NISM-Series-VI: Depository Operations · Introduction to Depository

Depository vs Bank: Functions and Comparison for NISM

Updated 11 October 2026 · Fact-checked

A depository is like a bank for securities. A bank holds your money in an account and moves it on your instruction. A depository holds your securities in electronic form in a demat account and transfers them on your instruction. A bank does not hold shares, and a depository does not lend or accept deposits.

Understand Depository vs Bank: Functions and Comparison

Start with the bank. You deposit money, and the bank keeps a record of your balance. When you issue a cheque or a transfer instruction, the bank debits your account and credits another account. No physical notes move. Only entries change.

A depository does the same for securities. It holds shares, bonds, debentures, mutual fund units and other securities in electronic form. You open a demat account through a Depository Participant (DP). When you sell, your account is debited and the buyer's account is credited. No paper certificate moves.

The analogy maps like this:

Bank holds money, depository holds securities.
Bank account holds your funds, demat account holds your securities.
Bank branch serves you, DP serves you as an intermediary and agent of the depository. The branch comparison is only loose, because a DP is a separate entity registered with SEBI, not a branch of the depository.
Cheque or transfer request moves money, delivery instruction moves securities.
Bank statement shows money balance, demat statement shows holdings and transactions.

The analogy has limits, and exams test them. A bank takes deposits and lends them out. It pays interest and takes credit risk. A depository does not use your securities for its own purposes. You remain the beneficial owner. Under the Depositories Act, 1996, the depository is the registered owner in the issuer's books only in name. It has no voting rights or other rights and benefits in respect of those securities. You, as the beneficial owner, hold those rights. Also, you deal with the DP, not directly with the depository.

Functions of a depository include dematerialisation (converting paper securities to electronic form), rematerialisation (converting back to paper), electronic transfer of securities, settlement of trades, pledge and hypothecation of securities, and passing on corporate benefits such as dividends, bonus and rights through the issuer or its registrar.

Key formulas to remember

Core analogy: Bank : Money :: Depository : Securities; A bank holds and transfers money. A depository holds and transfers securities in electronic form.
Account analogy: Bank account ↔ Demat account; Bank branch ↔ Depository Participant (DP); You reach the depository only through a DP. The branch comparison is loose: a DP is a separate SEBI-registered intermediary and agent, not a branch.
Instruction analogy: Cheque or transfer request ↔ Delivery instruction; Both are your authority to debit your account and credit another.
Ownership split: Depository = registered owner (in name only); Investor = beneficial owner; The depository's name appears in the issuer's records, but it has no voting or other rights and benefits in respect of the securities. These belong to the investor.
Key conversions: Demat: paper → electronic; Remat: electronic → paper; Both are depository functions carried out through the DP, issuer and registrar.

How to solve Depository vs Bank: Functions and Comparison questions

Most questions on this topic ask you to match a bank feature to its depository equivalent, or to spot a function that does not belong to a depository.

1Read the question and mark what is being asked: similarity, difference, or a function.
2Identify the asset in the question. Money points to a bank. Securities point to a depository.
3Map each term using the analogy: account to demat account, branch to DP, cheque to delivery instruction, statement to holding statement.
4Check whether the option involves lending, accepting deposits or paying interest. These are bank activities, not depository functions.
5Check ownership wording. The investor is the beneficial owner. The depository is the registered owner.
6Eliminate options that say you deal directly with the depository for account opening or instructions. That goes through a DP.
7Pick the one option that stays consistent with the analogy and its limits.

Quickest way: Money or securities test

When to use it: Use it for any match-the-pair or odd-one-out question with a ticking clock.

Ask: is this about money or securities?
If money, think bank. If securities, think depository.
Cross out any option where the depository lends, pays interest or takes deposits.
Choose the option that keeps the DP as the investor's contact point.

Common mistakes in Depository vs Bank: Functions and Comparison

Saying a depository lends money against deposited securities like a bank.
The bank analogy is stretched too far.
Fix: Remember that a depository only holds and transfers securities. Lending is a bank function.
Thinking the investor opens an account directly with NSDL or CDSL.
Students ignore the DP layer.
Fix: The DP is an intermediary and agent of the depository, registered with SEBI. You open the demat account through a DP.
Treating the DP as the depository itself.
Both terms sound alike and the DP is the face you see.
Fix: The DP is a separate registered intermediary that gives you access to depository services. The branch-and-bank comparison helps you remember the roles, but a DP is not a branch of the depository.
Mixing up registered owner and beneficial owner.
Both words sound like ownership.
Fix: The depository is the registered owner in the issuer's books only in name, with no voting or other rights and benefits in respect of the securities. You are the beneficial owner and hold those rights and benefits.
Assuming demat and remat are bank-like functions.
Students look for a direct bank match.
Fix: These are conversion functions with no bank equivalent. Learn them as depository-specific.
Believing a demat account holds cash.
The word account suggests a money balance.
Fix: A demat account holds securities. Money sits in your bank account.

Worked examples

Example 1

Which of the following is the closest depository equivalent of a cheque issued to a bank? (A) Demat request form (B) Delivery instruction (C) Account opening form (D) Corporate action notice

Show the solution

A cheque is your instruction to debit your money account and credit another.
The depository equivalent must be an instruction to debit your securities and credit another account.
A demat request form converts paper to electronic, so it is not a transfer instruction.
An account opening form opens an account. A corporate action notice is information.
A delivery instruction directs the DP to debit your demat account and credit another.

Answer: (B) Delivery instruction

Example 2

Which of the following is NOT a function of a depository? (A) Holding securities in electronic form (B) Transferring securities between accounts (C) Accepting deposits and lending to borrowers (D) Converting physical securities into electronic form

Show the solution

List what a depository does: hold securities electronically, transfer them, and convert paper to electronic form.
Option A is holding, so it is a depository function.
Option B is transfer, so it is a depository function.
Option D is dematerialisation, so it is a depository function.
Option C describes banking: accepting deposits and lending.

Answer: (C) Accepting deposits and lending to borrowers

Exam tips

Expect analogy-matching questions. Learn the five pairs: money and securities, bank account and demat account, branch and DP, cheque and delivery instruction, statement and holding statement.
Watch for options that give the depository banking powers such as lending or paying interest. They are wrong.
Read ownership wording carefully. Beneficial owner is the investor.
Remember the DP is your access point. Options saying you deal directly with the depository are usually traps.
In this paper a wrong answer carries a negative mark of 25% of the marks for that question. Guess only when you can confidently eliminate at least one option. Otherwise skip.

Practice questions from Introduction to Depository

Depository vs Bank: Functions and Comparison: frequently asked questions

What is the main difference between a depository and a bank?

A bank holds and transfers money. A depository holds and transfers securities in electronic form. A bank also lends and takes deposits, while a depository does not.

Is the depository analogy with a bank perfect?

No. It helps you understand accounts, instructions and statements. But a depository does not lend or pay interest, and you deal with it through a DP.

What are the main functions of a depository?

It holds securities in electronic form, converts paper securities to electronic form and back, transfers securities, supports settlement, and enables pledge and hypothecation. It also helps pass on corporate benefits to investors.

Who are the depositories in India?

NSDL and CDSL are the two depositories in India. You access either one through a Depository Participant.