Custodians of Securities Regulations 1996

When a foreign portfolio investor buys a thousand crore of Indian equity, it never personally clutches the shares. A custodian holds them — safekeeping the securities, collecting dividends, settling trades, and keeping the client's assets ring-fenced from everyone else's. The SEBI (Custodian of Securities) Regulations, 1996 (renamed the SEBI (Custodian) Regulations, 1996 with effect from 1 January 2019) build the gatekeeping and conduct architecture for this most trust-sensitive of intermediaries. For judiciary and CLAT-PG aspirants, the regulations are a compact, examinable code: a tight definition of “custodial services”, a steep Rs 50 crore net-worth gate, a body-corporate-only registration filter, and a Chapter III of obligations built almost entirely around one idea — the client's assets are never the custodian's own. This chapter walks the bare regulations provision by provision and anchors them to the larger securities-law jurisprudence on investor protection and market integrity.

What a custodian is, and why it matters

A custodian sits at the quiet centre of the securities ecosystem. It is not a broker who executes trades, nor a merchant banker who manages issues — it is the institution that holds the assets and administers them. Under regulation 2(d), a “custodian” means “any person who carries on or proposes to carry on the business of providing custodial services”. The pivot, therefore, is the defined activity in regulation 2(e).

“Custodial services”, in relation to the securities (or notified goods) of a client, or gold and gold-related instruments held by a mutual fund, or title deeds of real estate assets held by a real estate mutual fund scheme, means the safekeeping of those assets and providing services incidental thereto. The definition expressly includes maintaining accounts of the client's securities, collecting the benefits or rights accruing on them, keeping the client informed of issuer actions bearing on those benefits, and maintaining and reconciling the records of those services. A “custody account” (regulation 2(f)) is the client's account maintained by the custodian in respect of securities; a “client” (regulation 2(c)) is any person who has entered into an agreement with a custodian to avail of custodial services. “Securities” carries the meaning assigned in section 2(h) of the Securities Contracts (Regulation) Act, 1956.

The custodian's economic role — holding other people's wealth without owning it — explains every later obligation. It is why the regulations demand size, segregation, agreements and audit. As the Supreme Court stressed in the securities-market context in N. Narayanan v. Adjudicating Officer, SEBI, (2013) 12 SCC 152, “disclosure and transparency are the two pillars on which market integrity rests”; for the custodian, integrity in safekeeping is the third. These regulations form part of SEBI's wider intermediary framework, which you can survey in our common framework for intermediaries under the 2008 Regulations, and which is indexed on the SEBI intermediaries hub.

The statutory source: section 12 of the SEBI Act

The regulations are subordinate legislation. Their parent is section 12 of the SEBI Act, 1992, which prohibits any intermediary — including a custodian of securities — from buying, selling or dealing in securities except under, and in accordance with, a certificate of registration granted by the Board. Section 30 of the SEBI Act confers the rule-making power under which the 1996 Regulations were framed, and section 11 charges SEBI with protecting investors and regulating the market by such measures as it thinks fit.

This registration-as-gateway logic is common to every SEBI intermediary; the custodian regulations simply tune the dials — net worth, infrastructure, conduct — to the safekeeping role. The disciplinary teeth come from section 11B (directions), sections 11(4) and 11(2)(a) (powers), and the SEBI Act's penalty regime, supplemented by the regulations' own default chapter. Because custodians often belong to bank or financial-conglomerate groups, the eligibility filter under regulation 6 deliberately probes group fitness and arm's-length separation, a theme that recurs across the intermediary code, including the conduct expectations explored in our notes on the stock brokers' code of conduct.

Registration: application and the body-corporate filter

Chapter II governs entry. Under regulation 3, any person proposing to carry on business as a custodian on or after the commencement of the regulations must apply to the Board for a certificate; a person already carrying on the business at commencement had three months (extendable to six in special cases for recorded reasons) to apply. The application is made in Form A of the First Schedule and must be accompanied by the application fee under Part A of the Second Schedule. A person within the transitional class who fails to apply in time must cease the activity and abide by the Board's directions on transferring records, documents and securities.

Two screening provisions follow. Regulation 4 empowers the Board to reject an application that is incomplete or non-conforming, but only after giving an opportunity to remove the objection within a specified time — a small but real natural-justice safeguard. Regulation 5 allows the Board to call for further information or clarification, and to require the applicant or its authorised representative to appear for personal representation. Critically, regulation 6(2) provides that the Board shall not consider an application unless the applicant is a body corporate: an individual or partnership simply cannot be a SEBI-registered custodian. This corporate-only filter mirrors the institutional weight the role demands and contrasts with the historically individual-facing registrations seen among sub-brokers and authorised persons.

