SEBI Mandates Segregation And Risk Controls For Custodians

Markets regulator, the Securities and Exchange Board of India (SEBI), has released a detailed regulatory framework for custodians of securities. It is mainly aimed at strengthening governance, risk controls and transparency in post-trade services.

The new guidelines explain how custodians, especially those not owned by banks, should separate their regulated and unregulated services. They also require better disclosures and stronger internal governance and risk management. Most of these rules will come into effect from 24 March 2026.

Segregation Of Regulated And Unregulated Services

Under the new guidelines, non-bank custodians may provide additional financial services that fall outside SEBI’s direct regulations. But this can only be done through separate Strategic Business Units (SBUs). These SBUs must be clearly segregated from regulated custody services and maintain separate books of accounts on an ‘arm’s-length’ basis.

Importantly, the custodian’s net-worth requirements must be met to ensure that core regulated activities remain financially stable. The Custodians and DDPs Standards Setting Forum (CDSSF), in consultation with SEBI, will determine the list of financial services that will be allowed and classify core versus non-core activities for this framework.

Custodians are also required to disclose to clients when they provide unregulated services clearly and to obtain an acknowledgement that SEBI will not have jurisdiction for grievance redressal for such services.

Governance, Risk Management And Compliance Enhancements

SEBI has rolled out following rules to improve governance standards:

• Custodians must set up board-level committees for areas like audit, risk management, nominations, and remuneration.

• Custodians will be required to create strong systems to manage various risks, including monitoring suspicious transactions and handling technology or cybersecurity issues.

• Custodians can share staff, infrastructure, and technology between regulated and non-regulated activities. But they must maintain strict internal controls to prevent misuse of information.

• The guidelines also allow custodians to outsource non-core work, but they first need to ensure proper security measures are in place.

Relaxation Of Some Reporting Requirements

To promote ease of doing business and reduce compliance overhead, SEBI has also eliminated some reporting tasks that duplicate data that is already submitted to depositories.

The regulator clarified that custodians who do not hold physical securities will be exempt from maintaining vaults; however, those holding physical securities must maintain secure vaults or equivalent storage and disclose their vault specifications in quarterly reporting. These rules strike a balance between operational efficiency and investor protection, particularly in segments where physical securities still play an important role.

SEBI plans to roll out provisions like the wind-down framework and disaster recovery infrastructure gradually until 2029.

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Industry Response And Market Implications

Market participants have responded positively to the updated rules, saying that better governance and improved risk disclosures could strengthen investor trust, especially among FPIs and mutual funds that depend heavily on custodians.

Some custodians noted that SBU segregation might increase operational costs. In particular, for smaller non-bank custodians that offer a variety of services beyond traditional custody.

Market analysts say the updates could also influence how custodians structure their technology and back-office operations, with enhanced emphasis on compliance automation, internal controls, and cybersecurity readiness. The board-level committee requirements and phased implementation timelines provide custodians with time to align governance frameworks while continuing core services uninterrupted.

Overall, the guidelines are part of SEBI’s efforts to modernise India’s post-trade system and bring custodian practices closer to global standards, while improving investor protection, governance, and operational strength as markets grow.

Sources:

Outlook

ET

SEBI