The stock market is not a one-man show. It includes a number of key participants that work together in complete harmony, making millions of trades possible. Right from the stock exchange through which you trade to the stockbroker who facilitates trading, there are many major market players who function seamlessly to help you execute your trades and make investments in the markets. Among these market players, depositories play a major role too.
In India, we have two main depositories, namely the National Securities Depository Limited (NSDL) and the Central Depository Services Limited (CDSL). In this article, we’re going to get into the details of the National Securities Depository Limited and understand how NSDL works.
What is the National Securities Depository Limited (NSDL)?
The National Securities Depository Limited is one of the major depositories in India. A depository is essentially an organization that is tasked with helping traders and investors buy or sell shares and other securities in a paperless manner. Earlier, shares were held as physical share certificates. But with the dematerialization of shares, traders had to make the switch to holding their shares electronically. Depositories like the NSDL played a pivotal role in this transition, and to this date, they continue to support and enable dematerialized, paperless trades while simultaneously being responsible for eliminating the risk associated with holding shares and securities in physical form. These risks include theft, fraud, loss, delay in deliveries or damage.
The NSDL was founded on August 8, 1996. It was the first electronic depository to be established at the national level. Its founding was a major move towards modernizing the Indian financial markets, making the shift into the paperless era more concrete and rapid.
The practical side: How NSDL works
Well, now that you know what the National Securities Depository Limited is, it’s time to get into the details of how NSDL works. Simply put, the NSDL allows traders and investors to open accounts, so their shares and securities can be held electronically. It is comparable to a bank, where customers open accounts to store their funds. Except that in the case of the NSDL, the account holds the dematerialized or electronic forms of shares and securities instead of money.
Various kinds of market participants can open accounts with the NSDL, including banks, brokers, investors and any other entity that issues securities. However, to open an account with a depository like the National Securities Depository Limited, you cannot approach the organization directly. Instead, you need to open your account through a Depository Participant (DP). DPs are agents who act as links between depositories like the National Securities Depository Limited and traders or other account holders.
What are the services provided by the National Securities Depository Limited?
The NSDL performs many functions and provides a range of services that facilitate easier trades and smooth market processes. Here’s a preview of some things the depository does.
- Dematerialization of shares, wherein physical share certificates are converted to an electronic format
- Rematerialization of shares, wherein electronic or dematerialized securities are converted to physical certificates
- Provision of a consolidated account statement that displays all the investments and securities held by account holders
- Alerts and communication to demat account holders to pass on essential information about their investments or accounts
NSDL: Impact on the stock markets
The NSDL has brought about many positive developments in the Indian financial markets. There are many benefits that can be traced back to the depository. Here are some such pluses.
- The entity has eliminated the risk associated with physical share certificates and has also simultaneously reduced the costs associated with duplicating the copies of physical certificates.
- The possibility of bad deliveries has also been eradicated, since the NSDLholds securities in the demat form.
- Settlement of transactions has also become faster and smoother with the establishment of the National Securities Depository Limited, thus improving liquidity and making turnover faster for traders and investors.
- There’s also much less paperwork involved, making the whole process less cumbersome.
- NSDL also helps traders and investors stay up-to-date about their transactions, thanks to the periodic statements shared digitally.
All in all, the depository has made things much better for the stock market. With various value-added services like market transfers, off-market transfers, inter-depository transfer and other corporate actions, the NSDL plays a key role in the markets today. Together with CDSL, the other major depository in the markets, the National Securities Depository Limited is a vital market participant.