A Guide to the SEBI (Custodian of Securities) Regulations, 1996

A Guide to the SEBI (Custodian of Securities) Regulations, 1996

17 min read

The Securities and Exchange Board of India (Custodian of Securities) Regulations, 1996 provide the procedure for custodian of securities and related matters.

Brief History of the Regulations

The Securities and Exchange Board of India (SEBI) has prescribed the SEBI (Custodian of Securities) Regulations, 1996 on 16th May 1996 by the powers given under Section 30 of the SEBI Act, 1992.

List of Amendments

  • SEBI (Custodian of Securities) (Amendment) Regulations, 1996
  • SEBI (Custodian of Securities) (Amendment) Regulations, 1997
  • SEBI (Custodian of Securities) (Amendment) Regulations, 1998
  • SEBI (Investment Advice by Intermediaries) (Amendment) Regulations, 2001
  • SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002
  • SEBI (Criteria for Fit and Proper Person) Regulations, 2004
  • SEBI (Custodian of Securities) (Amendment) Regulations, 2006
  • SEBI (Custodian of Securities) (Second Amendment) Regulations, 2006
  • SEBI (Intermediaries) Regulations, 2008
  • SEBI (Custodian of Securities) (Amendment) Regulations, 2008
  • SEBI (Facilitation of Issuance of Indian Depository Receipts) (Amendment) Regulations, 2009

Download
Securities and Exchange Board of India (Custodian of Securities) Regulations, 1996


1. Important Definitions

Certificate means a certificate of registration granted by the Board under these regulations.

Client means any person who has entered into an agreement with a custodian of securities to avail custodial services provided by the custodian of securities.

Custodian of Securities means any person who carries on or proposes to carry on the business of providing custodial services.

Custodial Services in relation to securities of a client or gold or gold related instruments held by a mutual fund or title deeds of real estate assets held by a real estate mutual fund scheme in accordance with the SEBI (Mutual Funds) Regulations, 1996 means, safekeeping of such securities or gold or gold related instruments or title deeds of real estate assets and providing services incidental thereto, and includes-

  1. Maintaining accounts of securities or gold or gold related instruments or title deeds of real estate assets of a client
  2. Undertaking activities as a domestic depository in terms of the Companies (Issue of Indian Depository Receipts) Rules, 2004
  3. Collecting the benefits or rights accruing to the client in respect of securities or gold or gold related instruments or title deeds of real estate assets
  4. Keeping the client informed of the actions taken or to be taken by the issuer of securities, having a bearing on the benefits or rights accruing to the client
  5. Maintaining and reconciling records of the services referred to in the points above.

Custody Account means an account of a client maintained by a custodian of securities in respect of securities.


