Just like the Bank holding Fixed Deposits, Cash, and Recurring Deposits, a Depository holds Shares, Holdings, and Government Bonds, etc. Depository accounts are similar to deposits in bank accounts.

The depository is a link between the listed companies that issue shares and shareholders. They issue these shares through their agents and are the depository participants or DPS. A depository participant could be a broker, a bank or a financial institution, or an eligible entity as per SEBI norms and are responsible for the transfer of shares from the depository to investors. The investor receives a confirmation from the depository.

The risk associated with having to hold physical securities is eliminated by the Depositories. Before the establishment of depositories, a buyer had to keep track of the shares have been transferred to his account, and had to be safeguarded from theft, damage, and loss. Under the depository system, all these types of risks have been reduced or eliminated to a very great extent as the shares are held and transferred electronically. This has not only reduced the paperwork involved in trading but also reduced the time involved in transferring shares.

When in 1998 compulsory electronic trading was introduced for institutional investors, there was an increase in the trading volumes in the Indian market. This in turn increased the confidence of foreign investors to trade in the Indian market. Thanks to the depository system, there has been a considerable decrease in incidents of forgery, delay, and fraudulent transfer of shares. Dematerialization of physical shares resulted in digitalization and shares could be transferred electronically in “De mat Accounts“. This also resulted in saving a lot of time and cumbersome paperwork. It was to facilitate this process that the Depositories were established.

The Depository Act of 1996 paved the way for the establishment of National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL) the two depositories in India. NSDL was promoted by The National Stock Exchange while CDSL was promoted by the Bombay Stock Exchange, State Bank of India and Bank of India, Industrial Development Bank of India, and Unit Trust of India. NSDL and CDSL are the two depositories in India.