SEBI's New Custodian Measures: Enhancing Compliance and Risk Management

SEBI Tightens Custodian Regulations: What the New Norms Mean for India’s Capital Market Infrastructure

In a significant move to fortify systemic resilience and operational clarity, the Securities and Exchange Board of India (SEBI) on December 18, 2024, announced sweeping reforms to the regulatory framework governing custodians. The overhaul—focused on net worth thresholds, business continuity, outsourcing norms, and compliance streamlining—reflects SEBI’s broader push to align market infrastructure entities with the demands of a rapidly evolving financial ecosystem.

Higher Entry Barriers: Rs 75 Crore Net Worth Mandate

One of the headline changes is the substantial increase in the minimum net worth requirement for custodians—from previous thresholds to Rs 75 crore. This enhanced capitalisation norm is aimed at improving financial robustness and investor confidence, particularly in light of custodians’ central role in safeguarding securities and handling settlement-related risks.

Custodians currently operating under the old framework have been granted a three-year transition period to meet the new benchmark, offering them a structured runway for compliance without disrupting operations.

Risk Management Reimagined: BCP and Winding-Down Protocols

SEBI’s revised guidelines mandate that all custodians implement Business Continuity Plans (BCP) and Disaster Recovery (DR) frameworks that meet or exceed global benchmarks. These requirements mirror those already applicable to Qualified Stock Brokers (QSBs), underlining SEBI’s intention to bring custodial risk frameworks on par with other systemic market entities.

Importantly, custodians will now also need to prepare winding-down protocols—a pre-emptive roadmap to manage client transitions and preserve market stability in the event of a custodian’s operational exit. This regulatory foresight is expected to significantly strengthen investor protection.

Defining the Boundaries: Clarity on Permitted and Incidental Activities

In a bid to sharpen regulatory focus, SEBI has drawn a firmer line between core custodial functions and incidental or unregulated activities. Only activities directly related to regulated custodial services—such as settlement support, safekeeping, and fund administration—will be allowed within the custodian’s primary legal entity.

Any unrelated or ancillary functions must be hived off into a separate legal entity within two years. This segregation is designed to limit conflicts of interest and promote transparency while allowing for shared infrastructure or staffing arrangements on a fully disclosed, arm’s length basis.

Outsourcing Governance: Core vs Non-Core Activity Roadmap

To bring greater clarity to operational risk controls, SEBI—alongside the Custodians and Depositories Standard Setting Forum (CDSSF)—will now formally identify core and non-core functions of custodians. This classification will serve as the foundation for updated outsourcing norms, ensuring that essential functions remain under direct oversight, while allowing controlled outsourcing of support tasks.

Such measures aim to strike a balance between operational efficiency and risk containment, a pressing concern as market complexity grows.

Rationalising Physical Infrastructure and Reporting

In another practical shift, the obligation to maintain physical security vaults will now apply only to custodians who actually handle paper-based securities. This will reduce infrastructure waste and allow firms to tailor their operational footprint based on the nature of assets they service. Vault maintenance protocols will be developed in consultation with market stakeholders and must include clear client consent mechanisms for physical custody.

To address long-standing industry concerns around reporting duplication, SEBI will also phase out redundant disclosures where custodian filings overlap with those already submitted to depositories. This move is expected to lower compliance overheads and improve process efficiency.

Strategic Implications

Together, these reforms mark a deliberate shift towards better capitalisation, clearer operational boundaries, and more robust risk controls in India’s custodian ecosystem. At a time when foreign portfolio investor (FPI) flows and domestic institutional activity are growing, SEBI’s approach appears to prioritise stability without stifling scalability.

Custodians that adapt proactively to these changes—not merely by ticking boxes but by embedding governance into their operating DNA—stand to gain a strategic edge in an increasingly sophisticated marketplace.

Conclusion

SEBI’s overhaul of custodian regulations is more than a compliance update—it’s a recalibration of market expectations around safety, transparency, and resilience. As these norms take effect, custodians will play an even more vital role in underpinning trust in India’s capital markets.

For investors, issuers, and intermediaries alike, a stronger custodian framework could be a key enabler of long-term confidence and orderly market expansion.