NSDL or the National Securities Depository Limited is an organization that is concerned with holding and safeguarding the securities which are traded in the Securities Market.
Let’s go a bit in-depth in this detailed tutorial and try to grasp how NSDL fits in the whole framework of stockbroking in India and how do you get affected by it as a trader or an investor.
NSDL is said to be the largest and oldest depository in the country. It was established on the 8th of August, 1996 and was the first electronic securities depository at the national level.
The organization holds the securities in electronic format as compared to the traditional methods wherein the recording was done using paper transactions of shares, bonds and other kinds of financial instruments. With this advent, obviously, management of your securities has become much simpler and convenient (and not to forget safer too!).
It can also be compared to a bank wherein the only difference lies that in banks they hold the investor’s money and in NSDL they hold stocks, bonds and other such classes of securities.
Lots of stockbrokers in India collaborate with the depository so that the securities of their clients can be kept in the NSDL “safe”. At the same time, as an investor, you are suggested to check with the broker about its affiliation with any of the depositories before you open your account.
How NSDL Works?
Basic Services are provided to investors, brokers, banks and other kinds of security issuers that participate in the Indian financial market. They can open a depository account with the DPs.
The depository account can be of three different types:
Clearing Member Account and
The different services provided by the above mentioned three accounts are:
First is the dematerialization by which an investor can convert the physical certificates into electronic balances.
They need to deface the certificates and surrender them to the depository participant (DP) meaning is who acts as an intermediary between the participant and the investors. who then intimates the NSDL about them and sends the documents to the concerned issuer or the R and T agent.
After the authorities are satisfied they can confirm the request to the NSDL who then converts the securities into balances credited into the depository account.
The second process is rematerialization in which the investor can convert the securities in electronic form into the physical certificates by the process followed in the reverse as in case of dematerialization.
As part of the dematerialization process, you need to go through the NSDL Demat Account Opening with a stockbroker that has an affiliation with NSDL. A stockbroker, as part of the regulatory process, needs to get accredited with a repository and NSDL is one of the two prominent ones in India.
Furthermore, NSDL offers services like SMS alert for the Demat account holders so that they receive alerts directly from the NSDL transactions authority.
The last service provided is the NSDL CAS or the consolidated account statement which gives all the investments held in single and joint names in the security market.
Some other secondary level services provided by NSDL include:
Market transfers are allowed in which the securities can be sold.
Off-market transfers are trades not cleared by the clearing corporation.
The inter-depository transfer allows securities to transfer from one depository into the other.
Transmission is the devolution of shares other than by a transfer in case of death.
Corporate Actions are the benefits given by companies to investors. These include value-added services, pledges or hypothecation of securities, automatic delivery out instructions, dividend distribution, lending and borrowing, and public issues.
The concept of NSDL is a century-old in the country and came into structure due to the fact that the paper-based settlement of trades created a lot of havoc in the country and hence came the Depositories Act of August 1996 pacing with the foundation of the National Securities Depository Limited (NSDL).
The basic understanding of the depository system, securities are held inside this system in the depository accounts which is also similar to the bank accounts that hold funds into it. Just as in a bank account the transfer of funds from one to another occurs similarly securities are transferred through simple account transfers.
With the paper, there were a lot of documents required but with the fact that everything is available online a lot of time, money and energy are saved. It is confirmed that the cost of transactions in a depository manner is lower as compared to those in paperwork and certificates.
There are a number of benefits of holding an account in NSDL:
Get the option of immediate fund transfers and registration of securities as they are held in electronic form between the buyer and the seller. The transfer used to take 2-4 months but now it is immediately transferred into the buyer’s depository account.
There is less paperwork required as all the data is available online and can be accessed within just a few clicks.
There is no bad delivery as all the information about the securities is available online so the possibility of no objection disappears.
It also has the provisions of transferring bonuses and rights to the investor’s account.
There is always stamp duty required when there is transfer or sale of securities. However, such is not the case of electronic transfers.
Obviously, there is another side to the coin and there are a few issues related to NSDL one must be aware of:
The number of frauds is generally increased as everything is online and there is no physical checking that is performed. The hacking cases against online transactions are on a high rise with the several privacy issues encountered.
To set-up, a single depository is practically never possible.
Although this is an efficient system of transfer and it has helped a lot of investors and companies in different forms but the multiple depository systems invite a lot of problems with coordination.
A high cost is being experienced by a number of shareholders owing to the fact that participants debit the clients account for holding their account. This is mainly due to the presence of a number of depositories in the country.
It is not that efficiently regulated and maintained by the SEBI. There is room to improve that the regulatory body can look at.
It is still not a mandatory provision for a number of companies since they keep it as an option.
NSDL is one of the first and largest depositories in India set up in August 1996. It was set up for the economic development of the country and represents the national structure on an international platform.
These securities are handled in a dematerialized form in the Indian capital market. This entirely replaced the paper-based transaction modes carried out in India till now as they do not offer fast service in their electronic way.
NSDL supports the investors and the brokers in the capital market of the country increasing efficiency, minimizing risks, and reducing costs.
In case you are looking to get started with stock market trading or investments in general through NSDL or any other regulatory body, let us assist you in taking the next steps forward:
You may choose to learn more about the Indian Share Market by checking out the below-mentioned topics: