Description

SEBI prescribes specific conditions and modalities for Custodians pursuant to amendments to SEBI (Custodian) Regulations, 1996, covering segregation of activities, financial services, and outsourcing frameworks.

Summary

SEBI issued this circular on March 04, 2026, to prescribe specific conditions and modalities for Custodians following amendments to the SEBI (Custodian) Regulations, 1996 (notified September 18, 2025). The circular covers three key areas: segregation of activities, sharing of resources, and outsourcing of custodian activities.

Key Points

  • Custodians may carry on financial services activities beyond core custodial services, subject to conditions specified through the Custodians and DDPs Standards Setting Forum (CDSSF) in consultation with SEBI.
  • Non-bank custodians must operate SEBI-regulated and unregulated financial services through separate Strategic Business Units (SBUs).
  • Non-bank custodians must disclose unregulated financial services activities to clients and obtain acknowledgement that no SEBI recourse is available for grievances related to such unregulated activities.
  • Custodians may share manpower, infrastructure, and systems across financial services activities subject to conflict-of-interest controls.
  • Chinese walls and ’need to know’ principles must be maintained to manage conflicts of interest.
  • Outsourcing of non-core activities continues to be permitted per existing SEBI Circular CIR/MIRSD/24/2011.

Regulatory Changes

  • Implements provisions of the September 18, 2025 amendment to SEBI (Custodian) Regulations, 1996 relating to net worth, financial services rendering, and obligations of Custodians.
  • Regulation 9(f) of Custodian Regulations operationalized: non-bank custodians rendering unregulated financial services must do so through a separate SBU with segregated accounts on an arms-length basis.
  • Regulation 13 requirements (clauses i and ii) relaxed to permit shared manpower/infrastructure across financial services, subject to conflict-of-interest safeguards.
  • Net worth criteria for Custodians must be satisfied excluding the books of the SBU engaged in non-custodial activities.

Compliance Requirements

  • All Custodians: List of permissible financial service activities to be specified by CDSSF in consultation with SEBI.
  • Non-bank Custodians: Must establish separate SBUs for SEBI-regulated and unregulated financial services.
  • Non-bank Custodians: Must prepare and maintain separate accounts for each SBU on an arms-length basis.
  • Non-bank Custodians: Net worth requirements under Custodian Regulations must be met independently, excluding SBU books, and separately from capital adequacy requirements for each activity.
  • Non-bank Custodians rendering unregulated services: Must make appropriate disclosure to clients and obtain written acknowledgement of no SEBI recourse for unregulated activity grievances.
  • All Custodians sharing resources: Must implement adequate controls including chinese walls and ’need to know’ principles; must adhere to SEBI Circular CIR/MIRSD/5/2013 (August 27, 2013) on conflict of interest.
  • Outsourcing: Must continue to comply with SEBI Circular CIR/MIRSD/24/2011 (December 15, 2011) for outsourcing of non-core activities.

Important Dates

  • March 04, 2026: Circular issued and effective.
  • September 18, 2025: Date of the underlying amendment notification to SEBI (Custodian) Regulations, 1996 that this circular operationalizes.

Impact Assessment

This circular has significant operational impact on all registered custodians, particularly non-banking custodians. It introduces structural requirements (separate SBUs, segregated accounts) that may require organizational restructuring. The requirement to exclude SBU books from net worth calculations could affect compliance positioning for some custodians. Client disclosure and acknowledgement obligations for unregulated services add administrative processes. The relaxation of resource-sharing restrictions (Regulation 13) provides operational flexibility but comes with enhanced conflict-of-interest governance obligations. Overall, the circular enhances investor protection by ensuring clear delineation of regulated vs. unregulated custodian activities while providing custodians operational flexibility for shared services.

Impact Justification

Implements substantive operational and structural requirements for all registered custodians following 2025 regulatory amendments, affecting how custodians organize activities, manage conflicts, and outsource functions.