A depository is like a bank wherein the deposits are securities (viz. shares, debentures, bonds, government securities, units etc.) in electronic form. A Depository can be compared with a bank, which holds the funds for depositors. There are many similarities in Banks and Depositories.
- While the Bank holds funds in an account, depositories hold securities in an account.
- While Bank transfers funds between accounts on the instruction of the account holder, Depository transfers securities between accounts on the instruction of the account holder.
- While the bank facilitates transfers without having to handle money, Depository facilitates transfers of ownership without having to handle securities. Banks keep safe money, depositories keep safe securities.
In India, we have two depositories viz. National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL).
After depository, we have another entity called Depository Participant. Depository provides its services to investors through its agents called depository participants (DPs). These agents are appointed by the depository with the approval of SEBI. According to SEBI regulations, amongst others, three categories of entities, i.e. Banks, Financial Institutions and SEBI registered trading members can become DPs. Please note that accounts are always no frills at Depositories. This means an investor can have an account with depository without any balance.