The Securities and Exchange Board of India (Sebi) has issued a consultation paper seeking feedback on proposed updates to the Sebi (Custodian) Regulations, which govern the operations of custodians in the Indian securities market.
Custodians play a crucial role in ensuring the safety and proper management of assets for institutional investors, such as foreign portfolio investors (FPIs), mutual funds (MFs), alternative investment funds (AIFs), and portfolio managers. Their responsibilities include the safekeeping of securities, maintaining account records, collecting corporate action benefits, and ensuring compliance with various regulations. They also act as intermediaries in settlement cycles, a role that has become even more critical with the reduction in the equity settlement cycle from T+2 to T+1, and now, the push towards optional T+0 settlement.
Given the importance of custodians in ensuring smooth market operations, especially for institutional investors, the consultation paper proposes several changes to enhance regulatory oversight and operational resilience.
One of the most significant changes proposed is an increase in the net worth requirement for custodians to ₹100 crore from ₹50 crore. Sebi reasoned that a higher net worth could provide a cushion against potential fraud losses and operational risks. Custodians with higher net worth may be better equipped to absorb losses, maintain operational stability and enhance the trust of their clients and stakeholders in the ecosystem, the paper observed.
Sebi also proposed introducing a framework similar to those for other market intermediaries like stockbrokers and depository participant to streamline the process of managing changes in control within custodians,
In recognition of the vital role custodians play in the securities market, Sebi has also proposed a framework for Business Continuity Planning (BCP) and disaster recovery (DR) akin to those for qualified stockbrokers.
The consultation paper suggested a clearer demarcation of custodial and other financial services activities within custodians, proposing that certain related services be conducted through separate legal entities to avoid conflicts of interest. Furthermore, while custodians are allowed to outsource activities, Sebi emphasized that these services must comply with existing outsourcing guidelines to ensure proper oversight.
Sebi has invited public comments on the proposed changes by 28 November.
