Depository Participants- Definition & Services to Stock Investors?

Priyanka Bajpayee

18 Dec, 2019

A Depository system is very similar to the Banking System by replacing the cash by securities. A Depository System is a corporation where the shareholder’s securities are held in electronic form at the request of the shareholder through the medium of Depository Participant. The entity is appointed by a depository through which its services are provided to the investors.

For availing the services such as Dematerialization and Rematerialization of shares, the investor opens a Demat account with a Depository Participants, it also requires-

• Maintenance of a record of securities held by the investor,
• Settlement of trades by delivery or receipt of securities for transactions done by the investor on the stock exchange,
• On account of subscription, Credit of securities in an IPO or rights and bonus securities received, among others.

What are the two basic criteria to become a Depository?

1. The Depository must be registered under the Companies Act.

2. The Depository must be registered with SEBI. The Depository Participant has to comply with the eligibility criteria prescribed in the SEBI (Depository and Participants) Regulations, 2018.SEBI grants the certificate of registration.

Note-There are two depositories functioning in India, i.e. NSDL (National Securities Depository Limited)AND CDSIL(Central Depository Services(India) Limited.

What is the Depository Participant?

Depository Participant acts as an agent of the investor at the Stock Exchange. It is the representative of the Depository in the Depository system by presuming the link between the Company and the investor through the Depository.

Further, as per the SEBI GUIDELINES, below-mentioned participants can also become the Depository Participants-

• A public financial institution, bank,
• State financial corporation,
• Custodian,
• Clearing corporation, stockbroker, 
• Non-Banking Financial Statement or registered transfer agent.
• As an applicant, it must also possess the adequate infrastructure and trained personnel to carry out functions of a DP.

What are the services provided by the Depository Participants to the Stock Investor?

The various services provided by the Depository Participants to the Stock Investor are-

• 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 is the Dematerialization of Securities?

Dematerialization of securities is a process by which the physical securities are converted into electronic securities at the request of the investor. However, the process is optional, and the investor can still hold shares in physical form.

The Process involved in the Dematerialization-Various steps are involved in the Dematerialization Process-

• The first step is to fill the Dematerialization Request form and lodging DRF and share certificates with the Depository Participants.
• Depository Participant informs the Depository and sends certificates and DRF form to the Registrar.
• Further, the Depository intimates the Registrar or Issuer of securities.
• On receipt of the DRF form, the Registrar cancels the share certificate and enters in its ROM the name and details of the Depository.
• Registrar confirms to Depository.

What is Rematerialization Process?

Rematerialization of securities is a process by which the electronic securities are converted into physical securities at the request of the investor.

The Process Involved in the Rematerialization-Various steps are involved in the Rematerialization Process-

• The first step is to fill the Rematerialization Request form and lodging RRF with the Depository Participants.
• Depository Participant informs the Depository and sends the RRF form to the Registrar.
• Further, the Depository intimates the Registrar or Issuer of securities.
• Registrar prints the certificate and sends it to the Investor.
• Registrar confirms to Depository.

What is the Immobilization facility provided to the Stock Investor?

Immobilization is a process where the physical share certificate is kept with the depository for safe custody, and all the subsequent transactions in these securities take place in the Book-entry form. The immobilization of fresh issues may be achieved by issuing a jumbo certificate representing the entire issue in the name of the depository, and the owner has the right to withdraw his physical securities as and when required.

Trade settlement by delivery or receipt of securities-

The depository participants help the Stock investor in the settlement when the trade is final, and the investor must make the payment to the seller while the seller delivers the securities to the buyer investor. As the settlement date denotes the legal transfer of ownership of securities.

Conclusion-The functions and responsibilities of the Depository Participants are laid out by the SEBI in the Regulations.