2. Registration of Custodian of Securities

  1. Any person proposing to carry on business as custodian of securities on or after the commencement of these regulations has to make an application to the Board for grant of a certificate.
  2. Any person who is carrying on business as a custodian of securities on the date of commencement of these regulations has to make an application to the Board for grant of certificate within a period of 3 months from the date of such commencement. The Board may, in special cases, where it is of the opinion that it is necessary to do so for reasons to be recorded in writing may extend the period up to a maximum of 6 months from the date of such commencement.
  3. An application for grant of a certificate has to be made in Form A and has to be accompanied by an application fee as specified in Part A of the Second Schedule and be paid in the manner specified in Part B.
  4. Any person who fails to make an application for grant of certificate within the period or the extended period specified, has to cease to carry on any activity as custodian of securities and is subject to the directions of the Board with regard to the transfer of records, documents or securities relating to his activities as custodian of securities.
  5. The Board may require the applicant to furnish such further information or clarification regarding matters relevant to the activities of a custodian of securities for the purpose of consideration of the application.
  6. The applicant or his authorised representative has to, if so required, appear before the Board for personal representation, in connection with the grant of certificate.
  7. For the purpose of the grant of a certificate the Board has to take into account all matters which are relevant to the activities of a custodian of securities and in particular, whether the applicant fulfils the capital requirement, the applicant has the necessary infrastructure, including adequate office space, vaults for safe custody of securities and computer systems capability, required to effectively discharge his activities as custodian of securities, the applicant has the requisite approvals under any law for the time being in force, in connection with providing custodial services in respect of gold or gold related instruments of a mutual fund or title deeds of a real estate assets held by a real estate mutual funds scheme,where applicable, the applicant has in his employment, adequate and competent persons who have the experience, capacity and ability of managing the business of the custodian of securities, the applicant has prepared a complete manual, setting out the systems and procedures to be followed by him for the effective and efficient discharge of his functions and the arm’s length relationships to be maintained with the other businesses, if any, of the applicant, the applicant is a person who has been refused a certificate by the Board or whose certificate has been cancelled by the Board, the applicant, his director, his principal officer or any of his employees is involved in any litigation connected with the securities market, the applicant, his director, his principal officer or any of his employees has at any time been convicted of any offence involving moral turpitude or of any economic offence, the applicant is a fit and proper person and the grant of certificate is in the interest of investors.
  8. For the purpose of determining whether an applicant or the custodian of securities is a fit and proper person the Board may take into account the criteria specified in Schedule II of the SEBI (Intermediaries) Regulations, 2008.
  9. The capital requirement has to be a net worth of a minimum of INR 50 crores. 
  10. After considering the application, if the Board is satisfied that all particulars sought have been furnished and the applicant is eligible for the grant of a certificate, it has to send an intimation of the same to the applicant.
  11. On receipt of an intimation from the Board, the applicant has to pay to the Board a registration fee specified in Part A of the Second Schedule in the manner specified in Part B.
  12. The Board has to thereafter grant a certificate in Form B to the applicant on receipt of the registration fee. The Board may restrict the certificate of registration to providing custodial services either in respect of securities or in respect of gold or gold related instruments of a client or title deeds of real estate assets held by a real estate mutual funds scheme.
  13. A custodian of securities holding a certificate of registration as on the date of commencement of the SEBI (Custodian of Securities) (Amendment) Regulations, 2006, may provide custodial services in respect of gold or gold related instruments of a mutual fund only after taking prior approval of the Board.
  14. A custodian of securities holding a certificate of registration as on the date of commencement of the SEBI (Custodian ofSecurities) (Amendment) Regulations, 2008 may provide custodial services in respect of title deeds of real estate assets held by a real estate mutual fund scheme.
  15. The certificate granted to custodian of securities has to be subject to the conditions that it cannot commence any activities as custodian of securities unless it fulfils the capital requirement, it has to abide by the provisions of the Act and these regulations in the discharge of its functions as custodian of securities, it has to enter into a valid agreement with its client for the purpose of providing custodial services, it has to pay annual fees as specified in Part A of the Second Schedule in the manner specified in Part B, if any information previously submitted by it to the Board is found by it to be false or misleading in any material particular, or if there is any change in such information, it has to forthwith inform the Board in writing and besides providing custodial services, it cannot carry on any activity other than activities relating to rendering of financial services.
  16. Every certificate granted is valid for a period of 3 years from the date of grant of registration or its renewal. 
  17. A custodian of securities, desirous of having its certificate renewed has to make an application to the Board for renewal of the certificate in Form A, not less than 3 months before the expiry of its period of validity. The application for renewal of certificate has to be dealt with, as far as may be, as if it were an application for the grant of a fresh certificate and has to be accompanied with the application fee as specified in Schedule II.
  18. After considering an application for grant of certificate made, if the Board is satisfied that a certificate should not be granted, the Board may reject the application after giving the applicant a reasonable opportunity of being heard.
  19. The decision of the Board to reject the application has to be communicated within 30 days of such decision to the applicant in writing stating the grounds on which the application has been rejected.
  20. An applicant, who is aggrieved by the decision of the Board may, within a period of 30 days from the date of receipt of communication, apply to the Board for re- consideration of its decision.
  21. The Board has to, as soon as possible, in the light of the submissions made in the application for reconsideration made and wherever necessary, after giving the applicant a reasonable opportunity of being heard, convey its decision in writing to the applicant.
  22. Any custodian of securities whose application for grant of certificate has been rejected by the Board has to, on and from the date of the receipt of the communication, cease to carry on any activity as custodian of securities and is subject to the directions of the Board with regard to the transfer of records documents or securities that may be in its custody or control relating to its activity as custodian of securities.

