Depository Participants (DPs)

A Depository Participant (DP) is an authorised intermediary who acts as a link between investors and the central securities depository system. In India, the depository system operates through two central depositories — the National Securities Depository Limited (NSDL) and the Central Depository Services (India) Limited (CDSL). A DP facilitates the holding and transfer of securities in electronic or dematerialised form on behalf of investors, ensuring smooth and secure trading, settlement, and custody of financial assets.

Background and Evolution

The concept of depository participants emerged in India following the establishment of the Depositories Act, 1996, which aimed to modernise the securities market by introducing the dematerialisation (demat) of shares and eliminating the inefficiencies of the paper-based system.
Before the advent of depositories, securities transactions involved physical share certificates, which were prone to loss, theft, forgery, and delays in settlement. To overcome these challenges, India adopted a demat-based trading system where ownership of securities could be recorded and transferred electronically.
In this system, the depository holds securities in electronic form, while the DP serves as the point of contact between the investor and the depository. Every investor must open a Demat Account with a DP to hold and transact in securities.

Structure and Role of Depository Participants

The relationship among key entities in the depository system is as follows:

• Depository: The central organisation (NSDL or CDSL) that holds securities in electronic form.
• Depository Participant (DP): The agent or intermediary through whom investors access depository services.
• Investor / Beneficial Owner: The individual or institution holding securities in demat form.
• Issuer Company: The company whose securities are issued and held in electronic format.

The DP thus acts as a custodian and service provider for investors, ensuring their securities are safely recorded, transferred, and managed.

Eligibility and Registration

To operate as a Depository Participant, an entity must obtain registration from the Securities and Exchange Board of India (SEBI) and enter into an agreement with a depository (NSDL or CDSL). The eligibility criteria generally include:

• Institutional Status: Must be a registered financial intermediary such as a bank, stockbroker, custodian, non-banking financial company (NBFC), or registrar to an issue.
• Net Worth Requirement: Minimum net worth prescribed by SEBI (varies depending on category).
• Infrastructure Capability: Adequate systems and personnel to maintain investor records and ensure data security.
• Regulatory Compliance: Adherence to SEBI regulations, Know Your Customer (KYC) norms, and anti-money laundering (AML) guidelines.

Examples of prominent Depository Participants in India include HDFC Bank, ICICI Bank, Kotak Securities, Zerodha Broking Ltd, and Sharekhan Ltd.

Functions of Depository Participants

Depository Participants perform a wide range of functions related to the maintenance and management of securities in electronic form. Key functions include:

• Account Opening: Facilitating the opening of Demat Accounts for investors.
• Dematerialisation of Securities: Converting physical share certificates into electronic form.
• Rematerialisation: Converting electronic holdings back into physical form if requested by investors.
• Settlement of Trades: Ensuring seamless credit or debit of securities following stock market transactions.
• Transfer and Transmission: Facilitating transfer of securities between accounts and transmission to legal heirs in case of death of the account holder.
• Pledging and Hypothecation: Enabling investors to pledge securities as collateral for loans or other obligations.
• Corporate Action Processing: Crediting of dividends, bonus shares, rights issues, and stock splits directly into the investor’s Demat Account.
• Statement and Record Keeping: Providing periodic statements and transaction reports to investors.
• Nomination Facility: Allowing nomination of beneficiaries for securities held in Demat Accounts.

Advantages of Depository Participants

The introduction of DPs and the depository system has transformed the Indian capital market by improving efficiency, transparency, and investor protection.

• Elimination of Physical Risks: No loss, theft, or forgery of certificates.
• Faster Settlement: Automatic transfer of securities in T+1 or T+2 settlement cycles.
• Cost Efficiency: Reduced paperwork and stamp duty on transfer of securities.
• Improved Liquidity: Quick transfer and trading of securities enhances market liquidity.
• Transparency and Accuracy: Electronic records reduce errors and disputes over ownership.
• Easy Access: Investors can access their accounts online or through mobile platforms at any time.
• Corporate Benefits: Automatic credit of dividends and bonus shares simplifies corporate action processing.

Types of Demat Accounts Operated by DPs

Depository Participants offer different types of accounts based on the nature of the investor and purpose of holding:

• Regular Demat Account: For Indian residents investing in shares and securities.
• Repatriable Demat Account: For Non-Resident Indians (NRIs) investing through the Non-Resident External (NRE) account, allowing transfer of funds abroad.
• Non-Repatriable Demat Account: For NRIs using Non-Resident Ordinary (NRO) accounts, where funds are retained in India.
• Corporate Demat Account: For institutional or corporate investors managing large holdings.

Regulatory Framework and Oversight

Depository Participants operate under a robust regulatory framework established by:

• Depositories Act, 1996
• SEBI (Depositories and Participants) Regulations, 2018
• Bye-laws of NSDL and CDSL

These regulations specify operational standards, audit requirements, investor grievance mechanisms, and penalties for non-compliance. SEBI monitors DPs to ensure they maintain transparency, security, and fairness in dealings with investors.

Rights and Obligations of Depository Participants

Rights:

• To collect service charges and maintenance fees from clients.
• To freeze or suspend accounts under SEBI directions in cases of regulatory breaches.
• To act as an agent for multiple depositories, subject to approval.

Obligations:

• Maintain accurate and confidential records of client transactions.
• Comply with all regulatory guidelines, including KYC and AML procedures.
• Provide timely account statements and transaction details to investors.
• Ensure smooth functioning of dematerialisation and rematerialisation requests.
• Address investor grievances promptly.

Challenges Faced by Depository Participants

Despite technological advancements, DPs face certain challenges in day-to-day operations:

• Cybersecurity Threats: Growing digitalisation increases vulnerability to data breaches and hacking attempts.
• Operational Costs: Maintaining advanced IT infrastructure and regulatory compliance involves high costs.
• Investor Awareness: Many retail investors still lack awareness of demat procedures and compliance requirements.
• Regulatory Burden: Frequent policy changes demand continuous adaptation and staff training.

Significance in the Capital Market

Depository Participants play a pivotal role in ensuring the smooth functioning of the modern securities market. They bridge the gap between investors and depositories, enabling a safe, paperless, and efficient trading environment. Their operations have made possible the complete dematerialisation of securities, thereby improving the transparency, speed, and reliability of financial transactions.