The New Scenario for Buying Stocks or MFs

Investor will now have to fill in KYC documents only once, instead of doing so each time separately with different intermediaries for buying stock or MFs

To simplify investing in the capital market, the Securities and Exchange Board of India (Sebi) has further simplified the know your customer (KYC) norms by centralising the records. Investors will have to fill in KYC documents only once, instead of the current practice of doing so each time separately with different intermediaries for purchasing stocks and mutual funds.

The market regulator, in a notification, has said that an intermediary shall perform the initial KYC of the investor or its client and upload the details on the system of a regulated KYC registration agency (KRA).

“When the client approaches another intermediary, the intermediary can verify and download the client’s details from the system of the KRA. As a result, once the client has done KYC with a Sebi-registered intermediary, he need not undergo the same process again with another intermediary,” the note clarified.

Financial institutions do KYC as a part of their annual due diligence to identify the individual investing in financial products. It is also a check against money laundering or terrorist financing.

Currently, banks, insurance companies and securities markets have their own separate KYC norms. For securities market KRAs, Sebi has mandated that it will not consider an application unless it is a wholly-owned subsidiary of a recognised stock exchange having a nationwide network or trading terminals or a wholly-owned subsidiary of a depository or any other intermediary registered with Sebi.

There should not be any conflict of interest between the role of the applicant as KRA and other commercial activities of the applicant, its associates and group companies.

Analysts say the single-point registration agency will benefit investors and reduce duplication of the KYC documentation process. In case of any updating like change of address, it can be registered at one place itself. “Gradually, financial institutions should have a single KYC for various types of financial products, which will benefit the investors,” says Shyam Poddar, an independent insurance advisor.

The markets regulator has also underlined that the KRA shall have a secured data transmission link with other KRAs and with each intermediary that uploads the KYC documents on its system. The KRA will be responsible for storing, safeguarding and retrieving the KYC documents and will have to submit the details to Sebi whenever required. On its part, the KRA will retain the original KYC documents of the investor in both physical and electronic form and ensure that retrieval of the KYC information is done within the stipulated period.

The KRA will have to ensure that the integrity of the automatic data processing systems and ensure that all documents or records are not lost, destroyed or tampered with and that sufficient back-up of electronic records is available. While the intermediary will do the initial KYC/due diligence of the investor and upload the information on its system, in case of mutual funds, a registrar transfer agent appointed by the fund house will also undertake the KYC of the investor and send the original documents to the KRA.

To avoid misuse of the KYC data, Sebi has said that the intermediary will not use the KYC data of the client for any commercial gains by sharing the information with any third party, including its affiliates or associates. Moreover, Sebi will inspect KRAs to ensure that the books of account and records are in order and ensure that the privacy of the data is maintained.

Earlier, the market regulator had made the process of opening a trading account simpler and set up a centralised web-based system for faster redressal of investors' complaints. Opening a trading account will be in two parts where the first part of the KYC form will capture the basic information about the customer and the second part will carry details of additional information of the customer and mention the rights and obligations of the stockbroker or the sub-broker.

Under the new norms, investor will now have to sign only one document while opening a new trading account. In case the investor wants to avail running account facility or execute the power of attorney, he will have to give specific authorisation to the stockbroker and if the stockbroker is also a depository participant, the investor can use the same KYC form for basic details and take additional information relating to the demat account.

Also, at the time of opening a trading account, the broker will give a written document mentioning the various charges including brokerage that will be paid by the client.

Currently, an investor has to enter into a number of agreements, depending on his trading preference, and since the charges to be levied by the brokerage is not mentioned in the trading account document, it gives rise to disputes in the long run. 

Financial Express, New Delhi, 06-12-2011