Code of Conduct and Investor Protection — brokers' duties, ODR, the IPF, PoA and KYC

Where this chapter sits

Chapter 10 carries 5% of the paper and closes the syllabus. It is conduct and process — the rules you will personally be held to.

Three things dominate: the broker's code of conduct, the ODR timelines, and the PoA/DDPI restrictions.

10.1 SEBI's code of conduct for brokers

Chapter VIII of the SEBI (Stock Brokers) Regulations, 2026 prescribes a code of conduct for securities brokers.

A. General — five duties

1. Integrity: Shall maintain high standards of integrity, promptitude and fairness in the conduct of all its business. 2. Exercise of Due Skill and Care: Shall act with due skill, care and diligence in the conduct of all its business. 3. Manipulation: Shall not indulge in manipulative, fraudulent or deceptive transactions or schemes or spread rumors with a view to distorting market equilibrium or making personal gains. 4. Malpractices: Shall not create a false market either singly or in concert with others or indulge in any act detrimental to the investors' interest or which leads to interference with the fair and smooth functioning of the market. 5. Compliance with Statutory Requirements: Shall abide by all the provisions of the Act and the rules, regulations issued by the Government, the Board and the stock exchange.

Duty towards the investor — ten obligations

1. A stock-broker... shall faithfully execute the orders for buying and selling of securities at the best available market price and not refuse to deal with a small Investor merely on the ground of the volume of business involved.

2. A stock-broker shall promptly inform his client about the execution or non-execution of an order and make prompt payment in respect of securities sold and arrange for prompt delivery of securities purchased.

3. A stock-broker shall issue without delay to his client a contract note for all transactions in the format specified by the stock exchange.

4. A stock-broker shall not disclose or discuss with any other person or make improper use of the details of personal investments and other information of a confidential nature of the client.

5. A stock-broker shall not encourage sales or purchases of securities with the sole object of generating brokerage or commission. He shall not furnish false or misleading quotations or give any other false or misleading advice or information to the clients with a view of inducing him to do business in particular securities.

6. A stock-broker shall not deal or transact business knowingly, directly or indirectly or execute an order for a client who has failed to carry out his commitments in relation to securities with another stock-broker.

7. A stock-broker, when dealing with a client, shall disclose whether he is acting as a principal or as an agent and shall ensure at the same time that no conflict of interest arises between him and the client. In the event of a conflict of interest, he shall inform the client accordingly and shall not seek to gain a direct or indirect personal advantage from the situation and shall not consider clients' interests inferior to his own.

8. A stock-broker shall not make a recommendation to any client who might be expected to rely thereon... unless he has reasonable grounds for believing that the recommendation is suitable for such a client upon the basis of the facts, if disclosed by such a client as to his own security holdings, financial situation and objectives of such investment.

9. A stock broker or any of his employees shall not render, directly or indirectly, any investment advice about any security in the publicly accessible media, whether real-time or non-real-time, unless a disclosure of his interest including the interest of his dependent family members and the employer including their long or short position in the said security has been made.

10. A stock-broker should have adequately trained staff and arrangements to render fair, prompt and competence services to his clients.

Note the first one especially — not refuse to deal with a small Investor merely on the ground of the volume of business involved. Access is a duty, not a commercial choice.

Duty towards other stock-brokers — six obligations

1. A stock-broker shall co-operate with the other contracting party in comparing unmatched transactions... and shall co-operate with other contracting party for prompt replacement of documents which are declared as bad delivery. 2. A stock-broker shall extend fullest co-operation to other stock-brokers in protecting the interests of his clients regarding their rights to dividends, bonus shares, right shares and any other right. 3. A stock-broker shall carry out his transactions with other stock-brokers and shall comply with his obligations in completing the settlement of transactions with them. 4. A stock-broker shall not advertise his business publicly unless permitted by the stock exchange. 5. A stock-broker shall not resort to unfair means of inducing clients from other stock-brokers. 6. A stock-broker shall not neglect or fail or refuse to submit the required returns and not make any false or misleading statement on any returns required to be submitted to the SEBI and the stock exchange.

