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What is the Difference Between Custodian and Depository?

When you begin to take your investment seriously, you should be familiar with all financial terms and concepts in order to make sound decisions. Understanding the topic thoroughly will help you make the right decision and determine which is best for you. When you first start investing in the stock market, you will come across a variety of terms. Here is a distinction between Custodian and Depository that you should be aware of before investing. The functions of a custodian and a depository are very similar. The roles of custodians and depositories are constantly overlapping as the financial world evolves. However, there are a few key distinctions between custodian and depository which you must know.

Who are Custodians?
A custodian is a bank or financial institution that holds financial securities such as stocks, bonds, gold, and other valuables in their custody. Securities and shares are held in the custody of custodians. It’s possible that the securities are held by some banks. For example, in India, the ICICI bank holds shares on behalf of a customer. SEBI-registered market intermediaries, custodians are primarily responsible for the safekeeping of their clients’ securities (such as shares). Clients can take advantage of a variety of services, including corporate action reconciliation and clearing and settlement post-trading. A custodian is a company that provides investors and customers with safekeeping services. The bank or financial institution not only safeguards these assets, but also provides a historical view of their value. The custodian also handles the purchase and sale of such valuable assets on the investor’s behalf. As an important market intermediary, custodians aid in the reduction of systemic risk in the capital market. They also make cross-border securities like American Depository Receipts and Global Depository Receipts easier to issue.

Some of the leading custodians in India:
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

Who are Depositories?
Depositories are the people who are in charge of both the custody and the legal ownership of securities. Securities are not legally owned by custodians. A depository is a financial institution or organization that accepts deposits and holds securities and other financial assets in the business world. A depository owns these assets legally and is responsible for managing them according to established rules, laws, regulations, and guidelines. The clearing and settlement of financial securities, as well as the book-entry transfer of those securities, are all possible with a securities depository. For example, The Depository Trust and Clearing Corporation (the world’s largest depositor) acts as a custodian for securities held and also provides clearing and settlement services.

In India, there are two depositories namely National Securities Depository Limited (NSDL) or Central Depository Services (India) Limited (CDSL) that are registered with SEBI.

Difference Between Custodian And Depository in India
Custodian refers to the person in charge of the property, while Depository refers to the location where the funds are held. So your shares or holdings will be held by the custodian, but they will be legally held in a Depository’s safe-keeping account. As a result, your dematerialized shares will be held by the Depository.

In a nutshell, custody is a depository function, and each depository is a custodian; however, a custodian is not a depository.

Depositary = Custody + control, legal ownership of securities
Custodian = Custody only

Difference Between Custodian And Depository

Depository Custodian
Holds electronic versions of financial securities. Allows for the clearing and settlement of these securities, as well as the facilitation of their transfer. A Custodian is a bank or financial institution that only holds financial securities for safekeeping
Such as shares, debentures, and mutual funds Such as stocks, bonds, and gold
It is the legal owner and custodian of the financial securities it holds. The securities it holds are not legally owned by it.
Every Depository serves as a Custodian. Not every Custodian is a Depository.
Custody is one of a Depository’s functions. A Custodian’s sole function is custody.
Examples: CDSL, NSDL Examples: HDFC Bank, ICICI Bank, SBI

So, the main distinction is that the legal ownership of assets is held by the Depository rather than the custodian.

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