DP stands for Depository Participants; the DP system is analogous to Banking System. However, to understand the DP system, one needs to understand the Banking System initially.
Moreover, a depository is an Organisation wherein the Investors can keep their Financial Instruments, such as equity/shares, mutual funds, bonds, etc., in an E-form.
The main function of a Depository is to provide an Electronic platform by launching a dematerialisation facility, i.e., conversion of physical and financial instruments to e-instruments.
A Bank is wholesome of facilities, which contains offices, and the facilities which branches hold are given to customers by bank branches. A customer puts all his intention towards a bank, but what if a bank stays in one place throughout the span?
It cannot serve the facility to every customer like they are providing it to their nearby ones. That is why a bank appoints an agent, and everything gets done by a branch that gives every facility to a customer. Our Depository System exactly works the same.
For the electronic transaction of shares, bonds, and stocks in different trading sectors such as equities, derivatives, mutual funds, currencies, commodities, and so on, depositories serve as four fundamental pillars for the transaction of securities.
As a reminder, the following are the primary pillars of the depository system:
The Central Depository is a critical component of the depository system since it electronically stores all of an investor's holdings, shares, and securities.
Unlike what many people believe, a stockbroker is not the only one who may participate in a depository. Anyone who meets the requirements of the SEBI may become a depository participant.
The following industries or organisations are eligible to become Depository Participants by signing an agreement with the Securities and Exchange Board of India (SEBI) and according to its standards and policies:
The depository is the leading institution responsible for facilitating everything, which is recognised as Central Depositories Services India Ltd. (CDSL) and National Securities Depository Ltd. (NSDL). Because they are situated in Mumbai, they need to provide more transparent services all around the country.
Additionally, they need help communicating with people living in the corners to curb this problem. Therefore, NSDL appoints an agent known as a Depository Participant (DP), the actual Trading member of NSDL and is also called a Broker. The investors and traders are offered similar services by DP & its Sub-Brokers.
A Depository System is a mechanism by which we transfer our financial instruments electronically from one trader to another. The Depository System is also known as the "Scripless Trading System" because financial instruments are not kept here in physical form.
The depository system includes the following:
Dematerialisation is a process in which physical share certificates are converted electronically, and the same amount of electronic shares are transferred to the Demat account of the beneficiary owners.
The depository is responsible for digitally transferring cash, dividends or bonus shares, etc., into the shareholder's account. This helps speed up the process of transferring securities and reduces the amount of paperwork.
The beneficiary owners can use security as collateral security to borrow money from the market.
A depository provides a collateral account in which pledge securities are kept until borrowed money remains unpaid.
Clearing systems and depositories are linked together, and the actual trade settlement between the buyer and seller only occurs through the depository system.
The shares are traded on the exchange but not by physical transfer—however, the earlier shares circulated from one hand to the other while trading. However, since the Depositories were initiated, the shares are distributed electronically. This whole process of circulation is called Immobilisation.
Shares are traded in electronic form. Therefore the risk associated with a physical share certificate, i.e., loss by theft, forged share certificate and damage to the share certificate, etc., does not exist.
Inform depository along with the relevant documents and the regard charges, i.e., A/C number, Name, etc., are affected in the database of all the companies where an inventor is a registered holder of the securities.
Depository settles investors, accounts with the help of the Internet, and ownership of share charges in a fraction of a second just by changing the book entries, which is less time-consuming.
Dematerialisation has reduced the back-office cost, i.e., less use of paper by the broker.
The right issue or bonus issue immediately credits the account of the investors.
In banking terms, DP stands for Depository Participants, and the DP system is comparable to the Banking System. However, to comprehend the DP system, one must first understand the Banking System.
A depository is an organisation that allows investors to store their financial instruments, such as equity/shares, mutual funds, bonds, and other similar instruments, in electronic form.
A Depository's primary purpose is to offer an electronic financial product platform. Further, providing a dematerialisation facility converts physically held financial items into electronic financial instruments.
Following the public offering of securities by an issuer, the primary responsibility of the Share Registrar is to safeguard the records of the investors who have purchased such securities. In addition, a Transfer Agent is responsible for overseeing and monitoring the transfer of securities throughout the purchasing and selling operations.
Once the transfer of shares between buyer and seller is completed, a clearing and settlement company is formed to handle the transaction. It checks the transactions to see whether they are carried out smoothly and efficiently. It also governs the settlement and delivery of transactions between buyers and sellers, among other things.
National Securities Depository Limited is the first depository of India, which came into existence on December 12, 1995. Furthermore, NSDL was promoted by the Industrial Developed Bank of India (IDBI), Unit Trust of India (UTI), and National Stock Exchange (NSE) and commenced its operation on November 8, 1996. The Managing Director and CEO conduct the day-to-day operations. To assist the MB & CO in their functions, the Board appoints an Executive Committee (EC) of 15 members.
Central Depository Security Limited came into existence in February 1999. CDSL is promoted by Bombay Stock Exchange Limited (BSE), conjoined with leading banks such as State Banks of India, Bank of Baroda, HDFC Bank, Standard Chartered Bank, Union Bank of India, and Centurion Bank.
It means a person whose Name is recorded with a Depository. A beneficial owner is the real owner of the securities who has accommodated his securities with the depository as a book entry. DPS is an intermediary between the investors who are beneficiary owners and other constituents of the depository.
However, Investors can open Demat accounts only through DP. All the banks, financial institutions, and stockbrokers can act as Depository Participants after getting the certificate of registration from SEBI.
These are several eligible investors who can become a DP
Anyone who wants to work as a DP has to register with:-
For those whose net worth is of Rs.50 lakh minimum for becoming a DP:-
One cannot directly buy or sell shares on the stock exchange. Furthermore, to do this, one needs to open a Trading and Demat account with a Stock Broker and through a trading account, one can buy or sell the shares. While providing these facilities for trading, stockbrokers charge some fees which is known as the Brokerage charge, rather they confer some other charges.