10.2 Investor grievance

Investors are the backbone of the securities market. Protection of the interests of investors is of paramount importance for the intermediaries, stock exchanges and the regulators.

Grievances may lie against (a) intermediary/broking firm through which it is carrying out the transactions or/and (b) against the company of which it is a shareholder.

The escalation path: in the event of any grievance(s), the investor is first required to approach the concerned intermediary/trading firm/company for settling his/her grievance. If the investor is not satisfied, then he/she can approach the stock exchange(s) of which the broking firm is a member and/or the investor can approach the securities market regulator-SEBI.

10.2.1 Online Dispute Resolution

According to the current system of complaint resolution, any investor having a complaint can first approach the stock exchange for resolution of the complaint and if not satisfied, lodge a complaint with the SCORES. After exhausting these avenues, any complainant who is not satisfied, may opt for the arbitration mechanism of the exchanges.

Stock exchanges and depositories, together known as 'Market Infrastructure Institutions' (MIIs), have a robust and time-bound grievance redressal process.

SEBI has directed the MIIs to establish a common Online Dispute Resolution (ODR) portal. The ODR portal harnesses online conciliation and online arbitration for resolution of disputes arising in the securities markets.

Who may be brought before it: AIFs- Fund Managers · Banker to an Issue and Self-Certified Syndicate Banks · CIS – Collective Investment management company · Commodities Clearing Corporations · Depository Participants · Investment Advisors · InvITs - Investment Manager · Merchant Bankers · Mutual Funds - AMCs · Portfolio Managers · Registrars and Share Transfer Agents · REITs – Managers · Research Analyst · Stock brokers (including Online Bond Platforms & Online Bond Platform Providers).

And service complaints qualify too: listed companies/specified intermediaries/regulated entities OR their clients/investors... may also refer any unresolved issue of any service requests/service-related complaints for due resolution through the ODR portal — including non-receipt/delay of account statement, non-receipt/delay of bills, closure of account/branch, technological issues... improper service by staff, freezing of account, alleged debit in trading account.

Institutional and corporate clients have a choice: they may use the ODR portal OR by harnessing any independent institutional mediation, independent institutional conciliation and/or independent arbitration institution in India. The seat and venue of mediation, conciliation and/or arbitration shall be in India and can be conducted online.

10.2.2 Empanelment

An MII shall empanel one or more ODR Institutions as a service provider. And a separation requirement: MII should ensure that the primary/first ODR Institution to be empaneled with it, is not empaneled as the primary/first ODR Institution with any other MII.

Information collected includes copies of registration certificate, memorandum of association and articles of association/constitutional documents, rules governing conciliation and arbitration, PAN, Legal Entity Identifier number, composition of its board of directors... details of conciliators and arbitrators empaneled by the ODR institution, norms of such empanelment, fees, costs and charges.

10.2.3 The common portal

The MIIs shall, in consultation with their empanelled ODR Institutions, establish and operate a common Online Dispute Resolution Portal.

Its qualities: each MII must empanel institutions capable of undertaking time-bound online conciliation and/or online arbitration (in accordance with the Arbitration and Conciliation Act, 1996 and any other applicable laws) that harness online/audio-video technologies and have duly qualified conciliators and arbitrators.

And it connects to the existing systems: ODR Portal shall establish due connectivity with the SEBI SCORES portal/SEBI Intermediary portal.

Enrolment is effectively automatic: all Market participants in the securities market shall enroll on the ODR Portal within the timelines specified in SEBI circular and shall be deemed to have been enrolled on the ODR Portal at the end such specified timeline.

10.2.4 Initiating the process

Under the new regulations, an aggrieved investor or client must take up his grievance by directly lodging a complaint against the market participant. If the grievance is not resolved satisfactorily, the investor or client may escalate the same directly to MIIs (Exchanges or Depositories) or through the SCORES portal of SEBI. If the grievance is not resolved through these means, the investor or client may initiate the dispute resolution process through the ODR portal.

