Depositories Act 1996
The Depositories Act, 1996 provides the legal framework for the establishment and functioning of depositories in India, enabling the dematerialisation of securities and their electronic holding and transfer, underpinning the operations of NSDL and CDSL.
The Depositories Act, 1996 was a landmark piece of legislation that transformed India's securities settlement infrastructure by creating the legal basis for dematerialised (paperless) securities. Before this Act, shares and debentures existed only in physical certificate form, and share transfers were cumbersome, slow, and prone to fraud, forgery, and bad delivery.
The Act established the concept of a depository — a company that can hold securities in dematerialised form and enable electronic settlement of transactions. Under the Act, the Central Government can notify one or more depositories, subject to their registration with SEBI. India has two depositories: the National Securities Depository Limited (NSDL), established in 1996, and the Central Depository Services (India) Limited (CDSL), established in 1999. Together, they hold demat accounts for virtually all retail and institutional investors in India.
The Act defines the roles of the key participants in the depository system: the depository itself, Depository Participants (DPs) who are the agents through which investors access depository services (similar to how banks act as intermediaries for the central bank), issuers (companies whose securities are held in the depository), registered owners (the depository holding securities on behalf of the beneficial owner), and beneficial owners (the actual investors).
A crucial legal provision in the Act is that the depository is deemed the registered owner of dematerialised securities for all purposes of the Companies Act, while the beneficial owner (the investor) retains all beneficial rights — including the right to dividends, voting, and corporate actions. This legal distinction is what makes demat possible without altering fundamental shareholder rights.
The Act also provides for re-materialisation of securities (conversion back to physical form) and outlines the liability framework for depositories and DPs. SEBI regulates depositories, DPs, and the depository system under the Depositories Act and the SEBI (Depositories and Participants) Regulations, 2018.