What is Custodian?
A custodian, also known as a custodian bank, refers to a financial institution that holds the possession of customers' securities to reduce the possibility of theft or loss. The securities and other assets can be held in electronic or physical form. Custodians generally will be large, reputable firms since they are responsible for safeguarding the assets worth several million or even billions of dollars.
How Does It Work?
In addition to safekeeping securities, custodians also offer services, such as transaction settlements, account administration, dividend collection, interest payments, foreign exchange, and tax assistance. Based on the services desired by the clients, the fees charged also varies. Some firms charge a quarterly fee based on the aggregate value fo the holdings in custody.
With a power of attorney, a custodian may also gain rights to assert possession over the assets. That means the custodian can perform actions in the client's place, such as changing investments or making payments.
If the investment advisor is given the responsibility of customer funds, the advisor must follow the custody rules stated by the Securities and Exchange Board of India (SEBI). There are limited entities that can be considered as a qualified custodian, such as banks, registered brokers, registered dealers, and certain individuals.
Such entities will be responsible for supplying notices to the customers when certain activities are conducted on their behalf or while using their assets. Also, account statements must be sent to the customers to keep them informed about the current holdings of their assets.