But the investor need not exhaust every step: alternatively, the investor/client can initiate resolution through ODR portal if the grievance lodged against the market participant was not satisfactorily resolved or at any stage of the subsequent escalations.

And the market participant may start it too: the market participants can also initiate resolution through ODR portal after giving at least 15 days' notice to the investor/client.

10.2.5 Allocation

A complaint/dispute initiated through the ODR Portal will be referred to an ODR Institution empaneled by a MII and the allocation system on a market-wide basis will be a round-robin system.

With a review first: references to ODR Institutions shall be made after a review of such complaint/dispute by the relevant MII with the aim of amicable resolution and such review shall be concluded within 21 calendar days.

Documents the claimant may need to file include a statement explaining the dispute and the nature of transactions, separating delivery-based transaction and squared-off transactions · Contract Notes · Bills issued/received · Copy of the accounts statement given by broker · PAN/GIR No. · Certified copy of the Balance Sheet... showing the dues · Copy of acknowledgement of the latest Income Tax Return · Margin Statement · Member Constituent Agreement · Risk Disclosure Document.

10.2.6 Conciliation

The ODR Institution that receives the reference... shall appoint a sole independent and neutral conciliator from its panel of conciliators. The conciliator shall have relevant qualifications or expertise and should not be connected with or linked to any disputing party.

The timelines: the ODR Institution appoints within 5 days of receipt of reference, and the conciliator shall conduct one or more meeting/s for the disputing parties to reach an amicable and consensual resolution within 21 calendar days (unless extended for a maximum period of 10 calendar days by written or electronic consent of the disputing parties) from the date of appointment.

If it succeeds: the same shall be concluded by a duly executed settlement agreement between the disputing parties. Such an agreement shall be executed and stamped through an online mode.

If it fails:

a. the conciliator should ascertain the admissible claim value of the complaint/dispute that the conciliator determines is payable to the investor/client and notify the disputing parties as well as the ODR Institution and the MII.

b. An investor/client may pursue online arbitration (which will be administered by the ODR Institution which also facilitated the conduct of conciliation) on or after the conclusion of a conciliation process.

c. In case the Market Participant wishes to pursue online arbitration, then the Market Participant must deposit 100% of the admissible claim value with the relevant MII prior to initiation of the online arbitration.

Note the asymmetry — the investor pays nothing to escalate; the market participant must deposit the full admissible claim.

And the deposit can be released early: on an application made by the investor/client... the MII may, from the deposit received, release such amount to the investor/client not exceeding Rs 5,00,000/- (Rupees Five lakhs) — against appropriate undertaking/indemnity/security... to ensure return of the amount so released, in case the arbitration proceedings are decided against the investor/client.

10.2.7 Fees

The fees as stipulated in the SEBI circular may be borne by the MIIs and will be recoverable by them from the concerned Market Participant against whom the complaint/dispute is raised. Such fees shall be borne directly by the concerned Market Participant if it is initiating the dispute process.

And a prohibition: the Market Participant shall not shift the incidence of such fees to the investor/client at any time.

Late fee on conciliation: initiation of conciliation process after six months from the date of transaction/dispute arising will require payment of Rs 1000/- by the initiator of the complaint/dispute (whether such initiator be the investor/client or the Market Participant).

10.2.8 Arbitration

Arbitration, which is a quasi-judicial process, is an alternate dispute resolution mechanism prescribed under the Arbitration and Conciliation Act, 1996.

Appointment: the ODR Institution shall appoint a sole independent and neutral arbitrator from its panel of arbitrators within 5 calendar days of reference and receipt of fees.

Three arbitrators for large claims: in the event that the aggregate of the claim and/or counter-claim amount exceeds Rs 30,00,000/- (Rupees Thirty Lakhs)... the matter shall be referred to an Arbitral Tribunal consisting of three Arbitrators (within 5 calendar days of reference).