3. General Obligations and Responsibilities of Custodians

  1. Every custodian of securities has to abide by the Code of Conduct as set out in the Third Schedule.
  2. Where a custodian of securities is carrying on any activity besides that of acting as custodian of securities, then, the activities relating to his business as custodian of securities has to be separate and segregated from all other activities, its officers and employees engaged in providing custodial services cannot be engaged in any other activity carried on by him and every custodian of securities has to have adequate mechanisms for the purposes of reviewing, monitoring and evaluating the custodian’s controls, systems, procedures and safeguards.
  3. The custodian of securities has to be inspected annually by an expert and forward the inspection report to the Board within 3 months from the date of inspection.
  4. No custodian of securities can assign or delegate its functions as a custodian of securities to any other person unless such person is a custodian of securities (Provided that a custodian of securities may engage the services of a person not being a custodian, for the purpose of physical safekeeping of gold belonging to its client being a mutual fund having a gold exchange traded fund scheme, subject to conditions that, the custodian of securities has to remain responsible in all respects to its client for safekeeping of the gold kept with such other person including any associated risks, all books, documents and other records relating to the gold so kept with the other person has to be maintained in the premises of the custodian or if they are not so maintained, they have to be made available therein and if so required by the Board, the custodian of securities has to continue to fulfill all duties to the clients relating to the gold so kept with the other person, except for its physical safekeeping.
  5. Every custodian of securities has to open a separate custody account for each client, in the name of the client whose securities are in its custody and the assets of one client cannot be mixed with those of another client.
  6. Every custodian of securities has to enter into an agreement with each client on whose behalf it is acting as custodian of securities and every such agreement has to provide for matters such as, the circumstances under which the custodian of securities will accept or release securities, assets or documents from the custody account, the circumstances under which the custodian of securities will accept or release monies from the custody account, the circumstances under which the custodian of securities will receive rights or entitlements on the securities of the client, the circumstances and the manner of registration of securities in respect of each client and details of the insurance, if any, to be provided for by the custodian of securities.
  7. Every custodian of securities has to have adequate internal controls to prevent any manipulation of records and documents including audits for securities and rights or entitlements arising from the securities held by it on behalf of its client.
  8. Every custodian of securities has to have appropriate safekeeping measures to ensure that such securities, assets or documents are protected from theft and natural hazard.
  9. Every custodian of securities has to maintain documents such as records containing details of securities, assets or documents received and released on behalf of each client, records containing details of monies received and released on behalf of each client, records containing details of rights or entitlements of each client arising from the securities held on behalf of the client, records containing details of registration of securities in respect of each client, ledger for each client, records containing details of instructions received from and sent to clients and records of all reports submitted to the Board.
  10. Every custodian of securities has to intimate the Board, the place where the records and documents are maintained.
  11. Every custodian of securities has to preserve the records and documents maintained for a minimum period of 5 years.
  12. Every custodian of securities has to appoint a compliance officer who has to be responsible for monitoring the compliance of the Act, rules and regulations, notifications, guidelines, instructions, etc., issued by the Board or the Central Government and for redressal of investors’ grievances. The compliance officer has to immediately and independently report to the Board, any non-compliance observed by him.

4. Powers of the Board

  1. Power to call for information from a custodian of securities
  2. Power to appoint inspecting officer to undertake inspection of books of accounts, records and documents
  3. Power to empower inspecting officer for investigating complaints received from clients, investors or any other person in relation to activities of custodian of securities
  4. Power to issue notice
  5. Power to require inspecting officer to report to the Board
  6. Power to appoint auditor to inspect or investigate books of accounts, records, documents or affairs of a custodian of securities or applicant
  7. Power to recover expenses.

5. Schedule I

FORM A

Application for Grant of Certificate of Registration as Custodian of Securities

INSTRUCTIONS:

  1. This form is meant for use by the applicant for application for grant of certificate of registration as custodian of securities.
  2. The applicant should complete this form, and submit it, along with all supporting documents to the Board at its head office at Mumbai.
  3. This application form should be filled in accordance with the SEBI (Custodian of Securities) Regulations, 1996.
  4. The application will be considered by the Board provided it is complete in all respects.
  5. All answers must be typed.
  6. Information which needs to be supplied in more detail may be given on separate sheets which should be attached to the application form.
  7. The application must be signed and all signatures must be original.
  8. The application must be accompanied by an application fee as specified in the Second Schedule to the SEBI (Custodian of Securities) Regulations,1996.
  9. Every page of the form and every additional sheet must be initialled by the authorised signatory of the applicant.
  10. All copies of documents should be attested as true by an authorised notary.

