In this article we will discuss about:- 1. Meaning and Operations of Custodian 2. Duties and Responsibilities of Custodians 3. Stock Holding Corporation of India Ltd. (SHCIL).
Meaning and Operations of Custodian:
A custodian is a person who keeps custody of the securities on behalf of somebody else. The dictionary meaning of ‘custody’ is ‘duty of caring for, guarding’. It means, the valuable documents and papers should be carefully guarded by keeping the proper place under tight security. Custodian is a person who has custody of something; caretaker of a public building and property. Custodian is a caretaker of the securities and documents and in return he gets some benefit for his services called ‘custodial charges’.
Since the work of custodian is risky, costly and cumbersome in nature, only entities can do such work of custodian services which involves a lot of money, space requirement, full safety measures etc. Institutions can do it successfully. Custodian services are also called as ‘custodial services’.
Custodian is a caretaker of a public property or securities. Custodians are intermediaries between companies and clients (security-holders) and Institutions (FIIs and MFs). Custodians are intermediaries who are a link between real owners and entities. There is an arrangement and agreement between custodians and real owners to act as custodians of those who handover it. Custodial services are a capital intensive and technology driven business.
A custodian’s work consists of a receiving the shares on behalf of its customers from the brokers. In this one must keep in mind that the purchase/sale decisions are taken by the customer and the custodian is required to just receive the delivery of these shares. For this whenever the customers make any purchases or sales, they are supposed to send the contract note to the custodians along with the DIP or DIS i.e., the purchase instruction and the sale instruction, respectively.
Before receiving the shares, the custodian has to check whether he was issued an instruction for receiving the shares. He also has to verify whether the shares are as per the instruction of the customer with respect of the quantity and the type. On receiving the shares, the custodian has to send the shares for registration or keep them in street name (keep them with blank transfer deeds) as per the instructions of the customer.
Thereafter, he is supposed to follow up for the early receipt of the shares from the registrar or the share department of the company as the case may be. The shares may be received under objections or as registered. In case of the former, the custodian has to get the objection rectified from the concerned broker and again re-lodges them with the registrar or the share department on rectification of the objection.
On the other hand, if the shares are received as registered, the custodian has to hold the shares till the customer sells them and, if so, he has to deliver them to the broker. For this also the custodian has to act only on the instructions of the customer.
While holding the shares, the custodian has to exercise all the corporate actions on the shares like receiving of dividends, bonus shares etc. and on the customer’s instructions apply for rights shares or to handover the renouncement forms to brokers in case the customer sells the same.
Custodian services are very important and SEBI has put some sort of registration of custodians as a matter of mandate. An application has to be made for registration fulfilling the legal formalities as prescribed by the SEBI.
SEBI grants a registration certificate if satisfies all the conditions and formalities, fees, capital adequacy norms, necessary infrastructure facilities, organization structure of the client applicant etc. There are at present one firm, who has been approved by SEBI, to provide custody services to mutual funds and foreign institutional investors.
Duties and Responsibilities of Custodians:
The general obligation, duties and responsibilities of the custodians, both national and global custodians, are laid down by the SEBI regulations should be taken into base for performing their respective duties.
These are:
1. Custodians must exercise due care in safekeeping and administration of the assets, i.e., securities of the clients, and should act like ‘bailee’.
2. Separate custody account must be opened by the custodian in the name of each client.
3. A separate deposit account may be opened in the name of each client.
4. Recording of assets should be made by the custodians.
5. Manner of receiving, recording, delivery, receiving rights, cash, interest warrants, dividend warrants, etc.
6. Registration of securities.
7. Physical segregation of all securities and cash belonging to each client from those of other person including custodian’s own.
8. Where a custodian business is a part of a firm’s large business, separation of back office and front office functions so that the activities of safekeeping and administration could be kept separate from dealings, arranging deals, managing investments.
9. The separation of personnel should be made for this.
10. Adequate insurance of risks would be made with the general insurance companies.
11. Records must be maintained either manually or in a machine readable form.
12. The manner, method and system of receiving proper instruction from client regarding collection, receipt, reporting, release, delivery, etc. should be clearly stated.
13. Conduct of physical verification of securities and control mechanism should be stated and followed.
14. Annual audit should be made.
15. Conditions for indemnification are laid in custodial agreements.
16. Manner of accessing records.
17. Circumstances for termination of contract and manner of appointing a successor custodian.
18. Fees charged should be specifically mentioned in the agreement.
Custodial Services is a new method of services provided to FIIs and MFs to protect their assets i.e., security certificates and documents of ownership. A custodian is essentially a service provider. Every custodian should have adequate facilities and enough of capital and financial strength to manage the custodial services.
Stock Holding Corporation of India Ltd. (SHCIL):
It is a company incorporated under the Companies Act with an authorized Capital of Rs.25 crores and a paid up capital of Rs.10.5 crores subscribed by seven All-India Financial Institutions, namely IDBI, IFCI, ICICI, UTI, GIC and IRBI. SHCIL’s operations are computer aided and have offices at New Delhi, Kolkata and Chennai with headquarters at Mumbai.
The prime aim of it is to simplify and expedite the transactions eliminating most of the paper work and thus simplifying the job on the lines of Depository Trust Company (DTC) of USA or Canadian Depository for Securities Limited (CDT) who holds stocks on behalf of investors in its name.
The SHCIL renders services like:
1. Clearing and settlement services
2. Registration and Transfer processing
3. Depository services
4. Corporate actions and benefits collection, and
5. Management information system considering the pivotal services rendered by the SHCIL. NSE considered to use the services of it for the investors who would spread length and breadth of the country without which, the functions of NSE will not be full and perfect and so SHCIL is a complementary to it acting as a Depository.
