Can you open a bank account with RBI directly? Obviously no. Similarly, in the trading and stock exchange world, you can’t trade directly with the exchange (SEBI). This is where depository participants (DPs) come in.
This not only makes things easier to manage for the exchange but also allows traders and investors to get multiple options to choose from. Before moving forward, let’s establish a basic understanding of depositories and DP.
Depository Participants in India
- Angel Broking
- ICICI Direct
- Motilal Oswal
- India Info Line (IIFL)
- Karvy Financial Services
What is a Depository?
Just like a bank where you keep all your money, the depository is a financial institute that keeps all your financial assets safe. Depository keeps bonds, equities, mutual funds, and other units in a dematerialized form that can be transacted as and when required.
In India, there are 2 depositories, wherein assets are kept, viz. CDSL (Central Depository Services Limited) and NSDL (National Securities Depository Limited). However, you can’t directly interact with a depository to get your account opened and start trading. This is where Depository Participants come in.
Who is a Depository Participant?
A depository participant (DP) serves as a mediator between the depositories (NSDL and CDSL) and investors. Considered similar to a bank, traders can get a Demat account opened with a DP along with other facilities that help them invest and/or trade efficiently.
In other words, a DP serves as an agent of one or both of the depositories and its services are regulated by the exchange itself.
Why Do You Need a Depository and Depository Participants?
Earlier, trading was done through paperwork and buyers had to keep checking for the confirmation of shares/amount transferred to their accounts.
This carried the risks of theft, loss, and damage along with it. But the establishment of a central depository eliminated these risks by cutting down on the need for physical securities.
With a depository system, individuals can hold or transfer their shares electronically. In addition to making the process more secure, the introduction of depositories allowed for faster processing alongside reducing the dependency on paperwork.
However, the compulsory use of Demat/electronic trading brought a spike in the overall market volumes in 1998. Reducing the chances as well as incidents of delay, unscrupulous transfer, and forgery also attracted foreign investors to the Indian market.
Though managing this rise in the number of investors/traders and trading volume could have been difficult without depository participants. Thus, with depositories managing the entire transactions electronically, DPs serve numerous investors in trading over several stocks and managing their investment portfolios.
Who Can be a Depository Participant?
Any financial entity that passes the eligibility criteria of the SEBI norms for providing Demat-related services can serve as a DP. It can be:
- Public Financial Institutions
- State Financial Corporations
- Non-banking Financial Companies
- Stock Brokers
- Registrar & Transfer Agents
DP is responsible to execute the final transfer of shares between depository and the investors. Offered as an electronic record, the investor receives a confirmation of the transaction with the exchange.
What are the Functions of a Depository Participant?
The functional aspects of a financial entity, serving as a depository participant, are listed below:
Materialization and Dematerialization
A DP allows investors & traders to interact with the electronic trading system. On behalf of an investor, the financial entity converts his/her physical securities into electronic form and the balance of securities in electronic form into physical form in a BO account.
Maintaining and Settling Records
In addition to conversion, DP also needs to maintain the electronic records of holdings of traders. Trade settlement of underlying securities is also a function of DPs, which they deliver to (or receive from) linked BO accounts.
A depository participant also offers services to settle transactions made outside of the stock exchange.
When an investor buys any financial asset through a DP, the respective entity needs to provide electronic credit of securities that an issuer has allotted through IPO or any other form.
Opening Demat Account with a Depository Participant
As per SEBI, you need a Demat (dematerialization) account in order to hold & trade securities electronically. You can get an account opened with any of the 2 depositories (NSDL or CDSL) through a DP. For opening a Demat account, all you need to do is:
- Look for a list of reputable and authorized depository participants in India and find the best, experienced one for your investment/trading needs.
- Contact with the DP to receive information on how you can open an account with them.
- Most DPs would need you to fill an online form and submit some documents to get your account opened.
- Commonly required documents include Adhar Card, Bank Statement, Identification Proof, and a Photograph.
- The DP then verifies your documents and provides you with details to access your account with a depository.
Finding the Right Depository Participant
With an understanding of depositories and DPs, you must locate the right DP to open your Demat account. Here are a few things you can compare different DPs over.
Since the introduction of depositories has transformed the trading to an online, easy-to-understand and use thing, the DP should cater to the traders with the right technology.
Starting from opening an account to transfer of funds, and other services must be executed seamlessly, online. A DP delivering a tech-smart solution always has an upper hand over a non-technical one.
Read it in full now.