Question

Explain DP as the constituent of Depository system.

Answer 1

Under the depository system, securities are held in electronic form. The transfer and settlement of securities are done electronically. The depository system maintains accounts of the shareholder and enables transfer, collects dividends, bonus shares, etc. on behalf of the shareholder. This system is also called as scripless trading system. In India the Depository System was introduced by passing the Depository Act in 1996. Under this Act, a competitive multi-depository system consisting of two depositories, viz. NSDL and CDSL was set up. It will be of interest to note that the world’s first Depository was set up in 1947 in Germany.

All operations under the depository system are performed by the depository with the help of its constituents as follows:

1. It is the agent of depositary.
2. DP is registered under the SEBI Act. It enjoys rights and obligations as specified under SEBI (Depository and Participants) Regulations of 1996.
3. It is an intermediary appointed by Depository.
4. DP acts as a link between the Depository and the investor.
5. It directly deals with customers. It sends a statement of accounts periodically.
6. It functions like a securities bank.
7. It facilitates Dematerialisation.
8. It credits securities in the event of Rights Issue, Bonus Issue, etc.
9. It handles instant transfers of pay-outs like dividends, interest, etc.
10. It settles trade electronically.
11. The following can work as DP’s:
    1. Financial Institutions
    2. Banks
    3. Approved Foreign Banks
    4. Custodians: Responsible for overseeing operations of assets/funds.
    5. Stock Brokers
    6. Clearing Corporation
    7. NBFC (Non-Banking Financial Company)
    8. Registrar to an Issue or Share Transfer Agents
12. The DP maintains an account of securities of each investor.
13. The DP has a unique number for identification.