Depository
Also written Securities depository · Depository and depository participant · Depositories
An institution that holds investors' securities in electronic form and provides the services needed to transact in them — the securities equivalent of a bank holding money rather than cash.
In plain language
A depository is an institution that holds investors' securities in electronic form. The workbook compares it to a bank. A bank holds depositors' money and handles deals in that money. A depository does the same job for securities. Investors hold them electronically instead of on paper. The depository also gives services for dealing in them.
The Depositories Act, 1996 made this possible. It let companies and investors issue, hold and deal in securities through a depository. Two depositories operate in India. They are National Securities Depository Ltd (NSDL) and Central Depository Services (I) Ltd (CDSL).
For an adviser, the point is practical, not legal. A client's holdings are entries in an electronic record, not paper in a locker. So a transfer is instant. A holding cannot be lost, torn or forged. And the adviser plans from one statement instead of a folder of certificates.
How it works
The investor does not open an account with the depository. The account is opened and maintained by a depository participant — brokers and banks offer DP services — and DPs act as agents of the depositories. Separately, the issuer enters into an agreement with the depository to dematerialise its securities, and companies must apply to a depository to do so.
What is eligible. Under the SEBI (Depositories and Participants) Regulations, 1996: shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of an 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.
What is compulsory. For a security to be eligible to trade in the secondary market, it must be held in electronic or dematerialised form. SEBI regulations require all public issues in excess of Rs 10 crore to be issued only in dematerialised form. Mutual fund investors, by contrast, may ask for demat issuance or convert existing holdings, but are free to hold in the alternative — which is not a physical certificate at all but a Statement of Account.
Fungibility. Physical securities that are dematerialised are destroyed by the R&T agent and a credit entry made in the depository's electronic records. Dematerialised securities are fungible: a demat share has no distinctive identity — no certificate number, no distinctive numbers, no folio number. Ownership is described only as a number of shares held, identified by ISIN.
A worked example
Mrs Iyer, 62, comes to an adviser holding:
| Holding | Form | Market value |
|---|---|---|
| 2,000 shares of a listed FMCG company | physical certificates | Rs 9,60,000 |
| Units in four mutual fund schemes | statement of account | Rs 18,00,000 |
| 5.77% GS 2030 | demat | Rs 5,00,000 |
| Total | Rs 32,60,000 |
She wants to sell the shares and cannot. A security has to be in dematerialised form to be eligible to trade in the secondary market. So she opens a demat account with a DP — not with NSDL or CDSL directly — and submits the certificates. The R&T agent destroys them, and 2,000 shares appear as an electronic credit against a single ISIN.
The fungibility rule then bites in a way clients do not expect. She had bought 1,200 shares in 2009 and 800 shares in 2017, under two different certificate numbers. After demat those numbers are gone: she holds 2,000 shares of one ISIN, full stop. If she now sells 800 shares, which 800 she sold — and therefore what they cost her — is a matter for her own purchase records, because the depository no longer distinguishes them. An adviser who does not capture that history at onboarding cannot reconstruct it later.
Her mutual fund units, meanwhile, need not move at all. She may convert them to demat if she wants everything on one statement, but she is free to leave them as they are.
Why NISM asks about it
Chapter 5 (Introduction to Indian Financial Markets) introduces depositories among the institutions of the securities market, alongside exchanges, clearing corporations and depository participants. Chapter 17 (Operational Aspects of Investment Management), section 17.3, covers dematerialisation and rematerialisation in detail. Recurring questions: how many depositories operate in India and their names, which Act governs them, which securities are eligible for dematerialisation, the Rs 10 crore public-issue threshold, and what fungibility means in practice.
Common exam traps
- The depository is not the depository participant. The investor's account is opened and maintained by the DP, which acts as an agent of the depository. The investor has no direct account with NSDL or CDSL.
- The depository is not the exchange and not the clearing corporation. The exchange matches the trade, the clearing corporation confirms, settles and delivers it, the depository holds the security. Three institutions, three jobs.
- Demat is not compulsory for everything. The compulsion attaches to trading in the secondary market and to public issues above Rs 10 crore. Mutual fund units may be held in statement-of-account form.
- "Physical" mutual fund units are not certificates. There is no unit certificate of the old kind — the alternative to demat is a Statement of Account.
- Fungibility is a real loss of information. After demat there is no certificate number or distinctive number, so lot-wise cost records become the investor's own responsibility.
