Investing in equity markets has become really easy with several investment apps providing user-friendly features. The apps have also integrated with the several digital payment options making the overall investing process a really easy one.
Gone are the days when investors had to visit brokers and fill several forms to make an investment in the stock market. Today, investors manage their entire investment cycle via a few clicks/swipes over their mobile phones. As investors enjoy this seamless experience, it is only proper to know how this entire system came about at the first place.
The National Securities Depository Limited (NSDL), which recently celebrated its 25th anniversary, is one leading depository organisation which is credited behind this change.
The NSDL was established in December 1995. The idea behind establishing the NSDL is mentioned in SEBI’s Annual Report 1993-94. The report states that “the increasing volumes on Indian stock exchanges have resulted in enormous paper work”. A task force was established to reduce this paper work, and it suggested that by establishing depositories paper work could be reduced.
Depositories are specialised organisations that hold a person’s securities such as shares, bonds, etc. in electronic form, and transfers these securities across persons without human intervention. SEBI’s frequently asked questions compares depositories to banks. Banks transfer money electronically, and depositories do the same for securities. Just as banks safeguard customer deposits, depositories safeguard investor securities. Just as banks have agents, depositories have agents named depository participants (DPs) who “interfaces with the investor and provides depository services”.
How does the system work?
The investors open a depository account with one of the designated DPs. The securities bought and sold by the investors are recorded in the depository account without the need physically exchange share certificates. With DPs, the physical share certificates had to be converted into electronic versions via a process named as dematerialisation. These electronic securities are also called dematerialised securities, and that’s why the depository account is also called a demat account.
The first depository permitted by SEBI was the NSDL in 1995, followed by the Central Depository Services (India) Limited (CDSL) in 1999. While the NSDL was promoted by the National Stock Exchange, the CDSL was promoted by the Bombay Stock Exchange. While the NSDL has 282 DPs associated with it, the CDSL has 631 DPs registered with it. SEBI has termed these depositories and DPs as Market Infrastructure Institutions.
The first demat transaction at the NSE was done in December 1996. The demat concept was an instant hit. The value of demat transactions at the NSDL touched $1 billion in December 1997. By March 1998, the value of demat transactions crossed $5 billion, and touched $1 trillion in 2007. In 1998, the number of demat accounts was 100,000; this crossed 2.5 million by May 2000.
Apart from depository services, the NSDL launched other services as well. It started offering PAN card services and online tax accounting system in 2004, and it launched online uploading of central excise challan data in 2005. In 2007, the NSDL joined the mobile revolution and started a facility for delivery of shares using mobile phones. In 2011, it was appointed as registrar of the Unique Identification System which led to the Aadhaar card.
In 2015, the NSDL diversified into banking services. The RBI awarded the NSDL a licence to open a payment banks along with 10 other players. In 2018, the NSDL started the payment bank and offered digital loan against shares facility for bank DPs.
The 2020 COVID-19 pandemic led to a significant rise in retail interest in the stock market, leading to a sharp rise in the number of demat accounts. In 2021-22, the number of demat accounts on the NSDL rose to 26.8 million. The years 2021-22 saw a rise of 30 percent in number of demat accounts compared to an average growth of 6-7 percent in the previous decade. As of October 2021, the number of demat accounts was at 73.8 million.
In 2022, the NSDL has joined the new-age world of decentralised blockchain-based ledger system. It has launched a blockchain-based market platform to manage and monitor the security and covenant related to issuance of bonds. The new system will use cryptography to sign and stamp the securities. In the decentralised system, one can follow the audit trail of transactions — this will uphold transparency and strengthen the confidence in the market.
At its 25th anniversary function held on May 7, SEBI Chairperson Madhabi Puri Buch inaugurated the new blockchain-based system. She said, “Going forward, today will also be remembered as an important day as we are taking the first step in terms of use of distributed ledger technology in the market technology in the market”. In the same function, Finance Minister Nirmala Sitharaman launched the ‘Market Eklavya” — an investor awareness programme for students in various Indian languages.
To sum up, the NSDL has played a stellar role in shepherding development in India’s capital markets. While digitalisation and apps are the buzzword today, it was the NSDL’s dematerialisation of physical securities which kick-started the whole process 25 years ago. The next 25 years of the NSDL will be as exciting and challenging as only 7 percent of India’s 1.36 billion population have demat accounts, or invest in equities. As India grows and digitalises, it is likely that households will pour more of their savings into the equity markets which will keep the NSDL in the thick of action.
Amol Agrawal is faculty at Ahmedabad University.
Views are personal and do not represent the stand of this publication.
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