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 need for depository arose mainly due the following reasons:
1. Growth in Securities transactions: - There has been considerable growth in securities transactions, especially, in the post-reform period, i.e., since 1991. After 1991, the Govt of India introduced several reforms in the Indian Economy, including capital market reforms.
2. Limitations of Physical Transfer: -There were several limitations relating to physical transfer of shares. The limitations were
· Delay in transfer of shares.
· Problem of bad deliveries
· High cost of handling and transfer
· Chances of loss of certificates in transit.
· Chances of theft of certificates, etc
3. To comply with global standards: -Almost all the developed markets had introduced the depository system ensuring efficient transfer and settlement of securities. Due to reforms in capital markets, the foreign institutions investors (FIIs) were allowed to deal in stock exchanges. For this purpose the government also introduced the depository Act, 1996.
4. To enhance liquidity in stock markets: -There was a need to enhance liquidity in Indian Stock Markets. The seller of securities to get immediate cash payment for their transactions. The depository undertakes the trade and settlement processing through its subsidiary.
5. To ensure transparency in allotment of shares: -Now-a-days, the allotment of shares is to be done only through the Demat mode. The allotment of shares is to be effected through the depository in the Demat account of the investors. This has generated transparency in allotment of shares and reduced manipulations relating to transfer of shares.
6. Centralised Systems in Securities Dealings: - There was a need to adopt a central system for handling all the securities dealings. This has been made possible by setting up Central depository system, although there are two different depositories (NSDL, and CDSL).
