Functions of Custodian and Depository

Custodian:
A custodian is an entity which holds the documentary evidence of the title to property belonging like share certificates, etc for safekeeping. In Clearing Corporation, custodian is a clearing member but not a trading member. He settles trades assigned to him by trading members. He is required to confirm whether he is going to settle a particular trade or not. If it is confirmed, the Clearing Corporation assigns that obligation to that custodian and the custodian is required to settle it on the settlement day. If the custodian rejects (if there are mismatches due to errors in the system) the trade, the obligation is assigned back to the trading member. Only on receipt of the rejection message, the broker shall cancel the rejected contract note and issue a fresh contract note bearing a new number.

Depository:
A depository is an entity where the securities of an investor are held in electronic form.Depositories help in the settlement of the dematerialized securities. Each custodian/clearing member is required to maintain a clearing pool account with the depository. He is required to make available the required securities in the designated account on settlement day.

The depository runs an electronic file to transfer the securities from accounts of the custodians/clearing member to that of Clearing Corporation. As per the schedule of allocation of securities determined by the Clearing Corporation, the depositories transfer the securities on the payout day from the account of the Clearing Corporation to those of members/custodians.

Every investor who wants to hold securities in dematerialized form must open an account with a depository participant (DP) of his choice. Usually this is done by your broker on behalf of you. Depository Participants (DPs) hold accounts with depositories.

Just as one can hold funds in a bank account and transfer funds across accounts without actually handling cash;one can hold securities in a depository account and transfer securities across depository accounts without actually handling share certificates.

There are two main depositories in India.

1.National Securities Depository Ltd (NSDL)

2.Central Depository Services Ltd (CDSL)

NSDL is the first and largest depository in India. It established in August 1996. The Basic functions of a depository are

i)Maintaining dematerialized accounts

ii) Transfer of shares across DP accounts and iner-depository transfers

iii) Crediting Accounts in case of Corporate Actions like Dividend issue, Rights issue etc.

iv) Some other value added services like managing intermediary accounts for SLB (Stock Lending and Borrowing), IPOs, National Savings Certificates etc.

For more information on NSDL and CDSL please visit the following websites.

NSDL Website
CDSL Website