The Indian capital market took a major step in its rapid modernization when the National Securities Depository Limited (NSDL) was set up as the first depository in India. NSDL, promoted by the Industrial Development Bank of India, Unit Trust of India, National Stock Exchange of India Limited, and State Bank of India was registered on June7, 1996 with SEBI and commenced operations in November 1996. NSDL is a public limited company formed under the Companies Act, 1956 with a paid-up capital of Rs 105 crore.
NSDL interacts with investors and clearing members through market intermediaries called depository participants. NSDL performs a wide range of securities related functions through the DPs. These services are as follows:
(1) Maintenance of individual investors’ beneficial holdings in an electronic form.
(2) Dematerialization and re-materialization of securities
(3) Account transfer for settlement of trades in electronic shares.
(4) Allotments in the electronic form in case of initial public offerings
(5) Distribution of non-cash corporate actions.
(6) Facility for freezing/locking of investor accounts.
(7) Facility for pledge and hypothecation of securities.
Business Partners of NSDL
An important link between NSDL and an investor is a depository participant. A depository participant could be a public financial institution, bank, custodian, or a stock broker. Corporate entities are not allowed to become depository participants nor can they set up depositories. A DP acts as an agent of NSDL and functions like securities bank as an investor has to open an account with DP. The Stock Holding Corporation of India limited was the first depository participant registered with SEBI. The number of DP’s operational as at end March 2000 stood at against 24 in end March 1997 including all custodians providing services to local and foreign institutions. This number had increased to more than 212 in June 2002 with 1,649 service centers across the country.
At present, the competition among DPs has increased and, in a bid to attract and retain customers, DPs are exploring all avenues including latest technology for increasing their efficiency. For instance, Global Trust Bank (GTB) and Infrastructure Leasing and Financial Services (IL&FS) have launched Interactive Voice Response (IVR) units. They have also slashed their service charges and many of them are rendering free market and off market buy services to their corporate clients.
Besides DPs, the other business partners of NSDL are issuing companies/their transfer agents, clearing corporations/houses, and clearing members. NSDL facilitates the settlement of trades carried out in the book entry segment of stock exchanges. The actual settlement function is performed by the clearing corporation/houses of the stock exchanges. NSDL has its by-laws regarding the powers and functions of board of directors, executive committee, rules of business, participants, and nomination of persons of eminence, safeguard for clients, participants, and accounts by book entry, and so on. Trading in dematerialized securities commenced on December 26, 1996, in the NSE. As on June 8, 1998, 916 out of 1,010 active member brokers of NSE opened accounts with NSDL to be able to trade in the demat segment.
Central Depository Services (India) Limited (CDSL):
CDSL is the second depository set up by the Bombay Stock Exchange (BSE) and co-sponsored by the State Bank of India, Bank of India, Bank of Baroda, and HDFC bank,. BSE has a 45 per cent stake in CDSL while the banks have a 55 per cent stake. CDSL commenced operations on March 22, 1999. The same year, five stock exchanges established connectivity with CDSL for offerings trade in demat securities and 765 companies signed up with CDSL to get their securities admitted for dematerialization. CDSL has 163 DPs in 91 cities across 168 locations covering 320 cities. With a net worth of Rs 104 crore, CDSL plans to offer facilities like inter-depository transfer and linking of accounts through cell phones.
CDSL has been the preferred platform by the government of India for carrying out actual share transactions. PSU disinvestments have been done through CDSL system.
Every transaction at CDSL is done at one e-space. The centralized system of CDSL keeps a watch on every transaction.
CDSL has also attained membership of the Asia Pacific Central Securities Depository Group (ACG). The ACG is an organization that facilitates exchange of information and promotes mutual assistance among member depositories and clearing organizations of the Asia-Pacific region. It has 22 member organizations including depositories from Japan, Hong Kong, Singapore, Malaysia, Australia’s clearing organization, and the Reserve Bank of New Zealand. Membership of the organization is expected to help CDSL in enhancing its knowledge base and contributing to the development of other member organizations in the best international practices, settlement risk management, cross border linkages, and technological development. This, in turn would help CDSL to secure foreign institutional investors’ business through their custodians.