For securities to be eligible to trade in the secondary market, it should be held in the electronic/dematerialized form.
There are 2 Depositories in India.
a) NSDL (National Securities Depository Limited) which works for NSE.
b) CDSL (Central Depository Services Limited) which works for BSE.
Q) What do NSDL and CDSL do?
A) They convert physical share certificates into electronic form i.e Demat form.
Q) How do I convert my physical share certificate into a Demat form?
Basically, you just have to approach to your broker and he will do the rest of the things. Refer to the above figure.
Q) Why do I need to have a Demat account?
A) Earlier when the electronic system was not there, what used to happen is the settlement date was T+30.
Suppose, Rehan ordered to buy shares of XYZ company. Earlier it happened that before the buyer(say Rehan) gets the shares, he died. But the shares are still in the post because to the T+30 concept and Rehan’s broker has already taken money from Rehan and on top of that, the broker says to the company that I bought it from Rehan and in this way the broker transfer the shares from Rehan to himself. So, the broker made a double profit, and to avoid this Demat concept came (1996 dematerialization act).
If a company is listed on the stock exchange then it is required for the company to have its shares in Demat form. But for Private Limited firm you don’t need Demat, you will have a physical share certificate. For example, Patanjali shares are still in the physical format because it is not being traded on the stock exchanges.
Because of the electronic system, the settlement date has reduced drastically from T+30 to T+2. This system helps in superfast clearing and no chance of defaults even if the buyer dies.
Demat is required when you want to trade the securities and because of this, you have to approach Depositories.
Q) Does the company knows who is buying and selling?
A) No, but if they want to know then they will have to approach stock exchanges but stock exchanges don’t give it to the company unnecessarily.
Every day there is is a lot of buying and selling. Stock exchanges know who has bought from whom and they forward this list called Register of Members (List of Shareholders) to the depositary in the e-format.
Now, here comes Depository Participant (DP) in the picture. Let’s see who is he?
- Depository Participant (DP):- is an agent through which you open a Demat account also known as Broker.
Depository Participant (DP) maps (links) your account with NSDL/CDSL.
You cannot approach Depositories directly, that’s why you need to have a middle man.
Q) Why would a company e need a list of Register of Members on a particular date?
A) If a company wants to declare a bonus or dividend then and they need the list of Register of Members on a particular date called Record Date.