A Depository facilitates holding of securities in the electronic form and enables securities transactions to be processed by book entry. The Depository Participant (DP), who as an agent of the depository, offers depository services to investors. According to SEBI guidelines, financial institutions, banks, custodians, stockbrokers, etc. are eligible to act as DPs. The investor who is known as beneficial owner (BO) has to open a demat account Depository Participant, who opens Demat Account of Investors and also execute their instructions with regard to transfer, pledge, un pledge, invocation, lien, rematerialization, dematerialization etc.
Till the year 1996, Although India had a century old active capital market, Physical (paper based) Shares based settlement of trades caused substantial problems like bad delivery of shares on account of fake shares, stolen shares, forged signature etc., delayed transfer of shares in the name of Buyer, Issuance of shares or certificate by Companies more than actual issued capital (excess share). All the above problem were serious risk to the market and hurdle to the further development of Capital Market in India. This led to enactment of Depositories Act in August 1996 and paved the way for establishment of NSDL, the first depository in India.
CDSL second depository of India, was set up with the objective of providing convenient, dependable and secure depository services at affordable cost to all market participants esp Stock Broker and brought in the desired competition in the Depository Segment.
To promote use of electronic form of securities and to encourage investor for dematerialization of existing physical paper based shareholding, Depository Act,1996 exempted all depository based electronic transfer of shares and securities from Stamp Duty, which was 0.25 percent of the value of the securities.
Depository aims to ensure the safety and soundness of Indian marketplaces by developing settlement solutions that increase efficiency, minimise risk and reduce costs.