The award timelines:

Value of claim and/or counter-claim being in excess of Rs 1,00,000/-... the Sole Arbitrator or Arbitral Tribunal shall conduct one or more hearing/s and pass the arbitral award within 30 calendar days of the appointment.

When the value of claim and/or counter-claim is Rs 1,00,000/- or below... the Sole Arbitrator shall conduct a document-only arbitration process and pass the arbitral award within 30 calendar days — though the arbitrator, for reasons to be recorded in writing/electronically, may grant a hearing to the parties.

Extension is available only above Rs 1 lakh: the tribunal shall be at liberty to extend such time for disputes exceeding claims and/or counterclaims of Rs 1,00,000/-... up to a further period of 30 calendar days... when the matter requires detailed consideration.

If a party does not appear: if parties to the dispute do not provide any representation in the arbitral proceedings, the arbitrator may pass an ex-parte order after giving a notice of 7 calendar days to the concerned non-cooperative party(ies).

After the award: such payment shall be made by the Market Participant within a period of 15 calendar days from the date of the arbitral award (unless such award requires payment sooner). And MII shall provide necessary assistance to the investor/client for enforcement of the arbitral award.

Challenging an award: the party against whom order has been passed, will be required to submit its intention to challenge the award under Section 34 of the Arbitration Act within 7 calendar days in the ODR Portal.

And a limit on delay: in the course of such a challenge, if a stay is not granted within 3 months from the date of the receipt of award, complete adherence to the terms of the arbitral award must be done.

A market participant must fund its own challenge: if the Market Participant wishes to challenge such an arbitral award, then the Market Participant must deposit 100% of the amounts payable in terms of the arbitral award with the relevant MII prior to initiation of the challenge.

10.2.9 Venue and seat

The ODR Institutions shall conduct conciliation and arbitration in the online mode, and the investor/client may also participate... by accessing/utilizing the facilities of Investor Service Centers (ISCs) operated by any of the MIIs.

For an ordinary investor the seat is his home: where the investor resides permanently or, where the investor is not an individual, the place where it is registered in India or has its principal place of business in India, as provided in the relevant KYC documents.

10.2.10 Arbitration fees

Watch the printed figure for the Rs 30–50 lakh slab. The workbook prints the arbitrator's fee as 600000, which is out of line with the slabs either side of it (16,000 below, 1,20,000 above) and looks like a misprint — plausibly 60,000. The workbook does not correct it, so this table reproduces the printed figure; if a question turns on this slab, read its options carefully.

Plus applicable GST, Stamp Duty, etc. on actual outgoings.

Two notes: the Rs 0 – 1 lakh slab will be applicable for service request related disputes also, and fee for panel of arbitrators shall be split into a ratio of 40:30:30 with the higher proportion being payable to the arbitrator writing the arbitral award.

Late fees on arbitration: arbitration initiated after one month of failure of conciliation and up to six months, the fees payable would be double of the non-refundable fees specified in the table. And arbitration initiated after six months by a Market Participant will require payment of, additional fee of 50% of the fees... applicable per additional month of delay.

10.2.11 Market participants' responsibilities

All agreements, contractual frameworks or relationships entered into by Market Participants with investors/clients... shall stand amended or be deemed to incorporate provision to the effect that the parties agree to undertake online conciliation and/or online arbitration.

And their communications must signpost the route: the communications shall clearly specify, the availability of the SCOREs portal and the ODR Portal to the investor/client and that the same could be accessed by such investor/client if unsatisfied with the response (or the lack thereof) of the Market Participant.

Plus training: the Market Participants shall duly train their staff in attending to complaints/disputes and in handling the references arising from the SCOREs portal or the ODR Portal.

10.3 When a broker defaults

Steps carried out by the Stock Exchange:

Circular is issued to inform about declaration of Stock Broker as Defaulter. Information of defaulter stock broker is disseminated on Stock Exchange website. Public Notice is issued informing declaration of a stock broker as defaulter and inviting claims within specified period. Intimation to clients of defaulter stock brokers via emails and SMS for facilitating lodging of claims within the specified period.

