Whalesbook
India's Securities Markets Code 2025 Ushers in a New Era for Depositories
India's financial sector is adapting to major changes with the Securities Markets Code, 2025 (SMC). This new law combines three key acts—the Securities Contracts (Regulation) Act, 1956; the Securities and Exchange Board of India (SEBI) Act, 1992; and the Depositories Act, 1996—into one framework. The SMC officially upgrades India's depositories from simple intermediaries to vital Market Infrastructure Institutions. This change redefines their central role, responsibilities, and importance in the country's growing capital markets.
Wider Duties and Digital Securities
Depositories, previously mainly keeping records of securities transfers, now have much wider duties. The SMC allows them to help distribute money and securities benefits, manage electronic voting, and oversee investor rights linked to securities. This makes them key links for corporate governance and investor involvement. The code also expands digital asset holding beyond standard investments to include 'other regulated instruments' like insurance, pensions, loans, and even land records.
A key part of the SMC is making all securities digital. Investors can no longer hold physical share certificates; digital holdings are now required for market access. This fits with India's push for digitization and aims to boost transparency and efficiency in financial deals. The economic survey for 2025-26 reported 23.5 million new demat accounts in FY26, bringing the total to over 216 million.
Depository Participants: From Agents to Members
A key change in the SMC is how Depository Participants (DPs) are defined. Previously acting as agents for depositories, DPs are now considered 'members'. This moves from an agent relationship to a membership structure, changing how accountability works. While the SMC still includes ways to protect investors through indemnification, the shift from direct agency—where depositories were clearly responsible for DP actions—to a membership model creates a delicate balance. SEBI will need to watch closely to ensure depositories' traditional responsibilities are not weakened by this new structure.
Key Depositories and Analyst Views
India's two main depositories, National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL), are central to this transformation. NSDL, founded in 1996, handles over 89% of the total value of assets held digitally and had a market capitalization of about ₹17,720 crore in early 2026. CDSL, a listed company, has a market cap of around ₹27,438 crore as of April 2026, with its Price-to-Earnings (P/E) ratio around 58x at that time.
Analysts are optimistic about the depositories sector, expecting steady profit growth from more investors and transactions. Axis Capital, for example, has rated both NSDL (target ₹1,000) and CDSL (target ₹1,425) as 'Add'. However, they caution that near-term gains might be limited by potential margin adjustments and pressure on pricing from regulators.
SMC's Roots and Future Vision
This current regulatory shift recalls past changes. The 1996 Depositories Act was created after the 1992 securities scam revealed systemic weaknesses, moving India from a risky paper system to digital record-keeping. The SMC's effort to combine and update laws aligns with India's ongoing digital efforts and financial inclusion goals, aiming for a stronger and more accessible capital market.
Potential Risks: Accountability and Investor Trust
The change in DPs from agents to members presents a potential weak point. Although depositories still have indemnification duties, the membership model could spread accountability. This might allow for loopholes if SEBI does not strictly monitor it. The wider range of digital assets also increases potential broader market risks. SEBI must ensure the 'membership' structure doesn't weaken the clear line of responsibility that supported investor trust before. Unlike stock exchanges where members' actions aren't automatically blamed on the exchange, the balance between membership and depositories keeping central liability is untested. Also, DPs as agents provided a direct way to seek recourse, but the membership model could make it harder to assign blame during operational issues or disputes.
Outlook: Modernization vs. Investor Confidence
The SMC marks a major step towards a unified and modern Indian securities market. Making depositories key institutions and requiring digital securities should improve transparency and efficiency. However, how well the DP-member change protects investors will determine its success. SEBI's careful enforcement of the SMC's rules will be crucial to ensure modernization benefits don't harm investor confidence or market stability.