Consideration of the application and the fit-and-proper test

Regulation 6(1) lists what the Board weighs before granting a certificate. It must consider whether the applicant satisfies the capital requirement under regulation 7; whether it has the necessary infrastructure, including adequate office space, vaults for safe custody of securities and computer-systems capability; whether it holds the requisite approvals for handling goods, gold or real-estate title deeds where applicable; whether it employs adequate and competent persons with the experience and ability to manage the business; and whether it has prepared a complete manual setting out systems, procedures and the arm's-length relationships to be maintained with its other businesses.

The Board also examines integrity-facing factors: whether the applicant has previously been refused or had its certificate cancelled; whether the applicant, its director, principal officer or employees are involved in securities-market litigation or have been convicted of an offence involving moral turpitude or an economic offence; whether the applicant is a fit and proper person; and, residually, whether the grant is in the interest of investors. Regulation 6A ties the fit-and-proper assessment to the criteria in Schedule II of the SEBI (Intermediaries) Regulations, 2008 — the very common-framework standard analysed in our intermediaries framework chapter. The fit-and-proper enquiry is not a formality: in the broader enforcement jurisprudence, the Supreme Court in N. Narayanan v. Adjudicating Officer, SEBI, (2013) 12 SCC 152 underscored that those who occupy positions of trust in the securities market are held to a high standard of probity, and SEBI's preventive and remedial jurisdiction is to be construed liberally to protect investors.

The Rs 50 crore net-worth gate (Regulation 7)

The single most examinable number in these regulations is the capital threshold. Regulation 7(1) fixes the capital requirement referred to in regulation 6(1)(a) as a net worth of a minimum of rupees fifty crores. The Explanation defines “net worth” as the paid-up capital plus the free reserves as on the date of the application. This is a substantial barrier to entry, deliberately so: a custodian failing financially could imperil the very assets it safeguards, so the regulator front-loads solvency.

Two cautions for the exam. First, the figure is Rs 50 crore in the bare regulation as it currently stands; a 2024 SEBI consultation paper proposed raising it (to figures such as Rs 75 crore) and modernising the framework, but a proposal is not law — cite Rs 50 crore unless and until the regulation is amended. Second, the net-worth gate is distinct from the capital-adequacy regime applicable to other intermediaries; do not import the base-minimum-capital or deposit logic governing brokers, on which see our note on stock brokers' capital adequacy. The custodian's requirement is a flat net-worth floor, tested at application and — read with the conditions of certificate — to be maintained as a continuing obligation, since regulation 9(a) bars commencement of activities until the regulation 7 requirement is fulfilled.

Grant of certificate and the conditions attached

Under regulation 8, after considering the application with reference to regulation 6, if the Board is satisfied that the applicant is eligible it sends an intimation; on receipt the applicant pays the registration fee, whereupon the Board grants a certificate of registration in Form B. Regulation 10 mirrors this on the negative side: where the Board is satisfied that a certificate should not be granted, it may reject the application after a reasonable opportunity of being heard, must communicate the reasoned decision within thirty days, and the aggrieved applicant may seek reconsideration within thirty days of receipt. Regulation 11 provides that a custodian whose application is rejected must cease activity from the date it receives the communication and abide by the Board's directions on transferring custody records and securities — protecting clients even at the point of exit.

The certificate is not unconditional. Regulation 9 attaches binding conditions: the custodian shall not commence activities until it meets the regulation 7 capital requirement; it shall abide by the Act and the regulations; it shall enter into a valid agreement with each client for custodial services; it shall pay the annual fee; it shall forthwith inform the Board in writing if previously submitted information is found false or misleading or if it materially changes; and — importantly — besides custodial services it shall not carry on any activity other than activities relating to the rendering of financial services. The custodian is, by design, a financial-services-only entity.

From three-year licence to perpetual registration

A point that trips up candidates relying on dated material: the period of validity has changed. Originally, regulation 9A (inserted in 2006) made a certificate valid for three years from grant or renewal, and regulation 9B prescribed a renewal application in Form A not less than three months before expiry, dealt with as if it were a fresh application. The SEBI (Custodian) (Amendment) Regulations, 2019 (with effect from 22 March 2019) recast this regime.

The current regulation 9A reads that every certificate shall be valid unless it is suspended or cancelled by the Board — in other words, registration is now perpetual, subject only to ongoing compliance and the Board's disciplinary powers. Regulation 9B (renewal of certificate) has been omitted. For exam purposes: the live position is perpetual validity; the three-year-and-renewal answer is now historical and wrong if stated as current law. This shift from periodic renewal to perpetual-subject-to-conduct registration is part of a wider 2018–19 modernisation that also renamed the regulations from “Custodian of Securities” to simply “Custodian”.

