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 INTRODUCTION

¢ Custodian services mean safe ± keeping of securities of a

client.
¢ They provide incidental services such as :
- Management of all securities and derivatives
transactions for the "safe custody and administration of
fund assets in blocked accounts"
- Double-checking of buy/sell orders for legality and
market conformity
- Rating of assets based on market rates or valuation
reports
- Balancing of the statement of net assets with the
legal portfolio
- Double-checking of unit certificate pricing
 a BI GUID
IN a FOR CUaTODIA

a RVIC a.

The main elements of the a BI regulation for the

custodians of securities are:-

¢ 1- Registration

¢ 2- Their general obligations and responsibilities

¢ 3- Inspection and Audit

¢ 4- Action in case of default

¢ 5- Uniform norms and practices.

 R GIaTRATION

¢ Registration of custodian of securities with the

a BI is mandatory.
¢ The application for registration should be made in
the prescribed form accompanied by an application
fee of Rs 1,00,000/-
¢ a BI would see whether the applicant:
1- fulfills the requirement of net worth of Rs 50
crores.
2- he has the necessary infrastructure including
adequate office space, vaults for the safe custody
of securities and computer systems.
3- efficient employees
¢ The registration should be in the interest of investors.

¢ The applicant is a fit and proper person.For determining

whether the custodian is a fit and proper person the a BI
would take into account the criteria specified in the a BI
Intermediaries Regulation Act 2008.

¢ The applicant should be a corporate body and he has to

pay a registration fee of Rs 15 lakhs.

¢ The registration would require renewal after every three

years.
 G N RA

OB
IGATIONa/R aONaIBI
ITI a

1- COD OF CONDUCT:
¢ He should maintain the standard of integrity,
fairness and professionalism in the discharge of his
duties.
¢ He should be prompt in distributing
dividends/interest collected by him on behalf of his
clients, on the securities held in custody.
¢ He should be continuously accountable for the
movement of securities in/out of custody account
and provide complete audit trail whenever called by
the client/a BI.
¢ He should establish and maintain adequate
infrastructural facility to discharge custodial
services to the satisfaction of clients
¢ He should maintain client confidentiality in respect
of his affairs.

¢ He should take precautions to ensure that, where

the records are electronically maintained

¢ He should create and maintain records of

securities in such a manner that the tracing of
securities is facilitated in the event of loss of
original records for any reason.
2- aegregation of activities:-

¢ The activities relating to his business as custodian of

securities should be seprate and segregated from all other
activities.

¢ mployees engaged in custodial services should not be

engaged in any other activity of the organisation.

3- Inspection of aystems:

¢ It should be inspected by an expert. The inspection report

should be sent to the a BI within three months of
inspection.
4- a RAT CUaTODY ACCOUNT AND AGR M NT W ITH
C
I NTa:

¢ A separate custody account should be opened by the

custodian.

¢ The assets of one client should not be mixed with those of

others.

¢ The custodian should enter into an agreement with each

client providing for the circumstances under which he
would:
a- accept/release securities,asses/documents and money
from the custody account.
b- receive rights/entitlements on the securities of the
client.
5- INT RNA
CONTRO
a:-
¢ The custodians should have:-

1- Adequate internal controls to prevent the

manipulation of records/documents including audit
for securities and rights/entitlements arising from
securities held on behalf of clients.

2- appropriate safekeeping measures to ensure

that securities, assets and documents are
protected from theft and natural hazards.
„- MAINT NANC OF R CORDa: The custodian should
maintain records of each clients containing details of :
¢ aecurities
¢ Assets/documents
¢ Money received/released
¢ Rights/entitlements arising from the securities held
¢ Registration of securities.
¢
edger

All the reports should be submitted to a BI.These

records should be maintained atleast for 5 years and also
intimated to the a BI.
 INa CTION AND AUDIT

¢ The a BI is empowered to conduct inspection, icluding

inspection by an auditor of the books of accounts of
custodian for any of the following purposes:
1- To ensure that they are being maintained in the manner
specified in these regulations.
2- To investigate into complaints received from the investors
on any matter having a bearing on his activities.
3- To ascertain compliance with the provision of the a BI Act
and these regulations.
On the basis of the inspection report, the a BI can call upon
the custodian to take such measures as it deems fit.
 ACTION IN CAa OF D FAU
T

In case of default, the a BI can suspend/cancel the

registration of a custodian
auspension of Registration: a BI can suspend the
Registration for the following reasons:
1- Contravention of the provisions of the a BI Act, rules
framed under it.
2- Failure to furnish any imformation required by the a BI
3- Non submission of periodic returns/reports required by the
a BI.
4- Non cooperation in any enquiry/inspection by the a BI.
5- Failure to update its system/procedures as recommended
by the a BI
„- Failure to resolve complaints of clients or give a
satisfactory reply to the a BI.
7- Guilty of misconduct/breach of code of conduct.
8- Failure to pay annual fees.

