Multi-depository system
The Depositories Act, 1996 arrangement under which more than one depository can operate in India, so that no single depository holds a monopoly over the market — currently NSDL and CDSL.
In plain language
India did not build one depository and stop there. The Depositories Act, 1996 allows for several depositories. No single one gets the whole market to itself.
This is called a multi-depository system. It is one of the key features of India's depository system, alongside dematerialisation and fungibility. In practice, two depositories exist under the Act: NSDL and CDSL. Both compete for the same DPs, issuers and investors.
How it works
From Chapter 2, section 2.1.1: "The Depositories Act, 1996 provides for a multi-depository system. There can be various entities providing depository services." Chapter 2, section 2.3.1, then names the two depositories the Act has actually produced: National Securities Depository Limited (NSDL), incorporated 12 December 1995, and Central Depository Services (India) Limited (CDSL), registered in February 1999.
The practical effect of having two depositories, rather than one, runs through the whole workbook: NSDL and CDSL frequently prescribe different net worth thresholds, different forms, different terminology (hypothecation is an NSDL word; CDSL has no equivalent), and different automation (Auto Delivery-out is NSDL-only). An investor's securities sit with one depository at a time; moving them to the other needs an inter-depository transfer, not a simple instruction.
A worked example
Mr Iyer has a demat account with a DP that operates under NSDL. His brother-in-law's DP operates under CDSL. Both accounts hold ordinary equity shares, but:
| Feature | Mr Iyer (NSDL) | Brother-in-law (CDSL) |
|---|---|---|
| Term for a lender-favourable charge | Pledge or hypothecation | Pledge only |
| Stockbroker-DP net worth needed | Rs 3 crore | Rs 5 crore |
| Auto Delivery-out for CMs | Available | Not available |
If Mr Iyer wants to move his shares into an account at his brother-in-law's CDSL DP, a simple debit instruction will not do it — the shares have to cross depositories through an inter-depository transfer, precisely because the multi-depository system means NSDL and CDSL keep separate books.
Why NISM asks about it
Chapter 2, section 2.1.1, lists the multi-depository system as one of six key features of India's depository system. Expect it tested as a straight definitional recall, and as the reason behind the many "NSDL says X, CDSL says Y" contrasts that recur through every later chapter.
Common exam traps
- The Depositories Act permits multiple depositories; it does not mandate exactly two. NSDL and CDSL are simply the two that exist today.
- NSDL was incorporated first (December 1995, commenced operations November 1996); CDSL followed (registered February 1999, commenced operations March 1999).
- Do not confuse this with fungibility or dematerialisation — all three are listed together as separate key features, and a question naming one is not asking about the others.
Check yourself
1.Why does the Depositories Act, 1996 enable the setting up of multiple depositories in the country?
- a)So that each stock exchange can own exactly one depository
- b)So that equity shares and debt securities are held in separate depositories
- c)So that SEBI can assign each state to a different depository
- d)To ensure that there is competition in the depository services and more than one depository is in operation
Show the answer
Answer: (d) To ensure that there is competition in the depository services and more than one depository is in operation
Section 2.3.1 states: "The Depositories Act enables the setting up of multiple depositories in the country. This was to ensure that there is competition in the depository services and more than one depository is in operation." Section 2.1.1 lists it as a key feature: "The Depositories Act, 1996 provides for a multi-depository system. There can be various entities providing depository services."
The result is the two depositories, NSDL and CDSL. The Act "facilitated the establishment of the two depositories in India".
Why the other options are wrong:
- "One depository per stock exchange" — the Act has no such rule. The stated purpose is competition, not tying depositories to exchanges.
- "Separate depositories for equity and debt" — both depositories hold every eligible class of security. Nothing splits them by instrument.
- "Each state assigned to a depository" — invented. An investor can choose any DP of either depository.
Where this is taught
Free preparation for NISM Series VIRelated 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.
- FungibilityIn the depository, securities of the same class carry no distinctive or certificate numbers — every unit is identical to every other and interchangeable, so title is counted in numbers, not in serial numbers.
- CDSLCentral Depository Services (India) Limited — one of India's two depositories, promoted by leading Indian banks and the Bombay Stock Exchange, registered in February 1999 and operational from 22 March 1999.
- Inter-depository transferA transfer of securities from an account in one depository (NSDL or CDSL) to an account in the other, possible because SEBI regulations require the two depositories to be inter-connected.
- NSDLNational Securities Depository Limited, India's first depository, incorporated on 12 December 1995 by IDBI, UTI and the NSE, and one of the two depositories the Depositories Act, 1996 has produced.
- Odd lotA holding of physical securities smaller than the market's standard tradable lot — a problem the workbook says dematerialisation eliminated by reducing the tradable lot to one unit.
- Multilingual CASCDSL's Consolidated Account Statement made available in multiple Indian languages, aimed at wider accessibility for retail investors in rural and semi-urban areas.