Stock Broking Custodial Services and Depositories

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    STOCK BROKING, CUSTODIAL SERVICES &

    DEPOSITORIES

    1st October 2011

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    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 thesecurities 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. Theyalso help investors to take the right decision inpurchasing securities, by providing advisoryservices.

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    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)

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    Custodian

    A brokerage or other financial institution thatholds and manages a client's securities orother assets on his/her behalf.

    This reduces the risk of the client losing his/herassets or having them stolen. They are alsoavailable to the brokerage to sell at the client'sdemand.

    Like a bank, a custodian provides an investor aplace to store assets with little risk. Brokeragesnormally require a fee for custodial services.

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    Custodial Services

    Custodial services" in relation to securities meanssafekeeping of securities of a client and providing servicesincidental thereto, and includes-

    (i) maintaining accounts of securities of a client;

    (ii) collecting the benefits or rights accruing to the client inrespect of securities;

    (iii) keeping the client informed of the actions taken or tobe 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 servicesreferred to in sub-clauses (i) to (iii).

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    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 withthose 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 anyother 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 isacting as custodian of securities

    Every custodian of securities shall have adequate internal controls to prevent any manipulation ofrecords and documents, including audits for securities and rights or entitlements arising from thesecurities held by it on behalf of its client.

    Every custodian of securities shall have appropriate safekeeping measures to ensure that suchsecurities are protected from theft and natural hazard.

    Every custodian of securities shall preserve the records and documents maintained under sub-regulation (1) for a minimum period of five years.

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    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 onbehalf of his clients on the securities held in custody.

    3. The custodian of securities shall be continuously accountable for themovement of securities in and out of custody account, deposit, andwithdrawal of cash from the client's account and shall provide completeaudit trail, whenever called for by the client or Securities and ExchangeBoard of India.

    4. The custodian of securities shall establish and maintain adequate infra-structural facility to be able to discharge custodial services to thesatisfaction of clients, and the operating procedures and systems of thecustodian of securities shall be well documented and backed by operationsmanuals.

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    Code of Conduct for Custodian

    5. The custodian of securities shall maintain client confidentiality in respect ofthe client's affairs.

    6. Where custodial records are kept electronically, the custodian of securitiesshall take precautions necessary to ensure that continuity in record keepingis not lost or destroyed and that sufficient back up of records is available.

    7. The custodian of securities shall create and maintain the records ofsecurities held in custody in such manner that the tracing of securities orobtaining duplicate title documents is facilitated, in the event of loss oforiginal records for any reason.

    8. The custodian of securities shall extend to other custodial entities,depositories and clearing organisations, all such co-operation that isnecessary for the conduct of business in the areas of inter custodialsettlements, transfer of securities and transfer of funds.

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    Code of Conduct for Custodian

    9. The custodian of securities shall ensure that an arms length relationshipis maintained, both in terms of staff and systems, from his otherbusinesses.

    10. Every custodian of securities shall exercise due diligence in safekeepingand administration of the assets of his clients in his custody for which heis acting as custodian of securities

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    Depository System

    Depository system essentially aims ateliminating the voluminous and cumbersomepaper work involved in the scrip-based systemand offers scope for paperless trading throughstate-of-the-art technology.

    It is an institution which maintains an electronicrecord of ownership or securities.

    The storage and handling of certificates is henceimmediately eliminated which generates areduction in costs like back office cost forhandling, transporting and storing certificates.

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    CONSTITUENTS OF DEPOSITORY SYSTEM

    The depository system comprises of:

    i) Depository

    ii) Depository Participants (DPs)

    iii) Companies/Registrars

    iv) Investors

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    Depository

    Depository functions like a securities bank, where thedematerialized physical securities are traded and held incustody. This facilitates faster risk free and low costsettlement. Depository is much like a bank and performsmany activities that are similar to a bank depository:

    1. enables surrender and withdrawal of securities to andfrom the depository through the process of demat andremat,

    2. maintains investors holdings in electronic form,

    3. effects settlement of securities traded in depository modeon the stock exchanges,

    4. carries out settlement of trades not done on the stockexchanges (off market trades)

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    Depository

    Depository, operating in India, shall have a net worth ofrupees one hundred crore and instruments for whichdepository mode is open need not be a security asdefined in the Securities Contract (Regulations) Act 1956.

    The depository, holding securities, shall maintainownership 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 heldby it. Rights are intact with investors. There are twodepositories in India at present i.e. NSDL and CDSL.

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    Depository Participants

    A DP is investors representative in the depository system and as per theSEBI guidelines, financial institutions/banks/custodians/stock brokers etc.can become DPs provided they meet the necessary requirementsprescribed by SEBI.

    DP is also an agent of depository which functions as a link between thedepository and the beneficial owner of the securities. DP has to get itselfregistered as such under the SEBI Act.

    The relationship between the depository and the DP will be of a principaland agent and their relation will be governed by the bye-laws of thedepository and the agreement between them.

    Application for registration as DP is to be submitted to a depository withwhich it wants to be associated. The registration granted is valid for fiveyears 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 maintainownership 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 indematerialization of shares and other electronic transactions. A company isnot allowed to entertain a demat request from investors directly andinvestors have to necessarily initiate the process through a DP.

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