SEBI (KYC Registration Agency) Regulations, 2011

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

• Introduction: The SEBI (KYC Registration Agency) Regulations, 2011, aim to implement the Know Your Client (KYC) norms for intermediaries, ensuring compliance with the Prevention of Money Laundering Act, 2002.
• Key Objectives: The regulations focus on the registration of KYC Registration Agencies (KRAs), their functions and obligations, code of conduct, and guidelines for intermediaries and in-person verification.

Key Concept 1: Registration of a KRA

• Eligibility: A KRA can be a wholly owned subsidiary of a recognized stock exchange, depository, intermediary, or Self-Regulatory Organization (SRO).
• Requirements: The applicant must be a fit and proper person, have a net worth of at least Rs. 25 crores, and assure SEBI about its organizational capabilities, technology, and systems.
• Fees: The KRA applicant must pay an application fee of Rs. 50,000, a registration fee of Rs. 1,00,000, and an annual fee of Rs. 1,00,000.

Key Concept 2: Functions and Obligations of KRA and Intermediary

• KRA Functions: A KRA must obtain KYC documents from intermediaries, store and safeguard them, and submit them to SEBI or other authorities as required.
• KRA Obligations: A KRA must have electronic connectivity with other KRAs, ensure data privacy, and prevent unauthorized data sharing.
• Intermediary Functions: An intermediary must perform initial KYC/due diligence, upload KYC information to the KRA system, and retain physical KYC documents.
• Intermediary Obligations: An intermediary must verify and download client details from the KRA system, update KYC information, and not use KYC data for unauthorized purposes.

Key Concept 3: Code of Conduct for KRA

• Protection of Client Interest: A KRA must make efforts to protect the interest of its clients.
• Compliance: A KRA must comply with SEBI regulations, guidelines, and circulars, and ensure that its systems and procedures are in place to prevent unauthorized access to its database.

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 ensure that they 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 and not divulge client information without prior permission, except when required by law.
  • KRAs must not indulge in unfair competition and must display adequate information about their business on their website.
  • KRAs must redress investor grievances in a timely and appropriate manner.
  • KRAs must abide by the provisions of the Act and rules, regulations issued by the Government and SEBI.
• Guidelines for Intermediaries and KRAs:
  • Intermediaries must upload client KYC information to the KRA system and send KYC documents to the KRA within 10 working days.
  • KRAs must provide KYC information to intermediaries and maintain an audit trail of uploads, modifications, and downloads.
  • KRAs must ensure that client KYC documents are validated and verified through independent mechanisms, such as Aadhaar authentication and OTP validation.
• 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 can be relied upon by another intermediary.
• Case Study: The SEBI order in the case of M/s Tradebulls Securities Private Limited highlights the importance of implementing KYC procedures in a timely and effective manner, and the consequences of non-compliance with SEBI regulations.
• Amendments to SEBI KRA Regulations, 2011:
  • The regulations have been amended to introduce additional guidelines for KRAs, intermediaries, and in-person verification.
  • KRAs must continue to act as repositories of KYC data and must validate client records using independent mechanisms.
  • Intermediaries must follow risk-based due diligence approaches and conduct ongoing client due diligence based on the risk profile and financial position of clients.

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

• Non-Compliance with SEBI Circulars: The TSL was found to be non-compliant with the provisions of SEBI Circulars No. CIR/MIRSD/16/2011 dated August 22, 2011, No. MIRSD/Cir-2/2011 dated December 23, 2011, and No. MIRSD/Cir-5/2012 dated April 13, 2012.
• Violations: The violations included:
  • Not following the prescribed format for client signatures for each market segment.
  • Clients signing at all places in the KYC form, even if not applicable.
  • Majority of clients opting not to nominate anyone, with the tick box being checked later.
  • Not recording the details of the person conducting In-Person Verification (IPV) as required.
• Penalty: The Adjudicating Officer imposed a monetary penalty of Rs. 10,00,000 under Section 15HB of the SEBI Act, 1992, for non-compliance with the provisions of the SEBI Circulars.
• Case 10.2: SEBI v/s Aadinath Securities: Aadinath Securities was found to have not uploaded client KYC details as stipulated by SEBI, but claimed to have subsequently complied with the requirements.
• Findings: The findings of the case included:
  • Aadinath Securities had belatedly complied with the requirements in December 2015, much beyond the permissible time.
  • The reason for the delay was not plausible, and Aadinath Securities could not be exonerated for the inordinate delay.
  • The lapse showed a lack of due diligence and care, and the non-compliance would attract penalty action.
• Order: A monetary penalty of Rs 1 lakh was imposed on Aadinath Securities under Section 15HB of the SEBI Act, 1992, for defaults and failure.
• Review Questions:
  1. To effectively implement the KYC guidelines, SEBI notified the SEBI (KYC Registration Agency) Regulations, 2011.
  2. KRA shall have secure data transmission links with both other KRAs and intermediaries.
  3. 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.
  4. KRA systems shall clearly indicate the status of clients falling under PAN exempt categories, which is TRUE.