Depository is a place where financial securities are held in dematerialised (DEMAT) i.e. in electronic form. It is responsible for maintenance of ownership records and the facilitation of trading in dematerialized securities.
A depository eliminates the risk associated with holding physical securities. Earlier, the buyer would have to keep checking if the shares have been transferred safely to his account, and ensure that theft, damage or loss has not happened. After the depository system came about, such risks have been greatly reduced since the shares are held in and transferred in an electronic manner. They also reduce the paperwork involved in trading and fasten the transfer of shares. In 1998, DEMAT or electronic trading was made compulsory for institutional investors, which led to a spike in the overall trading volumes in the Indian market.
At present, there are only two depositories in India. The Depository Act of 1996 paved the way for the establishment of the two depositories in India, namely National Securities Depository Limited (NSDL) which is promoted by the National Stock Exchange, Industrial Development Bank of India and Unit Trust of India among others. The other depository is the Central Depository Services Limited (CDSL) which is promoted by the Bombay Stock Exchange Bombay Stock Exchange, State Bank of India, Bank of India among others.
The Securities and Exchange Board of India is responsible for the registration, regulation, and inspection of the depository. A depository participant is also answerable to the SEBI. It can be operational only after registration with SEBI post recommendation by NSDL or CDSL.