Custodians provide custodial services which are quite different from depositories. A custodian is an intermediary who keeps the scrips of the clients in custody or is the keeper of the account of its client. A custodian is not only a safe keeper of share certificates and a trustee of the same but also provides ancillary services such as physical transfers of share certificates, collecting dividends and interest warrants and conforming to transfer regulations. Besides these, it updates clients on their investment status. To claim benefits on behalf of its clients, a custodian keeps a track of book closures, record dates, bonus and rights shares. For rendering these services, custodians charge a fee of one per cent in the total volume of transactions.
Even though depositories have been set up, there is a need for custodians as they act as complements to depositories. The volume of transactions by fund managers is so large that custodial services are imminent. With depositories in existence, their volume of paper work has not only reduced but most of them also act as depository participants. Custodians provide the infrastructure facilities which ease the post issue post trade and settlement work.
Custodians are clearing members but not trading members. They are involved in the process of clearing. They settle trades on behalf of other trading members. A trading member may assign a particular trade to a custodian for settlement. If the custodian confirms to settle that trade, then the clearing corporation assigns that particular obligation to the custodian who is then required to settle it on the settlement day.
In India, the Stock Holding Corporation of India Limited and SBI Share Holding Corporation are the prominent custodians catering to the requirements of the UTI and financial institutions. SHCIL is the leading custodian with 75 per cent market share. Other banks like Canara Bank and Indian Bank have promoted Canbank Computer Services and Indian Clearing and Depository Services Limited (ICDS). These custodians usually provide services to institutional investors.
After liberalization foreign institutional investors (FIIs) were allowed to invest in the Indian capital market. Most of the FII’s business is routed through foreign bank’s custodians. According to the laws governing the US funds, no US fund is allowed to use a custodian that does not have a capital adequacy of $200 million. No Indian custodian, including SHCIL meets this requirement; hence only foreign banks operate as custodians for US based FIIs, pension funds and corporates. Hong Kong Bank, Citibank and Standard Chartered Bank are some prominent foreign banks which operate as custodians. At present, there are 12 registered custodians in India.
A custodian must be registered with SEBI. SEBI regulations provide the eligibility criteria and code of conduct to be followed by a custodian. A custodian is required to participate in the clearing and settlement process through the clearing house/clearing corporation.
Stock Holding Corporation of Indian Limited:
SHCIL promoted by seven all India financial institutions — IDBI, ICICI,IFCI, IRBI, UTI, LIC, GIC and its subsidiaries was incorporated in 1986. It commenced operations in 1988.
SHCIL was established to provide well developed and fully automated infrastructural facilities for trading, clearance, settlement and depository services for securities and monetary instruments. The objectives of SHCIL are to provide services which include market operations, corporate actions, safekeeping, custodian management, registration transfer and reporting. Support services include fund transfer and data bank information feeds. SHCIL handles market operations and provides custodial services to financial institutions and mutual funds such as UTI and LIC. It acts as a security agent (in India) to Morgan Stanley Bank of India Magnum Fund. It holds more than Rs 100,000 crore worth of securities and has a very sophisticated operating system. It is the largest custodian with more than 70 per cent market share of the domestic custodial business.
SHCIL has developed software modules for on line trade reporting, matching, clearance, and depository for on line clearance settlement. SHCIL apart from rendering custodial services also handles transfers and collects divided and interest in respect of securities on behalf of sponsoring institutions stock brokers and other investors. Its business is divided into five groups: clearing services, registration / transfer, processing, safekeeping, corporate actions and benefits collection and management information system (MIS).
SHCIL is a participating member of the International Society for Securities Administrators (ISSA), a specialized agency for promoting the exchange of ideas among global security administrations.