How Do Depositories Work?

Understanding the Difference Between CDSL and NSDL

Gone are the days when financial securities had traded in physical form. With the conception of the Dematerialisation Account, buying and selling securities has changed completely. Ever since SEBI incorporated Central Depository Services Limited (CDSL) and National Securities Depository Limited (NSDL) — investing in equity shares, mutual funds, and debentures has become simple. This raises the question, How do these Depositories work?

In this article, we explore the role of depositories in the Indian financial system — how they work and what they do. We will also try to understand how the two depositories of India function and look at how they are different from one another. Read on to find out how depositories operate, and figure out the difference between NSDL and CDSL!

What is a Depository?

A Depository is an organisation that offers financial assistance to clients. These organisations hold money deposits and securities in electronic form on behalf of investors. In India, depositories come under the jurisdiction of the Securities and Exchange Board of India (SEBI). They also incorporate banks, safehouses, vaults and other financial institutions. Depositories also play a pivotal role in the sale and purchase of securities.

physical depositories

How do Depositories Work?

Depositories are financial intermediaries whose fundamental objective is to ensure the safe storage of securities like mutual funds and equity shares on behalf of the investor. These are stored electronically in demat accounts maintained by depositories such as CDSL and NSDL. Depositories also assist in the timely distribution of dividends while also providing shareholder information to companies.

Depositories have also simplified checking status reports in real-time while making the transfer of shares seamless and secure. Before the advent of electronic trading practices, investors moved share certificates from one person to another while buying or selling. Now, while buying or selling a share demat accounts are handled by depositories. This makes the transfer as simple as moving the digital records between two demat accounts.

What Services Does a Depository Offer?

Depositories offer various financial services to individual and business clients alike. By opening an account with a depository partner affiliated with them, one can avail the services provided by NSDL and CDSL. These depository partners or DPs can be a stockbroker, banks or any other financial institution.

Some services provided by depositories to their clients include maintenance of demat accounts and dematerialisation and rematerialisation of securities. It also helps in trade settlement, transfer of shares, transmission of demat accounts and safekeeping of invested securities and capital.

What is National Securities Depository Limited?

The National Securities Depository Limited (NSDL) is India’s oldest depository institution, having been established in August 1996. It is an electronic securities depository that stores securities such as stocks, bonds, and other financial instruments. Furthermore, NSDL is equivalent to banks.

The main distinction between NSDL and banks is that NSDL holds securities while banks have depositors’ funds. Its promoters are the National Stock Exchange (NSE), the Industrial Development Bank of India (IDBI), and the Unit Trust of India (UTI). NSDL also offers a variety of share-related services.

NSDL plays a crucial role in the Indian financial system. It helps in achieving objectives like facilitating the transfer of securities. It may also hold them on behalf of investors in electronic form. Besides that, NSDL is also responsible for the surrender and withdrawal of securities, along with facilitating the mortgaging of securities for loans.

What is Central Depository Services Limited (CDSL)?

India’s second securities depository is Central Depository Services Limited. Founded in 1999, it holds a variety of securities in electronic form, including stocks, bonds, and more. It is also the primary depository of the Bombay Stock Exchange. Their promoters include major Indian banks such as the State Bank of India, Union Bank of India, and Axis Bank.

Other well-known institutions such as HDFC Bank, Bank of Baroda, and Standard Chartered Bank also hold shares in CDSL. It is also the first depository to reach the milestone of 4 million investor accounts. There are around 588 Depository Participants. CDSL’s main objective is to provide depository services that are convenient, dependable, and secure.

CDSL has the all-important responsibility of demat account maintenance. Thus CDSL undertakes the settlement of market and off-market transfers, account opening and managing said accounts. Besides that, it also takes care of the distribution of non-cash corporate actions, managing dividend payouts and transmission or nomination of securities.

Difference Between CDSL and NSDL

Being one of the essential financial intermediaries in the Indian financial system, both CDSL and NSDL are similar concerning their functioning and purpose. However, there are some differences between the two.

Stock Exchange

NSDL is the preferred depository of the National Stock Exchange, whereas the Bombay Stock Exchange prefers CDSL.

Promoters

For CDSL, BSE is the main promoter. However, in the case of NSDL – IDBI Bank, Unit Trust of India, and NSE are the primary promoters.

Account Nomenclature

Demat accounts opened with CDSL are identifiable using a unique 16 digit demat account number. The accounts opened with NSDL are identifiable using a unique 16 character alphanumeric account number that starts with ‘IN’ followed by 14 digits.

Registered Depository Participants

CDSL has 599 registered depository partners whereas NSDL only has 278.

Investor Accounts

NSDL manages the accounts of over 2.25 crore investors. On the other hand, CDSL has 3.96 active investor accounts, making it the largest depository in India.

CDSL vs NSDL: Is One Better than the Other?

The Securities and Exchange Board of India governs the functioning of both the CDSL and the NSDL. The only difference between both of these financial intermediaries is in terms of promoters, account numbers and preferred stock exchanges. Other than that, they are pretty similar. However, with that in mind, there is no choice offered to the investors as the depository in which their account is opened, is chosen by their DP.

Therefore, keeping the similarities in mind, we cannot conclude that one is better than the other. Having said that, even though an investor has no say in choosing their depository, it is still beneficial to have an in-depth understanding of how depositories work. Now that we know how CDSL and NSDL work, we are one step closer to achieving financial literacy.


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