DETAILS REQUIRED:

  1. Name, address of the registered office, address for correspondence, telephone numbers, fax numbers, telex numbers of the applicant and the name of the contact person.
  2. Indication of categories of the applicant which includes foreign bank, domestic bank, financial institution and other.
  3. Date and place of incorporation or establishment and date of commencement of business (enclose certificate of incorporation, memorandum and articles of association or statutory provisions, if any, under which incorporated or established). 
  4. Details of the activities carried on by the applicant, in India or overseas.
  5. Details of affiliates and subsidiaries of the applicant operating in India, and activities carried on by them.
  6. Details of registration with the Securities and Exchange Board of India or with the Reserve Bank of India or with any regulatory authority overseas of the applicant, and of its affiliates and subsidiaries operating in India.
  7. In case the applicant is buying, selling or otherwise dealing with the securities market as a custodian of securities immediately before the 24thMarch, 1995.
  8. Date of commencement of business as “custodian of securities” incase of banks, please enclose copies of the Reserve Bank ofIndia’s permission, and if applicable, copies of approval from theCentral Government, to carry on activities as custodian of securities.
  9. Type and number of existing clients (Financial Institutions, Mutual Funds, Foreign Institutional Investors, Depository Receipts, Portfolio Managers, Non Banking Finance Companies, Stock Brokers, Corporates, Individuals).
  10. Volume of assets under custody.
  11. Details if the applicant, director or principal officer is involved in any litigation connected with the securities market which has an adverse bearing on the business of the applicant; or has at any time been convicted for any moral turpitude or at any time has been found guilty of any economic offence.
  12. Details of whether there has been any instance of violation or non adherence to the securities laws, code of ethics/conduct, code of business rules, for which the applicant, or its parent or holding company or affiliate may have been subject to economic, or criminal, liability, or suspended from carrying out its operations, or the registration revoked temporarily.
  13. Details of the net worth and paid-up capital in Rupees as per the latest audited financial statements of the applicant (enclose copy).
  14. Details of services that are provided to clients or are proposed to be provided to clients as custodian of securities.
  15. Details of space owned in square feet (with location and enclosed copy of title), space on lease in square feet (with location and enclosed copy of lease agreement), space on rent in square feet (with location and enclosed copy of rental agreement) and details of vault, for each vault (in case the vault is built to any specific standard, details and documentary evidence of the same).
  16. Details regarding staff involved in activities as custodian of securities including organisation structure and experience and background of key personnel.
  17. Details regarding safekeeping and security systems and procedures including vault security and access control systems, systems for tracking securities, risk control and operations manuals (enclosed copies) and details of independent internal control mechanisms for monitoring, evaluation and review of accounting safekeeping and reporting systems and procedures.
  18. Details regarding automatic data processing systems and record keeping which includes details of hardware, software and communications systems, their capability, function and location, details of data storage and backup procedures and sites, their capability, function and location and details of disaster recovery systems and procedures.
  19. Declaration statement (to be given as below):

We hereby agree and declare that the information supplied in the application,including the attachment sheets, is complete and true.

We further agree that we shall notify the Securities and Exchange Board of India immediately any change in the information provided in the application.

We further agree that we shall comply with, and be bound by the Securities and Exchange Board of India Act, 1992, and the Securities and Exchange Board of India (Custodian of Securities) Regulations, 1996, and such other guidelines/instructions as may be announced by the Securities and Exchange Board of India from time to time.

We further agree that as a condition of registration, we shall abide by such operational instructions/directives as may be issued by the Securities and Exchange Board of India from time to time.

For and on behalf of………………

(Name of the applicant)

Authorised signatory …………………………. ……………………………………

 (Name) (Signature)

Date:

Place :

FORM B

CERTIFICATE OF REGISTRATION AS CUSTODIAN OF SECURITIES

I. In exercise of the powers conferred by sub- section (1) of section 12 of the Securities and Exchange Board of India Act, 1992, read with the regulations made thereunder, the Board hereby grants a certificate of registration to_____________________________________________

as a custodian of securities subject to the conditions specified in the Act and in the regulations made thereunder.

