Role of Custodians
The Securities and Exchange Board of India on 5th May, 1996, through its notification No.S.O.344 (E) has issued the SEBI (Custodian of Securities) Regulations, 1996 (amended on January 2006). If any person, wishes to act as a custodian of securities on or after the regulations have come into vogue; he has to obtain a certificate to that effect from SEBI. Generally, custodian services are availed of in-house by the Mutual Funds. However, the institutions which are acting as professional custodians are Stock Holding Corporation of India (SHCI), Citibank, Industrial Investment Trust Ltd., (IITL); Hong Kong Bank, ABN Amro, ICICI Bank, Citi Bank, and Bank of India (BOI) Shareholdings Ltd.
Responsibilities to be discharged by the custodians on behalf of Mutual Funds include receipt and delivery of securities, holding of securities, collecting income, holding and processing cost, corporate actions, etc.
Functions of custodians widely cover safe keeping of securities, corporate actions and transfer agents. Salient features of each of these functions are given below:
Safe Custody
Safe keeping of securities covers a wider range of services rendered to the customer viz., scheme-wise segregation of assets and regular checking and verification of securities, registration of securities for proper verification, regular reconciliation of assets to accounting records.
Trade Settlement
Trade transactions take place at the instance of fund managers, but settlements are done at the instance of the custodian which is responsible for the timely receipt and delivery of cash and securities i.e., securities will be delivered on receipt of cash and payment will be made only on receipt of securities. Any discrepancies arising out of the trade settlements are resolved at the end by the custodian.
Corporate Action
Custodian also assists in taking corporate actions viz., dividend declarations, exercise the rights of equity holders, collection of dividends, rights, etc.
Transfer Agents
Custodians perform various important functions, in addition to attending to shareholders transactional activities viz., to issue, transfer, exchange, redeem, maintain detailed records of transactions, receipt of dividends, reimbursement of dividend and purchase of securities, etc. They also maintain records of confirmations of transactions, cheque registers, certificates, files, commission reports, tax reporting, etc.
To sum up, the consolidated activities of sponsors, trustees, AMC and custodians form the basis of the organization and management of the mutual fund.