Master Guide to SEBI KYC Norms in Securities Markets

This guide provides comprehensive short notes on Chapter 7 of the NISM Series XXIV workbook, focusing on the regulatory framework, documentation, and digital procedures for Know Your Client (KYC) in the Indian securities market.

1. Comprehensive SEBI Guidelines for KYC Norms

KYC and Client Due Diligence (CDD) policies are the fundamental pillars of an effective Anti-Money Laundering (AML) process. These norms ensure that financial systems are not misused for illicit activities by establishing the true identity of every participant.

1.1 Core Principles of KYC

• Verification: Intermediaries must obtain and verify Proof of Identity (PoI) and Proof of Address (PoA) at the commencement of an account-based relationship.
• Prohibition of Anonymity: SEBI-registered intermediaries are strictly prohibited from opening or maintaining anonymous accounts, accounts in fictitious names, or accounts on behalf of persons whose identity cannot be verified.
• Uniformity: All intermediaries must use the same KYC form and supporting documents to ensure consistency across the securities market.

1.2 The Uniform KYC Format (Account Opening Form)

The Account Opening Form (AOF) is divided into two distinct parts:

1. Part I (Basic Details): Captures essential KYC information using templates provided by the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI).
2. Part II (Specific Information): Captures additional details relevant to the specific area of activity of the intermediary (e.g., stockbroking, mutual funds).

1.3 Permanent Account Number (PAN) Requirements

PAN serves as the unique identification number for all participants in the securities market, ensuring a sound audit trail.

• Mandatory Linkage: PAN must be linked with Aadhaar to remain operative.
• Verification: Intermediaries verify PAN online via the Income Tax website; original cards are not mandatory if verified online.
• Exemptions: PAN is not mandatory for:
  • Transactions by Central/State Governments or Court-appointed officials.
  • Investors residing in Sikkim.
  • UN entities and multilateral agencies exempt from Indian taxes.
  • SIPs of Mutual Funds up to Rs. 50,000 per year.

1.4 Admissible Proof of Identity (PoI)

The following Officially Valid Documents (OVD) are accepted:

• Passport, Driving Licence, or Voter's Identity Card.
• Proof of possession of Aadhaar number.
• NREGA Job Card signed by a State Government officer.
• Letter issued by the National Population Register containing name and address.
• Identity cards with photographs issued by Central/State Government departments, Statutory/Regulatory Authorities, PSUs, or Scheduled Commercial Banks.

1.5 Admissible Proof of Address (PoA)

If the OVD does not contain an updated address, the following are deemed OVD for a limited period of three months, after which an updated OVD must be submitted:

• Utility bills (electricity, telephone, piped gas, water) not more than two months old.
• Property or Municipal tax receipts.
• Pension or family pension payment orders (PPOs) containing the address.
• Allotment letters of accommodation or leave and license agreements from Government or listed companies.

1.6 Identification of Beneficial Ownership

Intermediaries must identify the Beneficial Owner (BO)—the natural person who ultimately owns or controls the client.

• Thresholds for Control:
  • Company: Ownership of > 10% of shares or capital.
  • Partnership Firm: Ownership of > 10% of capital or profits.
  • Unincorporated Association: Ownership of > 15% of property or capital.
  • Trust: Identification of the author, trustees, and beneficiaries with > 10% interest.
• Ongoing Diligence: Compliance is monitored through half-yearly internal audits by Stock Exchanges and Depositories.

2. Revolutionary Online and Digital KYC Procedures

To increase efficiency and convenience, SEBI has enabled digital onboarding using Aadhaar e-Sign, DigiLocker, and video-based verification.

2.1 The Digital KYC Process

1. Consent: Express consent from the client must be obtained before starting the online process.
2. Capture: Name, photograph, address, and mobile/email are captured digitally.
3. Verification: Mobile and email are verified via OTP.
4. Aadhaar Usage: Clients may voluntarily use Aadhaar for e-KYC or offline verification (XML/Secure QR Code not older than 3 days).
5. Bank Verification: Bank details are verified using the Penny Drop mechanism or bank APIs.
6. Redaction: If a client submits an Aadhaar copy where authentication is not required, the Aadhaar number must be redacted or blacked out.

2.2 Features for Online KYC Apps

Intermediaries can develop proprietary apps for KYC, which must include:

• Live Environment: Capturing live photographs and videos (preventing pre-recorded uploads).
• Security Tags: Automatic watermarking with CAF number, GPS coordinates (geo-tagging), and time stamps.
• Liveliness Check: Random action initiation to guard against spoofing and fraudulent manipulations.

2.3 In-Person Verification (IPV) and VIPV

IPV is mandatory for all clients.

• Authorized Persons: Can be performed by the intermediary, authorized persons of brokers, or NISM/AMFI-certified distributors for Mutual Funds.
• Video IPV (VIPV): A live, seamless, end-to-end encrypted interaction where the client’s face is clearly recognizable and they respond to random questions.
• Exemptions: IPV is not required if KYC is completed via Aadhaar authentication or if documents are verified online through DigiLocker.

3. SARAL Account Opening and Special Categories

3.1 SARAL Account for Resident Individuals

Designed for individual clients participating in the cash segment without additional facilities (like margin trading or derivatives):

• Simplified Address Proof: Only one documentary proof is required.
• Correspondence Address: If different from the OVD, a self-declaration is accepted, verified through "positive confirmation" (welcome kit receipt, phone calls, or visits).
• Mailing Safeguards: KYC completion letters are sent via registered post to verify the address; returns trigger a transaction block.

3.2 Requirements for Non-Individuals (Legal Entities)

Certified copies of the following additional documents are required:

4. Operational Roles: KRA and Intermediaries

4.1 KYC Registration Agency (KRA)

A centralized mechanism for storing KYC records to prevent duplication.

• Administration: Governed under SEBI KRA Regulations, 2011.
• Functions: KRA provides data/images to intermediaries and sends a confirmation letter to the client within 2 working days of receiving data.

4.2 Guidelines for Intermediaries

• Upload Timeline: Intermediaries must upload KYC information to the KRA system within 3 working days of completing the process.
• Data Integrity: Intermediaries must ensure no duplication and maintain electronic records.
• Confidentiality: Every piece of information maintained or verified must be kept strictly confidential unless required by law.

5. Key Terms and Exam Readiness

5.1 Important Terms

• OVD (Officially Valid Document): The baseline documents required for identity and address verification.
• Penny Drop: A mechanism to verify bank accounts by depositing a small amount (e.g., Rs. 1) to match the account holder's name.
• KUA/Sub-KUA: Entities registered with UIDAI to undertake Aadhaar authentication.
• Tipping Off: The prohibited act of informing a client that their transaction is being reported as suspicious.

5.2 Exam Knowledge Check

1. Q: Within how many days must an intermediary upload KYC data to the KRA?
   • A: Within 3 working days.
2. Q: Is PAN mandatory for all securities market transactions?
   • A: Yes, it is the unique identification number for all participants, with very specific exceptions (e.g., Sikkim residents).
3. Q: What is the validity of a utility bill used as address proof?
   • A: It must not be more than two months old and is valid for only three months as a temporary PoA.
4. Q: Who can perform IPV for Mutual Fund applications?
   • A: AMCs, NISM/AMFI-certified distributors, or scheduled commercial banks (for direct applications).

Note: These notes are based on the NISM-Series-24 Workbook Version: January 2025. For compliance purposes, always refer to the latest SEBI Master Circulars.