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Depository system
A depository system is considered as a system where scripts can be transferred as well as settled through the modern way of resulting transfer of possession of securities through book entry on ledgers rather than the conventional way of delivering scrips in physical form.
The modern method doesn’t require Paperwork. This new method helps in transparent trading in scrips and reduces the settlement span. Not only this, but the new method also contributes to the liquidity of security funding. This system is also called the ‘scripless trading system’.
There are four participants within the depository system :
1. The depository
A depository is known as an institution where the securities are kept in an electronic structure. A depository performs transactions of securities through the book entry in ledgers. For the clients, a depository acts as a guardian of the securities. Currently, there are two working depositories within India :
National Security Depository Ltd. (NSDL)
Central Depository Services Ltd. (CDSL)
2. The participant
A participant is known as an agent of the depository. A participant acts as a viaduct between the owners and the depository. A participant performs the function of maintaining the ownership track record of each owner in the form of book entries. Securities and exchange board of India requires the registration of both depositories as well as the participant.
SEBI keeps a condition that enough system and protection is available in a company to make sure that no manipulation of track records and transactions occurs.
3. The beneficial owner
The beneficial owner is that individual whose name gets noted along with a depository. A beneficial owner is considered the actual owner of the securities. A beneficial owner is the one who has submitted his securities in the book-entry format. A beneficial owner has every right and liabilities connected with the securities.
4. The issuer
The issuer is known as the organization which issues the security. The issuer tends to maintain a register in which the names of the registered security holders are noted. The issuers share a file of those shareholders who choose the depository system.
Benefits of the depository system
The establishment of a depository system has to lead to an efficient capital market. Given below are the advantages of the depository system that are received by investors as well as a country :
1. Paperwork has become very less.
2. Risks connected with depository systems, such as forgery, loss of share certificates, theft, etc., have been abolished.
3. Bad delivery has been abolished.
4. Liquidity of scrips has been increased by the process of fast settlement as well as the decrease in registration delay.
5. Transaction cost has been lowered for buying and selling of securities in comparison to physical form.
6. No requirement of stamp duty on securities movement.
7. Foreign investors find it luring and this leads to the promotion of foreign investment.
8. Establishment of an efficient capital market
9. Custodial services receive high chances for growth and development
What is the objective depository system?
Mentioned below are the major objectives of the depository system :
1. The depository system eliminates false happenings such as theft, bad deliveries, and copies of share certificates.
2. The cost of transactions comes out to be less for investors.
3. Depository system ignores the delay occurring due to security transfer.
4. Depository system creates an easy way to transfer, leading to a gain in liquidity.
5. A great track record of holdings is maintained for an investor. The major reason behind this is that details are maintained in electronic format.
6. Depository system gives infrastructure in the capital market for services.
7. Withdrawal from securities can be made with ease.
Conclusion
A depository system is considered a system where scripts can be transferred as well as settled through the modern way of resulting transfer of possession of securities through book entry on ledgers rather than the conventional way of delivering scrips in physical form. Currently, there are two working depositories in India, namely National Security Depository Ltd. (NSDL) and Central Depository Services Ltd. (CDSL). Depository system provides multiple advantages like Paperwork has become very less, Risks connected with depository system such as forgery, loss of share certificates, theft, etc. have been abolished, Bad delivery has been abolished, liquidity of scrips has been increased by the process of fast settlement as well as the decrease in registration delay. The facilities which are received by the depository system are Dematerialization, rematerialization, settlement of trade in electronic form, and nomination facility. Along with this, the public receives electronic credit for securities.
