The Securities and Exchange Board of India (Sebi) opposes transferring the responsibility of conducting know-your-client (KYC) procedures to individual entities due to concerns of "Paytm-like contamination."

When asked about centralizing KYC across the financial system, Sebi Chairperson Madhabi Puri Buch stated, “The current KYC registration agency (KRA) system is widely recognized and robust. A validated KYC by a KRA eliminates the need to repeat the KYC process in the capital markets.”

KRA, a Sebi-regulated body, manages KYC records within the capital market ecosystem.

A long-standing proposal aims to extend a similar structure across the entire financial market, including banks, insurance companies, and capital market intermediaries. The Sebi chief suggested that such a proposal would only work with a KRA-like system. Sebi does not support loosening KYC norms by allowing individual intermediaries to enroll new investors.

“This is why we have stated that we will not permit Paytm-type contamination in our market. We all saw what happened with Paytm. Since the banking system lacks a KRA-type system, the issue with Paytm remains isolated to Paytm. However, if we allowed Paytm into our system without a KRA, it would contaminate the entire system. We cannot allow that,” she explained at an event at the National Stock Exchange.

“We will always have our KRA in place to ensure validation. Otherwise, any rogue player could contaminate the entire system,” she added.

On January 31, the Reserve Bank of India imposed restrictions on Paytm Payments Bank due to various lapses, including irregularities in the KYC process.

The Sebi chief also mentioned that the regulator will soon consider mandating large brokers to offer block facilities, or application supported by blocked amount (ASBA), for the secondary market. Currently, this framework is optional and not provided by any major brokers.

“It has been some time. We should address this in our next board meeting. We will consider making it mandatory for the qualified stockbrokers,” said Buch.

Under the block facility, known as ASBA, investors can block funds in their bank accounts, which will only be debited upon trade confirmation. Once mandated, this facility will be available for the equity cash segment.

The move to ASBA in the secondary market is expected to benefit investors by Rs 2,800 crore. This mechanism has already been successfully implemented in the primary market.

Disclaimer: This Image is taken from Kamlesh Pednekar