Sebi issues norms to govern outsourcing by depositories

To safeguard capital markets from outside risks, markets watchdog Sebi today issued a new set of guidelines governing outsourcing by depositories.

The new norms will ensure depositories do not outsource their core and critical activity to third parties as they need to put in place robust monitoring on a real-time basis.

The depositories have been directed to implement the new guidelines within three months.

The two depositories registered with the Securities and Exchange Board of India (Sebi) are NSDL and CDSL.

In a circular, the regulator said "core and critical activity of depositories shall not be outsourced".

The core activity of depositories is not limited to processing of applications for admission of depository participants (DPs), issuers and registrar and transfer agents (RTAs), facilitating issuers/RTAs to execute corporate actions and monitoring and redressal of investor grievances.

Sebi said the core IT support infrastructure and functions for running core activity of these market infrastructure institutions should not be outsourced to the extent possible.

The depositories will also have to ensure proper audit of implementation of risk assessment and mitigation measures listed in the outsourcing policy document, the outsourcing agreement and service-level agreements pertaining to IT systems, among other measures.

Also, they need to ensure risk impact analysis is undertaken and only reputed entity with proven high delivery standards are selected and appropriate back-up and restoration systems are put in place.

Besides, they need to monitor and have checks and overall controls over the outsourced entity on a real-time basis.

The Depository System Review Committee (DSRC) has examined the outsourcing practice followed by depositories on various parameters.

Based on recommendations by DSRC, the depositories have been asked to ensure they will formulate and document an outsourcing policy duly approved by their board based on the guidelines given by Sebi.