Markets regulator Securities and Exchange Board of India is looking to review the rules for custodians by proposing a standardised framework for control changes, enhanced reporting requirements, and an updated code of conduct.
Additionally, the regulator has suggested for setting new standards for business continuity and contingency planning, according to a consultation paper floated on Wednesday.
The Custodian Regulations were first established in 1996 and given the expansion of custodial assets from Rs 2.70 lakh crore in 2002 to Rs 278.50 lakh crore in 2024 and advances in technology, SEBI aims to modernize the rules.
Custodians, currently 17 SEBI-registered entities, provide services like safekeeping assets, account maintenance, and compliance with regulations for clients such as foreign portfolio investors (FPIs), mutual funds, portfolio managers, and alternative investment funds.
They play a critical role in protecting investors' assets and ensuring compliance, particularly with FPIs, where they act as Designated Depository Participants (DDPs) and enforce investment norms.
Also, they facilitate timely settlements in the market, having supported SEBI's shift to a T+1 (trade plus one day) settlement cycle and the implementation of an optional T+0 settlement cycle.
The regulator created a working group (WG) to review the custodian regulations, with focus areas including code of conduct, business continuity, reporting requirements, control changes, and net worth standards.
The working group recommended requiring Sebi's prior approval for control changes, following a model used for other intermediaries like stockbrokers.
To align requirements across intermediaries, it has been proposed a similar framework for custodians, which includes submitting online applications for prior control changes via SEBI's intermediary portal, providing details about the applicant, acquirers, and their directors or partners and implementing a six-month validity period for the regulator's approvals.
Also, the working group has suggested for updating the custodian code of conduct and establishing requirements for business continuity, contingency planning, activity segregation, outsourcing, physical record storage, and reporting.
The SEBI has sought public comments till Nov. 28 on the proposals.
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