Chapter 22: SEBI (Custodian) Regulations, 1996

Custodians of Securities are high-tier institutional intermediaries responsible for the safekeeping and administration of securities, money market instruments, and physical gold belonging to institutional investors (Mutual Funds, FPIs, AIFs, and Pension Funds).

Scope of Custodial Services (Regulation 2(f))

Custodial services include:

1. Safekeeping of securities or gold/gold-related instruments of mutual funds;
2. Maintaining accounts of securities or physical gold;
3. Collecting dividends, interest, and processing corporate actions;
4. Settling securities transactions on stock exchanges;
5. Executing foreign exchange conversions and repatriation under RBI guidelines.

Capital Adequacy Mandate

Every applicant seeking registration as a Custodian must maintain a minimum net worth of ₹50 Crores.

Custodians must ensure complete segregation of client assets from corporate property.

Asset Segregation & Client Agreements

• Strict Separation of Custody: A custodian must maintain separate custody accounts for each client. Client assets can never be merged with the custodian's own assets or used to settle obligations of other clients.
• Formal Custodial Agreement: Must execute a comprehensive custodial agreement with every client detailing safekeeping duties, reporting schedules, indemnities, and voting instructions.
• Prohibition on Assignment: A custodian cannot assign or sub-contract its core custodial duties to any third party without SEBI's prior written approval.

Physical Vault Controls for Gold & Bullion

Where a custodian holds physical gold (such as underlying bullion for Gold ETFs):

• Gold must be stored in secure vaults meeting international security specifications;
• Dual-custody vault locks requiring simultaneous authorization by two senior vault officers;
• Mandatory quarterly physical audits by independent chartered accountants to verify bullion fineness (99.5% pure gold), bar weight, and serial numbers against depository records.

Institutional asset management relies heavily on error-free custodial clearing and corporate administration.

Reconciliation Routines

• Custodians must perform daily reconciliation of client book holdings with the records of depositories (NSDL and CDSL) and clearing corporations.
• Cash ledger balances are reconciled daily with Authorized Dealer banks.
• Any discrepancy must be investigated and remediated within twenty-four (24) hours.

Corporate Actions Processing & Proxy Voting

• Corporate Benefits Collection: The custodian tracks and collects dividend payouts, interest warrants, bonus share allotments, and rights entitlements on behalf of institutional clients.
• Proxy Voting: Under client custody agreements, the custodian receives shareholder voting notices from issuers, disseminates them to foreign/domestic fund managers, and executes voting instructions electronically at company general meetings.

Custodians operate under intensive regulatory compliance protocols.

Compliance Officer Role (Regulation 16)

• Every custodian must appoint a designated Compliance Officer responsible for monitoring adherence to SEBI regulations, RBI foreign exchange guidelines, and PMLA rules.
• Reports any material violation or operational failure directly to SEBI and the Board of Directors.

Half-Yearly Internal Audit & Investor Charter

• A comprehensive internal audit of custodial operations, IT networks, and vault security must be conducted half-yearly by an independent practicing Chartered Accountant.
• The custodian must publish an Investor Charter detailing its service deliverables, grievance escalation channels, and typical turn-around times for settlement confirmations.