And available on the website: norms for eligibility of claims for compensation from IPF · claim form for lodging claim against defaulter stock broker · FAQ on processing of investors' claims · provision to check online status of client's claim.

A transparency requirement: all the Stock Exchanges/Depositories/Clearing Corporations shall disclose on their websites, the data on complaints received against them and redressal thereof, latest by 7th of succeeding month.

10.4 Investor Protection Fund

The Central Government, vide notification No. F. No. 14/4/SE/85 dated August 22, 1985, has stipulated the setting up of the Investor Protection Fund (IPF) by Stock Exchanges.

Its purpose: this fund should take care of legitimate investment claims which are not of speculative nature of the clients of defaulting member(s).

It is a fund established and maintained by the Exchanges with an aim to protect the interests of the clients of the trading members of the Exchange, who may have been declared defaulters or who may have been expelled, and it shall be administered by way of a Trust created for the purpose.

Contributions to the IPF:

a) 1% of the listing fees received, on a quarterly basis. b) 100% of the interest earned on the 1% security deposit kept by the issuer companies at the time of the offering of securities for subscription to the public. c) Penalty collected by stock exchanges from Trading Members (TMs) for deficiency in modification of client code. d) Penalty collected... for default in pay-in for certain trades during periodic call auction for Illiquid scrips. e) Penalties collected... from their listed companies for non-compliance with various requirements of the SEBI (Listing Obligation and Disclosure Requirements) Regulations 2015. f) Penalty collected from TMs for default in pay-in by an investor in an Offer For Sale (OFS) transaction – 10% of the order value. g) Contribution towards the IPF based on the transaction charges collected from the members. h) At least 70% of interest or income received out of any investments made from the IPF. i) Any other contribution as may be specified by SEBI.

How income is applied: at least 70% of interest or income from IPF received every year shall be ploughed back to IPF; 25% can be utilised for promotion of investor education and investor awareness.

Review: the stock exchanges and depositories shall conduct half-yearly review (by end of March and September every year) to ascertain the adequacy of the IPF corpus.

Who can claim: the claims received against the defaulter TMs during the specified period shall be eligible for compensation from the IPF. And where the clients have dealt through the authorized persons of the defaulting TM, registered with the stock exchange, such clients will also be eligible.

Two exclusions: the claims of the investors or clients arising out of speculative transactions shall not be eligible for compensation from the IPF. And any claim received after three years from the date of expiry of the specified period may be dealt with as a civil dispute.

The process: once a TM has been declared defaulter, the claim(s) shall be placed before the Member Core Settlement Guarantee Fund Committee (MCSGFC) for sanction and ratification. MCSGFC's legitimate claims shall be sent to the IPF Trust for immediate disbursement.

And a cap: the stock exchanges shall fix suitable per investor compensation limits, in consultation with the IPF Trust and SEBI, with such a compensation... not more than the maximum amount fixed for a single claim of an investor.

Disclosure: the Stock Exchange will disclose the corpus of the IPF on its website and update the same on a monthly basis.

10.5 Power of Attorney and the DDPI

PoA is invariably obtained from the investor as part of the KYC and account opening process. Such PoA executed by clients has further found to have been misused by the stock brokers by taking authorization even for activities other than activities specified in SEBI circular.

SEBI's reiteration:

I. PoA is optional and should not be insisted upon by the stock broker/stock broker depository participant for opening of the client account.

II. PoA executed in favour of stock broker... shall be utilized:

a. For transfer of securities held in the beneficial owner accounts of the client towards Stock Exchange related deliveries/settlement obligations arising out of trades executed by clients on the Stock Exchange through the same stock broker. b. For pledging/re-pledging of securities in favour of trading member (TM)/clearing member (CM) for the purpose of meeting margin requirements. c. For limited purpose to apply for various products like Mutual Funds, Public Issues (shares as well as debentures), rights, offer of shares, tendering shares in open offers etc.