CANC

ATION OF R GIaTRATION: The a BI can cancel

the registration of a custodian when:
1- It is guilty of fraud or has been found convicted of an
offence involving moral turpitude.
2- It has been guilty of repeated defaults of the nature,
leading to suspension.
UNIFORM NORMa AND RACTIC a.

The a BI has prescribed uniform norms and practices to be

followed by the custodians of securities in their
interactions with other market participants. They must:
1- function as an integral part of the system and integrate
with the system. No custodian should function in isolation.
2- become member of clearing houses of the stock exchange
and participate in the clearing and settlement process
through them for all securities.
3- Comply with the applicable rules of stock exchanges
where they have become the members of the clearing
house.This would result in reduction of cost of services for
the clients.
4-advice all their clients about the facility to settle their
trades through the clearing house.
 D OaITORY aYaT M

¢ India has adopted the Depository aystem for securities

trading in which book entry is done electronically and no
paper is involved.
¢ It operates within the framework of Depositories Act &
a BI Depositories and articipants Regulations.
¢ It consists of depositories and depository systems (Ds).
¢ This depository system was started in the year 199„.
¢ Depository system of trading based on physical
transfer/custody of securities militated against the
efficient functioning of markets particularly in the context
of the large scale entry of Foreign Institutional Investors
(FIIs).
¢ The main problems faced by the investors in
general and FIIs in particular were :
- Inordinate delays in transfer of securities,
- Return of share certificates as bad deliveries
on account of forged signatures,
- Delay in the receipt/non ± receipt of
securities after allotment/refund orders to non ±
allottees ,
- Delay in getting duplicate
shares/debentures certificates, and
- Inadequate infrastructure in banking and
postal segments to handle a large volume of
application & storage of share certificates.
‡ In India it operates within the frameworks of
Depositories Act , 199„ and a BI Depositories and
articipants Regulation , 199„ .
 D OaITORI a ACT,199„

¢ The Depositories Act , 1996 was enacted to provide for

regulation of depositories in securities and matters
connected therewith or incidental thereto.
¢ It came into force from 20 th aeptember , 1995.
¢ The terms used in The Depositories Act,199„ are :
1. Beneficial owner
2. Depository
3. Issuer
4. articipant
5. Owner
¢ Agreement between depository and participant: A
depository shall enter into an agreement in the
specified format with one or more participants as its
agent.
¢ aervices of depository : Any person, through a
participant, may enter into an agreement, in such form
as may be specified by the bye-laws, with any
depository for availing its services.
¢ a rrender of certificate of sec rity : Any person
who has entered into an agreement with a depository
shall surrender the certificate of security, for which he
seeks to avail the services of a depository, to the
issuer in such manner as may be specified by the
regulations.
¢ áegistration of transfer of sec rities w ith depository:
very depository shall, on receipt of intimation from a
participant, register the transfer of security in the name of
the transferee. If a beneficial owner or a transferee of any
security seeks to have custody of such security , the
depository shall inform the issuer accordingly.

