Depository System and Dematerialisation
The Depositories Act 1996 replaced paper certificates with electronic records. The exam tests the vocabulary - depository, participant, beneficial owner, ISIN - and the sequence of a dematerialised transfer.
The framework
- Two depositories: NSDL (1996) and CDSL (1999), regulated by SEBI under the SEBI (Depositories and Participants) Regulations, 2018.
- A Depository Participant (DP) is the investor's interface; it is a SEBI-registered intermediary, usually a bank or broker.
- The depository is the registered owner in the company's register; the investor is the beneficial owner, holding dividend, bonus and voting rights.
- Each security has an ISIN, a 12-character identification number.
Dematerialisation and transfer
- The investor submits a Dematerialisation Request Form with the certificates to the DP; the registrar verifies and the balance is credited to the demat account.
- Transfer: on settlement the seller's account is debited and the buyer's credited through the depository system; no transfer deed, no stamp duty, no bad delivery.
- Rematerialisation reverses the process.
Worked example
Ms. A holds 500 shares of ISIN INE002A01018 and sells them on the exchange. On settlement, her DP account is debited by 500 and the buyer's DP account credited by 500; the registrar updates the register showing the depository as registered owner and the buyer as beneficial owner. The company pays the next dividend to the buyer because the depository's record on the record date names the buyer.
Traps
- Saying a depository keeps share certificates in a vault - it keeps electronic records only.
- Using "DP" and "depository" as synonyms.
- Forgetting that voting and dividend rights follow beneficial ownership, not the depository.