What are NSDL and CDSL? Why are they called Depositories?

NSDL, CDSL… Sounds Familiar? There won't be any market participant or Demat account holder in India who hasn't heard these names.

If you have a Demat account in India under any broker, you will get tagged with either NSDL or CDSL as your depository depending upon your depository participant (DP). You will be hearing from them through Emails or SMSs sometimes.

Let me ask you a question.

Cash & FD : Banks :: Shares : _____?______

Can you solve this riddle? If you are not sure about the answer then you are at the right place. Let me explain…

We mostly deposit our money in banks. This will not only safeguard our money but enables us to do a wide variety of transactions. When we put money as FD, it will give us returns in the form of interest.

In both the case there is money in our account. But is it physical? The answer is no. We put our physical money into our account and withdraws it into our hands physically. But what our bank account contains is money in its electronic form.

Similarly, a share depository helps you store your shares or securities in the electronic or dematerialized (demat) form. The buying, selling, and keeping of the shares are done with the help of a depository. Thus, a depository acts as a custodian.

Now I think you know the answer to the above question. YES…it is Depositories.

What are Depositories?

Depositories are those institutions that keep your shares or securities in an electronic or dematerialized form. One can buy, store or sell shares, ETFs, bonds, debentures, etc with the help of depositories.

In earlier days when the technology was not so developed and the internet was not established, the Stock Market was offline. Shares were held in the form of paper certificates. This was very risky as this paper can be torn or lost.

Later with the development of technology, the internet revolutionized the World and most things started their shift to online. The Stock Market also became online and easy to access.

When the Stock Market was making their shift to its online approach, better and safe methods of keeping the shares or securities and the record of trading was introduced in the form of demat. For keeping these records and maintaining these demat accounts depositories were formed.

Working of Depository

When you buy a share, it is credited to your Demat account, and when you sell it, the security is deducted from your Demat account.

So, what role does a depository account play in this scenario?

A Demat account serves as a conduit between you and the depository, which holds your shares. The shares are kept by the depositories when you create a Demat account to acquire shares.

Another important role that depositories play is when companies need to distribute dividends to their shareholders, they need information about their investors, which is where share depositories come in handy to them.

These are different services offered by the depositories,

• Maintenance of Demat accounts
• Rematerialization and dematerialization
• Trade settlement
• Share transfers
• Market and off-market transfers
• Distribution of non-cash corporate actions
• Nomination/transmission
• Account opening
• Account statement
• Changing account details

NSDL & CDSL

There are two Central Depositories in India and they are,

• National Securities Depository Limited (NSDL)
• Central Depository Services (India) Limited (CDSL)

It was during the late 90s that Indian Stock Markets digitalized. After the digitalization, there was a requirement for a depository, to hold the securities in the dematerialized form. For that, the National Stock Exchange came up with NSDL in 1996 through the depositories act.

Following this, the CDSL was established by the Bombay Stock Exchange in 1999. These are national share depositories linked by the Securities and Exchange Board of India (SEBI), the country's market regulator.

In India, every stockbroker must register with at least any one of the 2 central depositories to work and they are depository participants (DP). Each broker is assigned a unique DP number by the depository they are registered with.

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The difference between NSDL and CDSL

Ideally speaking there are no big differences in their working and operations. Both are central depositories in India which ensures safe holding and transactions of securities in their electronic form. One works for the NSE and the other works for BSE with different promoters.

CDSL and NSDL has no significant differences. Their operating approach and services supplied are identical, and they are both regulated by SEBI.

There is no point in having a debate on which is a better depository as it is irrelevant from a market participant's perspective. Your DP chooses a depository, but there is no conclusive response as to why they picked that depository or whether they perceive anything superior in it. There may be a variation in the fees charged to depository participants by various depositories.

You can't choose between CDSL and NSDL. It is up to your DP to make that decision. Larger depository players like State Bank of India, HDFC, and many more are registered in both NSDL and CDSL. Your investment decisions, portfolio performance, and returns have nothing to do with the depository with which your DP is connected.

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