Pension Fund Regulatory and Development Authority hereby makes the following regulations

## Report on the Pension Fund Regulatory and Development Authority Custodian of Securities Amendment Regulations, 2021 **1. Executive Summary:** This report analyzes the Pension Fund Regulatory and Development Authority (PFRDA) Custodian of Securities Amendment Regulations, 2021, based on the official notification. This amendment modifies the 2015 regulations concerning custodians of securities. The core purpose of the amendment appears to be to relax certain restrictions on custodianship where the sponsor of a Pension Fund, Trustee Bank or central record keeping agency or their associates, are holding 50 percent or more of the voting rights of the share capital of a custodian, subject to certain safeguards ensuring independence and financial stability. Key findings include specific conditions related to net worth, board composition, and operational independence required for such custodians. **2. Introduction:** This report aims to provide a comprehensive overview of the Pension Fund Regulatory and Development Authority (PFRDA) Custodian of Securities Amendment Regulations, 2021, as published in the Gazette of India. The analysis is based solely on the information contained within the provided policy text. **3. Policy Overview:** * **Original Policy:** The amendment modifies the Pension Fund Regulatory and Development Authority Custodian of Securities Regulations, 2015. * **Core Objective(s):** Based on the text, the core objective of the amendment appears to be to potentially broaden the pool of eligible custodians while implementing safeguards to maintain independence and prevent conflicts of interest in specific ownership scenarios. **4. Background and Rationale:** The amendment likely addresses a perceived need to allow for more flexibility in custodian ownership structures. The 2015 regulations may have unduly restricted entities with a significant ownership link to pension funds or related entities from acting as custodians. This amendment seems designed to address this by introducing specific conditions under which such entities *can* become custodians, potentially increasing competition and innovation within the custodian services market, subject to maintaining safeguards. **5. Key Provisions / Changes:** The amendment introduces the following key changes: * **Amendment to Regulation 8(1)(b):** A proviso is *inserted* after clause (b) of subregulation 1 of regulation 8. This proviso outlines the conditions under which an entity whose sponsor, associates, or holding company holds 50% or more of the voting rights of the share capital of a custodian can apply to become a custodian. * **New Rule/Provision:** The new proviso outlines the following conditions: * The sponsor, associates, or holding company must have a net worth of at least Rs. 50,000 crore at all points in time. * At least 50% of the directors of the custodian must not represent the interests of the sponsor or its associates. * The custodian and the pension fund company cannot be subsidiaries of each other. * No individual can be a director of both the custodian and the pension fund company. * The custodian and the pension fund company must sign an undertaking that they will act independently of each other in their dealings with the schemes. * **Difference/Effect:** The amendment *creates an exception* to previous restrictions regarding custodian ownership. Previously, such an ownership structure may have automatically disqualified an entity from becoming a custodian. Now, provided these conditions are met, an entity with such a structure *can* apply, subject to PFRDA approval. * **Amendment to Regulation 8(1)(c):** Clause c of subregulation 1 of regulation 8 is substituted as below “The applicants minimum holding of assets under custody on the date of application shall be as defined under the selection process.” **6. Target Audience and Stakeholders:** Based on the provided text, the target audience and stakeholders directly affected by these changes include: * Pension Funds * Pension Fund Sponsors * Trustee Banks * Central Record Keeping Agencies * Entities seeking to become Custodians of Securities, particularly those with ownership links to Pension Funds or related entities. * The Pension Fund Regulatory and Development Authority (PFRDA) **7. Implementation Aspects (Inferred):** * **Responsible Agency/Bodies:** The PFRDA is the responsible body for implementing and overseeing these regulations. * **Timelines/Procedures:** The regulations came into force on the date of their publication in the official gazette (September 22, 2021). Specific procedures for applying to become a custodian under the new proviso are not detailed in this text, but presumably, PFRDA will establish these. * **Amendment-Specific Aspects:** Entities seeking to leverage the new proviso must demonstrate compliance with all the listed conditions to the PFRDA's satisfaction. This likely involves submitting documentation related to net worth, board composition, and the undertaking of independent operation. **8. Expected Outcomes / Impact of Changes:** The likely intended outcome of these changes is to: * Increase the number of eligible custodian applicants. * Foster greater competition and potentially innovation within the custodian services market. * Maintain independence and prevent conflicts of interest through the stringent conditions attached to the exception. * Provide clarity on the requirements for custodians with specific ownership structures. The potential impact of the amendment is that more entities tied to pension funds may become custodians, as long as independence and financial stability are demonstrably maintained. **9. Conclusion:** The PFRDA Custodian of Securities Amendment Regulations, 2021, represent a targeted adjustment to the existing regulatory framework. The amendment introduces a conditional exception to restrictions on custodian ownership, potentially widening the pool of eligible custodians while reinforcing the importance of independence and financial soundness. The amendment's success will depend on the effective implementation and oversight by the PFRDA and the willingness of qualified entities to meet the stipulated conditions.

Key Entities Referenced