III. For limited purpose to transfer of funds from the bank account(s) of the clients for: meeting the settlement obligations... /margin requirements · recovering any outstanding amount due from the client(s) · meeting obligations arising out of the client subscribing to such other products/facilities/services · towards monies/fees/charges, etc. due to the Stock Broker/Depository Participant.

IV. All off-market transfer of securities shall be permitted by the Depositories only by execution of Physical Delivery Instruction Slip (DIS) duly signed by the client himself or by way of electronic DIS.

The DDPI

In order to make the process more transparent and simpler, the two conditions as specified in paragraphs II (a) & (b)... is made part of a separate document viz. 'Demat Debit and Pledge Instruction' (DDPI), under which the clients shall explicitly agree to authorize the stock broker... to access their BO account for the limited purpose of meeting pay-in obligations for settlement of trades executed by them.

The DDPI shall serve the same purpose of PoA and significantly mitigate the misuse of PoA. The use of DDPI shall be limited only for the two purposes as mentioned in paragraph II (a) & (b).

The client keeps alternatives: the client may use the DDPI or opt to complete the settlement by issuing physical Delivery Instruction Slip (DIS) or electronic Delivery Instruction Slip (eDIS) themselves.

And PoA is displaced for those two purposes: with the implementation of this circular, PoA shall no longer be executed for the conditions specified in paragraph II (a) & (b).

10.6 KYC and risk disclosure

The account opening kit

1) Client Account Opening Form which is in two parts. a) Know Your Client (KYC) form capturing the basic information about the client... and b) Additional Document capturing additional information about the client related to trading account. 2) Document stating the Rights & Obligations of stock broker and client for trading on Exchanges. 3) Uniform Risk Disclosure Documents (RDD) for all segments/Exchanges detailing risk associated with dealing in the securities market. 4) Guidance Note detailing Do's and Don'ts for trading on Exchanges for the education of the investor. 5) Document describing the Policies and Procedures of the stock broker. 6) A tariff sheet specifying various charges, including brokerage, payable by the client.

KYC

KYC is an acronym for "Know your Client", a term commonly used for Customer Identification Process. It entails verification of identity and address, financial status, occupation and such other personal information as may be prescribed.

Its place in the wider framework: Know Your Customer (KYC) and Customer Due Diligence (CDD) policies as part of KYC are the foundation of an effective Anti-Money Laundering process. The KYC process requires every SEBI registered intermediary to collect and verify the Proof of Identity (PoI) and Proof of Address (PoA) from the investor.

The governing law: the Prevention of Money-Laundering Act, 2002, Prevention of Money-Laundering (Maintenance of Records) Rules, 2005, SEBI Master Circular on Anti Money Laundering (AML) dated October 15, 2019.

And PAN is universal: PAN is the sole identification number for all participants transacting in securities market, irrespective of the amount of transactions.

e-KYC: SEBI in consultation with Unique Identification Authority of India (UIDAI) also allows brokers to accept e-KYC service provided by UIDAI as a valid process for KYC verification. The client must authorize the intermediary to access his data through UIDAI system, and the intermediary shall perform verification of the client with UIDAI through biometric authentication (fingerprint or iris scanning).

Technology innovations SEBI has allowed: the eSign mechanism of Aadhaar shall be accepted in lieu of wet signature · online/App based KYC, in-person verification through video · intermediaries may implement their own Application (App) · VIPV (Video IPV) · and an exemption — IPV/VIPV would not be required when the KYC of the investor is completed using the Aadhaar authentication/verification of UIDAI... or documents have been provided through digi-locker or any other source which could be verified online.

Financial documents for derivative clients: the stock broker shall have documentary evidence of financial details provided by the clients who opt to deal in the derivative segment.

The illustrative list: Copy of ITR Acknowledgement · Copy of Annual Accounts · In case of salary income - Salary Slip, Copy of Form 16 · Net-worth certificate · Bank account statement for last 6 months · Copy of Holding statement of de-mat account · Any other relevant documents substantiating ownership of assets · Self-declaration.

