You are currently viewing SEBI Circular on use of technology in KYC

SEBI Circular on use of technology in KYC

7 min read

This Circular was issued by the Securities and Exchange Board of India (SEBI) to clarify the procedure in relation to Know Your Client (KYC) processes, procedures and uses of technology for KYC. 

Brief History of the Circular

The Clarification on KYC Process and Use of Technology for KYC Circular was issued vide Circular No. SEBI/HO/MIRSD/DOP/CIR/P/2020/73 dated 24th April 2020 by SEBI under the powers conferred by SEBI Act, 1992.

Clarification on Know Your Client (KYC) Process and Use of Technology for KYC Circular

1. List of SEBI Registered Intermediaries to Whom the Circular is Addressed

  1. All recognised stock exchanges
  2. All recognised depositories
  3. Stock brokers through recognised stock exchanges
  4. Depository participants through depositories
  5. Association of mutual funds in India
  6. All mutual funds and asset management companies through association of mutual funds of India
  7. Portfolio managers
  8. KYC registration agencies
  9. Qualified registrar to an issue and share transfer agents
  10. Alternative investment funds
  11. Collective investment schemes
  12. Custodians
  13. Investment advisors

2. Preliminary Content

  1. The Circular acknowledged that KYC and Customer Due Diligence (CCD) policies are the foundation of an effective anti- money laundering process. Thus, every SEBI registered intermediary is required by the Circular to verify the proof of identity and proof of address from the investor
  2. The Circular affirms that provisions of the Prevention of Money-Laundering Act, 2002, Prevention of Money-Laundering (Maintenance of Records) Rules, 2005, SEBI Master Circular on Anti Money Laundering and all other relevant KYC and anti money laundering circulars would continue to remain applicable. Before undertaking online KYC, every SEBI Registered Intermediary has to obtain express consent of the investors.

3. Technology Adoption

Due to constant technological advancements, investors have been enabled to complete KYC processes online. In order to facilitate ease of doing business in the securities market, by this circular, various technological tools were recognised and they have been enumerated below-

  1. eSign service is an online electronic signature service that can facilitate an Aadhaar holder to forward the document after digitally signing the same provided the eSign signature framework is operated under the provisions of Second Schedule of the Information Technology Act and guidelines issued by the controller
  2. In terms of the Prevention of Money Laundering Rules, equivalent e-document means an electronic equivalent of a document, issued by the issuing authority of such document with its valid digital signature,  including documents issued to the Digital Locker account of the investor as under the Information Technology (Preservation  and  Retention  of  Information  by  Intermediaries  Providing Digital Locker Facilities) Rules, 2016
  3. Section 5 of the Information Technology Act, 2000 recognizes electronic signatures (which includes digital signature) and states that where any law provides  that  information  or  any  other  matter  has to  be  authenticated  by affixing the signature or any document has to be signed or bear the signature of any person then such requirement is deemed to have been satisfied, if such information or matter is authenticated by means of a digital signature affixed in such manner as prescribed by the Central Government. Therefore, the eSign mechanism of Aadhaar has to be accepted in lieu of wet signature on the documents provided by the investor. Even the cropped signature affixed on the online KYC form under eSign has to also be accepted as a valid signature.

4. Online Process of KYC

The Circular provides that, in  order  to  enable  the  online  KYC  process  for  establishing  account  based relationship with the SEBI registered intermediary, investor’s KYC can be completed through online  or app based KYC, in-person verification through video, online submission of Officially Valid Document (OVD) / other documents under eSign, in the following manner:

