By - King Stubb & Kasiva on April 24, 2024
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]
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.
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:
For those who prefer a more hands-on approach, they can visit a SEBI-registered investment firm. The process would entail the following:
The Master Circular has designed these processes to prioritize data privacy and 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.
SEBI has established strict regulations to ensure the secure and responsible use of Aadhaar e-KYC. Non-compliance can lead to serious consequences:
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 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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