SEBI (Custodian) Regulations, 1996

SEBI (Custodian) Regulations, 1996 (Part 1)

• Definition of a Custodian: A person who carries on or proposes to carry on the business of providing custodial services, which includes safekeeping of securities, goods, gold, silver, or title deeds of real estate assets, and providing services incidental thereto.
• Custodial Services: Includes maintaining accounts, undertaking activities as a Domestic Depository, collecting benefits or rights, keeping clients informed, and maintaining records.
• Registration of a Custodian: Any person proposing to act as a custodian needs to get himself registered with SEBI, which considers factors such as capital requirement, infrastructure, approvals, and competent personnel.

Key Concepts

• Functions of a Custodian: Includes providing custodial services, maintaining accounts, and collecting benefits or rights.
• Registration Requirements: The applicant should fulfill the capital requirement, have necessary infrastructure, and employ competent persons.
• Obligations and Responsibilities: Custodians should segregate activities, monitor and review systems, and maintain adequate internal controls.
• Code of Conduct: Custodians should maintain the highest standard of integrity, fairness, and professionalism, and be prompt in distributing dividends and interest.

Registration and Eligibility

• Capital Adequacy Requirements: The applicant should have a net worth of a minimum of Rs. 75 crores.
• Period of Validity of Certificate: Every certificate granted to the applicant as a Custodian shall be valid unless it is suspended or cancelled by SEBI.
• Fees: The applicant needs to pay an application fee, registration fee, and an annual fee to SEBI.

General Obligations and Responsibilities of Custodians

• Segregation of Activities: Custodians should ensure that activities relating to their business as custodian are separate and segregated from all other activities.
• Monitoring and Review: Custodians should have adequate mechanisms for reviewing, monitoring, and evaluating their controls, systems, procedures, and safeguards.
• Prohibition of Assignment: Custodians shall not assign or delegate their functions as a custodian to any other person unless such person is a custodian.
• Separate Custody Account: Every custodian shall open a separate custody account for each client.
• Agreement with the Client: Every custodian shall enter into an agreement with each client on whose behalf it is acting as custodian of securities.
• Internal Controls: Every custodian shall have adequate internal controls to prevent any manipulation of records and documents.
• Maintenance of Records and Documents: Every custodian shall maintain records and documents for a minimum period of five years.

Appointment of Compliance Officer

• Compliance Officer: Every custodian shall appoint a compliance officer who shall be responsible for monitoring the compliance of the Act, rules, and regulations.
• Responsibilities: The compliance officer shall immediately and independently report to the Board any non-compliance observed by him.

Code of Conduct

• Integrity and Fairness: The custodian shall maintain the highest standard of integrity, fairness, and professionalism in the discharge of his duties.
• Prompt Distribution of Dividends: The custodian shall be prompt in distributing dividends, interest, or any such accruals of income received or collected by him on behalf of his clients.
• Accountability: The custodian shall be continuously accountable for the movement of securities or goods in and out of the custody account.
• Confidentiality: The custodian shall maintain client confidentiality in respect of the client's affairs.

SEBI (Custodian) Regulations, 1996 (Part 2)

• Custodian Responsibilities:
  • Ensure continuity in record-keeping and maintain sufficient backup of records.
  • Create and maintain records of securities held in custody to facilitate tracing or obtaining duplicate title documents.
  • Extend cooperation to other custodial entities, depositories, and clearing organizations.
  • Maintain an arms-length relationship from other businesses.
  • Exercise due diligence in safe-keeping and administration of client assets.
• Investment Advice:
  • A custodian should not render investment advice without disclosing their interest, including long or short positions, in the security.
  • Employees of the custodian must also disclose the interest of their dependent family members and employer.
• Dispute Resolution:
  • Claims, differences, or disputes between a custodian and client shall be submitted to a dispute resolution mechanism, including mediation, conciliation, and/or arbitration, as per SEBI's procedure.
• Investor Charter:
  • The custodian must ensure compliance with the Investor Charter specified by SEBI from time to time.
• Key Terms:
  • Custodian: A person who carries on or proposes to carry on the business of providing custodial services.
  • Arms-Length Relationship: Maintaining separation between the custodian's business and other activities to avoid conflicts of interest.
  • Due Diligence: Exercising reasonable care and caution in safe-keeping and administration of client assets.