Security Market Operations

National Securities Depository Limited – Advantages and Functions of NSDL

National Securities Depository Limited was established on November 8, 1996 just after the enactment of Depositories Act, 1996. According to the Depository Act, 1996 “ depository means a company formed and registered under the Companies Act, 1956 and which has been granted a certificate of registration under sub – section ( IA ) of section 12 of the Securities and Exchange Board of India Act, 1992. ”

NSDL is the first and largest depository in India which works to support the investors and brokers in the capital market of the country. It offers dematerialized account facility to the investors for keeping their financial instruments ( such as equity shares, bonds, mutual funds etc. ) in an electronic form. Before the inception of NSDL, investors used to have their financial instruments in physical forM.

Functions of NSDL

(1) Dematerialisation facility – NSDL offers dematerialization facility by which investors can convert their paper form securities into an electronic form. An account which is used to keep electronic certificates is called ” Demat Account ”.

(2) Transfer of Benefits – Depository plays prominent role in the transfer of cash dividend, bonus shares or any other benefits announced by the issuer ( s ) among securities ‘ holders.

(3) Mortgage for loans – Investors can borrow money against the security of their financial instruments. NSDL offers mortgage account facility wherein pledged securities are kept until investors ‘ loan remains outstanding.

(4) Settlement of Securities – As discussed earlier, traders can liquidate their investments through secondary market. Just after the execution of an order, ownership of the securities transfers from seller to the buyer which is done through the joint efforts of clearing system of stock exchange and depositary.

Advantages of NSDL

(1) Elimination of Risk – Transformation of physical securities into electronic form removes the risk associated with paper form certificates such as loss by theft, forged certificate, damage of certificates, delivery to wrong person, damages of share certificates during transmission etc.

(2) Faster settlement cycle – Depositories are obliged to settle clients ‘ account on “ T + 2 ” basis ( Trading day + two days ) i. e. if a person buys shares on Monday then he gets the delivery of the same shares on Wednesday. Faster settlement cycle enables investors to shorten their investment ‘ s lock in period.

(3) Quick Transfer of Ownership – Dematerilaisation of shares makes the transfer of ownership easy and risk free. At present, ownership of shares changes hands in a fraction of second just by debiting the demat account of seller and crediting the demat account of buyer.

(4) Easy to update information – If investors want to change their personal information, they only need to inform their depository participant along with the relevant documents. Updation of clients ‘ personal details automatically changes the database of all the companies, where an investor is a registered holder of the securities.

(5) Safety – Safety of investors is the prime objective of depositories and to ensure the same, NSDL has taken following steps –

  • NSDL maintains the records of each and very transaction which takes place through its depository participant.
  • Periodic inspection of DPs and R & T agent is done by NSDL to avoid the possibilities of fraud.
  • NSDL uses state of the art technology for its operational efficiency.

(6) Less Costly – Introduction of dematerialised shares has reduced the back office cost ( i. e. less use of paper, no stamp duty ) of the brokers and they also provide the same benefits to the traders by charging less amount of brokerage.

(7) Faster Disbursement of Corporate Benefits – If any company provides right issue or bonus issue, depository immediately credits the account of the investor, thereby ensuring faster disbursement and avoiding risk of loss of certificates in transit.

(8) Transparency – Investors periodically receive their account statements which enable them to have better control over their transactions.

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Sarvesh Arora

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