The Securities and Exchange Board of India (SEBI) has proposed key changes to custodian regulations to strengthen market operations and oversight, as per a consultation paper released on Wednesday.
The SEBI has recommended doubling the minimum net worth requirement for custodians, from ₹50 crore to ₹100 crore, with a three-year compliance period for existing custodians. The capital market regulator currently has 17 registered custodians.
The consultation paper also includes measures to improve operational resilience, such as a Business Continuity Plan (BCP), a winding-down framework, and an expanded Code of Conduct to prevent unfair competition.
Custodians play a vital role in safeguarding assets for institutional clients, including FPIs, mutual funds, AIFs, and portfolio managers. They are central to SEBI’s investor protection mandate, especially for retail investors investing through mutual funds. Custodians serve as Designated Depository Participants (DDPs) for FPIs, overseeing registration and compliance with KYC and investment norms. Their responsibilities include the safekeeping of securities, record maintenance, collecting corporate action benefits, and regulatory compliance. Custodians also support settlement processes, which have gained importance with the shift from T+2 to T+1 equity settlement and the move towards optional T+0 settlement, for which they have facilitated necessary process updates.
Revising the original threshold of minimum net worth requirement for custodians after nearly three decades, SEBI aims to better equip custodians to manage growing fraud and operational risks, as their role and the volume of assets under custody have expanded significantly. Over the past two decades, assets under custody (AUC) have seen significant growth, rising from ₹2.7 lakh crore in March 2002 to ₹278.5 lakh crore by September 2024 — a compound annual growth rate (CAGR) of around 23%. Higher net worth would provide a buffer against potential losses, enhancing operational stability and client trust. Existing custodians below this threshold will have a three-year period to meet the new requirement.
Further, in its proposal, SEBI has introduced a Business Continuity Planning (BCP) and Disaster Recovery (DR) framework, similar to standards for qualified stock brokers, to ensure custodians can maintain operations during market disruptions, protecting institutional investors who represent significant trading volumes.
The framework also aims to streamline control changes within custodians by requiring prior SEBI approval for such changes, in line with guidelines for other intermediaries like stockbrokers and depository participants. Custodians would submit control change applications online, with a six-month validity for SEBI approvals.
Some of the other key proposals mentioned in the consultation paper include allowing local custodians to rely on Know Your Customer (KYC) documentation attested by global custodians, aligning their responsibilities with those of systemically important stock brokers.
The paper also suggests a clearer separation of custodial and other financial services within custodians to avoid conflicts of interest. While custodians can provide certain related financial services, SEBI recommends these be conducted under separate legal entities when such activities fall outside specific regulatory oversight, ensuring no spillover risk impacts regulated custodial services.
SEBI has proposed that custodians holding no physical securities need not maintain vaults, while those holding physical securities must secure them in vaults, with the option to use industry-standard safes if clients consent.
The markets regulator has invited public comments on its proposal by 28 November.
