Stiff conditions set to make NSDL's work difficult

Depository gets nod for record-keeping job, but uncertainty remains.

National Securities Depository (NSDL) will find it difficult to act as a record-keeping agency for pension funds following stiff conditions put forth by the Securities and Exchange Board of India (Sebi).

After its initial objection to the proposal, the market regulator has finally approved NSDL's participation in pension funds, but uncertainty remains.

The market regulator has asked NSDL to hive off its pension funds record-keeping operation and other related activities to a separate entity without any legal or financial links with itself within three years.

Observers say this will queer the pitch for NSDL as the Pension Fund Regulatory and Development Authority (PFRDA) has issued the licence only to NSDL and not to any other entity, which has no links with the depository.

Apart from the pension funds responsibility, NSDL maintains Tax Information Network (TIN) data for the income tax department along with discharging its depository functions of dematerialsing commodities, securities and small savings instruments. If NSDL has to adhere to the Sebi's conditions, it cannot continue to do the government work (keeping records of pension funds) for long.

The Sebi has been expressing its reservations over NSDL taking up any job other than that related to capital markets on the grounds that the Depository Act does not allow the entity to carry out any other functions.

The Regulation 7(c) of the Sebi (Depositories and Participants) Regulations stipulates that the depository shall not carry on any activity other than that of a depository unless the activity is incidental to that of a depository.

According to the Sebi, the functions related to pension funds are not defined as security and hence cannot be discharged by NSDL or any entity related to it.

NSDL, on the other hand, believes that operations related to the Tax Information Network (TIN) or pension funds are similar to those of a depository. TIN is proving to be quite useful for the income tax department in tracking down expenditures incurred, but not shown in the returns of assessees' income.

When the Depository Act and the related regulations came into force, nobody had thought of the jobs that NSDL is now undertaking. Since the government was in favour of NSDL taking up the record-keeping functions, the finance ministry felt it prudent to sort out the issue with the Sebi.

K P Krishnan, joint secretary, finance ministry, conveyed the ministry's view to the Sebi that record-keeping for the new pension scheme was related to the depository work and added that NSDL should be allowed to undertake the responsibility.

It appears that the Sebi board has managed to work out a please-all formula. The finance ministry has retained its power to assign the record-keeping responsibility to NSDL. The market regulator is happy as it has managed to protect the interests of investors, who are paying fees to NSDL for its depository functions.

The depository is also happy as it has at least been allowed to take up the work, which it argued was related to the depository functions.