Securities and Exchange Board of India (SEBI) released a draft circular for public comments proposing a framework for the orderly winding down of critical operations and services of KYC Registration Agencies (KRAs). This move is intended to safeguard the continuity and integrity of investor-related data and services in the event of a KRA’s exit—whether due to insolvency, voluntary closure, regulatory revocation, or other cessation events.
Understanding the Role of KRAs in Securities Markets.
KYC Registration Agencies (KRAs) play a pivotal role in India’s securities market ecosystem. When investors are onboarded by market intermediaries (like brokers or mutual fund distributors), their KYC details are uploaded to KRAs. These agencies act as central repositories, responsible not only for storing KYC documents but also for validating the data. This centralization allows other intermediaries to rely on a unified, verified source of KYC information—thus reducing duplication and ensuring consistency across the financial ecosystem.
Given this central and critical role, any disruption in a KRA’s operations could jeopardize access to millions of investors’ records and compromise the operational flow across the capital markets.
Why a Winding Down Framework is Necessary
Currently, while there are basic guidelines under the KYC Registration Agency Regulations, 2011, there’s no detailed procedure for how a KRA should responsibly cease operations. This new draft circular fills that gap by:
- Ensuring continuity of services to investors and intermediaries during a KRA’s wind-down.
- Mandating a seamless transfer of KYC records and responsibilities to a successor KRA.
- Requiring proper mechanisms for investor grievance redressal during the transition.
- Preventing data loss or service interruption, which could cause market instability.
Key Proposals in the Draft Circular
Under the proposed framework, KRAs wishing to surrender their SEBI registration will be required to satisfy certain critical conditions:
- Record Maintenance: KRAs must ensure preservation and secure transfer of all KYC records and documents.
- Client Service Continuity: Adequate arrangements must be made to prevent any break in services provided to intermediaries and investors.
- Grievance Redressal: A system must be in place for redressal of any pending or future investor grievances even after surrender of the license.
- Disclosures of Defaults or Pending Actions: The KRA must disclose any defaults or unresolved regulatory actions to SEBI as part of its exit application.
These requirements will help ensure that a KRA’s closure does not negatively impact the market or investor trust.
Public Consultation Open Until May 20, 2025
SEBI is currently seeking public comments on the draft circular. Stakeholders, industry participants, and investors are encouraged to submit their views through SEBI’s public comment portal or via email (consultationMIRSD@sebi.gov.in) with the subject line: “Framework for Orderly Winding Down of KYC Registration Agency.”
