Outsourcing Directives For SEBI Regulated Intermediaries – Delegation V/S Accountability

SEBI’s 2011 guidelines regulate outsourcing to ensure investor protection and regulatory accountability.

• While intermediaries may outsource ancillary tasks like technology support, “core” functions—including investment decisions, compliance, and risk profiling—must remain under their direct control
• SEBI adopts a “substance-over-form” approach, intervening when third parties effectively assume regulated roles regardless of their formal titles
• Recent enforcement orders demonstrate that accountability cannot be delegated; intermediaries must maintain effective oversight and remain fully liable for the acts and omissions of all service providers.

INTRODUCTION

Over a period of time, advances in technology, increasing regulatory complexity and the need for operational efficiency have led many SEBI regulated intermediaries to engage third-party service providers for a variety of support functions. While outsourcing can improve efficiency, scalability and cost effectiveness, it also raises concerns regarding investor protection, accountability, confidentiality, operational resilience and regulatory oversight.

Recognizing these concerns, the Securities and Exchange Board of India (“SEBI”) issued Circular No. CIR/MIRSD/24/2011 dated