What is the Difference between Depository and Custodian?

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What is the Difference between Depository and Custodian?

 

Depository and Custodian: In the financial world, the role of depository and custodian is becoming similar and so there is a thin line to differentiate between the two. And hence some of us are not very clear about what is the difference between a Depository and a custodian.

So, let us understand this..

 

Who are custodians?

In general, a custodian is a bank or a financial institution that holds financial securities such as stocks, bonds, gold, etc.
So basically, custodians are involved in having the custody of securities/ shares. They might be some banks who are holding the securities. Such as ICICI bank in India holding shares on behalf of a customer.
So, a customer (say Mukesh) has 1000 shares of a company (say Reliance Industries), and those shares are held with ICICI bank. Here ICICI bank acts as a custodian of these shares/ securities. Legally though, the shares are held in some depository (which is a bank for securities, just like a normal bank is for cash).

 

Who are Depositories?

Depositories are the ones who have the custody of the securities as well as also the legal ownership of those securities. Custodians do not have legal ownership of securities.

 

What’s the difference between Depository and Custodian?

To understand this further, if a custodian A transfers securities to custodian B and for those securities the Depository is X, then at depository level, the total amount of securities remains same but at Custodian level, custodian A will see a reduction in the number of securities while custodian B will see an increase in the number of securities.

So continuing from our above ICICI bank example, if the customer is now holding the same securities with another bank say HDFC bank, then still the depository is the same even though the custodian has changed.

In a nutshell, custody is a function of depository and so each depository is a custodian, but custodian is not a depository.
* Custodian = custody only
* Depositary = custody (frequent delegation) + control and legal ownership of securities

So, basically, the main difference is that the legal ownership of assets lie with Depository and not with the custodian.

 

Depository vs custodian
Source: Pixabay

TRUE or FALSE?

A Depository and a Custodian both perform the same function of safekeeping of securities but a Depository has legally beneficial ownership, which a Custodian cannot.
Ans: True

Who are the two Depositories in India?
1.      National Securities Depository Limited (NSDL)
2.      The Central Depository Services (India) Limited (CDSL)

Also, let’s have a look governing depositories and custodians in India..

Under which Act in India depositories are covered?
– There is a separate Act i.e. Depositories Act – 1956, from SEBI (depositories and participant ) Reg . 1996
Under which Act in India custodians are covered?
– There is no separate Act and it is regulated by SEBI (Custodian of Securities) Reg. 1996

 

Some of the largest custodians in the world are:

– The Bank of New York Mellon
– State Street Bank and Trust Company
– JPMorgan Chase
– Citigroup

Some of the custodians of securities in India are:

– ICICI bank
– SBI (State bank of India)
– HDFC Bank
– Standard Chartered Bank
– Stock Holding Corporation of India Limited
– IL&FS Securities Services Ltd.
– Axis Bank Limited

 

What happens in case of any loss?

In case of any investment loss, the depository is held liable. Because a custodian is responsible only for any general loss or negligence and is not responsible for any investment loss.

So, we hope with this article you got a good understanding of the difference between depository and custodian. Do check out our other articles to understand the difference between key economic terms which you must be aware of!

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