¢ =ptions to receive sec rity certificate or hold

sec rities w ith depository : very person subscribing to
securities offered by an issuer shall have the option either
to receive the security certificates or hold securities with
a depository .
¢ aec rities in depositories to be in f ngible form
: All securities held by a depository shall be
dematerialized and shall be in a fungible form.
¢ áights of depositories and beneficial owner :A
depository shall be deemed to be the registered
owner for the purposes of effecting transfer of
ownership of security on behalf of a beneficial
owner. The depository as a registered owner shall
not have any voting rights or any other rights in
respect of securities held by it. The beneficial
owner shall be entitled to all the rights and benefits
and be subjected to all the liabilities in respect of
his securities held by a depository.
¢ |ledge or hypothecation of sec rities held in a
depository : A beneficial owner may with the
previous approval of the depository create a pledge
or hypothecation in respect of a security owned by
him through a depository. Any entry in the records
of a depository under aection 12 (2) shall be
evidence of a pledge or hypothecation.
¢ ± rnishing of Information and records by
depository and iss er: very depository shall
furnish to the issuer information about the transfer
of securities in the name of beneficial owners at
such intervals and in such manner as may be
specified by the bye-laws.
¢ =ption to opt o t in respect of any sec rity: If a
beneficial owner seeks to opt out of a depository in
respect of any security he shall inform the
depository accordingly. The depository shall on
receipt of intimation make appropriate entries in its
records and shall inform the issuer.
¢ Depository to indemnify loss in certain cases:
Any loss caused to the beneficial owner due to the
negligence of the depository or the participant, the
depository shall indemnify such beneficial owner.
The loss due to the negligence of the participant is
indemnified by the depository, the depository shall
have the right to recover the same from such
participant.
¢ aec rities not liable to stamp d ty :
As per aection 8-A of Indian atamp Act, 1899:
a) an issuer, by the issue of securities to one or
more depositories shall, in respect of such issue,
be chargeable with duty on the total amount of
security issued by it and such securities need not
be stamped;
b) where an issuer issues certificate of security
under sub-section (3) of aection 14 of the
Depositories Act, 199„, on such certificate duty
shall be payable as is payable on the issue of
duplicate certificate under the Indian atamp Act,
1899;
c) transfer of registered ownership of securities
from a person to a depository or from a depository
to a beneficial owner shall not be liable to any
stamp duty;
d) transfer of beneficial ownership of shares, such
securities dealt with by a depository shall not be
liable to duty under Article „2 of achedule I of the
Indian atamp Act, 1899;
e) transfer of beneficial ownership of units, such
units being units of mutual fund including units of
the Unit Trust of India, dealt with by a depository
shall not be liable to duty under Article „2 of
achedule I of the Indian atamp Act, 1899;
¢ |enalties : Contravention/attempt to or abatement
of contravention of the provisions of this Act/any
regulations/bye-laws is punishable with
imprisonment for a term up to 10 years or with fine
upto Rs 25 crore , or with both.
In case of an offence under the Depositories Act
by a company , the company as well as every
person who was in charge of/responsible for the
conduct of business would be deemed guilty and
liable for punishment.
 a BI D OaITORI a AND
ARTICIANTa R GU
ATION
This includes the following :
¢ Registration of Depository
¢ Certificate of Commencement of Business
¢ Registration of articipants
¢ Rights of Depositories
¢ Inspection
¢ Action in Case of Default
 K Y F ATUR a

1. Multi ± Depository system

2. Depository services through depository participants
3. Dematerialisation
4. Fungibility
5. Registered Owner/ Beneficial Owner
„. Free Transferability of shares
 D OaITORI a IN INDIA

resently there are two depositories registered with a BI ;

¢ National aecurities Depositories
imited (NaD
)
¢ Central Depositories aervices
td (CDa
)
 NaD

¢ First depository company in the country.

¢ aponsored by the Unit Trust of India ,Na ,atate
Bank of India, HDFC Bank and Citibank.
¢ FUNCTIONa :
i) nables dematerialisation and
rematerialisation.
ii) Maintaining investors holdings in the electronic
form
iii) ffects settlement of securities traded on the
exchanges
iv) Carries out settlement of trades not done on the
stock exchange
v) Transfer of securities
vi) ledging/hypothecation of dematerialised
securities
vii) lectronic credit in public offerings of companies
viii)Receipt of non-cash corporate benefits like
bonus, rights ,and so on in electronic form and,
ix) atock lending and borrowing
¢ aervices
- NaD
offers a lot of services to the investors
through its network of depository participants(Ds).
- It also maintains a record of accounts of
individual investors.
 D MAT RIA
IaATION

¢ Conversion of physical certificates into

dematerialised holdings at the request of
investors is called dematerialisation.
¢ ateps :
1. The Investor surrenders defaced certificates
along with the dematerialisation request from
(DRF) to his D.
2. The D intimates the NaD
of the request
through the system.
3. The D submits the certificates along with the
DRF to the registrar.
 4. The Registrar confirms the dematerialisation
request from the NaD
.
5. The Registrar validates the request, updates
records and informs the NaD
.
„. The NaD
credits the Ds account and
informs the D.
7. The D updates the investor s account and
informs the investor.
 R MAT RIA
IaATION

¢ The conversion of dematerialised holdings back

into physical certificates is called rematerialisation.
¢ Rematerialisation takes place through the following
steps:
1. The beneficial owner submits a
rematerialisation request form (RRF) to the D.
2. The D intimates the NaD
of the request
through the system.
3. The D submits the RRF to the registrar.
4. The NaD
confirms rematerialisation request to
the registrar.
 5. The registrar updates accounts and prints
certificates and inform the NaD
.
„. The NaD
updates accounts and downloads
details to the D.
7. The Registrar dispatches the certificates to the
investors.
 ADVANTAG a OF D OaITORY
aYaT M
Depository system offers following advantages :
¢ No chance of loss, theft or fraud of shares.
¢ latform for Internet based trading.
¢ One demat account can hold shares of more than
one company.
¢ resently, no stamp duty payable by transferee on
purchase of shares
 DIaADVANTAG a

¢
ack of Control
¢ Note for greater supervision
¢ Complexity of system.
 MAJOR CUaTODIAN 
AY Ra

¢ ICICI Bank
¢ HDFC
¢ HaBC
¢ atandard Charted Bank
¢ Citibank
¢ Deutsche Bank
¢ aBI
$%