Sebi issues guidelines for custodians

Markets regulator Sebi has directed non-bank custodians to segregate regulated and unregulated financial services through separate strategic business units (SBUs), maintain separate accounts for these units and meet net worth requirements independently for these businesses.

In its circular, the regulator stated that the custodians and DDPs Standards Setting Forum (CDSSF), in consultation with Sebi, will specify the list of financial services activities custodians can undertake.

Sebi said that custodians that are not banks, or subsidiaries, associates or joint ventures of banks, must conduct Sebi-regulated and non-Sebi-regulated financial services through separate strategic business units (SBUs), maintain separate accounts for these units and meet net worth requirements independently of such businesses.

“Separate accounts shall be prepared and maintained for the SBUs on an arm’s-length basis; the net worth criteria for the custodian shall be satisfied after excludingthe books of the SBU,” Sebi said in its circular on Wednesday (March 4, 2026).

They have been directed to disclose to clients if they provide unregulated financial services and obtain an acknowledgement that Sebi will not handle grievances related to such activities.

The regulator also allowed custodians to share manpower, infrastructure and systems across financial service activities, provided adequate safeguards such as Chinese walls and conflict-of-interest controls are maintained.

Industry participants will also classify core and non-core activities through the CDSSF to ensure consistency in outsourcing, as custodians can outsource only non-core functions.

To facilitate ease of doing business, Sebi has relaxed vault requirements, stating that custodians will not be required to maintain vaults if they do not hold physical securities.

However, if physical securities are held, custodians are required to maintain vaults or equivalent secure storage facilities and disclose vault specifications as part of their quarterly reporting. Sebi has also strengthened governance and risk management standards.

Custodians are required to set up board-level committees such as audit, nomination and remuneration, and risk management committees, though bank custodians may rely on existing bank-wide governance structures. The custodian’s board will oversee incidents affecting market functioning and investor protection, including data security breaches.

Also, they are required to maintain records of committee observations and corrective actions. In September 2025, Sebi raised the minimum net worth requirement for custodians to ₹75 crore from ₹50 crore eariler in a bid to strengthen risk management systems.

Custodians provide services like safekeeping assets, account maintenance, and compliance with regulations for clients such as foreign portfolio investors, mutual funds, portfolio managers, and alternative investment funds. They play a critical role in protecting investors’ assets and ensuring compliance, particularly with FPIs, where they act as designated depository participants and enforce investment norms.