What Does a Depository Actually Do?

““The financial system is only as strong as its plumbing.” — Paul Volcker ”

Behind every share you own, there’s a digital vault keeping it safe — that’s what a depository does. We explore how depositories like NSDL and CDSL form the invisible backbone of India’s stock market. With NSDL’s IPO around the corner, it’s the perfect time to understand the world of depositories — what they are, how they work, and why they matter.
Markets & Investing
Author

Satvik Raman

Published

July 28, 2025

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The Basics: What Even Is a Depository?

Let’s start with the concept. Think about your bank. It holds your money digitally. A depository does something similar, but instead of money, it stores securities like shares, bonds, ETFs, and mutual fund units in electronic form.

So when you buy shares of a company (say, Reliance), you don’t receive a physical certificate. Instead, those shares are held digitally in your demat account — short for “dematerialized account.”

Depositories ensure these holdings are:

  • Safely stored
  • Easily transferred
  • Accurately recorded

Just like a bank needs branches to serve customers, depositories operate through Depository Participants (DPs) — typically your broker (like Zerodha, ICICI Direct, or Groww).

Why Depositories Matter

Before depositories were introduced, trading in India was paper-based. Share certificates got lost, signatures didn’t match, and transfers took weeks.

That changed in the mid-1990s when India introduced depositories. They:

  • Eliminated the need for physical share certificates
  • Enabled T+1 settlement (buy today, and get the shares in your account tomorrow)
  • Made trading faster, safer, and more accessible to millions of Indians

Today, a depository is a critical part of the stock market’s infrastructure — it’s what makes modern investing even possible.

A Simple Analogy to Tie It All Together

Say you buy 10 shares of Infosys through your trading app. What happens?

  1. You place the buy order.
  2. The stock exchange matches your trade.
  3. The depository (NSDL or CDSL) gets notified.
  4. On the settlement day (T+1), the seller’s demat is debited and yours is credited.

Think of it like UPI for stocks — except instead of money, you’re transferring ownership of securities, and the depository is the invisible trust layer that ensures it all works.

India Has Two Depositories: NSDL and CDSL

India is one of the few countries with two licensed depositories:

  1. NSDL (National Securities Depository Limited) — Established in 1996, backed by NSE
  2. CDSL (Central Depository Services Limited) — Established in 1999, backed by BSE

They’re both regulated by SEBI, and function largely the same way. Your broker decides which one holds your demat account.

Spotlight on NSDL

NSDL was the first depository in India and remains the largest by value of holdings. It plays a crucial role in enabling smooth settlement of trades, storage of securities, and investor services.

Here’s what NSDL handles:

  • Holds securities digitally — stocks, bonds, ETFs, mutual fund units
  • Enables trade settlements — ensures smooth transfer between buyer and seller
  • Records ownership — linked to your PAN and Aadhaar
  • Supports corporate actions — dividends, rights issues, bonus shares
  • Helps with pledging and unpledging of shares for loans

It also works with government initiatives like:

  • e-KYC infrastructure
  • National Academic Depository (stores academic certificates)
  • Insurance repositories and digital signatures

NSDL is not listed yet, but its IPO is expected soon. It’s backed by heavyweights like IDBI Bank, NSE, SBI, HDFC Bank, Citibank, and Standard Chartered.

What About CDSL?

CDSL, the second depository, went public in 2017 and has since gained popularity — especially among retail investors.

It now holds more individual demat accounts than NSDL, partly because brokers like Zerodha and Upstox often default to CDSL.

Here’s a quick comparison:

Metric NSDL CDSL
Founded 1996 1999
Backed by NSE BSE
Listed IPO upcoming Listed (2017)
Demat Accounts (approx) ~3 crore ~10 crore
Market Share (by value) Higher Lower

Both perform the same critical functions — it’s just a matter of which one your broker is connected to.

Final Thoughts: Why You Should Care

When you invest in stocks, you probably think about prices, charts, and news. But behind the scenes, depositories like NSDL and CDSL are working tirelessly to keep your holdings safe and transactions smooth. Without them, you’d be dealing with paperwork, lost certificates, and long settlement times.

So with NSDL’s IPO in the news, it’s a great time to step back and appreciate the market plumbing that makes investing so seamless today. Whether or not you choose to invest in NSDL, it’s worth knowing how it (and CDSL) quietly power India’s financial markets every single day.