Depository, Depository Participants and Issuer under The Depositories Act, 1996


Author: Khushi Paliwal, University College of Law, Mohanlal Sukhadia University


We, humans, are blessed with technology in the 21st century and the ‘depository system’ is one of those blessings where we can deposit our securities electronically. There was a time when investors used to get the physical certificates and they had to keep them safe and needed to forward the same to the next party.  But due to the innovation of the Depositories Act, 1996, this paperwork is replaced by an electronic mode of entries and largely known as the concept of dematerialization. 

The Depositories Act was enforced on 7 January 1996 and subsequently brought changes into the Companies Act, 1956; the Securities and Exchange Board of India Act, 1992; the Indian Stamp Act, 1899; the Income-tax Act, 1961; and the Benami Transactions (Prohibition) Act, 1988. It was brought by keeping in mind the objectives of free, speedy, accurate and safer transferability of securities deposited by the investor. 


In simple terms, we can say that a ‘depository’ is an institution which receives deposit, money, security etc. for example a bank or trust company. This institution has its obligation that he keeps the thing with reasonable care and upon request restores it to the depositor. It holds securities of inverters in electronic form. These securities can be shares, debentures, bonds, Government Securities, units etc.

A depository also provides services regarding transactions, acts as a trustee and an agent of the owner of the securities. Once the shares are submitted in the depository then their transfer would be regulated by the book-entry system and its basic function is to dematerialize the security and to maintain the book records.

Sub-section (1A) of section 12 of the Securities and Exchange Board of India Act, 1992 says that a depository means a company formed and registered under the Companies Act, 1956 and which has been granted a certificate of registration under the same Act i.e. SEBI.


There are generally four parties involved in a depository system:

  1. The Depository

A Depository is the most important party of the complete process because it is a center of holding securities electronically and keeps an eye on book entry transactions which are done by the Depository Participant. There are a few modes of registration with depository when it comes to securities transfer:

  • Every depository shall, on receipt of intimation from a participant, register the transfer of security in the name of the transferee.
  • If a transferee of any security seeks to have custody of such security, the depository shall inform the issuer accordingly.
  • The Beneficial Owner

In legal terms, a beneficial owner (BO) is an individual who enjoys the benefits of specific ownership even though that particular property and its legal title do not belong to him.

The investor who is also known as a beneficial owner is another party to the depository process; where he has to open a Demat account with the help of any depository participant for dematerialization of his holdings and transferring securities.

  • The Depository Participant

This party of depository system is an agent of depository (bank or any trusted institution) which offers depository services to investors. According to the guidelines placed by SEBI any financial institutions, banks, custodians, stockbrokers, etc. are eligible to act as depository participants. 

In India, a depository participant (DP) is described as an intermediaries or middlemen between the depository and the investors. There is an agreement made under the Depositories Act which governs the relationship between the two, depository participants and depository. 

As per the provisions mentioned under the SEBI Act, a depository participant can perform his services i.e. depository-related services only after he receives a certificate of registration from the said act. According to the report of 2012, there were 288 DPs of NSDL (National Securities Depository Limited) and 563 DPs of CDSL (Central Depository Securities Limited) registered under the SEBI Act. Depository Participants include brokers, banks, insurance companies, Stock Exchange clearing cells, the Reserve Bank of India, financial institutions, institutional managers, fund managers etc.

  • The Issuer

In the simplest term, an issuer is a person who issues the securities submitted in the bank/depository in dematerialized form. Issuers can be corporations, investment trusts, domestic or foreign governments, etc. These issuers make available securities such as equity shares, bonds, and warrants and it is a legal entity that develops, registers, and sells securities to finance its operations. Moreover, Section 1(1) (j) defines ‘registered owner’ as a “depository whose name is entered as such in the name of the issuer.”

Agreement between depository and participant:

A depository can enter into an agreement with one or more participants at once. All DPS are the agents of the depository; any person can approach these depository participants (DPs) and can enter into an agreement through the process of bye-laws and can avail the services of that depository. The same has been mentioned under Section 4(1) of the Act. 

Section 41 of the Companies Act lays down two modes of acquiring membership of a company and in both an entry of the name of a person as a member in the register of the members of the company is a condition precedent for a person to be regarded a member of the company. However to facilitate the beneficial owner of shares, on whose behalf the depository holds the shares, to be recognized as members, Section 41 in its new subsection 3 provides that every person holding equity share capital of a company and whose name is entered as a beneficial owner in the records of a depository shall be deemed to be a member of the concerned company.

Regulation 26 of the SEBI (Depositories and Participants) Regulations, 1996 states that depositories, participants, issuers, and issuer’s agent, in addition to the rights and obligations laid down in the Depositories Act and the bye-laws shall have the rights and obligations arising from the agreements entered into by them.

In Probir Kumar Misra v. Ramani Ramaswamy it was held that after the Depositories Act, 1996, such depositors who are holding equity share capital of the company and whose name is entered as the beneficial owner are also deemed to be members of the company, thus making them members under the Act.

In the case of Northern Projects Ltd. v. Blue Coast Hotels and Resorts Ltd. it was contended that only persons holding equity shares can be members of the Company in terms of Section 41(3) of the Act. This was rejected by the Court and it was stated that Subsection (3) of Section 41 is therefore only in addition to Section 41(1) and Section 41(2) and not in derogation or substitution of the first two subsections. The word ’shareholder’ and ‘member’ is used in the same connotation under the Act and the Section covers the third category of equity shareholders who are neither subscribers as contemplated by Sub-section (1) nor whose names are entered in the register of members as contemplated under Sub-section (2) of Section 41.


The motto behind the Depositories Act which provides for the establishment of depositories like NSDL and CDSL is to remove the irregularities which often take place in the capital market and to secure the investors’ interest, avoid corruption, a way for transparency and so on.

There is no doubt that the process often takes time, results in bad delivery and faulty paperwork. Sometimes theft, falsification, the proliferation of certificates are something common what we hear in the media. But this process/Act has overcome many loopholes including stamp duty, fake securities, high transaction cost, one share cannot be traded and many more things that actually existed earlier in the system.

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