Excited to know the process of becoming a Stock Broker ??
To tag yourself as a Stockbroker one needs to get registered under the guidance of SEBI. Once you are registered there, SEBI checks whether you have ideal resources for the Stock business and later a confirmation is sent to you through the Certificate of Registration.
Engaged in the business of loans and advances, acquisition of shares, stock, bonds, NBFC offers Banking services to the people who do not hold a Bank License, registered under the Companies Act 1956 of India. However, it does not cover any institution where the principal business includes agriculture, industrial activity, or the sale, purchase, or construction of the immovable property. For example; DHFL, LIC, TATA, IIFL, Aditya Birla, etc.
When we buy a share from the Company through an IPO from the Primary Market or the Share Market NSE, BSE a Secondary Market then the shares are normally allotted or issued in the form of E-shares. They are further preserved with the Depository Institution on your name in a separate account recognized as a Demat account.
A DP can be compared with a bank where you keep all your money, a Demat account can be compared with your savings account with the bank. The only difference is you get to handle shares instead of money in your Demat account. You can buy and sell it as per your preferences through a Share Broker.
DP or Depository Participant is analogous to the Banking System. To understand the DP system, one needs to initially understand the Banking System.
For Instance, normal Banks tend to cover all the areas by introducing their branches in the places. This helps people to get more eloquent services. But what if the Banks stop having their Branch Banks in your city or nearby your living place and are present only at one property ?? Unfortunately, the customers would be out of service most of the time and would not be as responsive if they were having their banks nearby to them.
The Depository System exactly works the same. The ideal institution that is responsible for facilitating everything is the Depository which is recognized as Central Depositories Services India Ltd.(CDSL) and National Securities Depository Ltd. (NSDL). Since they are based in Mumbai, they cannot provide many transparent services all around the country. Furthermore, it would be inconvenient to communicate with people living in the corners or amidst.
Hence to curb this problem NSDL has appointed an agent who is known as Depository Participant (DP) and is the actual Trading member of NSDL called Broker and they actually provide service to their customer and the same services are provided by a Sub-Broker. Though they work the same for a customer like a broker since there is a slight difference between them where a Broker buys and sells securities related to stocks for clients through exchanges while DP holds stocks of investments in Demat form.
Bifurcated with the two categories, the below both works under the same Organisation.
A little more About it…..
An agent handles all the activities in terms of an Issue. And the Registered Owner keeps a watch on the books of accounts lying in a company. Because all the shares are now beheld to a company that has been a custodian with it and that company issues a jumbo certificate to the depository.
The process of converting the materialized shares into a Dematerialised state is quite confidential. A Depository is introduced for even services in order to maintain the records accurately without any misplacement.
The IPO’s of companies are initially issued in the market. Investors later tend to purchase them if they expect the company would be giving them good returns on future dates. The details of the whole process are further maintained by the Registrar Agent. The Registrar Agent is the key to the maintenance from start to end during the IPO process.
Share Transfer Agent is an agent who on behalf of an issuer (company) maintains records of holders of securities issued by the company and deals with the process of transfer and redemption of securities.
A certain amount will be asked from you once you are done opening a Demat account with an Indian-registered stockbroker. You will be further obliged to pay this fee for any transaction that you make from your Demat account.
Note: If you open your Demat account with Lakshmishree, you will be deemed to not pay the above specified fees.
The stockbroker who acts as a connection between an investor and a depository is known as a Depository Participant. He represents the depository while dealing with a customer or a trader on his behalf.
The electronic transmission of financial products from one trader to another is made possible via Depository System. Because financial products aren't held here in physical form, the Depository System is also known as the "Scripless Trading System."
There are indeed certain stockbrokers in India who operate under the supervision of depository participants and adhere to SEBI regulations.
They have an arrangement with either the NSDL or the CDSL, or with both; to keep the investors' assets secure and in an electronic format.
To protect the investor's securities and ensure that they remain in the dematerialized form, it is necessary to maintain a depository participant account.
Furthermore, it is necessary to initiate a Demat account with a depository participant, which may either be CDSL or NSDL.
Since shares are purchased and sold via a Demat account, a Demat account is needed.
As per SEBI regulations, it is compulsory to have access a Demat account to trade electronically.
Note: If you opt to open the Demat Account with Lakshmishree through digital mode; you get Zero Annual Maintenance throughout your lifetime.
Based on the above facts, the registration of the Depository Participant is a must with SEBI. NSDL and CDSL, two Indian Depositories, will be used to electronically control all of your inventory and supplies.
Several equities listed on the NSE and BSE in India may now be traded with ease and speed. Equities, futures, options, commodities, currencies, and other financial instruments traded on numerous exchanges are all protected by a depository.
On the other hand, it is important to choose a suitable depository participant or stockbroker on various grounds. Including enough stock data on the portal published by NSE and BSE, which is technology-driven, low-cost for creating accounts, and effective service support.
How many depositories are registered with SEBI?
There are two depositories that are registered with SEBI. One is Central Depository Services Limited (CDSL) and the other is National Securities Depository Limited (NSDL).
How many Depository Participants are registered with CDSL and NSDL?
As per the data by SEBI, there are 636 registered Depository Participants in CDSL while NSDL has 289 registered Depository Participants. This data is as of November 24, 2022.
What is the main role of a DP?
The Depository Participant acts as a mediator between the traders and the depositories. Availing a service provided by a depository, the trader must have an account with a DP.
Can you open a Demat account directly with the depository?
No, a Demat account can only be opened with a Depository Participant (DP). A DP has an account with the Depository.
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