SEBI Proposes Framework for Orderly Wind-Down of KYC Registration Agencies

The Securities and Exchange Board of India (SEBI) on April 29 has drafted a framework for an orderly wind-down of the Know Your Client (KYC) Registration Agencies (KRAs). This was put in place to protect the interests of investors, the continuance of services, and the protection of sensitive information in case of ceasing from KRA due to insolvency, regulatory action, or voluntary exit.

Invest in Indian Markets and Unlock Future Potential With 5paisa!

Open Account Now

Ensuring Continuity in the Securities Market

The pivotal role of KRAs, among others in India, is maintaining and validating investors' KYC records. Intermediaries use these records for client onboarding and account-based relationships. Recognising the importance of these services, SEBI's proposed framework mentions the essentiality of continuous access to KYC services even in the event of a KRA being closed down.

"The KRAs must have a structured mechanism which will ensure continuity of services of a KRA and seamless transfer of its activities to a designated successor entity," SEBI stated in its consultation paper. ​

Key Components of the Proposed Framework

The draft framework outlines several measures to facilitate a smooth transition during the winding down of a KRA:​

• Identification of Anticipated Scenarios: KRAs must foresee situations that deprive them of the ability to render services, whether voluntary—a strategic business decision—or involuntarily—financial distress or regulatory actions.
• Determination of Critical Operations: KRAs shall identify critical operations, which, in simple terms, means the registration and modification of KYC records, to ensure that they will be accorded priority in the transition.
• Standard Operating Procedures (SOPs): The framework mandates the establishment of SOPs detailing steps for board approvals, SEBI notifications, stakeholder communications, secure data transfers, and parallel operations during the transition phase.​
• Oversight Committee Formation: KRAs must constitute an oversight committee to monitor the winding-down process, ensure compliance with regulatory requirements, and address investor grievances.​

KRAs are expected to finalise and publish this framework on their websites within 90 days of the circular’s issuance and review it periodically. ​

Public Consultation and Feedback

SEBI has opened the draft framework to public comments until May 20, 2025. All stakeholders may submit their suggestions via the SEBI website or email to fine-tune the proposal. ​

Enhancing Investor Protection

This directly relates to the general idea of the initiatives by SEBI for the betterment of various dimensions of investor protection systems. Earlier this month, for instance, the regulator initiated a process for an 'Investor Charter' for KRAs, detailing services given, including such rights to investors, besides mechanisms for grievance redressal . The charter hopes to eventually enhance the transparency level in the operation of KRAs vis-à-vis the investor's knowledge regarding such activities. ​

Industry Implications

This new framework is anticipated to have a far-reaching effect on the securities industry, especially for firms dependent on KRA services. By providing a structured and transparent exit process, SEBI attempts to stem disruptions in the market and build confidence among investors. 

Market participants are suggested to review the draft framework and provide their input, thus contributing to the creation of a robust mechanism for maintaining the integrity of the securities market.