Depository systemDepository system way for Dematerialization of securities. Shares and Bonds are being issued by various companies from some time back, these securities were issued in form of physical certificates but with the help of Depository system, the securities of shareholders are issued in ectronic form at the request of the shareholders.The old method of issuing securities certificates in paper form was very time consuming and often created problems of fake securities and bad deliveries. All these issues gave rise for the need of depository system and electronic mode of holding securities.Dematerialization Dematerialization is a new concept introduced in securities market. It is basically a process by which h the physical certificates of an investor taken/surrendered-by/to the company/registrar and destroyed and an equivalent number of securities are credited in the depository account of the credit of investor account on his request.In India there is Depository System for securities trading in which book entry is done electronically and no paper work is involved. The physical form of securities is eliminated and shares or securities are held in an electronic form.Before the introduction of the depository system through the Depository Act, 1996, the process of sale,, purchase and transfer of various securities was a huge problem and there was no safety at all.A Depository system is similar to a bank however the deposits here are shares, debentures , Bonds and government securities. A Depository functions as a bank as both are common houses holding assets of participating members and services to them.Comparison between a bank and a Depository Depository BankHold securities in an account Holds funds in an accountTransfer of securities between accounts Transfer of funds between accountsFacilitates safekeeping of shares Facilitates safekeeping of fundDepositories in IndiaCurrently there are two Depositories operating in India NSDL (National Securities Depository Limited) and CDS (Central Depository services). NSDL is India’s first Depository and was inaugurated in November 1996. NSDL was set up with an initial capital of US$28mn, promoted by Industrial Development Bank of India (IDBI), Unit Trust of India (UTI) and National Stock Exchange of India Ltd. (NSE). Later, State Bank of India (SBI) also became a shareholder. Main functions of Depository;1) Dematerialization: one of the main functions of depository system is to eliminate and reduce the movement of physical securities in the market. This is can be chieved only through dematerialization of securities.2) Account Transfer: The depository system gives effects to all transfers from the settlement of trades and other transactions between beneficial owners by recording entries in the accounts of such owners.3) Transfer and Registration: A transfer is the legal change of owner of a security in the records of the issuer. For effecting a transfer, certain legal steps have to be taken like endorsement of a transfer instrument and payment of stamp duty.4) Corporate Actions: A depository system may handle corporate actions in two ways. In the first case, it merely provides information to the issuer about the persons entitled to receive corporate benefits. In the second case, depository itself takes the responsibility of distribution of benefits.