  1. The investor visits the website/app/digital platform of the SEBI registered intermediary and fills up the online KYC form and submits requisite documents online.
  2. The name, photograph, address, mobile number, email ID and bank details of the investor have to be captured online and OVD / PAN / signed cancelled cheque has to be provided as a photo / scan of the original under eSign and the same has to be verified through mobile and email by One Time Password (OTP) or other verifiable mechanism. For this to happen, the mobile number of the investor will have to preferably be the one seeded with his or her Aadhar Card. Aadhaar can be verified through Unique Identification Authority of India’s (UIDAI) authentication / verification mechanism. Further, in terms of rules under the Prevention of Money Laundering Rules, every SEBI registered intermediary has to, where the investor submits  his  Aadhaar  number,  ensure  that  such  investor  to  redact  or blackout  his  Aadhaar  number  through  appropriate  means  where  the authentication of Aadhaar number is not required under the rules. SEBI registered intermediary cannot store/ save the Aadhaar number of investors in their system. Electronic KYC through  Aadhaar  authentication  service  of  UIDAI  or  offline  verification through Aadhaar QR Code/ XML file can be undertaken, provided that the XML file or Aadhaar Secure QR Code generation date is not older than 3 days from  the  date  of  carrying  out  KYC.  In  terms  of  SEBI  circular  No. CIR/MIRSD/29/2016  dated  January  22,  2016,  the  usage  of  Aadhaar  is optional and purely on a voluntary basis by the investor. PAN can be verified online using the Income Tax Database. Bank account details can be verified by Penny Drop mechanism or any other mechanism using the Application Programming Interface (API) of the Bank. The name and bank details as obtained can be verified with the information provided by investors. Any OVD other than Aadhaar has to be submitted through Digiocker / under eSign mechanism.
  3.  The Prevention of Money Laundering Rules state that in case OVD furnished by the investor  does  not  contain  updated  address,  the  document  as  prescribed therein in the above stated Rule have to be deemed to be the OVD for the limited purpose of proof of address.
  4. PML Rules allow an investor to submit OVD instead of PAN. However, in terms of SEBI circular No. MRD/DoP/Cir- 05/2007 dated April 27, 2007 the requirement of mandatory submission of PAN by the investors for transactions in the securities market has to continue to apply.
  5. Once all the information as required as per the online KYC form is filled up by the investor, KYC process could be completed after the investor would take a print out of the completed KYC form and after affixing their wet signature, sending the scanned copy / photograph of the same to the SEBI registered intermediary under eSign, or affixing online the cropped signature on the filled KYC form and submit the same to the SEBI registered intermediary under eSign.
  6. The SEBI registered intermediary has to forward the KYC completion intimation letter through registered post/ speed post or courier, to the address of the investor in cases where the investor has given address other than as given in the OVD. In such cases of return of the intimation letter for wrong / incorrect address, addressee not available etc, no transactions can be allowed in such account and intimation has to also be sent to the respective stock exchange and depository.
  7. The  original  seen  and  verified  requirement  under  SEBI  circular  no. MIRSD/SE/Cir-21/2011 dated October, 5 2011 for OVD would be met where the investor provides the OVD as a clear photograph or scanned copy of the original OVD, through the eSign mechanism or as a digitally signed document of the OVD, issued to the DigiLocker by the issuing authority.  
  8. SEBI vide circular no. MIRSD/Cir- 26 /2011 dated December 23, 2011 had harmonized the In- Person Verification (IPV) requirements for the intermediaries. In order to ease the IPV process for KYC, the said SEBI circular pertaining to IPV has been modified and it has been amended through this circular where it has been that IPV/ VIPV would not be required when the KYC of the investor is completed using the Aadhaar authentication / verification of UIDAI and IPV / VIPV cannot be required by the SEBI registered intermediary when the KYC form has been submitted online, documents have been provided through Digiocker or any other source which could be verified online.

5. Features for Online KYC App of the SEBI Registered Intermediary

  1. A SEBI registered intermediary may implement their own Application (App) for undertaking online KYC of investors.
  2. The App has to facilitate taking photographs, scanning, acceptance of OVD through Digilocker,  video  capturing  in  live  environment,  usage  of  the  App  only  by authorized persons of the SEBI registered intermediary. The App also has to have the features of random action initiation for investor response to establish that the interactions not pre-recorded, time stamping, geo-location tagging to ensure physical location in India is also implemented. The SEBI registered intermediary has to ensure that the process is a seamless, real-time, secured, end-to-end encrypted audiovisual interaction with the customer and the quality of the communication is adequate to allow identification of the customer beyond doubt. The SEBI registered intermediary has to carry out the liveliness check in order to guard against spoofing and  such  other  fraudulent  manipulations.  
  3. The SEBI registered intermediary has to, before  rolling  out  and periodically, carry out software and security audit and validation of their App. The SEBI registered intermediary may have additional safety and security features other than as prescribed above.

6. Process for Video In Person Verification (VIPV) through the SEBI Registered Intermediary’s App

  1. Intermediary through their authorised official, specifically trained for this purpose, may undertake live VIPV of an individual customer, after obtaining his/her informed consent. 
  2. The activity log along with the credentials of the person performing the VIPV has to be stored for easy retrieval.
  3. The VIPV has to be conducted in a live environment.
  4. The VIPV has to be clear and still, the investor in the video has to be easily recognisable and cannot cover their face in any manner.
  5. The VIPV process has to include random question and response from the investor including displaying the OVD, KYC form and signature or could also be confirmed by an OTP.
  6. The Intermediary has to ensure that the photograph of the customer downloaded through the Aadhaar authentication / verification process matches with the investor in the VIPV. 
  7. The VIPV has to be digitally saved in a safe, secure and tamper-proof, easily retrievable manner and has to bear date and time stamping.
  8. The Intermediary may have additional safety and security features other than as prescribed above.

7. Directions to Stock Exchanges and Depositories under this Circular

  1. Stock exchanges and depositories have been directed to bring the provisions of this circular to the  notice of the stock brokers, depository participants and also disseminate the same on their websites
  2. Stock exchanges and depositories have been directed to make  necessary  amendments  to  the  relevant  bye-laws,  rules  and regulations for the implementation of the above decision in coordination with one another to achieve uniformity in approach. 
  3. Stock exchanges and depositories have been directed to communicate to SEBI, the status of the implementation of the provisions of this circular Monthly Development Report of the following month.
  4. Stock exchanges and depositories have been directed to monitor the compliance of this circular.

Ultimate Guide to Fintech Law

Fintech Law is the regulatory ecosystem and legal framework governing the multi-trillion-dollar financial technologies (fintech) sector. Check out the Ultimate Guide to Fintech Law in India.

Manohar Samal