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Securities and Exchange Board of India (KYC Registration Agency) Regulations, 2011

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NOTIFICATION No. LAD-NRO/GN/2011-12/29/36772, dated 2-12- 2011

In exercise of the powers conferred by section 30 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) the Securities and Exchange Board of India hereby makes the following regulations, namely: -

CHAPTER I

PRELIMINARY

Short title & commencement

1. (1) These regulations may be called the Securities and Exchange Board of India {KYC (Know Your Client) REGISTRATION AGENCY} Regulations, 2011.

(2) They shall come into force on the date of their publication in the Official Gazette.

Definitions

2. (1) In these regulations, unless the context otherwise requires, the terms defined herein shall bear the meanings assigned to them below—

(a) Act means the Securities and Exchange Board of India Act, 1992 (15 of 1992);

(b) "Board" means the Securities and Exchange Board of India established under section 3 of the Act;

(c) "Certificate" means a certificate of registration granted by the Board under these regulations;

(d) "Client" means a person seeking to do/has done his KYC through intermediary with KRA;

(e) Inspecting authority means any one or more person appointed by the Board to exercise powers conferred under chapter IV;

(f) "Intermediary" means an entity associated with securities market and registered under sub-section (1A), (1B) and (1) of Section 12 of the Act; who is required to do KYC of its clients;

(g) "Intermediaries Regulations means Securities and Exchange Board of India (Intermediaries) Regulations, 2008;

(h) "KYC Registration Agency (KRA)" is a company formed and registered under the Companies Act, 1956 and which has been granted a certificate of registration under these regulations which hereinafter shall be deemed to be an intermediary in terms of the provisions of the Act;

(i) KYC means the procedure prescribed by the Board for identifying and verifying the Proof of Address, Proof of Identity and compliance with rules, regulations, guidelines and circulars issued by the Board or any other authority for Prevention of Money Laundering from time to time;

(j) "Operating Instructions" means operating instructions made by a KRA under Regulation 15;

(k) "Rules means Prevention of Money Laundering Rules, 2005;

(l)  "Prescribed" means prescribed by a general or special order or circular issued under the Act or these regulations.

(2) All other words and expressions used but not defined in these regulations shall have the same meaning as have been assigned to them under the Act or the Securities Contracts (Regulation) Act, 1956, (42 of 1956) or the Companies Act, 1956 (1 of 1956), or Prevention of Money Laundering Act (PML), 2005 or the PML Rules, 2005 or any statutory modification or reenactment thereto, as the case may be.

CHAPTER II

REGISTRATION OF KRA

Application for grant of certificate of initial registration

3. An application for the grant of a certificate of registration as a KRA shall be made to the Board in Form as specified in Schedule I and shall be accompanied by such fees and in such manner as specified in Schedule II of these regulations.

Application to conform to the requirements

4. An application, which is not complete in all respects and does not conform to the instructions prescribed in the Form and the requirements specified therein or the information, is false or misleading in any manner shall be rejected by the Board.

Provided that before rejecting any such application, the applicant shall be given, in writing, an opportunity to remove, within thirty days of the date of communication in this regard, such objections as may be indicated by the Board.

Notwithstanding anything contained in the first proviso, the Board may, on being satisfied that it is necessary, extend the time period by such further time, as it deems fit, in order to enable the applicant to remove the objections indicated by the Board.

Furnishing of information, clarification and personal representation

5. (1) The Board may require the applicant to furnish such further information or documents or clarifications as the Board considers necessary for the purpose of consideration of the application.

(2) The applicant or his authorized representative shall, if so required, appear before the Board for personal representation in connection with the grant of certificate of registration.

Consideration of application for grant of certificate of initial registration

6. (1) The Board shall not consider an application, unless the applicant is a fit and proper person to the satisfaction of the Board and belongs to one of the following categories, namely:

(a) a wholly owned subsidiary of a recognized stock exchange, having nation-wide network of trading terminals, or;

(b) a wholly owned subsidiary of a depository or any other intermediary registered with the Board or;

(c) a wholly owned subsidiary of a Self Regulatory Organization (SRO) registered under SEBI (Self Regulatory Organization) Regulations, 2004,

Provided that any conflict of interest does not exist between the role of the applicant as KRA and other commercial activities of the applicant, its associates and group companies.

