A depository participant is a financial intermediary that connects investors to a securities depository. The depository keeps the central electronic record of who holds which securities, but it does not usually deal with the public directly. Instead, banks, brokers, custodians and other approved institutions become participants, open accounts for their clients within the depository's system and carry out transactions on those accounts. In India, where the term is most widely used, it is commonly shortened to DP.
The arrangement is often compared to banking: the depository is like a central bank that keeps the master ledger, and the participant is like a branch where the customer holds an account. Every central securities depository works through members of this kind, although the label varies. The Depository Trust Company in the United States simply calls them participants, and European depositories also use that term.
The Indian model
India's system was created by the Depositories Act of 1996, which allowed securities to be held in electronic form. Two depositories operate under it: National Securities Depository Limited (NSDL), which began operating in 1996, and Central Depository Services (India) Limited (CDSL), which followed in 1999. Both are regulated by the Securities and Exchange Board of India (SEBI) under its regulations on depositories and participants.
An investor who wishes to hold listed securities opens a beneficial owner account, usually called a demat account, with a participant of either depository. The securities are legally registered in the name of the depository, while the investor is recorded as the beneficial owner with all the rights of a shareholder. Unlike many Western markets, holdings are recorded at the depository in each investor's own name rather than pooled in an omnibus account, so the depository can see every end investor.
Who can be a participant
SEBI's regulations limit the role to defined categories, including banks, public financial institutions, custodians, stockbrokers, clearing corporations, non-bank finance companies and registrars to an issue, subject to net worth and infrastructure requirements. An applicant is admitted by a depository and registered by SEBI. Participants must keep client securities separate from their own, maintain records, reconcile their records with the depository every day, submit to inspections and audits, and handle investor complaints.
Services provided
- Account opening. The participant carries out know your customer checks and opens the account.
- Dematerialisation. It accepts paper certificates and arranges their conversion, as described under dematerialisation of securities.
- Settlement of trades. It debits or credits the account to deliver or receive securities for trades on the exchange, as part of securities settlement.
- Off-market transfers. It moves securities between accounts on the holder's instruction for gifts, inheritance or private sales; see off-market transfer.
- Pledges. It records a pledge or lien when securities are offered as collateral for a loan or for trading margin.
- Corporate benefits. Bonus shares, splits and other securities entitlements are credited to the account, while cash dividends are paid by the issuer to the linked bank account.
- Statements. It provides transaction and holding statements; the depositories also send consolidated statements directly.
Controls and investor protection
Because the participant can move securities on its clients' accounts, the system includes safeguards against misuse. Each security is identified by its ISIN. Debits traditionally required a signed delivery instruction slip from the investor, and many brokers obtained a power of attorney to deliver securities for clients' trades. After cases in which brokers misused client securities, SEBI tightened the rules, replacing broad powers of attorney with narrower authorisations, introducing electronic consent by one-time password and requiring client collateral to be pledged in the client's own account rather than transferred to the broker.
Depositories send alerts to investors by text message and email for each debit, and investors can view their holdings directly through the depositories' own portals. If a participant fails, client accounts can be moved to another participant, since the holdings are recorded at the depository rather than on the participant's balance sheet.
Fees
The depositories charge participants, and participants set their own charges to investors. Typical items are an annual account maintenance fee and a charge for each debit transaction, with further fees for dematerialisation and pledges. Regulators have required a low-cost basic account for small investors.
Comparable arrangements elsewhere
Several other markets, including Pakistan, Bangladesh, Sri Lanka and Nepal, use the same term and a similar structure. In markets built on indirect holding, the participant is typically a custodian or broker holding a pooled safekeeping account at the depository, and end investors appear only in the participant's own books, forming a longer custody chain.