Difference between Indian Stock Market Vs US Stock Market | Custodian vs. Depository model
Hi, this is Viram from Vested and you’ve tuned into our series which talks about how the US stock market is structurally different from the Indian stock market. As part of this series, we will cover three topics:
- The Custodian versus the Depository model
- Fractional shares
- IPO investing for retail investors
Today’s topic is the Custodian vs. the Depository model
In India, we follow what is called the Depository model. If you’re buying shares through a broker in India, your shares will be held at a Depository either CDSL or NSDL. It is the ultimate responsibility of the Depository to ensure that the shares are held safely.
These shares are in electronic form in an account called a demat account. What’s important to note is that the account at the Depository is under your name. This means that you get direct communication from CDSL or NSDL and you can also go to their website to verify your holdings directly.
Now, the structure that the US stock markets follow is a little different – it’s the Custodian model. Under the Custodian model, the broker is the one who is responsible for the safety of the shares versus CDSL/NSDL. In India, the broker is the one who appoints a Custodian for the safekeeping of the shares.
Basically, the Custodian acts like a locker or a vault that the broker hires. This concept is called ‘in street name’ because the Custodian is holding the broker’s clients’ shares under the broker’s name.
Custodians in the US are the likes of Citibank and JPMorgan that hold billions or trillions of dollars.
In the US though unlike in India, the broker is the ultimate source of truth to be able to verify your securities or holdings. The SEC has strict oversight to ensure that the investors’ interests are protected. To add to it, every brokerage account is insured by the Securities Investor Protection Corporation by up to $500,000.
So that were the basic differences between the Depository and the Custodian model.
Stay tuned for the second and third part of the series that focuses on fractional shares and investing in IPOs across both markets.