NSDL may find it tough to hive off pension record-keeping operation

MUMBAI: The stand-off between the capital market regulator SEBI and the country’s top depository National Securities Depository (NSDL) over the latter’s foray into record keeping of the new pension scheme (NPS) is unlikely to be resolved soon, said sources familiar with the matter.

SEBI’s stipulation that NSDL hive off its pension fund record-keeping operation and other related activities into a separate, unrelated entity without any legal or financial links with itself within three years may be difficult to achieve.

"Such an entity will not make money in the first few years. Besides, one is not sure how this will go down with investors since it would be unrelated," said a source on condition of anonymity.

Pension regulator PFRDA had awarded the mandate only to NSDL and not any other entity which does not have any links with the depository. So, technically, hiving off a strategic business unit (SBU) into an entity, which would not even function as its subsidiary, may not be feasible.

Central record-keeping agency (CRA) is the vital architecture for the pension scheme as it keeps a tab on contributions by subscribers to the scheme and also the government, which puts in a matching share besides the subscribers earnings and related data.

While there is no problem in having a separate server for CRA activities, a complete technical segregation may not be possible, feels NSDL. No conditions were imposed on the depository when it was awarded the mandate for managing the tax administration network (TIN) for the income-tax department and some work for the central excise department.
Given that the fundamental nature of the transaction is different, it is not expected to clash in any way with the depository’s demat functions.

A few months ago, Sebi had objected to NSDL seeking to act as a CRA for the NPS, saying it was not part of the core functions of the depository. However, the finance ministry had intervened, saying NSDL’s move to function as a CRA was within the definition of a depository, which was also consistent with the provisions of the Depositories Act of 1996.
Towards the end of August, Sebi gave its go-ahead, although with a few conditions. One of which was that NSDL could act as a CRA only through a strategic business unit (SBU). But the stringent conditions may have just put the entire issue on the backburner.

The capital market regulator had taken the stance that the ‘non-depository activities’ of NSDL appear to be fraught with risks and could endanger the integrity of the system. It had highlighted two issues: One, any liability incurred on account of such activity is likely to endanger the net worth and solvency of the depository. Two, common information systems may result in breach of security of the depository system. Both outcomes could harm the interests of investors in the securities market, a mandate Sebi is obliged to perform.