If you are dabbling in the stock market, you are most likely doing so through a depository participant. Depository participants are entities that act as a medium between the stock market and traders, offering them a platform to be able to access the stock market. Depository participants act as agents of the NSDL and CDSL and are licensed to operate by the entities as per The Depositories Act, 1996.
Most of the online discount and full-service brokerage firms that individuals create Demat accounts with are depository participants. If you are trading through a brokerage firm, the broker you are dealing with is likely to be licensed as a depository participant. When your Demat account is opened, shares you purchase are held in that Demat account, with the depository participant. Despite the shares being in the depository participant account their sole owner is the holder of the Demat account or, the trader.
Given that, as a trader, you are taking on risk by investing in the market and tying up your capital in the investment, being able to trust your depository participant is a must for traders. In today’s day and age, most standard depository participants are built around well established and funded firms, resulting in a relatively stable trading atmosphere. However, one could find themselves wondering, that in the unlikely event that their depository participant does shut down, what happens to their shares. One is likely to be concerned given that the shares are held in the account, the holder of which is now shutting shop.
What happens to shares is the depository participants shut down?
In its simplest terms, if your depository participant does shut down, your shares will not disappear into thin air.
When you create a Demat account, you also inform your depository participant of whether you would like your Demat account to be held in the NSDL (backed by the national stock exchange) or the CDSL (backed by the Bombay Stock Exchange). Therefore, in the event that your depository participant does shut down, your shares are still safe in your Demat account which is held with the NSDL or CDSL. Given that both are backed by large institutions and are regulated by SEBI guidelines, it is unlikely that your shares will be in jeopardy if your depository participant account shuts down. So if your depository participant shuts shop, all you have to do is simply file a claim with the complete details of your trading and Demat accounts, post which the CDSL and NSDL will account up on the claim.
How your shares stay safe
In the past, there have been a number of stock market-related scams and scandals through the stock market. As a result, SEBI has, over the years, aimed to ensure that the barriers to entry to becoming a depository participant ensure that any entities not genuinely suitable for the role are deterred.
- For starters, there exist massive entrance costs into the market. Since interaction with the stock market has moved to the online sphere, depository participants make their returns from charging transaction fees that amount to a fraction of the sum being traded. As a result, in order to make any profit, a broker would have to acquire a massive user base. This strategy requires companies to spend massive amounts of cash in the short run to gain market share.
- SEBI also has in place stringent measures to ensure that the books of a depository participant are being routinely checked to ensure that there are no discrepancies that may hint at bad market practices. Additionally, SEBI also mandates that the minimum net worth of a depository be 100 crores, or over.
- It is likely that in the event that a depository participant decides it is winding up its business, that it will inform its account holders in advance. This allows time to secure your shares. One of the first things you can do is to begin the process of shifting your depository participant to another entity, ensuring that you secure your shares and your access to them before your current broker shuts down. One can also temporarily pause trading with that Demat account until they have shifted depository participants.
In the past, in the absence of stringent regulation and guidelines for the stock markets, investors could often lose money because their broker went bust. In today’s digital markets, however, brokers that are able to enter the market as depository participants are already required to pass stringent checks and barriers. In addition to this, the NSDL and CDSL, the two entities that deal with trading accounts, are backed by large government corporations. Given that depository participants are simply operating under a licence from these entities (regulated by SEBI), your shares are most likely to be safe even if your depository participant shuts down.
Despite the fact that your shares will be safe if your depository participant account shuts down, it is advisable to pick a depository participant that is well known to the general public and is historically reputable. If you would like to take it a step further, you can look into the owners and investors of the depository participant to ascertain whether you want to trust them or not.