Meaning: - A depository can be defined as ‘an institution which transfers the ownership of securities in electronic mode on behalf of its members.’ A depository is a nominee of the investors, who keeps the shares on their behalf. Therefore, the depository acts as a custodian of securities
The Importance of Depository can be explained from the benefits to investors, companies
I. BENEFITS TO INVESTORS: -
1. Quick Transfer of Shares: -The depository system enables quick transfer of shares. The transfer of shares can be done in a couple of days. Under the physical transfer of shares, it used to take 2 months or more for transfer of shares.
2. Less Paper work: -This system requires less paper work. The system follows the electronic book entry system. It does not require physical movement of certificates for transfer process. And also the shares are easily converted into electronic mode without much paper work and delays.
3. No Risks: -Under the depository system, there are no risks. The risks of bad deliveries, loss or theft of certificates, misplacement or mutilation of certificates, etc. do not take place under the depository system.
4. Less Cost: -Under the depository system, there are less costs. For instance, there is no payment of stamp duty, which was required under the physical transfer of shares.
5. Quick Receipt of Payment: -The depository system reduces the settlement time, and therefore, the investors can get quick receipt of payment from the broke or buyer of shares.
6. Quick Receipt of Dividend: -The distribution of dividends, interest and other benefits can be quicker, as the ownership can be quickly identified with the help of electronic data.
II. BENEFITS TO COMPANIES: -
1. Accurate data of shareholders: - The companies can easily trace the particulars of beneficial owners and their holdings periodically. Under this system, the transfer of shares is done immediately.
2. Reduction of Investors Complaints: -Investors complaints get reduced considerably under the depository system. Therefore, the company officials can concentrate on productive activities, rather than spending unnecessary time in dealing with investor’s complaints.
3. Quick Correspondence: -Correspondence with the members become faster and quicker, as the depository maintains accurate record of members.
4. Less Expenditure: -There is less expenditure on stationery and other costs. For instance, in the case of new allotment of shares, the company had to issue share certificates, and spend a good deal of money on registered post. This system does away with the cost of printing certificates, and reduces postage charges.
5. More Funds: -The companies are in a position to raise more long term funds by issue of shares and other securities. This is because; there is increase in investors’ confidence in the capital markets.
6. Reduction in secretarial work: -Due to demat of shares, there is considerable reduction in secretarial work, such as dispatching of share certificates, and other such related work. Therefore, the secretarial department can concentrate on more Productive activities.
