After effecting changes in the primary market, the Securities & Exchange Board of India (Sebi) is planning to make the know-your-client (KYC) procedure more stringent for the secondary market. In a letter to all stock exchanges, including the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE), Sebi has asked them to direct its member-brokers not to outsource KYC through third parties and carry out the verification only through its own compliance department.
According to informed Sebi sources, the stock market has witnessed stupendous growth since the second half of the previous calendar year, forcing several broking companies to expand their operations to various parts of the country.
In this rush to expand, several instances were brought to Sebi?s notice that the KYC procedure for a client of a sub-broker/franchisee situated outside main centres like Mumbai or Delhi was outsourced by the main broker to a local agency before the client began trading on the exchange. This practice is in violation of Sebi?s laid down procedure of the main broker carrying out the KYC exercise.
The broking circuit is, however, agitated with the Sebi move and the common complaint by most brokers is about a ?compliance overload?. On condition of anonymity, one leading broker said, ?A plethora of circulars is issued by stock exchanges, depositories and Sebi, especially after every market crisis. The January 2008 crash has resulted in several steps being taken by Sebi. The first one was asking brokers to disclose margin on positions in the derivatives segment. The next step was in relation to KYC norms.?
He added: ?Both these circulars are rich in intention but poor in implementation. Barring e-mail and SMS, it is not possible to communicate with investors in a matter of hours. Investors still are wary of using e-contracts and SMS is not an acceptable to the regulator. Hence, a large compliance overload has been put on the system.?
The Sebi move could be a fallout of the IPO scam, where it was found that KYC norms were not followed in line with the laid down requirement at the depository as well as the depository participant level. Also, times have changed and there has been a change of guard at the top at Sebi and these are also being seen as reasons why there are fresh proactive measures from the market regulator, sources explained.
Client KYC by brokers includes personal details as well as details of his bank account and DP account. This is done in order to facilitate speedier completion of the pay-in and pay-out process, broking sources said.