How does CDSL work as a depository?
Central Depository Services Limited or CDSL works as a depository. But how exactly does it work? In this post, we will dive deeper into understanding CDSL’s role as a depository.
What is a depository?
Before we dive into understanding CDSL’s role as a depository, let’s take a moment to understand what a depository is. A depository is a financial institution that holds securities such as shares, bonds, and debentures in both physical and electronic form.
Depositories in India have two major functions: to maintain securities in electronic form and to facilitate the transfer of securities.
How does CDSL work as a depository?
CDSL holds securities in electronic form and facilitates the transfer of securities just like any other depository in India. However, CDSL’s approach and services make it a preferred depository among investors.
CDSL’s electronic holding system of securities eliminates the need for physical securities and for investors to deal with the risks that come with it, such as damage, theft, or loss. When an investor opens a demat account with CDSL, the securities held in the account are converted from physical (paper) to electronic form. This conversion process is known as dematerialization or demat.
CDSL stores all these electronic securities in a secure and centralized manner, keeping track of who owns these securities. When an investor buys a security, CDSL transfers the securities from the seller’s account to the buyer’s account, ensuring that the ownership of the securities is accurately updated in its records. This process of transfer of securities is called settlement.
What are the services offered by CDSL?
CDSL provides a range of services such as:
1. Dematerialization
As stated earlier, CDSL facilitates the conversion of physical securities into electronic form. When an investor opens a demat account with CDSL, the physical securities present in the account are dematerialized and held in electronic format.
2. Depository services
An investor can hold various securities in a demat account created with CDSL. The depository services provided by CDSL include holding securities such as shares, debentures, and bonds held in demat form, and facilitating the transfer of the same from one account to another account.
3. Settlement services
The settlement of trades in the stock market is facilitated by the depositories in India. When an investor buys shares on a stock exchange, the shares need to be transferred from the seller’s demat account to the buyer’s demat account. CDSL, being a depository, facilitates this transfer or settlement.
4. Corporate actions
CDSL manages various corporate actions such as dividends, rights issues, bonus issues, and stock splits on behalf of the companies whose securities are held in demat form. CDSL coordinates the distribution of these benefits to the rightful owners.
What are the benefits of using CDSL?
The benefits of using CDSL are:
- Elimination of risks associated with physical securities, such as loss, theft, and forgery.
- Fast and efficient transfer and settlement of securities.
- Convenience of holding securities in electronic form.
- Facilitation of seamless corporate actions, ensuring investors receive their entitlements in a timely manner.
Conclusion
In conclusion, CDSL simplifies and streamlines the process of holding and trading securities in the stock market by providing depository and other related services. CDSL’s secure and efficient platform for holding securities electronically has contributed significantly to the growth and development of the Indian capital market.
By Astrobulls Research Pvt Ltd