SEBI’s New Proposal to Ease Compliance and Strengthening Custodian Standards

The Securities and Exchange Board of India (SEBI), the country’s capital market regulator, has unveiled new proposals aimed at streamlining the operations and compliance burdens for custodians. These custodians are entities responsible for managing assets on behalf of foreign portfolio investors (FPIs). The proposed measures are designed to enhance operational efficiency and align with evolving market dynamics.

Revision of Net Worth Criteria for Custodians

A key aspect of SEBI’s proposal is a revision to the net worth requirement for custodians, which has remained unchanged since 1996. Currently set at ₹50 crore, SEBI now recommends increasing the threshold to ₹100 crore. Custodians who do not meet the new requirement will be given a three-year transition period to comply with the updated criteria.

Simplifying Compliance Through KYC Documentation

In another significant proposal, SEBI suggests allowing local custodians and market participants to rely on Know Your Customer (KYC) documentation that has been attested by global custodians. This would simplify the KYC process, reducing the administrative burden on local entities and fostering greater operational efficiency.

Enhancing Governance and Risk Management Standards

SEBI is also contemplating an increase in the obligations and monitoring requirements for custodians. The regulator intends to ensure that custodians meet stringent governance, risk management, and technical standards. This would align their responsibilities with those of qualified stock brokers or systemically important brokers, ensuring that custodians manage risks effectively and maintain robust operational frameworks.

Recommendations from SEBI’s Working Group

A working group formed by SEBI has recommended additional measures to ease custodial requirements. These include modifications to the processes for managing physical records, implementing a code of conduct, and refining the procedures for changes in control of custodians. These suggestions are aimed at further reducing operational complexity for custodians while enhancing overall governance.

Growth in Custodian Assets Under Management

SEBI’s data highlights the rapid growth in the assets managed by custodians. As of September 2023, custodians were overseeing approximately ₹278.5 trillion in assets, a sharp increase from ₹2.7 trillion in March 2002. This substantial rise underscores the growing importance of custodians in India’s financial ecosystem and the need for regulatory measures that support their continued development.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.