STOCK BROKING, CUSTODIAL SERVICES & DEPOSITORIES

1st October 2011

Stock Broking
It is carried out by the stockbrokers. A stock broker is the member of the recognised stock exchange who buys, sells and deals in the securities on behalf of the clients for a commission. Stockbrokers offer services to both domestic and overseas clients. They follow the SEBI guidelines which are regulated by the relevant stock exchange. They also help investors to take the right decision in purchasing securities, by providing advisory services.

Sub Broker
Sub-broker" means any person not being a member of a stock exchange who acts on behalf of a stock-broker as an agent or otherwise for assisting the investors in buying, selling or dealing in securities through such stock-brokers; (As per SEBI)

Custodian
A brokerage or other financial institution that holds and manages a client's securities or other assets on his/her behalf. This reduces the risk of the client losing his/her assets or having them stolen. They are also available to the brokerage to sell at the client's demand. Like a bank, a custodian provides an investor a place to store assets with little risk. Brokerages normally require a fee for custodial services.

Custodial Services
Custodial services" in relation to securities means safekeeping of securities of a client and providing services incidental thereto, and includes(i) maintaining accounts of securities of a client; (ii) collecting the benefits or rights accruing to the client in respect of securities; (iii) keeping the client informed of the actions taken or to be taken by the issuer of securities, having a bearing on the benefits or rights accruing to the client; and (iv) maintaining and reconciling records of the services referred to in sub-clauses (i) to (iii).

Roles and Responsibilities of Custodian

Every custodian of securities shall open a separate custody account for each client, in the name of the client whose securities are in its custody and the assets of one client shall not be mixed with those of another client. Every custodian of securities shall have adequate mechanisms for the purposes of reviewing, monitoring and evaluating the custodian's controls, systems, procedures and safeguards. No custodian of securities shall assign or delegate its functions as a custodian of securities to any other person unless such person is a custodian of securities. Every custodian of securities shall enter into an agreement with each client on whose behalf it is acting as custodian of securities Every custodian of securities shall have adequate internal controls to prevent any manipulation of records and documents, including audits for securities and rights or entitlements arising from the securities held by it on behalf of its client. Every custodian of securities shall have appropriate safekeeping measures to ensure that such securities are protected from theft and natural hazard. Every custodian of securities shall preserve the records and documents maintained under subregulation (1) for a minimum period of five years.

Code of Conduct for Custodian

1. The custodian of securities shall maintain the highest standard of integrity, fairness and professionalism in the discharge of his duties. 2. The custodian of securities shall be prompt in distributing dividends, interest, or any such accruals income received or collected by him on behalf of his clients on the securities held in custody. 3. The custodian of securities shall be continuously accountable for the movement of securities in and out of custody account, deposit, and withdrawal of cash from the client's account and shall provide complete audit trail, whenever called for by the client or Securities and Exchange Board of India. 4. The custodian of securities shall establish and maintain adequate infrastructural facility to be able to discharge custodial services to the satisfaction of clients, and the operating procedures and systems of the custodian of securities shall be well documented and backed by operations manuals.

Code of Conduct for Custodian

5. The custodian of securities shall maintain client confidentiality in respect of the client's affairs. 6. Where custodial records are kept electronically, the custodian of securities shall take precautions necessary to ensure that continuity in record keeping is not lost or destroyed and that sufficient back up of records is available. 7. The custodian of securities shall create and maintain the records of securities held in custody in such manner that the tracing of securities or obtaining duplicate title documents is facilitated, in the event of loss of original records for any reason. 8. The custodian of securities shall extend to other custodial entities, depositories and clearing organisations, all such co-operation that is necessary for the conduct of business in the areas of inter custodial settlements, transfer of securities and transfer of funds.

Code of Conduct for Custodian

9. The custodian of securities shall ensure that an arms length relationship is maintained, both in terms of staff and systems, from his other businesses. Every custodian of securities shall exercise due diligence in safekeeping and administration of the assets of his clients in his custody for which he is acting as custodian of securities

10.

Depository System
Depository system essentially aims at eliminating the voluminous and cumbersome paper work involved in the scrip-based system and offers scope for paperless trading through state-of-the-art technology. It is an institution which maintains an electronic record of ownership or securities. The storage and handling of certificates is hence immediately eliminated which generates a reduction in costs like back office cost for handling, transporting and storing certificates.

CONSTITUENTS OF DEPOSITORY SYSTEM The depository system comprises of: i) Depository ii) Depository Participants (DPs) iii) Companies/Registrars iv) Investors

Depository
Depository functions like a securities bank, where the dematerialized physical securities are traded and held in custody. This facilitates faster risk free and low cost settlement. Depository is much like a bank and performs many activities that are similar to a bank depository: enables surrender and withdrawal of securities to and from the depository through the process of demat and remat, maintains investors holdings in electronic form, effects settlement of securities traded in depository mode on the stock exchanges, carries out settlement of trades not done on the stock exchanges (off market trades)

1. 2. 3. 4.

Depository
Depository, operating in India, shall have a net worth of rupees one hundred crore and instruments for which depository mode is open need not be a security as defined in the Securities Contract (Regulations) Act 1956. The depository, holding securities, shall maintain ownership records in the name of each participant. Despite the fact that legal ownership is with depository, it does not have any voting right against the securities held by it. Rights are intact with investors. There are two depositories in India at present i.e. NSDL and CDSL.

Depository Participants
A DP is investors representative in the depository system and as per the SEBI guidelines, financial institutions/banks/custodians/stock brokers etc. can become DPs provided they meet the necessary requirements prescribed by SEBI. DP is also an agent of depository which functions as a link between the depository and the beneficial owner of the securities. DP has to get itself registered as such under the SEBI Act. The relationship between the depository and the DP will be of a principal and agent and their relation will be governed by the bye-laws of the depository and the agreement between them. Application for registration as DP is to be submitted to a depository with which it wants to be associated. The registration granted is valid for five years and can be renewed. As depository holding the securities shall maintain ownership records in the name of each DP, DP in return as an agent of depository, shall maintain ownership records of every beneficial owner (investor) in book entry form. A DP is the first point of contact with the investor and serves as a link between the investor and the company through depository in dematerialization of shares and other electronic transactions. A company is not allowed to entertain a demat request from investors directly and investors have to necessarily initiate the process through a DP.