SEBI CLARIFICATION ON KNOW YOUR CLIENT (KYC) PROCESS AND USE OF TECHNOLOGY FOR KYC TO VARIOUS AUTHORITIES

CLARIFICATION ON KNOW YOUR CLIENT (KYC) PROCESS AND USE OF TECHNOLOGY FOR KYC

The pandemic has cast its shadow across various economic activities with massive dislocation in global production, supply chains and trade. In wake of the current nationwide lock down as directed by Government of India due to issue of Covid-19, SEBI feels to Clarification as per the need of the time. Also, in the wake of current scenario of lockdown in country, SEBI has issued clarification for certain activities carried out by All Recognized Stock Exchanges, All Recognized Depositories, Stock Brokers through Recognized Stock Exchanges, Depository Participants through Depositories, Association of Mutual Funds in India, All Mutual funds and AMCs through AMFI, Portfolio Managers, KYC Registration Agencies (KRAs), Qualified Registrar to an Issue and Share Transfer Agents (QRTAs), Alternative Investment Funds (AIFs), Collective Investment Schemes (CIS), Custodians, Investment Advisors for processing various investor requests pertaining to Compliance and disclosures to be made under SEBI Regulations and various SEBI circulars.

Thus, SEBI vide Circular No. SEBI/HO/MIRSD/DOP/CIR/P/2020/73 dated 24.04.2020 after considering the current situation due to COVID 19 issued CLARIFICATION ON KNOW YOUR CLIENT (KYC) PROCESS AND USE OF TECHNOLOGY FOR KYC.

CLARIFICATION states:

1.       Know Your Customer (KYC) and Customer Due Diligence (CDD) policies as part of KYC are the foundation of an effective Anti-Money Laundering process. The KYC process requires every SEBI registered intermediary (hereinafter referred to  as ‘RI’) to collect and verify the Proof of Identity (PoI) and Proof of Address (PoA) from the investor. 

2.       The provisions as laid down under the Prevention of Money-Laundering Act, 2002, Prevention of Money-Laundering (Maintenance of Records) Rules, 2005, SEBI Master Circular on Anti Money Laundering (AML) dated October 15, 2019 and relevant KYC / AML circulars issued from time to time shall continue to remain applicable. Further, the SEBI registered intermediary shall continue to ensure to obtain the express consent of the investor before undertaking online KYC.

3.       SEBI, from time to time has issued various circulars to simplify, harmonize the process of KYC by investors / RI. Constant technology evolution has taken place in the market and innovative platforms are being created to allow investors to complete KYC process online.  SEBI held discussions with various market participants and based on their feedback and with a view to allow ease of doing business in the securities market, it has been decided to make use of following technological innovations which can facilitate online KYC:

a.       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. 

b.      In terms of PML Rule 2 (1) (cb) “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 per Rule 9 of the Information Technology (Preservation  and  Retention  of  Information  by  Intermediaries  Providing Digital Locker Facilities) Rules, 2016. 

c.        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  shall  be  authenticated  by affixing the signature or any document shall be signed or bear the signature of any person then such requirement shall be 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 shall 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 shall also be accepted as valid signature.

4.      In  order  to  enable  the  Online  KYC  process  for  establishing  account  based relationship with the RI, Investor’s KYC can be completed through online / App based KYC, in-person verification through video, online submission of Officially Valid Document (OVD) / other documents under eSign, in the following manner:

i.        The investor visits the website/App/digital platform of the RI and fills up the online KYC form and submits requisite documents online.

ii.       The name, photograph, address, mobile number, email ID, Bank details of the investor shall be captured online and OVD / PAN / signed cancelled cheque shall be provided as a photo / scan of the original under eSign and the same shall be verified as under:

a.  Mobile and email is verified through One Time Password (OTP) or other verifiable mechanism. The mobile number/s of investor accepted as part of KYC  should  preferably  be  the  one  seeded  with  Aadhaar.  (the  RI  shall ensure  to  meet  the  requirements  of  the  mobile  number  and  email  as detailed  under SEBI circular  no. CIR/MIRSD/15/2011 dated August 02, 2011)

b.    Aadhaar is verified through UIDAIs authentication / verification mechanism. Further, in terms of PML Rule 9 (16), every RI shall, 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 sub-rule (15). RI shall not store/ save the Aadhaar number of investor in their system. e-KYC through  Aadhaar  Authentication  service  of  UIDAI  or  offline  verification through Aadhaar QR Code/ XML file can be undertaken, provided 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.

c.     PAN is verified online using the Income Tax Database.

d.    Bank account details are verified by Penny Drop mechanism or any other mechanism using API of the Bank.

(Explanation: based on bank details in the  copy  of  the  cancelled  cheque  provided  by  the  investor,  the  money  is deposited into the bank account of the investors to fetch the bank account details and name.)

