KYC norms for domestic investors too to be based on risk classification

The Securities and Exchange Board of India wants to bring domestic and foreign portfolio investors at par on know your client norms. This, it believes, will help in making the capital market more in sync with the global market and also facilitate in framing rules based on investors risk profiles.

In its draft circular seeking responses, the capital market regulator has proposed that the new structure will have KYC norms for domestic investors, both individual and institutional, based on their potential to bear risks — low, medium and high.

The existing system of KYC norms prescribes for two categories — individual and non-individual (institutional) — in the domestic investor segment. Fulfilment of KYC norms is mandatory for investment in the capital market.

The market intermediary will categorise the investors based on its risk management policy. The policy will define the norms for categorisation of the investors. Once the category is decided, minimum documents for KYC will be collected from the investors. However, the intermediary will be free to ask for additional documents from any category of investors.

In the proposed structure, investors with lower risk will have to submit lesser number of documents and vice versa. But, if the investor is also trading in the derivative segment (futures and options or F&O), he will have to submit documents to ascertain his/her financial position in addition to documents required for KYC.

A standard account opening form was prescribed by SEBI on December 26, 2013, for both domestic investor categories. For all individual investors, it sought permanent account number (PAN) and Aadhaar (if the applicant has one) accounts along with proofs of identity and address.

For non-individual or institutional investors, the applicant is required to provide PAN and registration number such as CIN (corporate identification number), residential address and photograph of promoters/ partners/ karta/ trustees and whole-time directors. DIN (director identification number) of whole time directors and Aadhar number of promoters and partners are also required to be submitted.

The draft has also prescribed additional norms for investors participating in F&O trading in the equity market. In case of individual investors, the market intermediary can ask for a three-month bank statement (against the current norm of six months), salary slip, copy of Form 16 and copy of demat account holding statements.

Commenting on the latest development, Jyoti Rai, Country Head (Corporate Services), ABAX India, said, “This in the long-term, not just for asset classification but also for investors and market participants, will lead to a much better risk assessment of the capital market for the regulator.”

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