II. The Registration Number of the custodian of securities is IN…………….

/……/….. /….

Date:

Place: MUMBAI By order

Sd/-

For and on behalf of

Securities and Exchange Board of India


6. Schedule II

FEES PAYABLE UNDER THE REGULATIONS

PART A

AMOUNT TO BE PAID AS FEES

Application Fee INR 5 lakhs

Registration Fee INR 50 lakhs

Annual Fee INR 10 lakhs

0.0005% of the “assets under custody” of the custodian of securities, whichever is higher

Explanation I- For the purpose of this part, the expression “assets under custody” means the value of the assets held by the custodian of securities as disclosed by him under sub-paragraph (4) of paragraph II.

Explanation II- It is clarified that no Registration fee is payable in case of renewal of the certificate of registration.

PART B

  1. The fees specified above is payable by way of direct credit in the bank account through NEFT/RTGS/IMPS or any other mode allowed by the Reserve Bank of India or by demand draft or bankers cheque in favour of “The Securities and Exchange Board of India” at Mumbai.
  2. On and from the commencement of the SEBI (Custodian of Securities) (Second Amendment) Regulations, 2006, the annual fee is payable with reference to each financial year, within one month of completion of the financial year.
  3. A custodian of securities who is granted registration on and after the commencement of the SEBI (Custodian of Securities) (Second Amendment) Regulations, 2006, has to pay proportionate annual fee in respect of the financial year in which he was granted registration and full annual fee for every subsequent financial year during which the registration subsists.
  4. A custodian of securities who is granted registration before the commencement of the SEBI (Custodian of Securities) (Second Amendment) Regulations, 2006, has to pay proportionate annual fee in respect of the financial year of such commencement and full annual fee for every subsequent financial year during which the registration subsists.
  5. The payment of annual fee has to be accompanied by a statement of assets under custody which shall be in such format as may be specified by the Board and has to be certified to be true and complete by the functional head of the custody services of the custodian of securities.

7. Schedule III

CODE OF CONDUCT

  1. The custodian of securities has to maintain the highest standard of integrity, fairness and professionalism in the discharge of his duties.
  2. The custodian of securities has to be prompt in distributing dividends, interests or any such accruals of income received or collected by him on behalf of his clients on the securities held in custody.
  3. The custodian of securities has to continuously be accountable for the movement of securities in and out of custody account, deposit, and withdrawal of cash from the client’s account and has to provide complete audit trail, whenever called for by the client or SEBI.
  4. The custodian of securities has to establish and maintain adequate infrastructural facility to be able to discharge custodial services to the satisfaction of clients, and the operating procedures and systems of the custodian of securities has to be well documented and backed by operations manuals.
  5. The custodian of securities has to maintain client confidentiality in respect of the client’s affairs.
  6. Where custodian records are kept electronically, the custodian of securities has to take precautions necessary to ensure that continuity in record keeping is not lost or destroyed and that sufficient back up of records is available.
  7. The custodian of securities has to create and maintain the records of securities held in custody in such manner that the tracing of securities or obtaining duplicate title documents is facilitated, in the event of loss of original records for any reason.
  8. The custodian of securities has to extend to other custodial entities, depositories and clearing organisations, all such co-operation that is necessary for the conduct of business in the areas of inter custodial settlements, transfer of securities and transfer of funds.
  9. The custodian of securities has to ensure that an arms length relationship is maintained, both in terms of staff and systems, from his other businesses.
  10. Every custodian of securities has to exercise due diligence in safe-keeping and administration of the assets of his clients in his custody for which he is acting as custodian of securities.
  11. A custodian of securities or any of his employees cannot render, directly or indirectly any investment advice about any security in the publicly accessible media, whether real-time or non-real-time, unless a disclosure of his interest including long or short position in the said security has been made, while rendering such advice. In case an employee of the custodian of securities is rendering such advice, he has to also disclose the interest of his dependent family members and employer including their long or short position in the said security, while rendering such advice.

Ultimate Guide to Fintech Law

Fintech Law is the regulatory ecosystem and legal framework governing the multi-trillion-dollar financial technologies (fintech) sector. Check out the Ultimate Guide to Fintech Law in India.


Manohar Samal