Segregation of activities and prohibition on assignment

Chapter III opens the obligations. Regulation 13 deals with segregation of activities: where a custodian carries on any activity besides acting as a custodian, the activities relating to its custodial business must be separate and segregated from all other activities, and its officers and employees engaged in providing custodial services must not be engaged in any other activity carried on by it. This is the structural wall between the custodian's safekeeping function and the rest of a financial conglomerate — a wall reinforced by the arm's-length manual demanded at registration.

Regulation 15 prohibits assignment or delegation: no custodian shall assign or delegate its functions to any other person unless that person is itself a custodian. A narrow, conditional exception permits a custodian to engage a non-custodian purely for the physical safekeeping of goods or gold belonging to a client (including a mutual fund running a gold ETF scheme) — but only if the custodian remains responsible in all respects to the client, including for associated risks; the books and records relating to those goods or gold are kept at, or made available at, the custodian's premises; and the custodian continues to discharge all duties to the client except physical safekeeping. The principle is unmistakable: the custodian cannot contract away its accountability for the client's assets.

The cardinal rule: a separate custody account per client

If the regulations have a heart, it is regulation 16. Every custodian shall 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 shall not be mixed with those of another client. This non-commingling rule is the operational expression of the trust relationship: the client's securities are the client's, never the custodian's, and never pooled in a way that lets one client's deficit be plugged with another's holdings.

The importance of strict asset-segregation and ring-fencing is most vividly illustrated by the 1992 securities scam jurisprudence — albeit under a different statutory office. In Harshad Shantilal Mehta v. Custodian, (1998) 5 SCC 1, the Supreme Court interpreted the powers of the Custodian appointed under the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992, and the priority of distribution under section 11 of that Act over notified persons' assets. The later decision in Ashwin S. Mehta v. Custodian, (2006) 2 SCC 385, refined how attached assets and the interests of bona fide third parties were to be treated. Aspirants must keep the two “custodians” distinct: the Special Court Act custodian is a court-appointed liquidating officer for scam-tainted assets, whereas the SEBI-registered custodian under these 1996 Regulations is a continuing intermediary holding live client assets. The scam cases are instructive on why regulation 16's segregation discipline exists — commingled and unaccounted securities were precisely what allowed the 1992 fraud to metastasise across banks and the market.

The client agreement (Regulation 17)

Because the custody relationship is contractual at root, regulation 17 mandates a written agreement with each client, which must provide for: (a) the circumstances under which the custodian will accept or release securities, goods, assets or documents from the custody account; (b) the circumstances under which it will accept or release monies from the custody account; (c) the circumstances under which it will receive rights or entitlements on the client's securities or goods; (d) the circumstances and manner of registration of securities for each client; and (e) details of any insurance to be provided by the custodian.

This is not boilerplate. The agreement is where the abstract duty of safekeeping is converted into operational triggers — who can instruct a release, on what proof, and with what consequence. Read with regulation 9(c), which makes a valid client agreement a condition of the certificate itself, regulation 17 means that operating a custody account without a compliant agreement is both a contractual gap and a registration breach. The discipline of clearly documented client mandates echoes the conduct standards SEBI imposes across intermediaries, including the merchant-banker engagement obligations discussed in our note on the Merchant Bankers Regulations, 1992.

Internal controls, records and the compliance officer

Regulation 18 requires every custodian to have adequate internal controls to prevent any manipulation of records and documents, including audits, for securities, goods and the rights or entitlements arising from them; and to maintain appropriate safekeeping measures so that those assets and documents are protected from theft and natural hazard. The phrase “natural hazard” is a reminder that custody is partly a physical-security problem, not only a ledger problem — hence the vault infrastructure tested at registration.

Regulation 14 complements this with a monitoring duty: every custodian must have adequate mechanisms for reviewing, monitoring and evaluating its controls, systems, procedures and safeguards, and must cause that mechanism to be inspected annually by an expert, forwarding the inspection report to the Board within three months of the inspection. Regulation 19 prescribes the record-keeping spine: records of securities, goods, assets, documents and monies received and released for each client; records of rights or entitlements; records of registration of securities; a ledger for each client; records of instructions received from and sent to clients; and records of all reports submitted to the Board. The custodian must intimate to the Board where these records are kept and must preserve them for a minimum of five years. Regulation 19A requires appointment of a compliance officer to monitor compliance with the Act, rules, regulations, notifications, guidelines and instructions and to redress investor grievances; tellingly, the compliance officer must immediately and independently report to the Board any non-compliance observed — a direct line to the regulator that bypasses management. Regulation 20 empowers the Board to call for any information from a custodian at any time, with a corresponding duty to furnish it within the period specified.

