The Securities and Exchange Board of India (SEBI) has introduced a new regulatory framework that allows custodians—except those backed by banks—to provide certain financial services that fall outside the regulator’s direct oversight.
The move aims to provide greater operational flexibility to custodians while ensuring strong governance, transparency, and investor protection mechanisms.
Separate Strategic Business Unit for Unregulated Activities
Under the new framework, custodians will be allowed to carry out such financial services through a separate Strategic Business Unit (SBU).
This unit must remain distinct from SEBI-regulated services to avoid conflicts of interest and maintain regulatory clarity.
Key requirements include:
- The SBU must maintain separate books of accounts
- Transactions must be conducted on an arm’s-length basis
- Custodians must continue to meet their net worth requirements without including SBU financials
This separation ensures that unregulated activities do not affect the financial stability or regulatory compliance of the custodian’s core operations.
Role of the Custodians and DDPs Standards Setting Forum
The Custodians and DDPs Standards Setting Forum (CDSSF) will play a key role in implementing the framework.
The forum will:
- Publish a list of financial services custodians can undertake
- Classify core and non-core activities
- Work in consultation with Securities and Exchange Board of India
Additionally, custodians will be permitted to outsource non-core activities, helping them improve operational efficiency.
Safeguards to Prevent Conflict of Interest
To ensure investor protection, SEBI has introduced several safeguards.
Custodians must implement:
- Strong internal control systems
- Chinese wall mechanisms to prevent information leakage
- The “need-to-know” principle for sensitive data access
While manpower, infrastructure, and systems may be shared between regulated and unregulated activities, these safeguards are mandatory to prevent misuse of information.
Mandatory Disclosures for Investor Protection
The market regulator has also required custodians to provide clear disclosures regarding unregulated financial services.
This measure will help investors understand the nature of such services and ensure transparency in operations.
Streamlining Compliance Requirements
In a move aimed at reducing regulatory burden, Securities and Exchange Board of India has discontinued certain reporting requirements that duplicate information already submitted to depositories.
This step is expected to simplify compliance processes while maintaining regulatory oversight.
Strengthening Governance and Risk Management
The new framework also introduces stricter governance requirements.
Custodians must establish board-level committees, including:
- Audit Committee
- Risk Management Committee
- Nomination and Remuneration Committee
Additionally, custodians will need to implement comprehensive risk management systems covering:
- Operational risks
- Legal risks
- Data security risks
They must also maintain systems to detect and report suspicious transactions.
Implementation Timeline
Most provisions of the new framework will come into effect from March 24, 2026.
However, certain requirements—such as wind-down frameworks and disaster recovery infrastructure—will be implemented gradually, with timelines extending up to 2029.
The new framework introduced by Securities and Exchange Board of India reflects a balanced approach between regulatory flexibility and investor protection.
By allowing custodians to diversify their financial services through a separate business unit while strengthening governance and risk management standards, the regulator aims to promote innovation and efficiency in India’s financial markets without compromising market integrity.