Uniform Norms and Practices for Custodians of Securities

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To All Custodians of Securities,

Dear Sirs,

1. Custodians of securities are an integral part of the securities market and have an important role to play in the institutional segment of the market. Their role is crucial in the effective functioning of the securities clearing and settlement system. It is therefore, important that the custodians follow uniform norms and practices in their dealing with their clients, brokers, stock exchanges and depositories. With this end in view, SEBI had held a series of meetings of the custodians, representatives of the stock exchanges and share transfer agents and the last such meeting was held on August 14, 1996. Based on the decisions taken at these meetings, SEBI issues the following guidelines for compliance by the custodians.
2. Custodians must function as an integral part of the system and integrate with the system. Therefore, no custodians shall have such norms and practices as would result in their functioning in isolation of clearing and settlement systems.
3. Custodians must become members of the clearing houses/ clearing corporations of the stock exchange(s) by the end of October 1996 and participate in the clearing and settlement process through the clearing house/clearing corporation for all securities.
4. Custodians shall comply with the applicable rules of the exchanges where they have become members of the clearing house/clearing corporation. This would facilitate the operations of the clients, and also result in reduction of cost of service for the client.
5. Custodians shall advise all the clients about the facility to settle their trades through the clearing house/clearing corporation, stressing the advantages such as :
• time bound rectification of objections;
• no shortages;
• reduction of risk; and
• cost efficiency.
6. Custodians shall also highlight that "DVP trades" (where delivery of securities is not taken or given by the custodian through the clearing house/clearing corporation) would not enjoy the attendant benefits of the clearing house/clearing corporation.
7. Custodians shall adopt the Uniform Good/Bad Delivery Norms, including norms for rectification of bad deliveries through Bad Delivery Cell, framed by SEBI and circulated to all the stock exchanges, as amended from time to time.
8. In cases of trades where the custodian does not take or give delivery from or to the clearing house/clearing corporation ("DVP Trades"), the custodians shall adopt the following norms :
• The custodians shall accept partial delivery of shares arising from a trade from the buying broker, irrespective of the value of the trade.
• Custodians shall accept delivery of shares arising from a trade from the buying broker in at least two partial deliveries, with the first partial delivery accounting for at least 50 percent of the total trade size. The delivery of shares of the second partial delivery shall be completed in accordance with the bye-laws of the exchange on which the trade was executed.
• In case any client expresses reservations about accepting partial settlement, such exceptions shall be brought to the notice of SEBI by the custodians.
• The custodians shall make payment for all shares delivered up to 5.30 p.m. on day 1 by 10.00 am on day 3 so that high value clearing on day 3 is possible for the broker.
• Custodians shall deliver stocks to brokers within 24 hrs of availability of clear funds from the broker or 48 hours of payment through a high value cheque or pay order or demand draft by the broker, whichever is earlier. Custodians shall deliver stocks to brokers by 12.00 p.m. on Monday for which the high value cheque or pay order or demand draft is presented to the custodian by the broker by 9.30 a.m. on the preceding Friday.
• Where collateral is taken for shares which are released to the broker for rectification of bad delivery, the collateral should be reasonable with reference to the bad delivery portion; and for collateral in the form of cash, interest shall be paid by the custodian to the broker.
9. The no delivery period observed by custodians should be in accordance with the norms specified by the relevant exchange.

Yours faithfully,
 

PRATIP KAR
EXECUTIVE DIRECTOR