What is a Custodian – Role in Asset Management and Securities

A custodian’s main role is to keep the money safe. It may not be visible to investors every day, but the assets like shares, bonds, and mutual funds are secured. 

For example, Riya invests ₹5,00,000 as:

• ₹3,00,000 in mutual funds, 
• ₹1,50,000 in stocks, and 
• ₹50,000 in bonds. 

Instead of managing these herself, she hires a custodian (bank). This is how her reports are updated:
 

Through this table, Riya can easily understand what is going on with her investments. 

Custodians let people like Riya focus on growing wealth, without worrying about safety or paperwork. Let’s learn more about their roles, benefits and drawbacks of hiring a custodian in this blog. 

What Is a Custodian? 

A custodian is a SEBI-registered financial institution, like a bank or trust. Their role is to safeguard client holdings, prevent misuse, and reduce systemic risks. 

Do you know that in India, custodians oversee assets worth ₹278.5 trillion as of September 2024? This is a massive increase from ₹2.7 trillion in 2002.

Role of Custodians in Asset Management & Securities Markets

Here, we will discuss the role of custodians and see if they really manage assets and work in volatile markets.

1. Safekeeping & Record-Keeping

Custodians keep investor securities safe, whether in physical or electronic form, and maintain accurate client records. They also ensure client assets are held separately to prevent misuse.
Globally, the custodian market handles around $230 trillion in client assets under custody or administration.

2. Settlements & Corporate Actions

Custodians process trade settlements, dividends, interest, stock splits, and bonus issues for investors.
For example, BNY Mellon manages over $55 trillion in assets under custody and administration, reflecting the sheer scale of these operations.

3. Administrative Services & Compliance

They provide fund accounting, investor reporting, tax documentation, and ensure legal compliance. For example, BNY Mellon handles nearly $50 trillion in global custody. This shows how much regulatory coordination and reporting are involved.

4. Risk Mitigation & Governance

Custodians maintain separate client accounts. This helps them maintain strong internal controls and undergo audits to minimise fraud and operational risks. SEBI has raised the minimum net worth requirement to ₹100 crore to strengthen this governance framework.

Why are Care Custodians Important?

Custodians work like “middlemen” for investors. Let’s break down how they benefit you as an investor with the help of the table given below.
 

Custodians give investors more time to invest and grow more while they take care of the security department. They combine safety, compliance, and efficiency. They make investing smoother and more secure.

Custodians in India

Not every bank is a custodian. The table given below mentions the major custodians in India right now. 
 

These are the major custodians in India. You might have heard about them. If you want to know the entire list, refer to the table below.
 

This data was extracted from the SEBI’s official website.

What are the Laws Custodians Follow?

Custodians operate under strict laws that keep investor assets protected and markets stable. Here's how the legal framework ensures trust and efficiency in the system.

1. SEBI Custodian Regulations, 1996

Custodians must keep activities separate, sign written agreements, maintain records, and protect client assets. This ensures transparency, prevents misuse, and builds investor trust.

2. Uniform Norms & Practices (1996)

Custodians must follow standardised settlement practices, complete trades on time, and accept partial deliveries. These norms keep the system smooth and reduce disputes.

3. Depositories Act, 1996

The Depositories Act, 1996, transformed how securities are held and managed in India. The Act led to the creation of NSDL (National Securities Depository Ltd.) and CDSL (Central Securities Depository Ltd.). This act also promoted paperless trading for faster settlements, better transparency, and efficient governance in capital markets.

4. SEBI Act, 1992

Custodians must register with SEBI and follow investor-protection rules. This is important to stabilise the securities market irrespective of its volatility and prevent investors from committing unfair practices.

5. SEBI’s 2024 Regulatory Enhancements

SEBI plans to raise custodians’ minimum net worth to ₹1 billion from 500 million rupees currently. Apart from this, it has enforced disaster recovery and tightened controls. These changes were introduced to increase reliability and protect against operational risks.
 

The combined effect of all these regulations is necessary to increase transparency and resilience. It ensures assets are safe, systems are dependable, and operations comply with industry-leading standards.

How to Become a Custodian in India?

At this point, you might wonder why there are only a few selected custodians in India. This is because not every bank can fulfil the criteria necessary for being a custodian. Given below is a process for a financial institution to be a custodian.
 

1. Meet Eligibility Requirements
   The criteria are:
   • An institution must have a strong infrastructure, such as office space, vaults, and IT systems. 
   • It must have expert staff, investor protection mechanisms, and internal control systems. 
   • It must maintain a minimum net worth of ₹50 crore.
   • It must have permission to undergo SEBI inspections and be “fit and proper” as per the regulation.
     
      
2. Submit Online Application via SEBI Intermediary Portal
   The next step is to use SEBI’s intermediary portal to apply. Submit Form A along with required documents like incorporation proof, infrastructure details, vault plans, IT systems, client list, and net worth certificate.
    
3. Undergo Detailed SEBI Evaluation
   SEBI evaluates the application, reviews management and operational systems, and verifies physical and digital infrastructure before approving.
    
4. Maintain Ongoing Compliance Requirements
   Once registered, make sure to renew registration on time and regularly submit asset-under-custody data along with the annual fee assessment. Also, don’t forget to meet uniform norms, such as participating in clearinghouses and not operating singly, and ensure vault specifications where applicable.

Conclusion 

Custodians look after the finances in major companies and institutions. Their main job is to secure their (companies’) financial assets, ensure compliance with regulations, and check if transactions are easy to make. Because of the custodians, investors can invest without worrying about security. This brings trust, transparency, and peace of mind in capital markets.

Frequently Asked Questions

Who ultimately pays custodian fees, and how are they charged?
Fees are normally billed to institutional clients such as mutual funds or FPIs and may be embedded in a fund’s expense ratio. Retail investors usually do not get billed directly.

Are client assets insured while held by custodians?
Many custodians maintain insurance and indemnity arrangements for operational losses, but coverage limits vary. Always check the custodian agreement and fund disclosures for exact terms.

What happens to client assets if a custodian becomes insolvent?
Client assets are supposed to be held separately and not form part of the custodian’s estate. Regulators and courts usually supervise the transfer of assets to another custodian to protect clients.

How do custodians manage cyber risk and operational disruptions?
Custodians run disaster recovery sites, regular audits, and strict access controls. SEBI’s recent rules require stronger DR and operational controls and periodic testing.

Can a retail investor choose or replace the custodian for their mutual fund holdings?
No. Custodian selection is made by the fund or asset manager. Retail investors can only review disclosures and, if concerned, approach the fund house or regulator.

How are cross-border securities and currency settlements handled?
Global custodians use sub-custodians, correspondent banks and FX settlement processes. Cross-border custody adds compliance steps, settlement windows and additional fees.

How should an institutional client evaluate a custodian’s reliability?
 Check SEBI registration, assets under custody, minimum net worth, audit reports, track record for settlements, disaster recovery certifications and client references.
 

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