India’s Pivotal Single Country Custodians

India’s Pivotal Single Country Custodians

A few weeks ago, Roger Harrold published an interesting and enriching article on, “Sub- Custody- Visibility over the Business Case” on linkedin. It was well researched and provided valuable insights. The article also covered challenges faced by Local Bank or Niche Bank who do not have Custody as their core competency.

Cut over to India, over USD 1 Trillion of Assets are owned by Institutional Investors. Single Country Custodians (read- India centric) custodised a significant of over USD 450 Billion of assets, across multi product and client segments (including FPIs). A unique feature of these Custodians is that their business is mostly self-developed, not driven by business from Global Custodians. The SCCs (SHCIL, Edelweiss, ICICI, HDFC, Axis, ISSL, Kotak SBI- Socgen and others) in India, outnumber multi Country Custodians by 11:7.

Post FPI Regulations of 2014, the multiple forward-looking initiatives by the Government and SEBI, led to increased inflows as well as other positives. Beside the diversity of increased flows, SCCs played a larger and more active role, Category III FPIs account for over 18% of the total number of FPIs (in the three years since they were permitted). Category III investors primarily are Single Country (read- India

 

dedicated) FPIs. It’s well acknowledged that Category III investors are more in number and lower in assets/volumes. The percentage of Category III investors will grow significantly as India’s Capital market grows and becomes diverse. This notwithstanding the fact that entry norms are stricter and complex; compliances are more; their investment pattern being different; needs are different and more importantly given the limited access to knowledge of the market- need confidence building measures. India’s SCC have played a pivotal role insupporting the inflows from this segment.

India’s SCCs while playing a pivotal role, especially since 2014 (post introduction of the FPI Regulations) have supported the ease of doing business, especially wrt Category II, III investors. The said SCCs have invested in Resources, Technology, Risk Management, Compliance standards, are implementing global standards and best practices, are rated higher in the highly acknowledged Global Custodian Surveys, offer competitive solutions, engage in global marketing and do a lot more! In effect, SCCs have gone all out to increase the Investors ease of doing business in India.

This in spite of the multiple challenges that dogs the development of inflows from the new segments and the growth of SCC. Challenges for SCCs include educating and explaining to a new class of investor (especially Category III) the ever-evolving documentation (onboarding /KYC) processes (relatively stringent, time and resource consuming); continuously investing in resources, Technology, compliance standards etc. Sudden policy changes add challenges as also when, competitive jurisdictions get into the game and offer multiple options and benefits to FPIs. The market fragments! Besides inflows getting reduced, the SCC’s-impacted by the increased complexities and competitive jurisdictions. Some of these complexities do not apply to the larger Category I Investors.

  • Is there a case for India’s SCCs to be heard more often and be actively engaged by the Regulators, Industry, Policy Makers on making India more attractive, enable greater ease of doing business at affordable costs?

  • Does it make the task of the SCCs harder- to attract inflows as well as be competitive?  

  • Are SCC’s capable and effective in a larger role- propagating the Single Country(India) story?

  • Do SCC add value and contribute to enabling inflows from new segments?

I feel so, given that the Eleven Custodians have been actively engaged in positioning India. They have amply displayed their strong expertise and ability in understanding the demands and requirements of the inflow Investors, they have created the confidence in the said segment and positioned India very well.  India’s SCCs account for over 50% of the total AUC while encouragingly handholding the new segment of India Centric Investors who invest their future in India’s growth story. India’s SCCs are here to stay.

Herein lies the role and significance and aspirations of the SCCs, be it an Indian or of another jurisdiction.

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