A depository system is a system, where securities are held in electronic form. The transfer and settlement of securities are done electronically. On behalf of shareholders, the Depository System maintains accounts of the shareholder, enables transfer, collects dividends, bonus shares, etc.
It is also known as, ‘Scripless trading system’. The Depository Act was passed in the year 1996 under which the depository system was introduced. NSDL and CDSL are the two depositories operating in India.
Importance of Depository System:
- Depository plays a very important role in the smooth functioning of the capital market.
- Reduced paperwork: The aim of the depository system is to reduce the paperwork. It is scriptless system.
- Use of Technology: Paperless trading is possible as it uses the technology. It facilitates electronic transfer.
- Elimination of Storage and handing: As it is a scriptless system storing and handing of certificates work gets eliminated.
- Reduces cost and efforts: Depository system the cost and efforts involved in storage and handling of physical certificates.