SEBI (KYC Registration Agency) Regulations, 2011

SEBI (KYC Registration Agency) Regulations, 2011 (Part 1)

Introduction: The SEBI (KYC Registration Agency) Regulations, 2011, aim to provide a framework for the registration and functioning of KYC Registration Agencies (KRAs). The regulations emphasize the importance of Know Your Client (KYC) norms in preventing money laundering and ensuring the integrity of the securities market.
Registration of KRA: To register as a KRA, an applicant must be a fit and proper person and belong to one of the following categories:
- A wholly owned subsidiary of a recognized stock exchange
- A wholly owned subsidiary of a depository or any other intermediary registered with SEBI
- A wholly owned subsidiary of a Self-Regulatory Organization (SRO) registered under SEBI (Self-Regulatory Organization) Regulations, 2004
Functions and Obligations of KRA:
- Obtain KYC documents from intermediaries
- Store, safeguard, and retrieve KYC documents
- Submit KYC documents to SEBI or other statutory authorities as required
- Carry out independent validation of KYC records
- Retain KYC documents in electronic form for a specified period
- Ensure the integrity of automatic data processing systems
- Take precautions to prevent unauthorized access to the database
Functions and Obligations of Intermediary:
- Perform initial KYC/due diligence of clients
- Upload KYC information with proper authentication on the KRA system
- Furnish scanned images of KYC documents to the KRA
- Retain physical KYC documents
- Verify and download client details from the KRA system when the client approaches another intermediary
Code of Conduct for KRA: A KRA must make all efforts to protect the interest of its clients and ensure that its systems and procedures are designed to prevent money laundering and other illicit activities.

SEBI (KYC Registration Agency) Regulations, 2011 (Part 2)

Introduction: The SEBI (KYC Registration Agency) Regulations, 2011, outline the guidelines for KYC Registration Agencies (KRAs) to maintain high standards of integrity, dignity, and fairness in their business conduct.
Key Requirements:
- KRAs must exercise due diligence, ensure proper care, and exercise independent professional judgment.
- KRAs must maintain confidentiality of client information and not divulge it without prior permission, except as required by law.
- KRAs must not indulge in unfair competition and display adequate information about their business on their website.
- KRAs must redress investor grievances in a timely and appropriate manner and avoid misrepresentation.
- KRAs must abide by the provisions of the Act and rules, regulations issued by the Government and SEBI.
Obligations of KRAs:
- KRAs must inform SEBI about any action, legal proceeding, etc., initiated against them in respect of any material breach or non-compliance.
- KRAs must not render investment advice or make recommendations to clients.
- KRAs must ensure that their employees are fit and proper and have relevant professional training or experience.
- KRAs must have internal control procedures and financial and operational capabilities to protect their operations and clients from financial loss.
Guidelines for Intermediaries and KRAs:
- Intermediaries must upload KYC information on the KRA system and send KYC documents to the KRA within 10 working days.
- KRAs must provide KYC information in data and image form to intermediaries and send a letter to clients confirming the details.
- KRAs must develop systems to prevent duplication of entry of KYC details and ensure uniformity in formats.
- KRAs must maintain an audit trail of upload/modifications/downloads made in the KYC data.
In-Person Verification (IPV):
- Intermediaries must carry out IPV for all clients, and the details of the person carrying out the IPV must be recorded on the KYC form.
- IPV carried out by one SEBI-registered intermediary shall be relied upon by another intermediary.
Amendments to SEBI KRA Regulations, 2011:
- KRAs shall continue to act as a repository of KYC data and shall be responsible for storing, safeguarding, and retrieving KYC documents.
- KRAs shall independently validate records of clients whose KYC has been completed using Aadhaar as an OVD.
- KRAs shall validate details such as Aadhaar, mobile number, and e-mail ID using OTP validation, and PAN using the Income Tax Database.

SEBI (KYC Registration Agency) Regulations, 2011 (Part 3)

Non-Compliance with SEBI Circulars: The TSL was found to have violated the provisions of SEBI Circulars No. CIR/MIRSD/16/2011, No. MIRSD/Cir-2/2011, and No. MIRSD/Cir-5/2012, which relate to the implementation of the Know Your Client (KYC) guidelines.
In-Person Verification (IPV): The inspection observed that the official conducting IPV had signed the document, but the name, designation, and other details of the official were not recorded by the TSL as required by Clause 3(ii) of SEBI Circular dated December 23, 2011.
Code of Conduct: The TSL was found to have failed to adhere to the prescribed code of conduct in respect of high standard of integrity, promptitude, fairness, due skill, care, and diligence, thereby not abiding by the Act, rules, and regulations in terms of Regulation 7 read with clauses A (1), A (2), and A (5) of the code of conduct for stockbrokers.
Monetary Penalty: The Adjudicating Officer imposed a monetary penalty of Rs. 10,00,000 under Section 15HB of the SEBI Act against M/s. Tradebulls Securities Private Limited.
Case 10.2: SEBI v/s Aadinath Securities: Aadinath Securities was found to have belatedly complied with the requirements of circulars dated December 23, 2011, and April 13, 2012, and was imposed a monetary penalty of Rs 1 lakh under Section 15HB of SEBI Act, 1992.

Review Questions

1. To effectively implement the KYC guidelines, SEBI notified the SEBI (KYC Registration Agency) Regulations, 2011.
1. KRA shall have secure data transmission links with both other KRAs and intermediaries that upload the KYC documents on its system.
1. Once the initial KYC of the new clients is done, the intermediary shall immediately upload the KYC information within 10 working days on the system of the KRA and send the KYC.
1. KRA systems shall clearly indicate the status of clients falling under PAN exempt categories, which is TRUE.