What Is CDSL And How Does It Work- The Complete Guide On Central Depository Services Limited
Central Depository Services Limited (CDSL) began its operations in 1999 in Mumbai, and it's known to be the second-largest depository in India after NSDL. Like NSDL, CDSL provides all services such as holding financial securities in the electronic format, facilitating trade, and settlement of orders. Just as NSDL, all forms of stocks and securities are held at this central depository. This second Indian securities depository institution operates for the Bombay Stock Exchange (BSE), and it is promoted by the State Bank of India (SBI), HDFC Bank, Bank of India, Bank of Baroda, Standard Chartered Bank, Axis Bank and the Union Bank of India.
As an investor, you should know the two depositories in India- National Securities Depositories Ltd (NSDL) and Central Securities Depositories Ltd (CDSL). In short, both these depositories hold an individual's financial securities such as shares and bonds in dematerialised form and facilitate trading in stock exchanges. To know about NSDL, you can click here. In this blog, Fintra will highlight the vital facts about CDSL as follows:
- What is Central Depository Services Limited (CDSL)?
- What is a Depository Participant (DP)?
- How Central Depository Services Limited (CDSL) Functions?
- What is a Central Depository Services Limited (CDSL) Demat Account?
- Benefits/Advantages of Central Depository Services Limited (CDSL)
What is Central Depository Services Limited (CDSL)?
Central Depository Services Limited (CDSL) was created to provide reliable, convenient, and secure depository services at an affordable cost to all market participants. In February 1999, after it received the certificate of commencement of business from SEBI, CDSL became operational.
Later on, every leading stock exchange such as the BSE Ltd, National Stock Exchange, and Metropolitan Stock Exchange of India established strong connectivity with CDSL. With a wide network of DPs, and operating from over 17,000 sites, across India, CDSL offers convenience for investors to select a DP based on its location. The system of CDSL is built on centralized database architecture, and due to this reason, it enables DPs to provide on-line depository services with the latest status of an investor's account. One another hallmark of CDSL's services is the constant updating of procedures and processes in tune with evolving market practices. To ensure compliance of regulatory and operational requirements, CDSL regularly conducts audits of its DPs.
Central Depository Services (India) Ltd (CDSL), which is the second Indian central securities depository, is owned by the Indian Government and is registered as a depository that is used to hold various securities such as stocks, shares, property, etc., in an electronic form. Its primary function is to hold securities in certificated or uncertificated (dematerialized) form, and it also helps to do book-entry transfer of securities up to nearly 500 shares in physical form. However, nowadays traders have adapted to the electronic format for trading in securities.
What is a Depository Participant (DP)?
The Depository Participant (DP) offers depository services to the investors. Moreover, as per the regulations of the Securities and Exchange Board of India (SEBI), financial institutions, banks, and stockbrokers are eligible to act as DPs. DP is a CDSL authorized agent that acts as an intermediary between the investor and CDSL. In other words, a DP acts as a link between the beneficial owner, the stock exchange, and the issuing company. Investors who use the depository services are termed as the Beneficial Owner and are required to maintain a Demat account to use the functions of Central Depository Service Limited, which also includes the facilities of the dematerialization and transferring of securities. Central Depository Services Limited (CDSL) authorizes DPs to assist investors in handling the digitalized form of securities throughout India.
How Central Depository Services Limited (CDSL) Functions?
Since we have already explained what is CDSL, now we will highlight its working mechanism. CDSL's operating mechanism is just like a bank, and the only difference is that banks have money from depositors whereas CDSL has securities from investors in an electronic format.
However, one can’t directly approach CDSL and open an account. It has to first approach a depository participant (DP) who'll then assist in doing the needful. CDSL offers various services for holding securities, equity, commercial papers, government, bonds, certificate of deposits etc.
What is a Central Depository Services Limited (CDSL) Demat Account?
To use the services of Central Depository Service Limited (CDSL), it's vital to own a CDSL Demat account. To open a CDSL Demat account, you first have to visit a DP, the list of it can be seen on CDSL’s website. Once a DP, which is registered with CDSL, has been selected, you have to submit the KYC documents such as your address proof, PAN Card, and other bank account details. Upon obtaining successful verification, one will receive the CDSL Demat account number and other related details. Demat account is not only useful for availing the CDSL services but will even aid trading in stocks and other securities.
Benefits/Advantages of Central Depository Services Limited (CDSL)
Some of the benefits/advantages of holding securities with CDSL are as follows:
- Since the share certificates are in the electronic format, the investor is in the safe zone from facing the risks of theft, loss or damage to the physical share certificates.
- An investor doesn't need to be skeptical about the genuineness of the securities bought because the securities that are in the depository can't be returned under objection for any reason. This also eliminates the risk of bad delivery.
- The securities get transferred immediately to the investor’s account when the payment is transferred to the company’s account. The investor doesn't have to wait for the registration process from the company or its Registrar.
- Since the stock exchanges follow the method of the T+2 rolling settlement cycle, the settlement of trades gets done on the 2nd working day from the trade. This action is made possible because the dematerialized securities have paved the way for swift transfer of securities and liquidity.
- When transferring securities in the dematerialized format, stamp duty does not apply to the investors.
- In case of bonus issue or rights issue of shares, firms can directly credit their investor's accounts.
- When there's any update, changes in the personal information, and/or transmission of the BO, it directly gets updated with the CDSL. By giving single standing instruction to CDSL, the investor can easily update their details with all the companies in which they have a vested interest.
- A statement that consolidates the position of all the holdings is sent by CDSL to the investors. This enables the investor to make a well-informed decision about their financial strategy.
- The investor also gets real-time information about the listed company management about the holdings and they can even track the changes in any details related to that securities or stocks.
Conclusions
With the ongoing modern updates and awareness of the stock markets, various numbers of people got associated with the CDSL to open Demat accounts for initiating trading and/or investing. Few investors have begun trading and/or investing as a way for earning passive income while some have made this their career. However, before beginning the trading journey, Fintra advises to always bear in mind to open the best and right Demat account with a reliable stockbroker as it will enable you to make a wise investment decision.
