If cost efficiency is the mantra of the modern business, outsourcing is the name of the game. The flip side of ‘outsourcing’, however, is a cause for concern. Not surprisingly, the Securities and Exchange Board of India (SEBI) has decided to hold the whip to reign in market intermediaries who outsource certain of their jobs. Keen to ensure that the intermediaries don’t court assorted risks associated with outsourcing, the regulator is also out to fix responsibility for any outsourcing-related negative fall-outs. It has now come out with norms for outsourcing activities by the intermediaries.

For one, the regulator has made it clear that intermediaries shall not outsource their core business activities and compliance functions. It has gone on to list certain businesses which shall not be outsourced. It has also directed the intermediaries to report ‘suspicious transactions’ in respect of activities carried out by third parties to the financial intelligence unit or any other competent authority. Also, it has instructed the intermediaries to do a self-assessment of their current outsourcing pacts and bring it in alignment with the new norms within six months.

Among other things, the norms require the intermediaries.

To have a comprehensive policy on outsourcing.

To make their boards responsible for such a policy.

To put in place a outsourcing risk management programme.

To ensure that outsourcing does not diminish their ability to fulfil their obligations to customers and regulators.

To ensure that outsourcing does not impede effective supervision by the regulators.

To do right due diligence in selecting the third part and monitoring its performance.

To ensure that such outsourcing relationship are defined by written contracts.

To ensure that confidential information is protected.

Source:http://www.thehindu.com/business/markets/article2717963.ece

The Securities and Exchange Board of India (SEBI) had agreed for a discussion paper to invite public comments so as to develop suitable guidelines for outsourcing by an intermediary. SEBI took this because of its concern over the increasing trend of key services outsourcing done by the market intermediaries to the third parties. The regulator has clearly stated in the discussion paper that the concerns need to be addressed and the outsourcing needs to be organized in an orderly manner, although outsourcing cannot be banned completely.

Currently, intermediaries like depository participants, stock brokers, portfolio managers, merchant bankers, registrar and share transfer agents are outsourcing some of their activities related to data entry, record keeping, despatch, front-desk customer services, and KYC verification among other services to unregistered third parties.

The regulator opined that as the intermediaries are registered based on their strength, outsourcing of key activities by them to unregistered third parties defeats the purpose of regulation and creates risk for the entire market. “It is therefore felt that the key activities which are crucial to the intermediation service may be delivered by the intermediary itself. The informal feedback indicates that the compliance with securities laws, investor grievance redressal and KYC must not be outsourced under any circumstance,” stated the Sebi discussion paper.

SEBI has listed out nine principles for outsourcing of any intermediation services which are inspired by the principles of IOSCO. Further, A proposal has also come from the regulator’s side for the intermediaries to ensure that outsourcing arrangements neither ‘diminish its ability to fulfill its obligations to customers and regulators, nor impede effective supervision by the regulators’.

The discussion paper also talks about establishing a comprehensive outsourcing risk management programme to address the outsourced activities and the relationship with the third party. Additionally, it has also proposed that the board of directors or equivalent body representing the market intermediary should assume the responsibility for the outsourcing policy and related overall responsibility for activities undertaken under that policy.

Source:-http://www.siliconindia.com/shownews/SEBI_concerned_over_the_increasing_trend_of_outsourcing-nid-77712-cid-5.html