Note that this is required for derivative clients specifically — for others the broker obtains documents in accordance with its risk management system.

Risk categorisation

Members must categorize client as Low Risk, Medium Risk and High Risk based on the due diligence or KYC documents.

Low risk clients are those who have a respectable social and financial standing and transactions and dealings are satisfactory with timely payment and delivery. Medium risk clients are generally those who indulge in speculative transactions in excess of their known sources of income. High risk clients are those with a history of default and their financial status is suspect.

The parameters: location of client, nature of business activity, volume and value of turnover, nature of transaction, manner of payments.

Cases needing enhanced due diligence: (1) Non-face to face client (2) Clients with multiple accounts in similar names and large number of accounts having common parameters such as common partners/directors/promoters/address/email address/telephone numbers or authorized signatory (3) Unexplained transfers between such multiple accounts (4) Unusual activity compared to past transactions and use of different accounts by client alternatively (5) Sudden activity in dormant accounts.

KRA and CKYC

All members have to be registered with any one or more KRAs registered by SEBI as per the SEBI KRA Regulations 2011.

The upload deadline: a new client can be allowed to start trading/dealing on the exchange platforms through the member as soon as the client is registered by completing the necessary KYC documentation process. However, the Member shall be under obligation to upload KYC details with proper authentication on the system of the KRA, within 10 days of receipt of the KYC documents from the client.

Trading may begin at once; the upload has ten days.

And the data may not be exploited: the member shall not use the KYC data of a client obtained from the KRA for purposes other than it is meant for; nor shall it make any commercial gain by sharing the same with any third party including its affiliates or associates.

Responsibility stays with the member: the Member shall have the ultimate responsibility for the KYC of its clients, by undertaking enhanced KYC measures commensurate with the risk profile of its clients.

CKYC — an initiative of the Government of India which aims to have a system which allows investors to complete their KYC only once before interacting with various entities across the financial sector.

**It is managed by CERSAI (Central Registry of Securitization Asset Reconstruction and Security Interest of India), which is authorized by Government of India to function as the Central KYC Registry (CKYCR) — acting as centralized repository of KYC records of investors in the financial sector with uniform KYC norms and inter-usability of the KYC records across the sector.

It needs extra data: CKYC requires additional information (for e.g. - investor's maiden name, mother's name, FATCA information etc.).

Its coverage widened: initially, CKYC is applicable only to Individuals (both Resident Individuals and Non-Resident Individuals (NRIs)), and then trading members required to upload the KYC records of LE accounts opened on or after April 01, 2021 on to CKYCR.

Accessibility

The Hon'ble Supreme Court of India in a judgement dated April 30, 2025, emphasized the need for easy access to financial services for persons with disabilities. Accordingly, intermediaries dealing in derivatives must ensure that the process of digital KYC is accessible to persons with disabilities.

Intermediaries shall ensure that:

An account can be opened with the signature of a guardian eKYC is available for persons with disabilities eKYC requires the applicant to blink his/her eyes as proof of liveliness. A blind person who cannot perform this "proof of liveliness test" should not be denied benefits of eKYC. For such investors, intermediaries may use alternate parameters such as facial expressions, nodding of head, client showing OTP while being clearly visible on screen, real time video recording and displaying copies of documents on the screen.

UCC and social media

In 2001, SEBI made it mandatory for brokers to use unique client codes for all clients, mapped with the PAN number of the client, provided to the exchange before entering into any trade for the client — and if the broker fails to register the unique client code with the Exchange, he is liable to be penalized.

On social media: regulated entities and their agents shall prominently disclose their registered name and registration number on the home page of their social media handles as well as at the beginning of each of the videos/content (which relate to the securities market) uploaded by them — so that their securities market-related content can be clearly distinguished from that of unregistered persons.

