# MJ't _ _..;;.j:_(;...:;Al--'~Lf_j)

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URL: https://www.frixlaw.com/law-library/documents/agency%3Asec%3Ae55ec88e4d4dd7f7

## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

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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) .

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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

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PRATfP KAR

EXECUTIVE DIRECTOR

Securities and Exchange
Board ofIndia

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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

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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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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Asec%3Ae55ec88e4d4dd7f7. Public record. Not legal advice.