The name and bank details as obtained shall be verified with the information provided by investor.

e.    Any OVD other than Aadhaar shall be submitted through Digiocker / under eSign mechanism.

iii.     In terms of Rule 2 (d) of Prevention of Money-Laundering (Maintenance of Records) Rules, 2005 (PML Rules) “Officially Valid Documents” means the following:

a.  the passport,

b.  the driving licence,

c.  proof of possession of Aadhaar number,

d.  the Voter's Identity Card issued by Election Commission of India,

e.  job  card  issued  by  NREGA  duly  signed  by  an  officer  of  the  State Government and

f.   the letter issued by the National Population Register containing details of name, address, or any other document as notified by the Central Government in consultation with the Regulator.

iv.      Further, Rule 9(18) of PML Rules states that in case OVD furnished by the investor  does  not  contain  updated  address,  the  document  as  prescribed therein in the above stated Rule shall be deemed to be the OVD for the limited purpose of proof of address.

v.       PML Rules allows an investor to submit other 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 transaction in the securities market shall continue to apply.

vi.     Once all the information as required as per the online KYC form is filled up by the investor, KYC process could be completed as under:

a. The investor would take a print out of the completed KYC form and after affixing their wet signature, send the scanned copy / photograph of the same to the RI under eSign, or

b. Affix online the cropped signature on the filled KYC form and submit the same to the RI under eSign.

vii.    The RI shall 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 shall be allowed in such account and intimation shall also sent to the Stock Exchange and Depository.

viii. 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 in the following manner:

i.    As a clear photograph or scanned copy of the original OVD, through the eSign mechanism, or;

ii    As digitally signed document of the OVD, issued to the DigiLocker by the issuing authority.  

ix.     SEBI vide circular no. MIRSD/Cir- 26 /2011 dated December 23, 2011 had harmonized the IPV requirements for the intermediaries. In order to ease the IPV process for KYC, the said SEBI circular pertaining to IPV stands modified as under:

i. IPV/ VIPV would not be required when the KYC of the investor is completed using the Aadhaar authentication / verification of UIDAI.

5.       Features for online KYC App of the RI

- SEBI registered intermediary may implement their own Application (App) for undertaking online KYC of investors. The App shall facilitate taking photograph, scanning, acceptance of OVD through Digilocker,  video  capturing  in  live  environment,  usage  of  the  App  only  by authorized person of the RI.

The App shall also have 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 etc is also implemented. RI shall ensure that the process is a seamless, real-time, secured, end-to-end encrypted audio-visual interaction with the customer and the quality of the communication is adequate to allow identification of the customer beyond doubt.

RI shall carry out the liveliness check in order to guard against spoofing and  such  other  fraudulent  manipulations.  The RI  shall  before  rolling  out  and periodically, carry out software and security audit and validation of their App. The RI may have additional safety and security features other than as prescribed above.

6.      Feature for Video in Person Verification (VIPV) for Individuals – To enable ease of completing IPV of an investor, intermediary may undertake the VIPV of an individual investor through their App. The following process shall be adopted in this regard:

i.    Intermediary through their authorised official, specifically trained for this purpose, may undertake live VIPV of an individual customer, after obtaining his/her informed consent. The activity log along with the credentials of the person performing the VIPV shall be stored for easy retrieval.

ii.      The VIPV shall be in a live environment.

iii.     The VIPV shall be clear and still, the investor in the video shall be easily recognisable and shall not be covering their face in any manner.

iv.     The VIPV process shall include random question and response from the investor including displaying the OVD, KYC form and signature or could also be confirmed by an OTP.

v.       The RI shall ensure that photograph of the customer downloaded through the Aadhaar authentication / verification process matches with the investor in the VIPV. 

vi.    The VIPV shall be digitally saved in a safe, secure and tamper-proof, easily retrievable manner and shall bear date and time stamping.

vii.    The RI may have additional safety and security features other than as prescribed above.

Link: https://www.sebi.gov.in/legal/circulars/apr-2020/clarification-on-know-your-client-kyc-process-and-use-of-technology-for-kyc_46565.html

DISCLAIMER: THE ARTICLE IS BASED ON THE RELEVANT PROVISIONS AND AS PER THE INFORMATION EXISTING AT THE TIME OF THE PREPARATION. IN NO EVENT I SHALL BE LIABLE FOR ANY DIRECT AND INDIRECT RESULT FROM THIS ARTICLE. THIS IS ONLY A KNOWLEDGE SHARING INITIATIVE.

THE AUTHOR – CS DEEPAK SETH (ASSOCIATE PARTNER HELPINGHANDS PROFESSIONALS LLP) AND CAN BE REACHED AT CONTACTHHPRO@GMAIL.COM OR 9910248911.