The custodian plays a critical role in portfolio management services. This article explains the custodian's functions, SEBI requirements, and how PMS custody compares with AIF custody.
What is a Custodian?
Definition
A custodian is a SEBI-registered intermediary that safely stores the securities and financial assets of investors. They play a vital role in ensuring that transactions in the market are executed properly and in compliance with the rules.
Regulatory Status
Custodians are registered under the SEBI (Custodian) Regulations, 1996. SEBI has hiked custodians' net worth requirement to ₹75 crore, giving three years for compliance.
Custodian's Role in PMS
Mandatory Appointment
Every portfolio manager shall appoint a custodian in respect of securities managed or administered by it.
Functions
Custodians provide services like:
- Safekeeping assets
- Account maintenance
- Compliance with regulations
- Ensuring transactions are executed properly
Independence
An independent custodian must hold the client's assets to prevent any conflict of interest.
SEBI Requirements for PMS Custody
Mandatory Appointment
- Every portfolio manager must appoint a custodian
- Mandatory for portfolio managers dealing in commodity derivatives
Exceptions
The requirement does not apply to a portfolio manager:
- Who performs purely advisory functions
- Who provides only advisory services
Client Asset Segregation
The client's funds and securities should be kept separate from the manager's assets.
Comparison with AIF Custody
Similarities
Independent Custodian: Both PMS and AIF require an independent custodian to hold client assets.
Safekeeping: Both require custodians for safekeeping of assets.
Compliance: Both require compliance with SEBI regulations.
Differences
| Aspect | PMS | AIF |
|---|---|---|
| Custodian Type | SEBI-registered custodian | SEBI-registered custodian |
| Asset Holding | Client's demat account | AIF's demat account |
| Ownership | Client owns securities | AIF owns securities |
| Segregation | Client-level segregation | Scheme-level segregation |
Key Difference
In PMS, securities are held in the client's own demat account, while in AIF, securities are held in the AIF's demat account.
Commodity Derivatives
Mandatory Appointment
It would be mandatory for portfolio managers to appoint SEBI-registered custodian before dealing in Exchange Traded Commodity Derivatives.
Compliance Requirements
Appointment
Portfolio managers must:
- Appoint a SEBI-registered custodian
- Ensure the custodian is independent
- Maintain proper custody arrangements
Reporting
Portfolio managers must:
- Disclose custodian details to clients
- Report custody arrangements to SEBI
Audit
Custody arrangements must be verified during:
- Annual compliance audit
- SEBI inspections
Expert Legal Guidance
Anuj Desai & Associates provides expert legal advisory services on custodian compliance for portfolio managers. Our securities law experts help clients appoint compliant custodians, establish proper custody arrangements, and ensure regulatory compliance. Contact us for guidance on custodian compliance and other regulatory matters.