Chapter IV (Part 2): KYC Framework, Verification Standards, and Statutory Compliances

Building directly upon the foundational types of demat accounts discussed in Part 1, this second part explores the strict procedural framework of the account opening process. This framework is heavily governed by Know Your Customer (KYC) regulations, In-Person Verification (IPV) mandates, digitization initiatives (e-KYC and Central KYC), and global tax reporting regulations like FATCA.

KYC Verification and Documentation Requirements

To open a demat account, the Depository Participant (DP) must establish and verify the identity and address of the applicant using reliable, independent source documents. The regulatory requirements differ based on whether the applicant is an individual (non-body corporate) or an artificial judicial entity (corporate).

1. Non-Body Corporate / Individual Investors

When verifying individual applicants, DPs must adhere to the following checklist:

• Identity Verification: The DP must verify the legal identity of the applicant.
• KYC Application Form: The DP must record all necessary client details on the prescribed KYC Application Form.
• In-Person Verification (IPV) Standards:
  • The DP is legally mandated to carry out an In-Person Verification of the client.
  • The DP must either affix a physical stamp or directly print the IPV details on the main KYC Application Form.
  • Strict Prohibitions: Attaching a separate sheet to the KYC Application Form or using stickers to record IPV details is strictly prohibited.
• Joint Holder Limitations: A single demat account can have a maximum of three joint holders. To ensure absolute security, independent proof of identity must be obtained for all joint holders without exception.

2. Corporate Investors

Because corporate bodies are artificial legal persons, they are subject to a much more rigorous documentation regime. To open an account for a corporate investor, the DP must obtain:

• Constitutional Documents: Certified copies of the Memorandum of Association (MOA), Articles of Association (AOA), and the Certificate of Incorporation.
• Board Approvals:
  • A copy of the Board Resolution authorizing the opening of the specific demat account.
  • A copy of the Board Resolution granting authority to invest in the securities market.
• Authorized Signatories: The names of all authorized signatories, their designations, their specimen signatures, and their recent physical photographs.
• Corporate Address Proof: Official proof of address of the corporate entity.
• Financial and Ownership Records:
  • Copy of the audited Balance Sheets for the last two financial years.
  • Copy of the latest shareholding pattern of the company.

Standard Fields in Account Application Forms

Regardless of the investor category, the account opening forms prescribed by the depositories require the systematic collection of the following essential details:

1. Full Name of the Account Holder.
2. Mailing and Communication Address.
3. IT PAN: Details of the Income Tax Permanent Account Number (PAN).
4. Bank Account Details: Active bank account numbers and routing details to facilitate direct credit of monetary corporate benefits.
5. Minor Guardian Details: If the primary account holder is a minor, the name, details, and signature of the legal guardian must be recorded.
6. Foreign Address Details: For Non-Resident Indian (NRI), Foreign Institutional Investor (FII), or Overseas Corporate Body (OCB) accounts, the DP must capture their foreign address alongside relevant Reserve Bank of India (RBI) approval details.
7. Clearing Member Details: Special transitional accounts opened for market clearing require the respective Clearing Member (CM) details.

Modern Digitized KYC Frameworks

To facilitate financial inclusion and lower transaction costs, SEBI and the Government of India have institutionalized digital verification mechanisms.

1. Aadhaar-Based e-KYC (UIDAI Service)

SEBI permits DPs to utilize the secure e-KYC service launched by the Unique Identification Authority of India (UIDAI).

• Instant Verification: It provides an instant, electronic, and non-reputable proof of identity and address, as well as the client's date of birth and gender (which are digitally signed and encrypted).
• Communication Syncing: It provides the resident's mobile number and email address (if available) directly to the DP, helping to streamline communication.
• Modes of Execution:
  • In-Person: Performed physically at the DP's service center using biometric authentication.
  • Remote: Performed online using an One-Time Password (OTP) verification sent to the client's UIDAI-registered mobile number.

2. Central KYC Records Registry (C-KYC)

Under rules amended by the Central Government, the Central Registry of Securitization Asset Reconstruction and Security Interest of India (CERSAI) is authorized to act as and perform the functions of the Central KYC Records Registry.

• Digital Repository: C-KYC acts as a centralized repository to receive, store, safeguard, and retrieve KYC records of clients in a digital format.
• The 3-Day Filing Mandate: As per Rule 9(1A) of the Prevention of Money-laundering (Maintenance of Records) Amendment Rules, every reporting entity (including DPs) must file the electronic copy of a client's KYC records with the Central KYC Registry within three days of commencing an account-based relationship.

3. Aadhaar Linking Mandate

Following announcements in the Union Budget 2017-18, SEBI instructed depositories to ensure that DPs take necessary steps to link existing and new individual demat accounts with their Aadhaar numbers.

• NSDL Online Facility: NSDL provides a direct online portal where individual demat account holders can input their Aadhaar numbers, which are then verified and authenticated directly with UIDAI.

FATCA (Foreign Account Tax Compliance Act) Compliance

India’s Inter-Governmental Agreement (IGA) with the United States of America for the implementation of FATCA entered into force on 31st August 2015.

• The Mandate: Under Rule 114H(8) of the Indian Income Tax Rules, 1962, financial institutions are legally required to obtain self-certifications and perform exhaustive due diligence on all individual and entity accounts opened between 1st July 2014 and 31st August 2015.
• The Enforcement Deadline: This self-certification and supporting documentation had to be collected by 31st August 2016.
• Account Closure Rule: If a client failed to provide self-certification within the deadline, the DP was legally required to close the account and report it as a "reportable account" to the authorities under the prescribed due diligence procedures.

Key Exam Takeaways

1. Max Holder Limit: A demat account can have a maximum of three joint holders, and proof of identity is compulsory for all three.
2. IPV Integrity: IPV details must be printed or stamped directly on the KYC form. Separate sheets or stickers are strictly invalid.
3. C-KYC Timeline: Reporting entities must upload electronic KYC records to CERSAI within 3 days of opening an account.
4. FATCA Deadlines: Accounts opened between 1st July 2014 and 31st August 2015 required self-certification by 31st August 2016, failing which they had to be closed.

Important Terms Glossary

• In-Person Verification (IPV): The physical or live-video verification process carried out by an intermediary to confirm that the applicant is a genuine person.
• CERSAI: Central Registry of Securitization Asset Reconstruction and Security Interest of India, the central agency managing digitized KYC records in India.
• FATCA: Foreign Account Tax Compliance Act, a US tax regulation implemented in India via an Inter-Governmental Agreement (IGA) to prevent tax evasion.
• Self-Certification: A mandatory declaration signed by the account holder confirming their tax residency status under international agreements.