Q.The Depositories Act, which created the legal framework for holding securities electronically in India, was passed in the year:

The depository system holds securities electronically and allows their easy transfer without paper certificates.

Earlier, investors held shares and debentures as physical certificates, which caused problems such as theft, forgery, damage, delays in transfer and bad deliveries. The depository system was introduced to remove these difficulties by holding securities in electronic form.

Under this system, an organisation called a depository (in India, NSDL and CDSL) keeps the investor's securities in a demat account. The investor operates this account through a Depository Participant (DP), which acts as an agent linking the investor with the depository. When securities are bought or sold, they are simply credited to or debited from the demat account by book entry, just like a bank handles money in a savings account. This makes trading quick, safe and convenient, and does away with all the risks and paperwork of physical certificates. The system is governed by the Depositories Act, 1996 and regulated by SEBI.