Adwaith Krishnan A S
Introduction
The securities exchange board of India (SEBI) on September 23 this year have made amendments to the SEBI (Custodian of Securities) Regulation 1996. These amendments were made to bolster the current regulations, Protection and trust of investors and to enhance the transparency. There are few amendments made to the regulation including the 2022 amendment where Clause 7 was added to the existing Regulation 8 that mandates the custodians who already have a registration certificate must take SEBI’s prior approval before providing custodial services for silver or silver-related instruments held by mutual funds. The recent amendment is a more comprehensive one compared to other amendments as it enables stronger governance, raising financial criteria, expansion of permissible activities for the custodians.
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Key Amendments (2025) to the SEBI (Custodian of Securities) Regulation 1996
According to Regulation 2(d) of the SEBI (Custodian of Securities) Regulation 1996, custodians are the persons who provides custodial services. The custodial services refer to the safekeeping and administration of a client’s financial and physical assets such as securities, goods, gold etc. One of the key amendments was made to Regulation 7 where the capital requirement was upgraded to 75 crores from 50 crores for the purpose of grant of certificate by the board under Regulation 6 of SEBI Custodian regulations provided that the custodian shall fulfil this requirement independently from capital adequacy requirement and if the certificate of registration was granted before the amendment , the custodian has to comply with the requirement within 3 years from the date of amendment for undertaking activities. This ensures that a dedicated buffer will be there to protect the custodian from undercapitalization when it is facing operational risks and also protect the investor. Japan’s new proposed custody rules (yet to get approved) also put forward a similar kind of system where crypto platform requires to hold the assets of the consumer separately from the company funds and cannot be used for any other purposes other than improving the consumer protection. Even though the Japanese case is based on crypto platform, a parallel can be drawn as both the regulation wants to improve the protection of the investors.
Regulation 9 clause f was amended and the custodians may carry on any activities related ton performing financial services other than the custodial services provided that the custodian is not a falling under the definition of banking company under Section 5(c) of banking regulations act, 1949 or subsidiary, associate or joint venture of such companies. This provides the custodian with the opportunity of exploring additional financial services that it can render to the clients. For examples in the USA, independent custodians have expanded their service beyond pure safekeeping as they provide services like fund accounting, transfer agency operations, performance reporting, collateral management, and portfolio risk analytics.
Regulation 19 B: Raising the Bar for Custodian Governance and Accountability
Another important amendment was the insertion of Regulation 19 B; it provides for the obligations and the responsibilities of the custodians. This provision lays down the obligation and the responsibilities of the custodians. They are now required from time to time meet the required obligations and the discharge of responsibilities in the manner specified by SEBI. This includes ensuring an appropriate governance structure and processes, risk management policy, framework for orderly winding up, scalable infrastructure and appropriate technical capacity and any other measures that SEBI. The insertion of this regulation makes the compliances stricter and enhances the protection of the clients. In the case of Orbis financial corporation limited, SEBI alleged that the institution has violated the custodian norms as it didn’t had any proper software for physical securities which led to the situation where unauthorised person assessing the vaults, lack of infrastructure, and not appointing a competent person for managing custodian business. The matter was settled as Orbis has paid Rs 1.6 crore as settlement amount. This is an example where the lack of proper guidelines can cause governance failure. The insertion of the Regulation 19 B will cure the defect of governance failure by laying the down obligations and the responsibilities of the custodian.
Third Schedule Reforms: Elevating Custodian Conduct and Oversight
In the third schedule a number of new clauses have been added after Clause 11. The newly added Clause 12 mandates the custodian to abide the rules, regulations and direction issued by the reserve bank of India from time to time. Clause 13 prohibits the customer from indulging in any kind of unfair competition practices which hampers the interests of other custodians. From Clause 14 to 26, Sebi has mandated strict conduct, governance and compliance standards for the custodians such as avoid the exaggeration of the services that they are providing, false statements or suppressing of material information furnished to the board, ensuring good corporate policies etc. The Clause 23 lays down that the custodian is responsible for the act of the employee while conducting the business will make the custodian more responsible toward the investor. For example, in 2017, JP Morgan Chase and co faced regulatory scrutiny for weak internal controls in securities settlement as it was fined USD2.8 million by FINRA in 2018 for failing to segregate client securities properly demonstrating that custodians are liable for compliance failures. This is a welcoming steps as it put India’s position with the regulations that are place in the USA
Conclusion
In conclusion, the recent amendments by SEBI to the Custodian of Securities Regulations, 1996 is a new milestone in enhancing the custodial framework in India, as it is now more aligned with the international best practices. SEBI has improved both the governance and investor protection by increasing the capital requirement as well as the activities allowed and the obligations contained in the Regulation 19B. The presence of detailed standards of conduct and compliance in the Third Schedule has ensured employees of custodians uphold transparency, accountability and a sound stewardship of their workforce as a way of reducing risks of operational lapse as apparent in the case of Orbis. In addition, by allowing the custodians to engage in other financial services on specified terms, innovativeness will be promoted, and investors will be protected. These amendments are an indication that the nature of investments in India is to move towards a healthier, risk conscious and investor-based custodial framework that is similar to other global models such as the USA and Japan.
References:
https://crypto-economy.com/japans-proposed-custody-rule-highlights-push-for-stronger-oversight/.
https://www.globalcustody.pro/p/global-custody-pro-13-june-2025.
https://legal.economictimes.indiatimes.com/news/litigation/orbis-financial-corp-settles-custodian-rules-violation-case-with-sebi-pays-rs-1-6-cr/114292907.
https://bankerandtradesman.com/jpmorgan-pays-2-8m-fine-improper-safeguards-customers/.
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(Author is a third-year student at NLU Odisha)
