The report highlights the need and benefits of the Depository System in India while focusing on the services provided such as paperless trading. It also gives a brief introduction to National Security Depository Limited (NSDL) and Central Depository Services Limited (CDSL).

1. Introduction to Depository Systems in India

2. I. INTRODUCTION & MEANING OF DEPOSITORY SYSTEM:-
Depository System is a mechanism in which the transfer and settlement of scrips takes place not
by way of the conventional process of transfer of securities and the physical distribution of
scrips, but by means of a new mechanism of transfer of ownership of securities by means of a
book entry in the ledgers or depositaries without the physical movement of scrips.
The new system thus removes paperwork, promotes automated and transparent script trading,
shortens the settlement time and eventually leads to the liquidity of investment in securities. This
system is also known as the 'Scripless trading system.
There are four players involved in the depository system which involves:
(i) The Depository:
The depository is a company in which the securities of the investor are held in electronic
form and which carries out the transactions of the securities by means of a book entry.
The depositary shall act as the default owner of the securities deposited with him for the
limited purpose of the transfer of ownership. It serves as the custodian of the shares of its
clients. The name of the depository appears in the records of the issuer as the registered
owner of the securities.
(ii) The Participant:
The participant is the agent of the depositary. It serves as a bridge between the depository
and the beneficial owners. It holds the ownership records of each beneficial owner in the
form of a book entry. Both the depositary and the participant must be registered with the
Indian Securities and Exchange Commission.
SEBI grants the requisite approval for the same only on the condition that adequate
systems and safeguards are available in such companies to ensure that records and
transactions are not manipulated.
(iii) The Beneficial Owner:

3. Beneficial owner means an individual whose name is registered with the depository as
such. The beneficial owner is the actual owner of the securities, who has deposited his
securities with the depositary in the form of a book entry. It has all the rights and
obligations associated with the securities.
(iv) The Issuer:
The issuer is the company that issues the protection. It maintains a registry to record the
names of the registered securities owners, the depositaries. These issuers are sending the
list of shareholders who opt for the depository system to the depositories. (S., n.d.)
II. NEED FOR DEPOSITORY SYSTEM:
Physical segment trading is full of inefficiencies due to the handling of huge quantities of
certificates and also entails numerous other problems such as delays in transfer, delays in
settlement, transit losses, forgery certificates, stolen certificates, mutilation of certificates, postal
losses, court proceedings, lawsuits, etc. A new trading mechanism, viz., is required to resolve
these deficiencies. A depository system has been placed in place that facilitates the investor to
keep securities in electronic form and to trade in those securities. The first depository to be set up
in India is a National Securities Depository Limited (NSDL) and is funded by IDBI, UTI and
NSE. (Investor Guide, n.d.)
III. SERVICES PROVIDED BY DEPOSITORY SYSTEM:
● Dematerialization (usually referred to as demat) is the transfer of physical securities
certificates to electronic form
● Rematerialization, known as remat, is opposite of demat, i.e. physical certificates are
issued from electronic securities.
● Transfer of shares, change in beneficial ownership
● Settlement of transactions done on trade connected to the Depositary
● Provision and non-performance of securities for loan against share
● Corporate action benefits are directly applied to the Consumer Account of Demat and
Bank. (Depository Participant, n.d.)