- RBI, not NSDL or CDSL, is the depository of Government securities under the legal provisions — even though government securities are listed among the securities eligible for dematerialisation.
Where this is taught
- Series SEBI-ICE · Chapter 5: Investment in Securities Marketintroduced here
- Series II-A · Chapter 11: Depository Servicesintroduced here
- Series VI · Chapter 2: Introduction to Depositoryintroduced here
- Series V-A · Chapter 3: Legal Structure of Mutual Funds in Indiaintroduced here
- Series X-A · Chapter 5: Introduction to Indian Financial Marketsintroduced here
- Series XXI-A · Chapter 2: Introduction to Securities Marketsintroduced here
- Series X-A · Chapter 17: Operational Aspects of Investment Management
Related terms
- DematerialisationConverting securities held as physical certificates into book-entry holdings: the certificates are defaced, mutilated and surrendered to the issuer, and an equivalent quantity is credited to the holder's demat account.
- NominationThe account holder's written direction naming who receives the securities on death — up to ten nominees for a demat account, with percentages that must total 100, mandatory for single holdings.
- Depository participantThe SEBI-registered agent through whom an investor reaches a depository — NSDL and CDSL cannot open investor accounts themselves, so every demat account is opened and operated through a DP.
- ISINThe 12-character code (ISO 6166) that identifies one specific security in the depository system — country prefix, nine-character basic number and a check digit, as in INE475C01012.
- Certificate of registrationThe SEBI registration without which a depository cannot deal in securities, no entity may act as a DP, and no FPI may invest. It is valid unless SEBI suspends or cancels it.
- Beneficial ownerThe investor who owns dematerialised securities for every practical purpose — the depository is the registered owner on the company's books, but the dividends, bonus, rights and votes are the investor's.
- Distinctive Number databaseThe depositories' central record, under SEBI's June 2015 circular, of the distinctive numbers of listed companies' equity shares — physical and demat — to reconcile issued, listed and demat capital.
- Financial systemThe whole set of institutional arrangements that move funds from surplus units (households) to deficit units (companies and governments) — made up of financial markets, instruments and intermediaries.
- Invoking a lienThe lender selling or redeeming the securities marked under its lien and taking the proceeds — the securities are never transferred into the lender's own name.
- Financial marketThe market in which financial assets such as equities, bonds, currencies and derivatives are created or transferred — a mechanism for dealing in financial securities and commodities at low cost.
- Account AggregatorAn RBI-regulated NBFC that retrieves a customer's financial information from Financial Information Providers — including AMCs through their RTAs — and passes it on only with the customer's explicit electronic consent.
- PINS accountThe designated bank account through which an NRI's or PIO's purchases and sales of listed Indian securities must be routed, and through which the bank reports those investments to the RBI.
- Vault ManagerThe SEBI-registered intermediary that stores and safekeeps gold deposited for trading in Electronic Gold Receipts, and coordinates their creation, transfer and extinguishment with the depository.
- Stock exchangeA body of individuals, or a body incorporated under the Companies Act, that assists, regulates or controls the business of buying, selling or dealing in securities.
- Composition of offencesClosing a criminal case under the Depositories Act by agreement instead of a trial — available for any offence except one punishable with imprisonment only, or with imprisonment and also fine.
- Market Infrastructure InstitutionsThe institutions that form the plumbing of the securities market — stock exchanges, depositories and clearing corporations, and under SEBI's cyber framework also KRAs and QRTAs.
- CustodianThe SEBI-registered entity that holds a fund's securities in accounts of its own and settles its trades, so the assets sit somewhere other than with the manager who decides what to buy.
- Custodial agreementThe legally binding contract between an AIF and its custodian, fixing the scope of custody services, the parties' mutual obligations and the commercial terms.
- Dematerialised unitsAIF unit capital held in electronic form with a depository: every scheme must now issue units in demat only, each carrying its own ISIN against which the NAV is uploaded.
- Securities marketThe market in which securities are issued, purchased by investors and subsequently transferred among investors — the regulated channel that moves household savings to businesses.
- Bad deliverySecurities that are delivered for settlement but rejected by the depository for technical reasons such as incorrect signatures, names or details — treated like a short delivery and closed out through auction.
- Innovation SandboxA SEBI framework letting FinTech firms, start-ups and others not regulated by SEBI test their solutions offline, in isolation from the live market, overseen by exchanges, depositories and qualified RTAs.