Before 1996, trading in the stock markets was time-consuming due to a lot of paperwork and long delays in buyer-seller confirmation. To add to the woes, fraud and mistakes in the trading system caused people to be hesitant to trade in the stock markets.
A proper system was needed to solve these issues and increase investor participation and faith in the working of stock markets. The introduction of the “Depository Act” in 1996 addressed these issues.
In this blog, you will find out what a depository is, its function, the distinction between NSDL and CDSL, and which is superior.
What is a depository?
Shares can be stored in two forms, similar to how money can be stored, physically or digitally. The physical equivalent of money is cash or notes; for shares, it is a share certificate. This form of share ownership is called a materialized format since you can physically hold or touch it.
However, shares can also be stored digitally in a dematerialized format, just like how money is stored in a bank account. To store shares in dematerialized form, you need to open a Demat account with a depository, which is similar to opening a bank account with a bank.
By storing shares in a Demat account, you can avoid the hassle of keeping physical share certificates safe and secure and easily manage your share portfolio online.
Additionally, it offers faster and more convenient transactions since you don’t need to transfer share certificates physically.
Overall, opening a Demat account can be a beneficial move for those who invest in stock markets.
In India, there are two major depositories where you can open a Demat account: NSDL and CDSL.
What is NSDL in the Stock Market?
National Securities Depository Limited (NSDL) is a significant depository in the Indian stock market and is among the largest in the world.
It handles the dematerialized financial securities and provides various services, such as managing Demat accounts, allotting public issues, generating Consolidated Account Statements, and alerting investors about crucial investment-related information.
What is CDSL in the Stock Market?
Central Depository Services Limited (CDSL) is another national depository in India and was also listed on the National Stock Exchange on June 30, 2017. CDSL provides services similar to NSDL, such as maintaining a Demat account, offering electronic access to securities information, providing SMS alerts about transactions, facilitating e-voting, and e-locker services.
It is the first and only depository in the Asia-Pacific region to be listed on a stock exchange and the second globally, according to its 2020-21 annual report.
Role of NSDL and CDSL
NSDL and CDSL play a crucial role in the stock market:
- Depositories eliminate the risks associated with carrying physical assets, such as loss, damage, or theft of share certificates, by holding securities in an electronic format.
- By offering margins to their clients, NSDL and CDSL aid in bringing liquidity to the market.
- Depositories have a crucial role in transferring the ownership of shares to you upon purchasing any financial asset.
- The depositories’ presence has decreased the possibility of fraud and incorrect deliveries.
Difference between NSDL and CDSL
NSDL and CDSL have similar functions, but the two depositories have a few notable differences. Here are a few key differences you need to know
- Stock exchange: NSDL and CDSL are primarily distinguished by the stock exchange they serve. NSDL manages the dematerialized financial securities of the National Stock Exchange, while CDSL holds the securities of the Bombay Stock Exchange. However, both depositories are available for exchanges to use for trading and securities settlement.
- Promoters: NSDL and CDSL also differ in terms of their promoters. NSDL is promoted by the National Stock Exchange (NSE), Industrial Development Bank of India (IDBI), and Unit Trusts of India (UTI). In contrast, CDSL is promoted by the Bombay Stock Exchange (BSE), State Bank of India (SBI), HDFC Bank, Bank of Baroda, Standard Chartered Bank, and other financial institutions.
- Established in: NSDL is the pioneer of Indian depositories, having been set up in August 1996, while CDSL was established three years later in 1999.’
- Demat account number format: The format differs based on your chosen depository. If your account is with NSDL, your 16-digit number will start with ‘IN’ followed by 14 digits. But, if your account is with CDSL, your 16-digit number will consist of only numeric digits.
- Statistics:As of March 31, 2023, NSDL had 283 depository participants and 3,14,63,053 active demat accounts and securities worth ₹302.18 Lakh crore under Demat custody. In contrast, CDSL had 588 registered depository participants with 8,30,01,541 active demat accounts and securities worth ₹3971.12 Lakh crore under Demat custody.
NSDL or CDSL, which is better?
To differentiate between alternatives, they must exhibit significant differences. However, this is not the case when comparing NSDL and CDSL. Both of them have similar functions and offer similar services. They are both registered with the government and are governed by the SEBI. Consequently, there is no clear answer as to which among NSDL and CDSL is superior.
To wrap up, NSDL and CDSL are depositories in India that enable the secure storage of financial assets in electronic format. Despite their minor differences in the stock exchange, promoters, Demat account number format, and some statistics, the functions and services offered by both depositories are similar. They are both actively involved in the market to ensure the smooth trading of securities.
If your Demat account number comprises 16 digits, beginning with ‘IN’, followed by 14 numbers, then it is associated with NSDL.
On the other hand, if your 16-digit Demat account number contains only numeric digits, then it belongs to CDSL.
In terms of the number of registered intermediaries and active Demat accounts, CDSL surpasses NSDL. Consequently, CDSL can be considered larger than NSDL in terms of the number of DPs and active accounts.
Yes, you can transfer shares between NSDL and CDSL through inter-depository transfer. It can be done manually using a Delivery Instruction Slip or online through the Speed-e-facility.
If you have a Demat account with NSDL, you can sell your shares by submitting a sell order through your brokerage platform. The proceeds from the sale will be credited to your linked bank account.
No, NSDL is a private company providing depository services in India.