4. IV. BENEFITS OF DEPOSITORY SYSTEM:
A. Benefits of Depository System to Investors:
➔ Electronic securities settlement saves time. Time expended on the preparation of share
certificates and the sale of shares shall be avoided.
➔ The depository ensures that only pre-tested properties with good title are traded. As a
result, an investor is always assured of good title properties. In addition, problems with
bad deliveries and all risks associated with physical certificates, such as failure, robbery,
mutilation, etc., are avoided.
B. Benefits of Depository System to Company:
➔ The depository system allows the management of the company to retain and update
details on the company's shareholding pattern. The organization is able to know the
particulars of beneficial owners and their holdings on a daily basis.
➔ Owing to the dematerialization of shares, the expense of the issue is greatly reduced.
C. Benefits of Depository System to Intermediaries:
Intermediaries would benefit from increased liquidity, security and stock exchange turnover,
improved cash flow removal of forgeries and counterfeits, eliminating the possibility of
settlement due to bad deliveries.
D. Benefits of Depository System to Capital Market:
➔ As the trading, clearing and settlement process is automated and interlinked with the
depository, the capital market is more transparent.
➔ The use of computers and advanced communication systems in the depository system
have made market capital effective. (Benefits of Depository System, n.d.)

5. V .What is a Demat Account?
A Demat account, also known as a
Dematerialised account holds the facility of
trading and acquiring shares and securities
in an electronic format. Holding a Demat
account facilitates easy trade, especially
online trading where shares are bought and
held in one’s particular Demat account.
VI. How to open a Demat account?
The procedure of opening a Demat account is easy, and convenient. Hence it is available in two
modes, online, as well as offline. The steps to opening a Demat account offline are as follows:
1. Select a Depository Participant: After going through your requirements, and
internal sources available, you must choose one, from the range of Depository
Participants suiting your needs.
2. Fill an Application Form: To open a Demat account, you must fill out an application
form for the same, along with KYC documents such as Identity Proof, Address Proof,
PAN card, Bank details, and other personal details.
3. Verification process: When you are opening a Demat account, you will be given a
list of rules and regulations to ensure ethical and legal trading, and to clear any doubts
about your personal Demat account and trading using that account. The DP will
conduct an in-person verification of you and your KYC documents and you will have
to pay any necessary fee (which usually varies from one DP to another) associated
with opening a demat account.
4. Final approval: Once your documents are verified, your account will be approved
and you will also be given the Unique Identification Number for that particular
account of yours.

6. The steps to opening a Demat account online are as follows:
1. Open up the official website of the Depository Participant you have chosen according to
your needs.
2. Fill out a simple application form, asking for your
name, phone number and city of residence. You
will then receive an OTP on the registered phone
number.
3. Enter the received OTP and fill in other KYC
details including bank account details, PAN card
details etc.
4. Your Online Demat account would have been set
up by now, enjoy trading!
5. All details, updates and notifications for the same will be received on the registered email
address or phone number.
A single person, an investor can have multiple Demat accounts, either with the same Depository
Participant or even others.
How to open a Trading account?
To hold an active trading account, you must firstly open an account and then register with the
stock exchange. After comparing the different services and brokerage rates provided by different
firms registered with SEBI, select the right one according to your needs. Then again, fill out the
application form for the account, along with personal and KYC documents. After the verification
has been carried out successfully, the trading account becomes active.
Trading using Demat accounts:
Since we are looking at trading – both ways, let us consider two situations:
1. When the investor wants to buy: The order to buy shares in your preferred brand can
be placed from your trading account. After the order is processed at the stock exchange
level, the shares purchased will be credited into your personal Demat account.

7. 2. When the investor wants to sell: From your trading account, you make the order to sell
an x amount of a particular security. The procedure will be performed at the exchange
level and your account will show the most recent transaction as debited to reflect the sale.
The trading that you are intending to carry out, can be conducted online or even on call,
depending on the rules and regulations of your Depository participant/broker. The only detail to
be taken care of, while conducting the transaction over call, is to have your account information
already as those will be requested to complete the purchase or sale.
The information so provided, will rightfully be examined and verified by the exchange before
carrying out the transaction and will also share information regarding availability of your
preferred shares, market price etc.
Another piece of advice is to link both your trading, as well as Demat accounts before you start
trading. This will ensure that the information is locked and will reduce the hassle of providing it
before every transaction. (How to Open Demat Account, n.d.)
VII. Paperless Trading
When products and services cross borders in international
trade, details must be passed between relevant parties, any
private firms or public bodies, as well as suppliers, logistics
suppliers, customs, regulative agencies, sellers and consumers.
Paperless trade refers to the digitization of these information
flows, including making available and enabling the exchange
of trade-related data and documents electronically. (UNECE,
2018, page 6).
“Transforming what was historically a paper-based documentation system into the electronic
format which speeds up trade and eases the expenses of doing business in today’s interconnected
world”. (UNECE, 2018, 6) Bottlenecks in supply chain management and regulative
documentation may be notablytricky for smaller businesses or e-traders with less expertise and
resources.therefore, this gives a promising ways to manage the logistic challenges of

