising out of Bonus Issue, Split, Consolidation, Mergers are faster; and consolidation of holding across folios and across instruments such as equity, debt and government securities becomes possible.

One account, every instrument — which no filing cabinet of certificates could ever offer.

Fungibility: your shares stop having serial numbers

A physical share certificate is a specific piece of paper with a certificate number, distinctive numbers for the shares on it, and a folio number for the holder. Demat sweeps all three away.

Think of currency notes deposited in a bank. You do not get back the same notes you paid in — you get the same amount. That is fungibility.

So how is your holding described? The investor's ownership of the security is described in terms of number of shares held.

And identified how? In the depository, the dematerialised securities are identified in terms of the ISIN (International Securities Identification Number) and the number of shares.

The ISIN identifies the security, not your particular units. The ISIN is a unique 12 digit number allotted to each security in conformity with the ISIN Standard. The first two digits identify the country. For example, for India it is IN. The next 9 alpha-numeric characters are the basic numbers that identify the company and the specific security of the company. The last digit is the check digit.

2 + 9 + 1 = 12.

The paper itself is not filed away — it is destroyed. Under the Depository Act, the physical securities that are dematerialised are required to be destroyed by the R&T agent and a credit entry is made in the electronic records of the depository.

Which is why the first sample question answers "destroyed" and the fifth answers "false" — preserving certificate numbers would defeat the very idea of fungibility.

Registered owner and beneficial owner: two names, one shareholding

This split confuses more candidates than any other point in the chapter, and the workbook states both halves plainly.

The depository's name is in the register; the investor gets everything of value.

What "beneficial owner" entitles you to — the workbook lists five: transact in the securities as they deem fit; receive all entitlements such as dividends, bonus, rights, interest and the like; exercise voting rights on the shares held in their account; avail facilities such as consolidation, transfer, transposition, nomination, pledge and other transactions as deemed fit; and receive periodic information, as agreed, from the depository participant about the status of their account.

Nothing of substance is lost by the registered name being the depository's.

The DP keeps your side of the record: separate accounts have to be maintained for each beneficial owner. Transfer to and from the account of the beneficial owner and all other entries in the account must be supported by instructions from the client. The DP should provide a transaction statement at least on a monthly basis.

Instructions from the client — nothing moves without them.

And the depository feeds the issuer the real names when it matters: it shall give the list of beneficial owners periodically to the issuer/R&T agent and will provide the details of beneficial owners as on the record date for a corporate action.

Which is how a dividend reaches you even though the register shows the depository.

The tripartite agreement and its two deadlines

Three parties sign one document.

The depository, the issuer company and the registrar and transfer agent enter into a tripartite agreement that lays down the role and responsibilities of each party.

The depository undertakes to assign a unique identity code to the dematerialised security, give the list of beneficial owners periodically to the issuer/R&T agent, provide the details of beneficial owners as on the record date for a corporate action, and supply information such as pending dematerialisation requests... within a specified period on the payment of a prescribed fee.

The issuer and R&T agent undertake to enable continuous electronic connectivity with the depository, using the hardware, software and other system requirements, specified by the depository; to give appropriate notice to the depository of any fresh issues and other corporate actions such as dividends and bonus; to be responsible for the destruction, cancellation and mutilation of certificates received for dematerialisation; and to answer for any liability undertaken by the depository according to the bye-laws.

Two deadlines to memorise: the issuer/R&T agent will abide with the 15 days and 30 days limit for processing requests for dematerialisation and rematerialisation of securities respectively.

15 to go electronic, 30 to come back to paper — the harder direction takes longer.

And both sides carry the same grievance limit: any complaint received from a beneficial owner will be resolved within a period of 21 calendar days, under the SEBI (Facilitation of Grievance Redressal Mechanism) (Amendment) Regulations, 2023 w.e.f. August 18, 2023.

Chapter 6 sets the same 21 calendar days for an RTA's investor grievances — one limit across the market.

