What Happened
- SEBI issued revised guidelines for registered custodians, raising the minimum net worth requirement from Rs 50 crore to Rs 75 crore
- Existing custodians have been given three years to meet the enhanced net worth requirement
- Custodians are now permitted to share manpower, infrastructure, and systems across financial service activities, subject to information barriers and conflict-of-interest controls
- Non-bank custodians must operate SEBI-regulated and non-SEBI-regulated services through separate Strategic Business Units (SBUs) with arm's-length accounts
- Custodians not holding physical securities are exempted from the vault maintenance requirement; those holding physical securities must maintain vaults and disclose specifications in quarterly reports
- The guidelines came into force on March 24, 2026
Static Topic Bridges
Role of Custodians in the Securities Market
A custodian in the securities market is an intermediary that provides safekeeping of securities and other financial assets on behalf of institutional investors, along with settlement, clearing, and corporate action processing services.
- SEBI (Custodian of Securities) Regulations, 1996 provide the regulatory framework for custodians in India
- Custodial services include: safekeeping of securities, gold, or title deeds of real estate assets; maintaining accounts of securities; collecting benefits or rights accruing to the client; keeping clients informed of corporate actions
- Primary clients: mutual funds, foreign portfolio investors (FPIs), insurance companies, pension funds, alternate investment funds (AIFs)
- Custodians are a critical part of the securities market infrastructure, reducing settlement risk and ensuring smooth processing of trades
- Registration: mandatory registration with SEBI under Section 12(1)(i) of the SEBI Act, 1992
- Major custodians in India include: Stock Holding Corporation of India (SHCIL), HDFC Bank, Deutsche Bank, Citibank, Standard Chartered Bank, Kotak Mahindra Bank
- Custodians differ from depositories (NSDL, CDSL): depositories hold securities in electronic form at a systemic level, while custodians provide custodial and settlement services for specific institutional clients
Connection to this news: The enhanced net worth requirement from Rs 50 crore to Rs 75 crore reflects SEBI's intent to ensure custodians have adequate financial strength to absorb operational risks and meet growing institutional demand in India's expanding capital markets.
SEBI's Market Infrastructure Regulation
SEBI regulates a layered market infrastructure comprising stock exchanges, clearing corporations, depositories, and intermediaries (including custodians). The regulator has been progressively tightening governance and financial requirements across all infrastructure entities.
- SEBI Act, 1992 (Section 11) empowers SEBI to regulate the securities market and protect investor interests
- Market infrastructure institutions (MIIs): stock exchanges (NSE, BSE), clearing corporations (NSE Clearing, Indian Clearing Corporation), depositories (NSDL, CDSL) -- governed by SEBI's framework for MIIs
- Intermediary categories regulated by SEBI: stock brokers, custodians, merchant bankers, portfolio managers, credit rating agencies, debenture trustees, registrars, and transfer agents
- SEBI (Stock Brokers) Regulations, 2026 -- a recent overhaul of the broking regulatory framework
- SEBI Mutual Funds Regulations, 2026 -- another major regulatory update
- Net worth requirements serve as the first line of defence against operational and credit risk for intermediaries
- The shift to SBU-based segregation for non-bank custodians follows a global trend of ring-fencing regulated activities to prevent contagion from non-regulated business lines
Connection to this news: The SBU requirement and infrastructure sharing provisions balance two objectives: allowing operational efficiency through shared resources while preventing conflicts of interest and ensuring that regulated activities are adequately ring-fenced.
Investor Protection and Market Integrity
The core mandate of securities market regulation is investor protection, which is achieved through capital adequacy norms, governance requirements, disclosure obligations, and segregation of client assets.
- SEBI's investor protection mandate derives from Section 11 of the SEBI Act, 1992: "to protect the interests of investors in securities and to promote the development of, and to regulate the securities market"
- Custodians play a critical investor protection role by maintaining segregation between client assets and proprietary assets
- The Investor Education and Protection Fund (IEPF) under the Companies Act, 2013 provides a safety net for unclaimed dividends and deposits
- SEBI's Investor Protection Fund at stock exchanges compensates investors for losses due to defaulting trading members
- Key governance requirements for custodians: appointment of compliance officer, periodic reporting to SEBI, internal audit, maintenance of records for minimum 5 years
- The enhanced net worth and SBU requirements reduce the risk of co-mingling of funds and ensure adequate buffer for client asset protection
Connection to this news: The revised guidelines strengthen the custodial framework at a time when India's market is attracting record institutional investment, with FPI assets under custody and domestic mutual fund AUM reaching new highs, necessitating robust custodial infrastructure.
Key Facts & Data
- Previous custodian net worth requirement: Rs 50 crore
- Revised custodian net worth requirement: Rs 75 crore
- Compliance timeline for existing custodians: 3 years
- Guidelines effective date: March 24, 2026
- SEBI (Custodian) Regulations: 1996
- SEBI Act: 1992 (Section 11 -- investor protection mandate; Section 12(1)(i) -- registration)
- Major depositories in India: NSDL (1996), CDSL (1999)
- SBU requirement: non-bank custodians must separate SEBI-regulated and non-regulated activities
- Vault requirement: only mandatory for custodians holding physical securities