8. e-commerce component of governmental efforts to boost the potency of customs controls and
trade administration processes, and of keeping trade competition in an exceedingly growing
digitizing world.
How paperless trading works ?
When a sales order is received, a system configured to use EDI messages can prepare all the
required documents (or messages) to enable processing like a packing list, delivery note, invoice,
and customs declaration. The system can also potentially manage reorders for inventory
replenishment and link to other entities to order transport request certifications or arranging other
services. Code lists are another important aspect of shifting from paper to electronic messages.
Any information which will be able to codify should be codified to avoid confusion. An example
can be in English language altogether, packaging goods that are palletized is often conveyed as
slab, board, honeycomb slate on them, before even taking into consideration in accounts of
differences between languages. We might consider that each of these means palletized or stacked
on a pallet transport structures, but a computer, unless it has been given commands to identify all
the variations, will not necessarily process that these are the synonymous wordings. However, if
“palletized” is displayed using a code, there is no ambiguity.
VIII. National Security Depository Limited (NSDL)
National Securities Depository Limited (NSDL) is one of the largest Depositories in the world.
The enactment of the Depositories Act paved the way
for NSDL’s establishment in August 1996. It has
established a modern infrastructure that handles most of
the securities held and settled in dematerialized form in
the capital market of India.
Using flexible and innovative technology systems, NSDL works to support the brokers and
investors in the capital market of India. NSDL aims at ensuring the soundness and of Indian
marketplaces by developing settlement solutions that minimize risk, reduce costs and increase
efficiency.

9. NSDL, playing a central role in developing services and products that continues to nurture the
growing needs of the financial services industry, provides various services to stock exchanges,
stock brokers, issuer companies, custodians, investors etc. through its network of more than 275
Depository Participants. NSDL, thus, has been able to win the trust of millions of investors and
other intermediaries, standing true to its tagline − Technology, Trust and Reach.
As per the bye laws, these are the safeguards to protect interest of clients and participants:
1. PROTECTION OF DATA
1.1. The Depository shall take necessary steps to protect the storage and transmission of
data under the Depository system. The data shall be protected from unauthorised access,
destruction and manipulation. To eliminate the possibility of unauthorised interception of
data, the transmission of data shall be in encrypted form and will have to be decrypted at
the user’s end. The backup of data stored under the Depository system by the Participants
and the Depository shall be kept by the Participants and the Depository respectively. The
Depository shall ensure sufficient security measures to prevent the access of unauthorised
persons to the data of the Depository operations, as specified in the Business Rules from
time to time.
1.2. The Depository shall have an adequate Business Continuity Plan for electronic
records and data to prepare for, prevent and recover from any disaster.
2. PROTECTION OF ACCOUNTS OF CLIENTS
2.1. The Clients have an option to freeze their accounts with the Participants to render it
inoperable for a limited period of time. On the Client opting to freeze the account,
Participant of such Client shall not affect any debit entry or any such other transaction
unless the instruction for freezing the account has been withdrawn or modified by the
Client.
3. PROVISION OF DAILY TRANSACTIONS TO THE CLIENTS ON DISPUTE
3.1. In case of a dispute between a Client and a Participant with whom the Client had
maintained his account, and the Participant’s unwillingness to give transaction statement

