What is the meaning of a Depository?
Depository in simple terms is a institution which holds your securities in a dematerialised form. In this case a Depository is an institution which holds your Shares, Government Bonds, Mutual funds etc on your behalf. Like a Bank is to your Fixed Deposits, Cash and Recurring Deposits, a Depository is to your Shares, Holdings, Government Bonds etc.
In simple terms –
Bank Account with a Bank -> Keep your money
Demat Account with a Depository participant -> Keep your shares, bonds, mutual funds, etc
What is Dematerialisation?
Long back when at the BSE, stocks were traded in rings and when deals were fixed money was exchanged for receipts. Later physical shares certificates were provided. This invited a lot manual paper work and physical process also led to scams.
After which Dematerialisation was introduced in 1996. Because of Dematerialisation this entire process was digitized and shares were transferred electronically in your “Demat Accounts“. This saved a lot of time and endless paper work. There are Depositories formed to facilitate this process. There are 2 Central Depositories in India
What is the function of a Depository?
Mitigate Risk: A depository helps mitigate risk by digitizing the whole process of shares transfers and ownership of them. the holder does not have to provide his DEMAT account details now and then when he makes a trade, His DEMAT Account information is automatically provided to all concerned parties and the holdings, government and mutual funds are automatically deposited in one’s DEMAT Account. It reduces the risk of fake share certificates and loss or theft of share certificates.
The Depository has various depository participants registered with it which offer depository services or demat account services to their clients.