10.6.2 Risk disclosure

It is very important that client should undertake transactions only if understand the nature of the relationship into which you are entering and the extent of their exposure to risk.

Trading in Equity shares, derivatives contracts have varying element of risk and is generally not an appropriate avenue for someone of limited resources/limited investment and/or trading experience and low risk tolerance.

And: client is solely responsible for adverse consequences or loss while trading on stock Exchanges. Client should be aware that there can be no guarantee of profits or no exception from losses.

Hence: before onboarding client, member should ensure that the client signs a Risk Disclosure Document. By signing, client agrees that he is aware of all the risks involved in derivatives trading.

The RDD must cover: a. Price Fluctuation/Market Risk · b. Macroeconomic scenarios leading to unexpected price movement arising out of foreign exchange movement, government/central bank policy, global scenario's · c. Sudden liquidity dries down · d. Basis risk vis-à-vis spot prices/rates · e. Risks of position remaining unhedged · f. Risk in short positions in options · g. Broker's credit risk i.e., Counterparty risk · h. Risks arising out of technical snags, operational issues or technology related issues · i. Other penalties which may arise due to open position limit breaches or margin short fall.

10.6.3 The six risks in this market

Market Risk: Market risk is the risk of losses on financial investments caused by adverse movement of currency prices.

Liquidity Risk: there may be a risk of lower liquidity in some derivatives contracts as a result, client order may only be partially executed, or may be executed with relatively greater price difference or may not be executed at all.

Leverage Risk: the amount of margin is small relative to the value of the derivatives contract, so the transactions are 'leveraged'... provides the possibility of great profit or loss in comparison with the margin amount.

Execution Risk: there is risk that the buy or sell order placed in ETCD may not get executed at the desired price due to higher price volatility or due to type of order place. This may result in slippages.

Basis risk: the potential risk that arises from mismatches in a hedged position. Basis risk occurs when a hedge is imperfect, so that losses are not exactly offset by the hedge.

Its two sources, worked out: you need to hedge an exposure of USD 9500, which requires the futures contracts of 9500/1000 = 9.5. Since we can buy or sell only in integral multiples, we need to buy or sell either nine or ten contracts. The former leads to under-hedging and the latter, to over-hedging. And the derivatives contract expires on every Friday day of the week or two working days prior to the last business day of the expiry month. If the exposure to be hedged has maturity of some other day in the month, there will be mismatch in the maturity.

Plus a third: the basis risk may also arise in case the price movement in derivatives contract is not in proportionate to price movement in underlying asset.

Risk due to cash settlement: current ETCD contracts are cash settled, leads to imperfect hedging or arbitrage.

10.6.4 Suspicious Transaction Reporting

SEBI Intermediaries including brokers shall monitor transactions of the client to ensure that those are not suspicious from money laundering or tax evasion point of view.

Examples given: reversal trade, profit transfer trades or trades associated with dabba trades.

FIU is a separate intelligence arm under finance ministry, and the brokers are expected to report such transactions to FIU through online mechanism provided by FIU.

The duty is the broker's own: though, the Exchange through its surveillance mechanism may raise a suspicion about a client's transactions, it is the duty of the concerned broker to identify those suspicious transactions through its regular monitoring and report them to FIU. And members should not depend solely upon the direction from Exchanges' surveillance mechanism but are required to have their own robust controls and procedures.

Tipping off is illegal: the brokers are not supposed to inform the client about this reporting, as it will lead to tipping-off information to the client, which is illegal and not allowed.

The deadlines: the Suspicious Transaction Report (STR) shall be submitted within 7 days of arriving at a conclusion that any transaction, whether cash or non-cash, or a series of transactions integrally connected are of suspicious nature.

And: the Non-Profit Organization Transaction Reports (NTRs) for each month shall be submitted to FIU-IND by 15th of the succeeding month.

With a record requirement: the Principal Officer shall record his reasons for treating any transaction or a series of transactions as suspicious. It shall be ensured that there is no undue delay in arriving at such a conclusion.