India’s depository industry is dominated by two giants, NSDL (NSE-backed) and CDSL (BSE-backed), forming a tight duopoly. Every demat account in the country is serviced by one of them, placing these two players at the core of India’s investment landscape.
But what exactly do these depositories do?
A depository is like a digital vault for all your financial investments. Instead of holding physical share certificates, which were vulnerable to loss, theft or damage, a depository keeps your shares, mutual fund, bonds, ETFs, and government securities in electronic (dematerialised) form, eliminating the risks or complications of paper-based securities.
Key functions performed by the depository are:
- Safekeeping of securities: Holds shares, bonds, mutual funds, ETFs, and government securities in electronic form.
- Settlement of trades: Transfers securities between buyer and seller accounts on a T+1 basis.
- Maintaining records: Maintains accurate and up-to-date investor ownership details.
- Corporate actions: Executes the credit of dividends, bonuses, splits, and interest payments to the investor’s account.
- Pledging of securities: Allows investors to use their dematerialised securities as collateral to secure loans without physically moving them.
Why should a depository be part of your investment portfolio?
The growth of depositories is closely linked to the expansion of India’s financial markets. Here’s a breakdown of the potential.
- Untapped Potential: India has 20.6 crore demat accounts, still less than Dream11’s 25 crore users, highlighting significant room for growth.
- Proxy to Capital Market Growth: Depositories directly benefit from India’s rising retail participation in equities, driven by discount brokers like Zerodha, Groww, etc.
- Low Penetration: Only ~14% of Indians have a demat account, compared to 62% in the US, leaving a scope across 78 crore PAN holders.
- Projected Growth: Demat accounts are projected to reach 25 to 30 crore by FY30.
- Government Push: Plans like dematerialisation beyond equities to insurance and academic records can open up new revenue streams for depositories.
But why are there only 2 depositories in India?
- High license cost: Minimum net worth of ₹100 Cr+ prevents casual entrants and keeps the system efficient.
- Utility model: Depositories function like public utilities (power grids, railways), not as competitive services.
- Regulated for safety: SEBI prefers only a few tightly regulated depositories to reduce settlement and record-keeping risks.
- Global standard: Many countries operate with a single depository, such as the USA (DTCC), UK (Euroclear UK), Japan (JASDEC), and Singapore (CDP).
This ensures efficient functioning, as having too many depositories would fragment investor records, complicate clearing-house coordination, and raise the risk of fraud or duplication.
Competitive advantages of these depositories:
- High Entry Barriers: The high capital and regulatory costs restrict new competitors.
- High Operating Leverage: A large portion of expenses (~58%) is fixed costs for employees, cybersecurity, and IT infrastructure. A new entrant would face significant losses for a prolonged period while it gains market share.
- High Switching Costs: For a broker like Zerodha to switch from CDSL to NSDL, the process of transferring critical data would be operationally disruptive and expensive, making client retention for a new depository extremely difficult.
Can the depositary business be impacted by AI/ Blockchain technologies?
The simple answer is no. AI and blockchain will not replace depositories. Instead, these technologies will help depositories function more efficiently.
One major advantage of blockchain technology is its distributed nature. This means that the data is stored in multiple places instead of just one, making the system more secure. For example, if one system fails or gets hacked (like the malware attack on CDSL in 2022), the records are still safe in other locations, reducing the risk of a complete system failure.
Additionally, blockchain has the potential to shorten settlement cycles from T+1 to T+0, making markets faster and more efficient.
How do these depositories earn money:
Depositories have a mix of revenue streams, which can be split into two main categories:
1. Market-Linked (Cyclical) Revenue
This revenue rises and falls with market activity. When markets are booming, these revenues soar; when they crash, they fall sharply. It includes:
- Transaction charges: Fees for crediting or debiting securities in demat accounts, such as purchases or sales of shares,
- IPO and corporate action fees: Charges for processing IPOs, bonus issues, stock splits, mergers, and similar actions.
Example: Between Sep 2024 and Mar 2025, Nifty 50 fell by around 15%, and CDSL’s quarterly revenue dropped about 30%, from ₹322 crore to ₹224 crore. This decline reflects slower trading activity during the market fall. Since CDSL earns most of its revenue from depository services, reduced activity directly impacts its earnings.
2. Non-Market-Linked (Recurring) Revenue
This revenue is more stable and predictable, regardless of market conditions. It includes:
- Annual issuer fees: Fees paid by companies for each type of security (ISIN) listed in their depository.
- Online data and service charges: Fees for services like KYC maintenance, PAN-Aadhaar linking, and e-voting for shareholder meetings.
- Other income: Fees from services like storing important documents in secure e-lockers or acting as an insurance repository.
Difference in Revenue Streams of NSDL and CDSL
- CDSL earns around 76% of its revenue from its core, high-margin depository operations, showing a strong focus on its main business.
- NSDL, in contrast, earns the majority of its revenue, around 51% from payment banking, yet this segment barely contributes 1.1% to profits, leaving its core, high-margin depository business less dominant in overall earnings.
CDSL vs NDSL: Who truly stands out
- Market share:
- CDSL clearly leads the depository space, holding about 79.5% market share (in terms of demat accounts). NSDL, by comparison, accounts for only a 20.5% share.
- Custody value and client base:
- CDSL: Focuses on retail investors, so total custody value is lower at ₹79 lakh crore, but it shows strong penetration in the retail segment.
- NSDL: Primarily serves institutional clients such as mutual funds, insurers, pension funds, and FPIs. Large, concentrated investments drive a comparatively higher custody value of ₹503 lakh crore.
- Number of demat accounts:
- CDSL: With 15.56 crore accounts, its retail-focused model provides broad reach via discount brokers and fintech platforms.
- NSDL: With 4.10 crore accounts, its institutional focus means fewer clients, but much larger sums per account.
Conclusion:
In our opinion, CDSL stands out as a fundamentally stronger and more efficient business compared to NSDL, with a much higher operating profit margin of ~58% versus NSDL’s ~26% and a superior 5-year Return on Equity of ~29%. Its sales have grown at an impressive ~37% CAGR over the past five years, fuelled by India’s retail investing boom and key partnerships with discount brokers such as Zerodha, Groww, Upstox, etc. Together, these metrics position CDSL as a dominant player in the Indian depository industry.
Finology is a SEBI-registered investment advisor firm with registration number: INA000012218.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
