What are the Benefits of Depository System?

The benefits of depository system may be studied under four heads namely,

  1. Benefits to investors,
  2. Benefits to companies,
  3. Benefits to intermediaries; and
  4. Benefits to the capital market.
Benefits of Depository System
Benefits of Depository System

Benefits of Depository System to investors

1. A depository ensures that only pre-verified assets with good title are traded. Therefore, an investor is always assured of assets with good title. Moreover, the problems of bad deliveries and all the risks associated with physical certificates, such as loss, theft, mutilation etc. are avoided.

2. Electronic transaction of securities saves time. Time spent on preparation of share certificates and transfer deed are avoided.

3. Electronic transactions reduces the settlement time.

4. Instant transfer of securities enables the investor to get dividend, right and bonus without delay.

5. Transaction costs are reduced as transfers in electronic form are exempt from stamp duty.

6. There is no problem of odd lots as the marketable lot in depository is fixed as one share.

7. The interest rate on loan against pledge of dematerialised shares is comparatively lower.

8. As a security measure, the account holder can totally freeze his account for any desired period.

9. Depositories enable the investors to deliver shares in any part of the country without exposing themselves to the risk and cost of transportation.

10. The investor is able to revise his portfolio more frequently due to low transaction costs and quick transfer of securities.

Benefits of Depository System to Company

1. The depository system enables the company management to maintain and update information about shareholding pattern of the company. The company is able to know the particulars of beneficial owners and their holdings periodically.

2. The issue cost gets drastically reduced because of dematerialisation of securities.

3. Paperless trading is a boon for the company management.

4. Distribution of cash corporate benefits (dividends) and non-cash corporate benefits (rights and bonus) will be quicker as the ownership can be easily identified.

5. The transfer process under depository system is prompt and free from defects. So, complaints against the company by an investor is avoided in this regard. This helps the company build a good corporate image.

Benefits of Depository System to Intermediaries

Intermediaries will be benefited from enhanced liquidity, safety and turnover on stock market, improved cash flow elimination of forgery and counterfeit with elimination of risk from settlement due to bad deliveries.

Benefits of Depository System to capital market

1. As the trading, clearing and settlement mechanism are automated and inter-linked with the depository, the capital market is more transparent.

2. Use of computers and improved communication technology in the depository system has made capital market activities efficient.

3. Investors repose a high degree of confidence in the capital market.

4. Use of depository system attracts foreign investors.

5. Volume of trade in capital market substantially increases. More and more middle income group become involved either directly or through mutual funds.