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PUBLIC

SECURITIES AND EXCHANGE COMMISSIOf'.JAV~<U.L.ABILITY

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WASHINGTON. D.C. 20549

February 25 , 1997

VIA FACSIMILE AND AIR MAIL

Mr. Pratip Kar

Executive Director

Securities and Exchange Board of India

Mittal Court

'B' Wing, 224

Nariman Point, Mumbai-400 021

INDIA

Dear Mr. Kar:

Your letter to Mr. Paul Leder dated January 16, 1997 was

referred to the Division of Investment Management (the

IIDivision") for response.

The Division is primarily responsible

for the regulation of investment companies in the United States.

In your letter, you state that the National Securities

Depository Ltd. ("NSDL") ·has been organized under The

Depositories Act, 1996 and the Securities and Exchange Board of

India (Depositories and Participants) Regulations 1996

(IIRegulations"). You further note that U.S.-based institutional

investors have advised you that before they will use NSDL as a

foreign custodian, the United States Securities and Exchange

Commission (ltSEClt) must issue a "no-action" letter to NSDL. You

specifically request information regarding any formalities NSDL

would have to complete in order to obtain a "no-action" letter.

I

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,

Section 17(f) of the Investment Company Act of 1940 ("1940

Act") sets forth the custodial requirements for U.S.-registered

management investment cpmpanies ("funds"). Rule 17f-5 thereunder

permits funds to maintain their assets with certain categories·of

lIeligible foreign custodians." Generally, these include foreign

banks that have more than $200 million shareholders' equity;

majority-owned subsidiaries of U.S. banks that have more than

$100 million shareholders' equity; certain centralized securities

depositories and clearing agencies; and transnational foreign

securities depositories and clearing agencies.

Based upon your characterization of NSDL, subparagraphs

(c) (2) (iii) and (c) (2) (iv) of Rule 17f-5 seem most relevant to

your inquiry.

Rule 17f-5(c) (2) (iii) defines the term lIeligible

Mr. Pratip Kar

Securities and Exchange Board of India

February 25, 1997

Page 2

foreign custodian ll to include a IIsecurities depository or

clearing agency, incorporated or organized under the laws of a

country other than the United States, which operates the central

system for handling of securities or equivalent book-entries in

that country. III Rule 17f - 5 (c) (2) (iv) defines an eligible foreign

custodian as a "securities depository or clearing agency,

incorporated or organized under the laws of a country other than

the United States which operates a transnational system for the

central handling of securities or equivalent book-entries."

Rule 17f-5 is self-operative and does not require any

foreign institution that satisfies the definition of "eligible

foreign custodian" to obtain the prior approval of the SEC before

serving as an eligible foreign custodian for U.S.-registered

funds.

Thus, if the NSDL is the only central depository for

handling securities or equivalent book-entries in India, it falls

within the definition of eligible foreign custodian and does not

need the approval of the SEC to provide custodial services to

U.S. funds. After reviewing the materials you forwarded with

your letter, it is not immediately apparent whether the NSDL

qualifies as an "eligible foreign custodian." Specifically, you

do not state whether the NSDL operates the central system for

handling of securities or equivalent book-entries in India.

Section 3(a) (23) (A) of the Securities Exchange Act of 1934

defines "clearing agency" generally as an intermediary that makes

paYments or deliveries in connection with transactions in

securities.

The term includes any entity, such as a securities

depository, that (1) acts as a custodian of securities in

connection with a system for the central handling of securities

. whereby all securities of a particular class or series of an issuer

deposited within the system are treated as fungible and may be

transferred, loaned, or pledged by bookkeeping without physical

delivery of securities certificates, or (2) otherwise permits or

facilitates the settlement of securities without physical delivery

of securities certificates.

Rule 17f-4 defines a "securities depository" as a "system

for the central handling of securities where all securities of any

particular class or series of any issuer deposited within the

system are treated as fungible and may be transferred or pledged by

bookkeeping entry without physical delivery of securities."

Rule

17f-5(c) (2) (iii)

refers

to

both

securities

depositories and clearing agencies because a foreign securities

depository may be known as a IIclearing agency" in certain

countries.

See Investment Company Act ReI. No. 13724 at n. 31

(Jan. 17, 1984) (reproposing Rule 17f-5).

Mr. Pratip Kar

Securities and Exchange Board of India

February 25, 1997

Page 3

Foreign custody arrangements with foreign securities

depositories or clearing agencies that do not operate the central

system for handling securities or equivalent book-entries in a

given country are evaluated on a case-by-case basis. 2 If the

NSDL does not satisfy the "eligible foreign custodian"

requirements under Rule 17f-5, we suggest that the NSDL consult

an attorney familiar with the U.S. federal securities laws.

On July 27, 1995, the SEC proposed for pUblic comment

amendments to Rule 17f-5 that would, among other things, amend

the definition of "eligible foreign custodian." I am sending

with this letter a copy of current Rule 17f-5, a copy of the

release proposing the amendments, copies of Rule 17f-4 and

Section 3(a) (23) (A) of the Securities Exchange Act of 1934, and

three no-action letters, Jardine Fleming China Region Fund, Inc.,

Malaysian Central Depository Sdn. Bhd., and Intersettle Swiss

Corporation for International Securities Settlements as examples

of case-by-case evaluations.