Provided further that the applicant shall have to satisfy to the Board about the organizational capabilities, technology and systems and safeguards for maintaining data privacy and preventing unauthorized sharing of data.

Notwithstanding the aforementioned, the Board shall have the power to examine any possible case of conflict of interest in applications.

(2) The applicant as mentioned in sub regulation (a) to (c) of regulation 6(1) above shall have a net worth of at least Rs 25 crore on a continuous basis.

Grant of certificate of initial registration

7. (1) The Board, on being satisfied that the applicant is eligible, shall send intimation to that effect to the applicant, for the grant of certificate of initial registration, and grant a certificate in the Form as specified in Schedule I.

(2) The certificate of initial registration granted under sub-regulation (1) shall be valid for a period of five years from the date of its issue to the applicant.

(3) The grant of certificate of initial registration shall be subject to the payment of such fees and in such manner as specified in Schedule II of these regulations.

Grant of certificate of permanent registration

8. (1) The KRA which has been granted a certificate of initial registration under regulation 7 may, three months before the expiry of the period of certificate of initial registration, make an application for grant of certificate of permanent registration in the Form as specified in Schedule I.

(2) An application under sub-regulation (1) shall be accompanied by such fees and in such manner as specified in Schedule II of these regulations.

(3) The application for grant of a certificate of permanent registration shall be accompanied by details of the changes that have taken place in the information that was submitted to the Board while seeking initial registration, as the case may be, and a declaration stating that no changes other than those as mentioned in such details have taken place.

(4) The application for permanent registration made under sub-regulation (1) shall be dealt with in the same manner as if, it were a fresh application for grant of a certificate of initial registration.

(5) The Board, on being satisfied that the applicant is eligible, shall send intimation to that effect, to the applicant and shall grant a certificate of permanent registration in the format as specified in Schedule I.

(6) The grant of certificate of permanent registration shall be subject to payment of such fees and in such manner as specified in Schedule II of these regulations.

Criteria for fit and proper person

9. For the purpose of determining whether an applicant is a fit and proper person, the Board may take into account the criteria specified in Schedule II of Intermediaries Regulations.

KRA to abide by code of conduct

10. The KRA holding a certificate of registration shall at all times abide by the Code of Conduct as specified in Schedule III of these regulations.

Procedure where certificate of registration is not granted

11. (1) Where an application for the grant of certificate of initial or permanent registration does not satisfy the requirements specified in regulation 6 & 9, the Board shall reject the application after giving the applicant an opportunity of being heard.

(2) The decision of the Board to reject the application shall be communicated to the applicant in writing within thirty days of such decision, stating therein the grounds on which the application has been rejected.

(3) Any applicant, aggrieved by the decision of the Board, may apply within a period of thirty days from the date of receipt of such intimation to the Board for reconsideration of its decision.

(4) The Board shall reconsider an application made under sub-regulation (3) and communicate its decision thereon, as soon as possible in writing to the applicant.

Effect of refusal to grant certificate of permanent registration

12. A KRA whose application for grant of certificate of permanent registration has been refused by the Board, on and from the date of the receipt of the communication, shall cease to carry on any activity as a KRA;

Provided that the Board may, in the interest of the investors of the securities market, permit KRA to carry on activities undertaken prior to the receipt of the intimation of refusal subject to such condition as the Board may specify.

Surrender of certificate of registration

13. (1) A KRA, who has been granted a certificate of registration under the Act or the regulations made there under, desirous of giving up its activity and surrender the certificate, may make a request for such surrender to the Board.

(2) While disposing a surrender request under these regulations, the Board may require the KRA to satisfy the Board about the factors, as it deems fit, including but not limited to the following –

a.  the arrangements made by KRA for maintenance and preservation of records and other documents required to be maintained under these regulations;
b.  redressal of investor grievances;
c.  transfer of records of its clients;
d.  the arrangements made by it for ensuring continuity of service to the clients;
e.  defaults or pending action, if any.

(3) While accepting the surrender, the Board may impose such conditions upon the KRA, as it deems fit, for protection of the interests of investors and the securities market, and such person shall comply with such conditions.

