Before the dot com boom or internet revolution, buying and selling financial securities and holding them was done in the traditional way of physical shares consisting of the share certificate, contract note, and settlement receipts on paper. It creates a series of complications for users and brokers while maintaining the data. With technology-enabled solutions, the digitization of the stock market was initiated with a screen-based trading system (SBTS). The system helped not only individuals to perform quick trades but also helped exchanges to execute those trades within seconds instead of minutes and hours in the traditional way.
Nowadays, it is easy and convenient for experienced and young traders to participate in the stock market with a demat A/C, trading account, and savings account. People can open a demat account by paying certain charges and by visiting the website and submitting the documents. The account opening charges, maintenance fees, interest, and brokerage varies and depends on the broker providing these services.
Overview of the Indian Depository System
National Securities Depository Limited (NSDL), the first and largest depository institution, was introduced after the successful establishment of the National Stock Exchange (NSE) for the efficient functioning of the market. Before the economic liberalization of India in the ‘80s, shares were physically traded with exchanges and brokers, enduring challenges in proper storage and dispatch of share certificates with other documents. In 1996, after much more chaos, conflicts, frauds, and mismanagement, the NSDL proposed and launched the process of dematerialization with the demat account to allow transparency in stock market trading.
In the beginning, existing investors holding the physical forms of shares had to surrender them to the depository system, which would convert these shares into electronic format. Also, the NSDL later came up with innovative ways for live trading and settlement solutions. Thus, it boosted the efficiency of live trades and order flow due to online trading and minimal risk with reduced cost after digitization.
Depositories Act of 1996
A registered organisation to maintain stock market services like buying and selling shares, bonds, and debentures in an electronic form to enable smooth efficiency in the market is called a Depository. The Security and Exchange Board of India (SEBI) is responsible for the registration, regulation, and inspection of depository institutions. NSDL was incorporated in August 1996, and after a few years, in July ‘99, Central Depository Services Limited (CDSL) was introduced.
- The depository system holds all the securities listed in the exchanges within the country. It enables smooth transfer of ownership, interest, and dividend payments without or with minimum delays in the process.
- As per the act, securities transactions must be processed by depository participants. According to SEBI guidelines, a financial institution, bank, or broker can be a depository participant.
- To avail of the services of the depository, an investor with registration must enter an agreement with any depository participant.
- Any bank, broker, or financial institution in India can act as the depository only after obtaining a Certificate of Commencement of Business from SEBI.
- Any investor entering the depository agreement has to surrender the certificate of security to the depository, and on receiving it, the depository will name the investor as the beneficial owner in its records.
As per the SEBI, new demat accounts opened in India were around 4 million every year from ‘18 to ‘20. In the months from April ‘20 till January ‘21 itself, an all-time high of 10.7 million accounts was opened.
Tech-enabled products and services provided by numerous digital platforms have increased accessibility and participation in the financial markets. The use of apps and online transactions with brokers and banks has soared investor participation not only in equity segments, but also in derivative segments, FDs, mutual funds, SIPs, ETFs, and bonds. With the continuous evolution in digitalisation, AI-enabled trading has given rise to new ways and types of strategies and plans for future investors and traders.