SEBI Defines Entities Eligible for Aadhaar e-KYC in Securities Market

Posted On - 24 April, 2024 • By - King Stubb & Kasiva

Know Your Client (“KYC”) is a process used by financial institutions to verify the identity and suitability of their clients. In the securities market, e-KYC refers to electronically verifying a client’s identity using digital documents instead of physical ones. This can expedite the onboarding process and improve efficiency. Aadhaar is a unique identification number issued by the Government of India to its residents. It serves as a digital proof of identity and can be leveraged for e-KYC purposes.

The Securities and Exchange Board of India (“SEBI”) issued a circular on April 5, 2024, to clarify which entities are allowed to utilize Aadhaar e-KYC services for KYC verification in the securities market.[1] This builds upon the provisions outlined in the Master Circular on KYC norms (SEBI/HO/MIRSD/SECFATF/P/CIR/2023/169) dated October 12, 2023, which detailed the use of Aadhaar e-KYC for Resident Investors.[2]

The Department of Revenue, Ministry of Finance (“DoR-MoF”) plays a key role in authorizing entities to undertake Aadhaar authentication services under Section 11A of the Prevention of Money Laundering Act, 2002. Their Gazette Notification S.O. 801(E) dated February 20, 2024, identified 24 specific entities permitted to use these services.[3]

Master Circular on KYC norms for the securities market

The Master Circular provides the procedure for the utilization of Aadhaar for electronic Know Your Client (“e-KYC”) verification within the Indian securities market. It outlines two distinct processes for the same.

Online Portal

This method empowers the investor to complete e-KYC independently through a web portal offered by your chosen investment firm. The procedure is as follows:

Initiation: Provide an Aadhaar number on the designated portal.
Authentication: A one-time password (“OTP”) will be sent directly to the Aadhaar-registered mobile number for added security.
Verification: Once the OTP is confirmed, the portal securely retrieves your KYC details stored with UIDAI (the Aadhaar issuing body).
Transparency: The verified KYC information is then displayed on the portal for review.

Assisted Investor Process

For those who prefer a more hands-on approach, they can visit a SEBI-registered investment firm. The process would entail the following:

Location: Visit the chosen investment firm (acting as a Sub-KYC User Agencies (“KUA”)).
Technology: The firm will utilize a specialized device registered with UIDAI to initiate e-KYC using your Aadhaar.
Biometric Verification: Provide your fingerprint or iris scan for confirmation.
Seamless Retrieval: Similar to the online method, the KYC details are securely obtained from UIDAI.
Verification Display: Upon successful authentication, the KYC information is presented on the device’s screen for your confirmation.

The Master Circular has designed these processes to prioritize data privacy and security.

Prioritizing Data Security

The Aadhaar number itself remains confidential throughout the process. Investment firms (Sub-KUAs) and intermediaries are strictly prohibited from storing it. They can only capture it using a secure method provided by UIDAI (Aadhaar Number Capture Services or ANCS). Furthermore, sharing of e-KYC data is only permitted under specific regulations and even then, it’s done in an encrypted format for enhanced protection. To increase protection, it is mandated that full Aadhaar numbers are never stored or displayed anywhere.

Responsibilities of Different Parties

KUAs: These authorized entities by UIDAI have the capability to perform e-KYC. However, obtaining special permission from UIDAI is necessary before they can share your e-KYC data with investment firms. Additionally, KUAs are required to maintain detailed logs of activity and undergo regular audits as mandated by UIDAI regulations.
SEBI Registered Entities: These entities encompass your investment firms and other intermediaries that leverage e-KYC for client onboarding. They must strictly adhere to the following guidelines:
Registered Devices: Only devices that are registered with UIDAI can be used for e-KYC purposes.
Client Consent: Before sharing your e-KYC information, obtaining your explicit consent is mandatory.
No Aadhaar Storage: Storing your Aadhaar number is strictly prohibited.
Investors: They have the right to approach KUAs if you have any concerns regarding the handling of your e-KYC data. You can raise any grievances or seek clarification directly from the source.

Consequences of Non-Compliance

SEBI has established strict regulations to ensure the secure and responsible use of Aadhaar e-KYC. Non-compliance can lead to serious consequences:

SEBI Action: SEBI has the authority to take necessary action against entities that fail to comply with the established guidelines.
UIDAI Audits: UIDAI may conduct audits of both KUAs and Sub-KUAs to ensure adherence to their regulations.

By implementing these comprehensive measures, SEBI aims to create a secure and streamlined experience for both investors and investment firms when utilizing Aadhaar for e-KYC. This not only simplifies the account opening process but also strengthens the overall integrity of the Indian securities market.

Looking Forward

Looking ahead, SEBI’s recent circular clarifies which entities can use Aadhaar e-KYC services, streamlining the verification process in the securities market. Whether through online portals or assisted methods, the aim is to cater to investor needs while maintaining data privacy. The responsibilities of stakeholders are outlined, ensuring accountability. Non-compliance carries consequences, emphasizing SEBI’s commitment to market integrity. These measures promise a smoother onboarding experience and reinforce trust in the securities market.

[1] https://www.sebi.gov.in/legal/circulars/apr-2024/entities-allowed-to-use-e-kyc-aadhaar-authentication-services-of-uidai-in-securities-market-as-sub-kua_82813.html.

[2] https://www.sebi.gov.in/legal/master-circulars/oct-2023/master-circular-on-know-your-client-kyc-norms-for-the-securities-market_77945.html.

[3] https://www.sebi.gov.in/sebi_data/commondocs/apr-2024/Govt%20Notification%20feb%202024_p.pdf.

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