The depository participant is like a middle person between an investor and the depository (CDSL & NSDL). Depository participants can be a stockbroker, bank, NBFC, etc.
In this article, we will be talking in detail about the role, function, etc. of a depository participant. Following are the points covered in the article.
1. Role of depository participant
Before depositories came into existence investor had to physically complete the transaction by moving the share certificates between which many problems arose like theft, loss, fraud, etc.,
To get away from this problem government allowed NSE and BSE to set up their own depositories. In the year 1998, it was made compulsory to trade in stock through the dematerialized form. This resulted in a spike of new investors coming to the market, resulting in overall high volumes.
Also, establishing depositories attracted foreign investors because the following problems were mitigated by the dematerialization of securities forgery, unscrupulous transfer, and reduction of chances as well as incidents of delay.
A depository participant is an organization between a depository and an investor. Depository participant allows an investor to trade through his platform and provide him regular profit and loss statements in exchange for fees, they keep his shares in a dematerialized form.
The following picture describes the role of the depository participant.
2. Functions of depository participant
Following are the functions of a Depository Participant
- Opening account for investors
- Re-materialize and dematerialization of securities
- Pledging and un-pledging of loans against shares
- The setting of transaction done on stock exchanges in connection with depositories
- Transfer of securities
- Corporate action benefits such as directly transferring securities into the Demat account or bank accounts of customers.
3. Difference between depository & depository participant
There are two depositories in India CDSL and NSDL. CDSL is promoted by the Bombay Stock Exchange and other Financial Institutions and NSDL is promoted by National Stock Exchange and also is promoted by other financial institutions.
To know more about depositories read this article: Role of CDSL and NSDL.
A person cannot open a direct account with a depository it has it has to go through the depository participant. Same as how a person cannot open an account with RBI it has to open an account with a bank.
The depository is an organization that keeps all the shares of a company in a safe place in the form of Demat accounts.
A depository participant is a middle person between an investor and a depository who facilitates their functions. All the shares in a Demat account are kept with the depository.
4. Depository participant vs stock broker
Usually, investors think that a stockbroker can only become a depository participant but this is not the case. The Depositories Act, 1996 and SEBI (Depositories & Participants) Regulations, 1996 provide the list of entities who are eligible to become a Depository Participant.
Some of the entities from the list are as follows:-
- Public Financial Institutions.
- Clearing House or Clearing Corporation of a Stock Exchange.
- Stock Broker who is granted Certificate of Registration under the SEBI Act, 1992.
- Non-Banking Financial Company having a net worth of not less than Rs.50 lakh.
- Scheduled Banks including Foreign Banks approved by the Reserve Bank of India (RBI).
- State Financial Corporation established under the State Financial Corporations Act, 1951.
To know who is eligible to become a Depository go to cleartax.in
5. Depository participant charges
There are many charges which an investor has to pay in order to buy or sell securities, one of them is are DP charges which are levied by depositories and depository participants in order to provide various services mentioned above.
If an investor holds on to securities as a delivery i.e. hold on for more than one day he has to pay depository charges. In the case of intraday trading, the investors don’t have to pay dp charges.
Depository charges a flat fee which in the case of CDSL is ₹5.50 and NSDL is ₹4.50 per company, per day. It does not depend on what is the amount or the number of shares that are to be sold.
Following is an example: If an investor buys 1000 share from Uptox app and holds the same for more than one day and sell the position the next day he will be liable to pay ₹5.5 depositories to CDSL & ₹13 additional to Uptox plus 18% GST as DP charges
The same is true for all other institutions that act as depository participants but the DP charges can change as per each DP, so an investor should inquiry in advance before opening an account. For Example, DP charges for Zerodha are ₹13.5 (+18% GST).