The Code of Conduct (Third Schedule)

Regulation 12 obliges every custodian to abide by the Code of Conduct set out in the Third Schedule. Its ten-plus clauses translate the regulatory architecture into behavioural standards. The custodian must maintain the highest standard of integrity, fairness and professionalism (clause 1); be prompt in distributing dividends, interest or any such accruals received on behalf of clients on the securities held in custody (clause 2); remain continuously accountable for the movement of securities and goods in and out of the custody account and for deposits and withdrawals of cash, providing a complete audit trail whenever called for by the client or the Board (clause 3); and establish and maintain adequate infrastructure backed by well-documented operations manuals (clause 4).

Further clauses require the custodian to maintain client confidentiality (clause 5); where records are kept electronically, to ensure continuity is not lost and sufficient back-up is available (clause 6); to maintain records so that tracing securities or obtaining duplicate title documents is facilitated if originals are lost (clause 7); to extend cooperation to other custodial entities, depositories and clearing organisations for inter-custodial settlements and transfers of securities and funds (clause 8); to maintain an arm's-length relationship, in staff and systems, from its other businesses (clause 9); and to exercise due diligence in safekeeping and administering client assets (clause 10). A further clause (inserted in 2001) restricts the custodian or its employees from rendering investment advice on a security in publicly accessible media without disclosing their interest or position. Breach of the Code is not merely aspirational: under the default chapter, being “guilty of misconduct or making a breach of the Code of Conduct” is an express ground for action.

Inspection and audit (Chapter IV)

Chapter IV equips SEBI to verify, not merely trust. Regulation 21 empowers the Board to appoint one or more inspecting officers to inspect the custodian's books, records and documents, ordinarily after giving notice under regulation 22 (though notice may be dispensed with where the Board is satisfied that it is in the interest of investors). Regulation 23 casts a duty on the custodian under inspection to produce records, furnish statements and information, allow reasonable access to premises, and extend reasonable facilities and assistance to the inspecting officer. Regulation 24 requires the inspecting officer to submit a report to the Board as soon as possible on completion, and regulation 25 provides for communication of the findings to the custodian and an opportunity to respond before action.

The framework also allows the Board to appoint an auditor to inspect or investigate the books and affairs (regulation 25A) and to recover the expenses of such inspection or investigation from the custodian (regulation 25B). This inspection-and-audit machinery is the practical backbone of supervision — it converts the paper obligations of Chapter III into something the regulator can test against the custodian's actual systems, ledgers and vaults.

Default, enforcement and investor protection

Chapter V governs action in case of default. Regulation 26 identifies the triggers for disciplinary action — among them, contravention of the Act, rules or regulations; failure to furnish information or furnishing false information; non-cooperation with inspection; and being guilty of misconduct or breaching the Code of Conduct in the Third Schedule. Following the SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 and the SEBI (Intermediaries) Regulations, 2008, the detailed enquiry mechanism that once lived in regulations 28–32 was omitted and folded into the common intermediary enforcement procedure — so the modern default process for a custodian runs through the 2008 framework, including suspension or cancellation of registration, monetary penalties under the SEBI Act, and directions under section 11B.

The deeper purpose is investor protection, and the higher courts have consistently read SEBI's powers expansively to that end. In Sahara India Real Estate Corp. Ltd. v. SEBI, (2013) 1 SCC 1, the Supreme Court held that SEBI's jurisdiction and remedial powers must be construed to protect the vast body of investors, ordering refund of monies raised in violation of the securities-issue framework. In N. Narayanan v. Adjudicating Officer, SEBI, (2013) 12 SCC 152, the Court affirmed that SEBI may take preventive and remedial measures and impose penalties to safeguard market integrity, and that those in fiduciary positions cannot escape accountability. Applied to custodians, these principles mean that a failure of segregation, a breach of the Code, or a manipulation of custody records is not a private contractual lapse alone — it is a regulatory wrong that SEBI may pursue in the interest of every investor whose assets the custodian was trusted to hold. For the systemic context of how a collapse of custodial and accounting discipline can cascade through the market, the Special Court Act litigation in Harshad Shantilal Mehta v. Custodian, (1998) 5 SCC 1, remains the cautionary backdrop against which the entire 1996 regime should be read.