Sebi puts out guidelines for risk-rating of depository participants
Sebi aims to enhance transparency, improve risk management and curb the risks of manipulations of investor accounts in dematerialized form
Mumbai: The Securities and Exchange Board of India, or Sebi, on Friday put out guidelines for depositories to inspect and grade depository participants in an effort to enhance transparency, improve risk management and curb the risks of manipulations of investor accounts in dematerialized form.
There are two depositories in India—National Securities Depository Ltd (NSDL) and Central Depository Services Ltd (CDSL). Depository participants (DPs) are entities that are engaged in the business of opening and managing demat accounts.
Following recommendations of Sebi’s depository system review committee (DSRC), Sebi prescribed 112 different areas of inspection for DPs by the two depositories. The basic parameters of inspection will include account opening and KYC documents; delivery instruction slips; transactions; compliance with prevention of money laundering norms; record maintenance; service centre details; information technology areas; power of attorney details; details of pledges and freeze; and inter-depository transfers among many others.
In order to assign risk-ratings to DPs, depositories will have to compute the total risk score of DPs. The total risk score will be a sum of quantitative risk score and qualitative risk score, which will be derived from the risk-weightage based on the inspection, said a Sebi circular.
After completing inspection, depositories will categorize their DPs as ‘high risk’, ‘medium to high risk’, ‘medium risk’, and ‘low risk’, based on the percentile of risk score.
The market regulator also directed that depositories will have to jointly inspect DPs which are registered with both depositories to have better control over them, avoid duplication of manpower, time and cost and also to reduce the possibility of regulatory arbitrage.
According to Sebi’s January bulletin, the number of depository participants fell from 871 in fiscal 2013 to 866 at the end of December. The total number of investor accounts was 13.06 million at NSDL and 8.68 million at CDSL at the end of December 2013. The number of investor accounts in December 2013 increased by 0.4% and 0.3% over the previous month at NSDL and CDSL respectively, according to the Sebi bulletin.
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