Every time you place an order for a commodity futures contract, you receive a warehouse receipt instead of the actual commodity. Even this receipt is not physically delivered – it’s stored in electronic form in your demat account.
This process of dematerialisation involves four main entities. These are the depository participant (DP), the warehouse, the registrar and transfer (R&T) agent, and National Securities Depository Limited (NSDL).
Depository Participant (DP)
The DP is any institution that provides financial services to commodity traders. It acts as an intermediary between NSDL and the traders. A DP may be a bank, broker, custodian, or financial institution. It should be registered with NSDL.
A warehouse accepts and stores physical commodities that traders wish to dematerialise. It does this on behalf of a commodities exchange. But the trader cannot deliver his commodity stock at just any warehouse. The warehouse should have approval from the exchange where he wants to trade. Exchanges are particular about the quality of the commodities that trade on them. So, warehouses have to assay the commodities that come in. They need to do this using NSDL’s standardised screens.
Registrar and Transfer (R&T) Agents
An R&T agent maintains detailed records of traders’ commodity deposits at warehouses. It also keeps records of traders’ personal details and demat transactions. Plus, it tracks communications between traders and warehouses. This data helps reconcile NSDL’s records with a trader’s demat account balance.
National Securities Depository Ltd. (NSDL)
NSDL is one of India’s two main securities depositories. It maintains electronic records of most of the commodities that trade in India. These records are in both dematerialised and materialised form. NSDL receives information from R&T agents. It updates investor accounts on the completion of each trade.
Now that you know who all are involved, let’s have a look at the actual process of dematerialisation.