(4) On and from the date of the surrender or cancellation of the certificate, the KRA shall—

(a) return the certificate of registration so cancelled to the Board and shall not represent itself to be a holder of the certificate for carrying out the activity for which such certificate had been granted;

(b) cease to carry on any activity in respect of which the certificate had been granted;

(c) transfer its activities to another entity holding a valid certificate of registration to carry on such activity and allow its clients to withdraw any assignment given to it, without any additional cost to such client;

(d) make provisions as regards liability incurred or assumed by it;

(e) take such other action including the action relating to any records or documents that may be in custody or control of such person, within the time period and in the manner, as may be required under the these regulations, or as may be directed by the Board.

CHAPTER III

FUNCTIONS AND OBLIGATIONS OF KRA AND INTERMEDIARY

Documents to be obtained by the KRA for the purpose of KYC

14. The KRA shall obtain the KYC documents of the client from the intermediary; as prescribed by the Board and in terms of the rules, regulations, guidelines and circulars issued by the Board or any other authority for Prevention of Money Laundering, from time to time.

Functions and obligations of the KRA

15. The KRA has the following functions and obligations—

(a) KRA may prepare the Operating Instructions in co-ordination with other KRA(s) and issue the same to implement the requirements of these regulations.

(b) KRA(s) shall have electronic connectivity and with other KRA(s) in order to establish inter-operability among KRAs.

Explanation: Inter-operability means the ability of the KRA to determine whether the KYC documents of the client are in the custody of another KRA.

(c) KRA shall have a secure data transmission link with other KRA(s) and with each intermediary that uploads the KYC documents on its system and relies upon its data.

(d) KRA shall be responsible for storing, safeguarding and retrieving the KYC documents and submit to the Board or any other statutory authority as and when required.

(e) KRA shall retain the original KYC documents of the client, in both physical and electronic form for the period specified by Rules, as well as ensuring that retrieval of KYC information is facilitated within stipulated time period.

(f) Any information updated about a client shall be disseminated by KRA to all intermediaries that avail of the services of the KRA in respect of that client.

(g) KRA shall ensure that the integrity of the automatic data processing systems for electronic records is maintained at all times.

(h) KRA shall take all precautions necessary to ensure that the KYC documents/records are not lost, destroyed or tampered with and that sufficient back up of electronic records is available at all times at a different place.

(i)  KRA shall have adequate mechanisms for the purposes of reviewing, monitoring and evaluating its controls, systems, procedures and safeguards.
(j)  KRA shall cause an audit of its controls, systems, procedures and safeguards to be carried out periodically and take corrective actions for deficiencies, if any and report to Board.

(k) KRA shall take all reasonable measures to prevent unauthorized access to its database and have audit of its systems and procedures at regular intervals as prescribed by the Board.

(l) KRA shall have checks built in its system so that an intermediary can access the information only for the clients who approach him.

(m) KRA shall appoint a compliance officer who shall be responsible for monitoring the compliance of the Act, rules and regulations, notifications, guidelines, instructions, etc., issued by the Board or the Central Government and for redressal of client's grievances. The compliance officer shall immediately and independently report to the Board any non-compliance observed by him.

(n) KRA shall send a letter to each client after receipt of the KYC documents from the intermediary, confirming the client's details thereof.

(o) KRA shall take adequate steps for redressal of the grievances of the clients within one month of the date of receipt of the complaint and keep the Board informed about the number, nature and other particulars of the complaints from such investors.

Functions and obligations of an Intermediary

16. The Intermediary has the following functions and obligations –

(a) The intermediary shall perform the initial KYC/due diligence of the client, shall upload the KYC information on the system of the KRA and send the original KYC documents to KRA forthwith from the date of account opening or within the time as prescribed by the board from time to time. However, in case of mutual funds, an RTA appointed by the mutual fund may also undertake the KYC of the client and send the original documents to the mutual fund or KRA.

(b) When the client approaches another intermediary subsequently, it will be optional for the intermediary to verify and download the client's details from the system of KRA or to take fresh KYC as per existing system. However, upon receipt of information on change in KYC details and status of the clients by the intermediary or when it comes to the knowledge of the intermediary, at any stage, the intermediary shall be responsible for uploading the updated information on the system of KRA and for sending the physical documents to KRA, wherever necessary.

(c) An intermediary shall not use the KYC data of a client obtained from the KRA for purposes other than it is meant for; nor shall it make any commercial gain by sharing the same with any third party including its affiliates or associates.

(d) The intermediary shall have the ultimate responsibility for the KYC of its clients, by undertaking enhanced KYC measures commensurate with the risk profile of its clients.

