Meaning and Need for the Depository System

Before the mid-1990s, every Indian company share existed only as a piece of paper — a physical share certificate. Buying, selling or transferring shares meant physically moving that certificate from seller to buyer, getting it registered in the company's books, and waiting weeks for the process to complete. The Maharashtra HSC (MSBSHSE) Std XII Secretarial Practice syllabus places this chapter right after the chapters on shares, debentures and deposits precisely because it explains how those very securities are actually held and transferred today — no longer on paper, but electronically, through a depository.

What a depository is. A depository is an organisation that holds investors' securities — shares, debentures, bonds, government securities and mutual fund units — in an electronic (dematerialised) form, and enables the transfer of ownership of these securities through a simple book-entry (an electronic debit and credit), instead of the physical movement and registration of paper certificates. In this sense a depository does for securities what a bank does for money: just as a bank holds cash in an account and lets you transfer it by cheque or online transfer without handling currency notes, a depository holds securities in an account (a demat account) and lets you transfer them electronically without handling paper certificates.

Why the system was needed — the problems of the paper-based (physical) system. The old, purely physical system of holding and transferring securities suffered from serious problems, all of which the depository system was designed to remove:

1. Bad deliveries. A certificate could be rejected on technical grounds — a mismatched signature, a torn or mutilated certificate, an incomplete transfer form — causing costly delay.
2. Long transfer delays. Registering a transfer with the company or its Registrar and Transfer Agent could take weeks, holding up settlement and payment.
3. Risk of loss, theft and forgery. Physical certificates could be lost in transit, stolen, or fraudulently duplicated/forged.
4. High paperwork and stamp duty. Every transfer required a physical transfer deed and stamp duty, adding cost and administrative burden for companies, investors and the stock exchanges alike.
5. Odd lots. Certificates were often issued in fixed lot sizes, forcing investors holding an odd number of shares to buy or sell in inconvenient lots.

These problems were slowing India's capital market exactly as trading volumes were growing rapidly in the early 1990s. The response was the Depositories Act, 1996, which created the legal basis for holding and transferring securities electronically — the subject of this chapter.