SEBI Permits Custodians to Offer Limited Services Outside Regulatory Purview

The Securities and Exchange Board of India (SEBI) has issued a framework allowing custodians to provide certain financial services that fall outside the regulator’s direct oversight. The rules apply to custodians that are not backed by banks. 

According to the circular, such services must be carried out through a separate strategic business unit (SBU). The unit must remain distinct from activities that fall under SEBI’s regulatory framework. 

Separate Structure for Additional Activities 

Custodians undertaking these services must maintain separate books of accounts for the SBU. The accounts are required to be maintained on an arm’s-length basis from regulated custody operations. 

SEBI has also stated that the custodian’s minimum net worth requirement must be met after excluding the financial position of the SBU.  

Role of Industry Body in Defining Activities 

The Custodians and DDPs Standards Setting Forum (CDSSF) will publish a list of financial services that custodians may undertake under this framework. The forum will also prepare a classification of core and non-core activities in consultation with SEBI. 

Custodians will be allowed to outsource non-core activities. The classification is to provide operational clarity on which functions fall within regulated custody services. 

Safeguards and Client Disclosures 

SEBI has permitted custodians to share manpower, infrastructure and systems between regulated and unregulated services.  

However, they must put in place internal safeguards to address possible conflicts of interest. These include internal controls, Chinese walls and adherence to the “need-to-know” principle. 

For services outside SEBI’s oversight, custodians must obtain an acknowledgement from clients stating that complaints related to such services cannot be taken to SEBI. 

Governance and Compliance Measures 

The circular also outlines governance requirements for custodians. Firms will need to constitute board-level committees covering audit, risk management, and nomination and remuneration matters. 

They must also establish risk management frameworks addressing risks, along with systems for reporting suspicious transactions. In addition, SEBI has removed certain reporting requirements that duplicate information already submitted to depositories. 

Implementation Timeline 

Most provisions of the framework will come into effect from 24 March 2026. Some requirements, including those related to wind-down frameworks and disaster recovery infrastructure, will be introduced in phases, with deadlines extending up to 2029. 

Read More: SEBI Steps Up Tech Monitoring to Tackle Retail Investment Scams! 

Conclusion  

The new rules define how custodians can structure activities that fall outside SEBI’s regulatory scope. They include requirements on separate business units, disclosures to clients, and internal safeguards.  

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.   
 
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