)

If you have any further questions, please contact me at

(202) 942-0660 or [FAX] (202) 942-9659.

Sincerely,

~~.~,~~

Assistant Chief Counsel

Attachments (with airmail copy)

2

See,~, Malaysian Central Depository Sdn. Bhd. (pub.

avail. May 19, 1993); Jardine Fleming China Region Fund, Inc. and

Custody of B Shares Trading on the Shenzhen and Shanghai Securities

Exchanges (both pub. avail. Apr. 26, 1993); Camara de Liquidacao e

Custodia S/A and Balsa de Valores de Sao Paulo (both pub. avail.

Oct. 28, 1992); and Intersettle Swiss Corporation For International

Securities Settlements (pub. avail. Dec. 12, 1996) (transnational

depository) .

~an-16-97

03:08P

sEBI

91

IIMARP

22

2845761

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PRATfP KAR

EXECUTiVE DIRECTOR

eN

IlMARP/

/1997

January 16, 1997

Dear Mr Leder,

As you may be aware, the National Securities Depository Ltd (NSDL) has been Set up and has

started operations in November 1996 for demateralisation and book entry transfer of securities.

NSDL has been Set up under the Depositories Act, 1996 and SESI (Depositories and

pal1.icipants) Regulations 1996. NSDL has been registered with SEBI as required by the

Depositories Act and the SESr regulations. NSDL has framed bye~laws and business rules,

which have been approved by SEBI. Copies of the Depositories Act, Regulations, bye-laws

and business rules are enclosed for your reference. As you would note. Sub-section (3) of

Section (3) of the Depository Act, 1996 and regulation 13 of the SEBl (Depositories and

Pal1.icipants) Regulations, 1996 provide for adequate safeguards to be taken by the depository.

Foreign Institutional Investors (Fils) based in the US. such as pension funds and mutual funds

and global custodians of such funds have advised us that for them to be able use NSDL, a 'no

action' letter would need to be granted by the US SEC. As We are keen to see foreign invc:stors

participate in the depository as speedily as possible, We request that a 'no action' letter be

issued in respect ofNSDL.

It may be recalled that this issue was raised by our Chairman, Mr D.R. Mehta during our

meeting with Chairman Levitt and Mr Micheal Mann, then Director of th~ Office of

International Affairs, and we were infonned that US SEC would look at the request for a 'no

action' lener favourably. We would be grateful if you could let us know at the earliest

regarding any formalities to be completed by us or by NSDL to obtain this letter from the US

j SEC.

With regards,

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Mr Paul Leder

Acting Director of the

Office (If Inlcmntional Affair!

US Securities and Exchange: (

Washington DC 20549

USA

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Mlllal Coon. 'B' Winll. 224, NaTimAo Point. Mumbai-\OO 021. Tel, : 285045\ To 2850456, 2880962 To 2880970, Fu : 022-2045633/202107 .•

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Jan-16-97

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PRATfP KAR

EXECUTIVE DIRECTOR

Securities and Exchange

Board ofIndia

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IlMARPI

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11997

January 16, 1997

Dear Mr Leder,

As you may be aware, the National Securities Depository Ltd (NSDL) has been set up and has

started operations in November 1996 for demateralisation and book entry transfer of securities.

NSDL has been set up under the Depositories Act, 1996 and SEBI (Depositories and

participants) Regulations 1996. NSDL has been registered with SEBI as required by the

Depositorie~ Act and the SEBI regulations, NSDL has framed bye-laws and business rules,

which have been approved by SEBl. Copies of the Depositories Act, Regulations, bye-laws

and business rules are enclosed for your reference. As you would nole, Sub-section (3) of

Section (3) of the Depository Act, 1996 and regulation 13 of the SEBI (Depositories and

Participants) Regulations, 1996 provide for adequ!1te safeguards to be taken by

depository.

tne

Foreign Institutional Investors (FlIs) based in the US, such as pension funds and mutual funds

and global custodians of such funds have advised us that for them to be able use NSDL, a 'no

action' letter would need to be granted by the uS SEC. As We are keen to see foreign inv~stors

participate in the depository as speedily as possible, We request that a 'no action' letter be

issued in respect ofNSDL.

It may be recalled that this issue was raised by our Chairman, Mr D.R. Mehta during our

meeting with Chainnan Levitt and Mr Micheal Mann, then, Director of th~ Office of

International Affairs, and we were infonned that US SEC would look: at the requesl for a 'no

action' leUer favourably. We would be grateful if you could let us know at the earliest

regarding any formalities to be completed by us or by NSDL to obtain this letter from the US

\ SEC.

With regards,

encl: ala

Mr Pau I Leder

Acting Director of the

Office ofIntcmntional Affain

US Securities and Exchange (

Washington DC 20549

USA

~ ~ ...lft" ~. 22'1, ~~, ~-400021. ~ : 2850451 <{2850456 (Iq), :i880~62 It 2&80970""', ~: 022.204563J(Z021073

Mitlal Coorl. '8' WinlL. 224, Nar;mRn f'uinl. Mumbai--400 021. Tel, ; 2850451 To 2850456, 2880962 To 2880970, Fax: 022-2045633/202107:;

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