Inadequate KYCs: Sebi lays down rules for deactivation of accounts

Capital markets regulator Sebi on Friday released a framework for automated deactivation of trading and demat accounts of investors in case of inadequate Know Your Client (KYC) details.

The framework will come into effect from August 31, the Securities and Exchange Board of India (Sebi) said in a circular.

Noting that addresses form a critical part of the KYC procedures, Sebi said that every address recorded for the purpose of compliance with the KYC procedures has to be accurate.

An intermediary is required to update the address from time to time. However, the regulator observed that in some cases accurate or updated addresses of clients are not maintained. This is borne out of the fact that when Sebi issues any notices, during the course of any enforcement proceedings on such addresses, the same remains unserved.

Under the rules, market infrastructure institutions (MIIs)-- stock exchanges, except commodity derivatives exchanges, and depositories -- will have to physically serve Show Cause Notice (SCN) or order issued by the regulator to the concerned entity.

The MIIs will have to forward the signed acknowledgement of its receipt by the concerned addressee or its authorized representative to the regulator within 30 days from the date of receipt of such instructions from the markets watchdog.

If none of the MIIs is able to deliver the SCN or order at any of the addresses mentioned in the KYC records linked to any trading or demat account of the entity; and obtain a signed acknowledgement of its receipt from the entity or its authorized representative, then all MIIs will deactivate all trading and demat accounts within five working days from the last unsuccessful delivery report.

The regulator clarified that if one of the MIIs is able to deliver the SCN or order, as the case may be, to the entity and obtain signed acknowledgement, then none of the accounts of the entity will be deactivated.

Sebi said that pending pay-in and pay-out obligations and open positions may be permitted to be settled, squared off or closed out, while enforcing the deactivation of trading or demat accounts of such entities.

MIIs will have to ensure that they communicate the details of the deactivation along with reasons to the respective registered intermediary.

The concerned entity may place a request to the registered intermediaries seeking re-activation of trading or demat accounts along with the correct proof of address and signed acknowledgement of receipt of the SCN or order.

Sebi said that the process of reactivating the accounts by the MIIs should not exceed more than five working days after receipt of request from the entity along with all the documents. The framework would also apply to joint accounts.

The MIIs may deviate from the new rules in cases where compliance with the framework is hampered due to factors beyond the control of the entity.

In such cases, the MIIs will have to record the reasons for deviating from the mandate of the framework and communicate the same to Sebi within two working days of such deviation.

The new rules are aimed at ensuring that the client furnishes accurate or updated details of address and ensuring that KYC details are correct.