Authorised Dealer Category-1 bank

Not every custodian can become a Designated Depository Participant for foreign investors. SEBI sets rules for this. One of its rules comes from a different regulator entirely.

A DDP applicant must be an Authorised Dealer Category-1 bank. RBI, not SEBI, grants this status. It is a banking approval under India's foreign exchange rules. It is not a securities-market registration at all.

So a DDP applicant needs two approvals, not one. It needs SEBI registration as a custodian. It also needs RBI authorisation as an Authorised Dealer Category-1 bank.

SEBI will not consider an application for approval as a Designated Depository Participant unless the applicant satisfies several conditions together, one of which is that the applicant "is an Authorised Dealer Category-1 bank authorised by the Reserve Bank of India." The other conditions, considered alongside it, include: being a registered DDP with SEBI; being a custodian of securities registered with SEBI; having a multinational presence, through branches or agency relationships with regulated overseas intermediaries; having systems to comply with FATF Standards and the PMLA, 2002; and being a fit and proper person under Schedule II of the SEBI (Intermediaries) Regulations, 2008.

SEBI can also consider an application from an entity regulated in India that does not itself hold Authorised Dealer Category-1 status, if SEBI is satisfied it has sufficient experience providing custodial services and the approval serves the securities market's development. Even then, such an entity must be registered as a participant and custodian with SEBI, and must have a tie-up with an Authorised Dealer Category-1 bank — the AD Category-1 status cannot be dispensed with entirely, only obtained indirectly through a partner.

A large custodian bank applies to SEBI for approval as a DDP. It already holds SEBI registration as a custodian, and it is separately authorised by RBI as an Authorised Dealer Category-1 bank, giving it the standing to deal in foreign exchange transactions on behalf of clients. Because it meets both conditions together, alongside its multinational branch network and its FATF-compliant AML systems, SEBI can approve it as a DDP.

Compare this to a domestic custodian with no Authorised Dealer Category-1 authorisation of its own, but with 8 years of custodial-services experience and a genuine tie-up arrangement with an AD Category-1 bank. SEBI may still approve this custodian as a DDP under the alternative route, precisely because the tie-up substitutes for the direct AD Category-1 status it lacks on its own.

Chapter 12, "Eligibility criteria of Designated Depository Participant", lists Authorised Dealer Category-1 bank status as one condition among several SEBI checks before granting DDP approval, immediately followed by the alternative tie-up route for entities that lack it directly.

Expect a question naming the RBI-side qualification a DDP applicant needs — Authorised Dealer Category-1 bank status — alongside its SEBI-side custodian registration, and on what an entity without direct AD Category-1 status must instead arrange (a tie-up with one).

• Authorised Dealer Category-1 status comes from RBI, not from SEBI — it is a foreign-exchange authorisation, distinct from the custodian registration SEBI itself grants.
• A DDP applicant needs both approvals together — SEBI custodian registration and RBI AD Category-1 status — neither alone is sufficient.
• An entity lacking direct AD Category-1 authorisation is not automatically disqualified — SEBI may still approve it as a DDP if it ties up with an AD Category-1 bank and shows sufficient custodial experience.
• At all times, the DDP and the Custodian of the FPI must be the same entity — a separate but related rule that reinforces why the DDP applicant's custodian registration matters so much.