Have you ever wondered, when you place an order to buy or sell a security in the market, who are the parties that are involved to execute the trade? And more importantly, what role do they play in facilitating the trade? In this article, we will look at one of the important parties called Depository Participant and also the role of Depository Participant in India.
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What are Depositories?
The first thing to know is what are depositories? The term depository in simple terms can mean a facility in which something can be deposited or stored. A depository can be an organization, institution or even a bank. The purpose of using these institutions is to hold your assets securely.
In the financial markets, the depositories assist in trading securities and hold them on behalf of investors. A depository gives security and liquidity in the market. The cash that they hold is used for lending purposes by them.
However, upon request, the depositories are liable to return the amount to the investors, a mechanism that is similar to the banks.
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Who are the Depositories in India?
The two depositories in India are NSDL which is short for ‘National Securities Depository Limited’ and CDSL which stands for ‘Central Depository Securities’ Limited. They are national institutions regulated by the Securities and Exchange Board of India (SEBI).
There are two exchanges in the country, NSE and BSE. The NSDL works for the NSE and CSDL works for the BSE. The depositories are responsible for exchanging and settlement of securities.
What are Depository Participants?
Since there are a lot of investors and only two depositories, they cannot contact these institutions directly. A need for an intermediary was felt and the concept of depository participants was formed. The role of a depository participant is to act as an intermediary between the depository and the investor.
Investors open an account with the depository through a registered Depository Participant. A Depository Participant (DP) is the agent or the registered stockbroker of a depository. While the investor-level accounts in securities are held and maintained by the DP, the company level accounts of securities issued are held and maintained by the depository.
A legal agreement between the DP and the depository regulates their relationship. The Depositories Act, 1996 defines a DP as a person registered under Section 12 of the Securities Exchange Board of India (‘SEBI’) Act, 1992. Section 12 of the SEBI Act states that no DP shall buy, sell or deal in securities unless registered with SEBI.
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Services provided by Depository Participants
The Depository Participants also provide various other services to investors apart from holding securities on behalf of them. They include:
- Opening a Demat account.
- Dematerialization of securities, i.e. converting physical securities into electronic form.
- Rematerialization of securities, i.e. converting electronic securities balances into physical form.
- Keeping the record of securities in the electronic form held by the Stock Investor.
- Trade Settlement by delivery or receipt of securities.
- Off-market transactions and its settlement between BOs.
- Facilitating loans against shares and pledging of dematerialized securities.
- Helping an investor that they can open one account either with the same depository or with the different depository. Additionally, the investor is required to strictly company with the SEBI Guidelines.
- Freezing of the Demat account.
What are the eligibility requirements to become a Depository Participant?
- The minimum net worth requirement for a stock broker to become CDSL DP is 2 crores (INR).
- A broker having net worth of not less than 1 crore (INR) may be admitted as under category ‘Limited Depository Participant’ subject to condition that they will increase the networth to at least 2 crores (INR). They are permitted to open only upto 5000 accounts.
Regulations relating to Depository participants in India
Anyone who wants to register and work as a Depository Participant in India has to registers with three laws that are:
- A Depository under the Depository Act, 1996.
- SEBI under SEBI Act, 1992 (section-12) (Sub Section-1A)
- It has to follow SEBI (Depositories and Participants ) regulations, 1996
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Who can become a Depository Participant?
The following parties can become a registered depository participant in India if they meet the eligibility criteria:
- Public Financial Institution
- Banks including Foreign Banks
Banks that are functioning as Depository participants in India
| Depository Participants (Banks and other Financial Institutions) | MCap (Rs. in Cr.) |
|---|---|
| Axis Bank Ltd. | 224,108.93 Cr |
| Edelweiss | 6,939.09 Cr |
| HDFC Bank Ltd | 859,293.61 Cr |
| ICICI Bank | 550,866.65 Cr |
| SBI | 438,466.16 Cr |
| Yes Bank Limited | 34,901.48 Cr |
- State Financial Corporations
- An Institution engaged in providing financial services promoted by above mentioned jointly and severally.
- Custodian of Securities
- Clearing Corporation or Clearing House of a Stock Exchange
- Stock Broker who is granted Certificate of Registration under the SEBI Act, 1992.
The list of clearing corporations includes Indian Clearing Corporation Ltd., Metropolitan Clearing Corporation of India Ltd., Multi Commodity Exchange Clearing Corporation Ltd., National Commodity Clearing Ltd. and NSE Clearing Limited.
Some of the well-known depository participants and their Market Share
| Depository Participants (Brokers) | Active Clients | Market Share (%) |
|---|---|---|
| Zerodha | 5,484,447 | 19.06% |
| Upstox | 4,261,522 | 10.9% |
| Angel Broking | 2,861,515 | 8.28% |
| ICICIdirect | 2,605,215 | 8.36 |
| HDFC Securities | 1,037,145 | 5.07 |
| 5paisa | 1,336,132 | 4.61 |
| Kotak Securities | 1,065,692 | 3.93 |
| Motilal Oswal | 767,316 | 2.99 |
| IIFL Securities | 798,795 | 1.54 |
- Non Banking Financial Company having a net worth of not less than Rs.50 lakh.
- Registrar & Transfer Agents who have a minimum net worth of Rs.10 crore.
In conclusion
In India, investors have the option to trade through exchanges like NSE and BSE. The presence of a Depository Participant is opening up a new perspective of trading. As an investor, you should make sure that you invest via a depository participant who is registered with one of the two depositories.
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