10. to the Client, the Depository shall cause to provide or provide, through the Participant,
such details about daily transactions as might be required by the Client.
4. INVESTOR PROTECTION FUND
4.1. NSDL shall also establish and maintain an Investor Protection Fund for the
protection of interest of beneficial owners.
4.2. The contribution to and utilization of the Investor Protection Fund shall be in
accordance with the norms specified by SEBI from time to time. (National Security
Depository Limited, 2020)
IX. Central Depository Services (India) Limited (CDSL)
Central Depository Services Limited (CDSL) was founded in
1999 to fulfil a single goal: Dependable, Convenient and
Secured depository services at affordable cost to all market
participants.
CDSL is a Market Infrastructure Institution (MII). It is an
essential part of the structure of Capital, providing services to all Market participants - Clearing
Corporations, Exchanges, Depository Participants (DPs), Investors and Issuers. It was initially
promoted by Bombay Stock Exchange Ltd., which has thereafter divested its stake to leading
banks as its sponsors.
As per the bye laws, these are the safeguards to protect interest of beneficial owners and
participants:
1. CONTINGENCY FUNDS
1.1. CDSL may establish different funds for protecting and safeguarding the interests of
participants and Beneficial Owners including Participants Funds and Beneficial Owners
Protection Funds that may be set up under these Bye Laws from time to time. Each
participant will be required to contribute to these funds in the manner and on terms and
conditions specified by CDSL.

11. 1.2. CDSL shall specify in the Operating Instructions or by way of a separate instrument,
the procedure for establishment, operation and administration of these funds and the
purpose for which these funds may be used from time to time.
1.3. CDSL shall also specify, in the Instructions of Operations or other instrument as the
case may be, the entities entitled to make claims on the funds, the procedure for making
claims, and the inter se priority of such claims on funds.
1.4. The funds so established shall be held in trust by CDSL for the benefit of participants
and Beneficial Owners as the case may be.
2. CONFIDENTIALITY
2.1. CDSL shall cause all its employees who are in the normal course of its business as a
depository, likely to have access to data or information relating to any security or
securities belonging to any Beneficial Owner including any unpublished price sensitive
information as defined under Regulation 2 (k) of Securities and Exchange Board of India
(Insider Trading) Regulations, 1992 to execute fidelity bonds undertaking that the
employee shall at all times maintain complete confidentiality in respect of all such data or
information.
2.2. CDSL, participants, Issuers, RTAs, Clearing Corporations and Clearing Members
may provide or disclose such details, particulars, data or information relating to any
Beneficial Owner and/or his account as may be required or directed in writing by any
tribunal, court, Central or State Government, SEBI or any other regulatory or revenue
authority empowered by law, in that behalf or to the concerned Issuer and/or RTA or
Clearing Corporation or as may be required for compliance with any obligations in law or
for enforcement of any of its rights or for protection of its interest without reference or
recourse to the other or to the concerned Beneficial Owner provided however that save
and except as aforesaid, none of them shall divulge or permit or suffer to be disclosed any
such data, particulars, details or information to any party or person and shall hold such
details, particulars, data and information in strict confidence.
3. PROTECTION OF DATA

12. 3.1. CDSL shall take necessary steps to protect the transmission and storage of data under
the CDSL system. The data shall be protected from manipulation, unauthorised access
and destruction. The transmission of data shall be in encrypted form so as to eliminate the
possibility of unauthorised interception of data. The back-up of data stored under CDSL
system by CDSL shall be kept in the exclusive custody of CDSL, and of such
participants, Issuers, RTAs, and Clearing Corporation respectively. CDSL shall ensure
appropriate security measures, to prevent the access by unauthorised persons to the data
of CDSL operations. CDSL shall take adequate measures for maintenance of transaction
logs and audit trail for each change either in account details or in Beneficial Ownership
of securities. (Central Depository Services Limited, n.d.)