Updated 31.12.2023
A Depository refers to a place or entity that holds financial securities in a dematerialized form. In the Indian capital market, this term has a lot of relevance where they hold securities in dematerialized (Demat*) form.
In demat form, all physical share certificates were converted into electronic form and the same was deposited into the Shareholders Demat Account.
As per the latest communication from the Depositories, effective Saturday, December 30, 2023, all Off-Market transactions will be considered for execution only if the demat account of the Buyer (transferee account) is added as a beneficiary under the Demat account of the Seller (transferor account). The Depositories will not allow the execution of any Off-Market transfers without the buyer account being added as a beneficiary in the seller’s account.
There are two central depositories in India viz. CDSL (Central Depository Service India Ltd.) & NSDL (National Securities Depositories Ltd.). The depository participants maintain accounts with the depository who in turn maintains sub-accounts of their customers. Depositories [Depository participants,] acting as custodians of securities. The depositories transfer securities from sellers to buyers on receipt of instructions from stock exchanges with documentation.
Depository accounts hold securities in the same way that bank accounts hold funds. When a trade occurs, a depository transfers the ownership of securities from the account of one investor to another. It helps in reducing the paperwork associated with the finalization of a trade and accelerates the process of transfer of securities.
The introduction of the depository system eliminated the problem of bad delivery, objections, needless delay in share transfer, and duplication of share certificates which existed in earlier systems. Moreover, the depository system functions in a paperless environment wherein immediate transfer of shares is facilitated.
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