Key terms in this chapter

Advantages of demat holding: Risks of loss, mutilation and forgery are eliminated; transaction time is reduced; cost including stamp duty is reduced; transfer, transmission, nomination, receipt of benefits and automatic credit of bonus, split, consolidation and merger shares are faster; and holdings can be consolidated across folios and across equity, debt and government securities.
Beneficial owner: In the issuer's records the investor is the beneficial owner, holding all corporate benefits such as dividends, bonus, rights and voting rights, while the depository is the registered owner.
Dematerialisation: Converting physical securities into electronic form. Companies apply to a depository, whose executive committee evaluates the eligibility of the securities for admission. Securities may be dematerialised at the time of issue or subsequently, and ICDR requires all issues by public limited companies to be only in dematerialised format.
Depositories Act, 1996: The Act that allows companies and investors to issue, hold and transact in securities through a depository, and under which physical securities that are dematerialised must be destroyed by the R&T agent.
Depository: An institution that offers the service of holding the securities of investors in electronic form, comparable to a bank holding depositors' funds and facilitating fund-related transactions. Two operate in India — NSDL and CDSL.
Depository participant: The investor's interface with the depository — appointed by the depository with SEBI's approval to act as its agent or contact point. The investor opens a demat account through the DP, which ensures KYC norms are followed and regularly updated.
Depository's responsibilities: Assign a unique identity code to the dematerialised security; give the list of beneficial owners periodically to the issuer or R&T agent; provide details of beneficial owners as on the record date for a corporate action; supply information sought by the issuer within a specified period on payment of a prescribed fee; and resolve a beneficial owner's complaint within 21 calendar days.
Designated Depository Participant: Under the SEBI (FPI) Regulations, 2019, a DDP grants registration to FPIs on behalf of SEBI and carries out allied activities. Every FPI must engage a DDP before investing in the Indian securities market, and at all times the DDP and the FPI's custodian must be the same entity.
DP net worth: SEBI prescribes minimum net worth only for stock brokers, NBFCs and R&T agents acting as DPs; there is no requirement for other categories. For a stock broker the value of dematerialised securities held for beneficial owners is a multiple of its net worth, and the depository may prescribe a higher requirement.
DP's account obligations: Separate accounts for each beneficial owner; transfers to and from the account and all other entries supported by instructions from the client; and a transaction statement at least on a monthly basis.
Eligible DP categories: Banks including foreign banks operating in India, financial institutions, non-banking finance companies, stock brokers, R&T agents, custodians and clearing corporations, under the SEBI (Depositories and Participants) Regulations, 2018.
Eligible securities: Shares, scrips, stocks, bonds, debentures, debenture stock, Indian Depository Receipts, Electronic Gold Receipts or other marketable securities of any incorporated company or body corporate; and units of a mutual fund, rights under a collective investment scheme, venture capital funds, certificates of deposit, commercial paper, money market instruments, government securities and unlisted securities.
Fungibility: Once a share certificate is dematerialised it has no distinctive identity in terms of share certificate number, distinctive numbers or folio numbers. Ownership is described only in terms of the number of shares held.
ISIN: International Securities Identification Number — a unique 12 digit number allotted to each security in conformity with the ISIN Standard. The first two digits identify the country (IN for India), the next nine alpha-numeric characters identify the company and the specific security, and the last is the check digit.
Issuer and R&T agent's responsibilities: Enable continuous electronic connectivity with the depository using specified hardware and software; give notice of fresh issues and corporate actions such as dividends and bonus; abide by the 15-day and 30-day limits for dematerialisation and rematerialisation respectively; be responsible for destruction, cancellation and mutilation of certificates; answer for liability undertaken by the depository under the bye-laws; and resolve complaints within 21 calendar days.
PAN-Aadhaar linkage: Where eligible demat account holders fail to link PAN with Aadhaar within the specified time, the account becomes KYC non-compliant (inoperative PAN) and faces restrictions on both debit and credit transactions.
Rights of the beneficial owner: To transact in the securities as they deem fit; receive all entitlements such as dividends, bonus, rights and interest; exercise voting rights; avail facilities such as consolidation, transfer, transposition, nomination and pledge; and receive periodic information from the depository participant about the account.
Tripartite agreement: The agreement between the depository, the issuer company and the registrar and transfer agent laying down the role and responsibilities of each party in the depository system.

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Original explanatory writing based on the official NISM workbook for Series II-A, which is published and copyrighted by NISM. Check figures against the current edition at nism.ac.in.

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