Presented By Sri Harshini Mudigonda Rubi Agrawal Pooja Gopal Naina Shrivastav

CUSTODIAN SERVICES

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

INTRODUCTION

SEBI GUIDELINES FOR CUSTODIAL SERVICES.

The main elements of the SEBI 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.

REGISTRATION

Registration of custodian of securities with the SEBI is mandatory.

The application for registration should be made in the prescribed form accompanied by an application fee of Rs 1,00,000/-

SEBI 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 SEBI would take into account the criteria specified in the SEBI 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.

GENERAL OBLIGATIONS/RESPONSIBILITIES

1- CODE 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/SEBI.

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- Segregation of activities:-

The activities relating to his business as custodian of securities should be seprate and segregated from all other activities.

Employees engaged in custodial services should not be engaged in any other activity of the organisation.

3- Inspection of Systems:

It should be inspected by an expert. The inspection report should be sent to the SEBI within three months of inspection.

4- SEPRATE CUSTODY ACCOUNT AND AGREEMENT WITH CLIENTS:

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- INTERNAL CONTROLS:-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.

6- MAINTENANCE OF RECORDS: The custodian should maintain records of each clients containing details of :

SecuritiesAssets/documentsMoney received/releasedRights/entitlements arising from the securities heldRegistration of securities.Ledger All the reports should be submitted to SEBI.These records

should be maintained atleast for 5 years and also intimated to the SEBI.

INSPECTION AND AUDIT

The SEBI 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 SEBI Act and these regulations.

On the basis of the inspection report, the SEBI can call upon the custodian to take such measures as it deems fit.

ACTION IN CASE OF DEFAULT

In case of default, the SEBI can suspend/cancel the registration of a custodian

Suspension of Registration: SEBI can suspend the Registration for the following reasons:

1- Contravention of the provisions of the SEBI Act, rules framed under it.

2- Failure to furnish any imformation required by the SEBI 3- Non submission of periodic returns/reports required by the

SEBI.4- Non cooperation in any enquiry/inspection by the SEBI.5- Failure to update its system/procedures as recommended by

the SEBI

6- Failure to resolve complaints of clients or give a satisfactory reply to the SEBI.

7- Guilty of misconduct/breach of code of conduct.8- Failure to pay annual fees.

CANCELLATION OF REGISTRATION: The SEBI 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 NORMS AND PRACTICES.

The SEBI 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.

India has adopted the Depository System for securities trading in which book entry is done electronically and no paper is involved.

It operates within the framework of Depositories Act & SEBI Depositories and Participants Regulations.

It consists of depositories and depository systems (DPs).This depository system was started in the year 1996.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).

DEPOSITORY SYSTEM

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 , 1996 and SEBI Depositories and Participants Regulation , 1996.

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 20th September , 1995.The terms used in The Depositories Act,1996 are : 1. Beneficial owner 2. Depository 3. Issuer 4. Participant 5. Owner

DEPOSITORIES ACT,1996

Agreement between depository and participant: A depository shall enter into an agreement in the specified format with one or more participants as its agent.

Services 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.

Surrender of certificate of security : 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.

Registration of transfer of securities with depository: Every 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.

Options to receive security certificate or hold securities with depository : Every person subscribing to securities offered by an issuer shall have the option either to receive the security certificates or hold securities with a depository.

Securities in depositories to be in fungible form : All securities held by a depository shall be dematerialized and shall be in a fungible form.

Rights 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.

Pledge or hypothecation of securities 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 Section 12 (2) shall be evidence of a pledge or hypothecation.

Furnishing of Information and records by depository and issuer: Every 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.

Option to opt out in respect of any security: 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.

Securities not liable to stamp duty : As per Section 8-A of Indian Stamp 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 Section 14 of the Depositories Act, 1996, on such certificate duty shall be payable as is payable on the issue of duplicate certificate under the Indian Stamp 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 62 of Schedule I of the Indian Stamp 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 62 of Schedule I of the Indian Stamp Act, 1899;

Penalties : 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.

This includes the following :Registration of DepositoryCertificate of Commencement of BusinessRegistration of ParticipantsRights of DepositoriesInspectionAction in Case of Default

SEBI DEPOSITORIES AND PARTICIPANTS REGULATION

1. Multi – Depository system2. Depository services through depository participants

3. Dematerialisation

4. Fungibility

5. Registered Owner/ Beneficial Owner 6. Free Transferability of shares

KEY FEATURES

Presently there are two depositories registered with SEBI ;National Securities Depositories Limited (NSDL)Central Depositories Services Ltd (CDSL)

DEPOSITORIES IN INDIA

First depository company in the country.Sponsored by the Unit Trust of India ,NSE ,State

Bank of India, HDFC Bank and Citibank.FUNCTIONS : i) Enables dematerialisation and

rematerialisation. ii) Maintaining investors holdings in the electronic

form iii) Effects settlement of securities traded on the

exchanges iv) Carries out settlement of trades not done on the

stock exchange v) Transfer of securities

NSDL

vi) Pledging/hypothecation of dematerialised securities

vii) Electronic credit in public offerings of companiesviii)Receipt of non-cash corporate benefits like

bonus, rights ,and so on in electronic form and,ix) Stock lending and borrowingServices - NSDL offers a lot of services to the investors

through its network of depository participants(DPs). - It also maintains a record of accounts of

individual investors.

Conversion of physical certificates into dematerialised holdings at the request of investors is called dematerialisation.

Steps : 1. The Investor surrenders defaced certificates

along with the dematerialisation request from (DRF) to his DP.

2. The DP intimates the NSDL of the request through the system.

3. The DP submits the certificates along with the DRF to the registrar.

DEMATERIALISATION

4. The Registrar confirms the dematerialisation request from the NSDL.

5. The Registrar validates the request, updates records and informs the NSDL.

6. The NSDL credits the DP’s account and informs the DP.

7. The DP updates the investor’s account and informs the investor.

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 DP.

2. The DP intimates the NSDL of the request through the system.

3. The DP submits the RRF to the registrar. 4. The NSDL confirms rematerialisation request to

the registrar.

REMATERIALISATION

5. The registrar updates accounts and prints certificates and inform the NSDL.

6. The NSDL updates accounts and downloads details to the DP.

7. The Registrar dispatches the certificates to the investors.

Depository system offers following advantages :No chance of loss, theft or fraud of shares. Platform for Internet based trading. One demat account can hold shares of more than

one company.Presently, no stamp duty payable by transferee on

purchase of shares

ADVANTAGES OF DEPOSITORY SYSTEM

DISADVANTAGES

Lack of ControlNote for greater supervisionComplexity of system.

ICICI BankHDFCHSBCStandard Charted BankCitibankDeutsche Bank SBI

MAJOR CUSTODIAN PLAYERS

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