Power of the Board to issue clarifications

17. In order to remove any difficulties in the application or interpretation of these regulations, the Board shall have the power to issue clarifications and guidelines in the form of notes or circulars which shall be binding on the KRA and the intermediaries.

CHAPTER IV

INSPECTION of KRA

Board's right to inspect

18. (1) The Board may appoint one or more persons as inspecting authority to undertake inspection of the books of accounts, records, documents, infrastructure, systems and procedures, of a KRA, for any purpose specified in sub-regulation (2).

(2) The Board may inspect a KRA for the following purposes:

(a) that the books of accounts, records and KYC documents, as prescribed by the Board, are being maintained by the KRA;

(b) to look into the complaints received by the KRA from clients or any other person;

(c) to ascertain whether the provisions of the Act and these regulations are being complied with;

(d) to ascertain whether the systems, procedures and safeguards being followed by a KRA are adequate;

(e) to ensure that privacy of clients' data is maintained and the same is not shared with any other agency/associates in violation of these regulations;

(f) to ensure that the affairs of a KRA are being conducted in a manner which are in the interest of the investors and securities market.

Notice before inspection

19. (1) Before undertaking an inspection under regulation 19, the Board shall give not less than 10 days notice to the KRA, for that purpose.

(2) Notwithstanding anything contained in sub-regulation (1), where the Board is satisfied that in the interest of the investors no such notice should be given, it may, by an order in writing direct that the inspection of the affairs of the KRA be taken up without such notice.

(3) On being empowered by the Board, the inspecting authority shall undertake inspection and the KRA against whom an inspection is being carried out shall be bound to discharge his obligations as provided under regulation 20.

Obligations upon inspection by the Board

20. (1) It shall be the duty of the KRA whose affairs are being inspected, and of every director, officer and employee thereof, to produce to the inspecting authority such books, accounts, records and other documents in its custody or control and furnish him with such statements and information relating to its activities as a KRA, within such reasonable period as the inspecting authority may require.

(2) The KRA shall allow the inspecting authority to have reasonable access to the premises occupied by it or by any other person on their behalf and also extend reasonable facility for examining any books, records, documents and computer data in the possession of the KRA or any other person on their behalf and also provide copies of the documents or other materials which, in the opinion of the inspecting authority are relevant for the purposes of the inspection.

(3) The inspecting authority, in the course of inspection, shall be entitled to examine or to record the statements of any director, officer or employee of the KRA.

(4) It shall be the duty of every director, officer or employee of the KRA to give to the inspecting authority all assistance in connection with the inspection, which the inspecting authority may reasonably require.

Submission of Report to the Board

21. The inspecting authority shall, as soon as possible, on completion of the inspection, submit a report to the Board:

Provided that if directed to do so by the Board the inspecting authority shall submit interim reports.

Communication of findings, etc.

22. (1) The Board shall, after consideration of the inspection report, communicate the findings of the inspecting authority to the KRA, seek its comments on the same and if required, give it an opportunity of being heard.

(2) On receipt of the reply, if any, from the KRA, the Board may call upon him to take such measures, as the Board may deem fit, in the interest of the securities market and for due compliance with the provisions of the Act, and these regulations.

Action on inspection report

23. The Board shall after consideration of the inspection report take such action as provided under Chapter V of the Intermediaries Regulations and in terms of the Act.

Appointment of Auditor

24. (1) The Board shall have the power to appoint a qualified independent auditor to inspect, into the books of accounts, records, documents, infrastructures, systems and procedures of a KRA.

(2) The Board shall be entitled to recover from the KRA such expenses including fees paid to the auditors, as may be incurred by it for the purposes of inspecting the books of accounts, records, documents, infrastructures, systems and procedures of the KRA.

CHAPTER V

PROCEDURE FOR ACTION IN CASE OF DEFAULT

Liability for action in case of default

25. A KRA shall be liable for action if it—

(a) contravenes any of the provisions of the Act, and these regulations;

(b) fails to furnish any information relating to its activity as a KRA as required under these regulations;

(c) does not co-operate in any inspection or investigation or enquiry conducted by the Board;

(d) fails to comply with any direction of the Board;

(e) fails to pay the requisite fees to the Board;

and shall be dealt with in the manner provided under the Chapter V of the Intermediaries Regulations.