Know Your Depositor

A broker has to know who its client is. A warehouse has to know whose grain that is — and the two questions are not the same.

Goods sitting in an exchange-accredited warehouse are the backing for warehouse receipts, and a warehouse receipt is a document of title that can be endorsed, pledged, auctioned and delivered against a short futures position. If nobody can say who actually owns the pile, the title is worthless and the receipt with it.

Know Your Depositor is the rule that keeps that from happening. It is prescribed by the clearing corporation, and it is the WSP's obligation, not the broker's.

The rule has two limbs, and the second is the one that does the work.

The clearing corporation must ensure that it and the WSP are able, at any point of time, to identify:

1. the depositor of the goods deposited in the registered warehouses, and
2. the actual beneficiary, where the depositor and the beneficiary are different people.

The second limb is the anti-benami provision. Grain deposited by an agent, a commission agent or a financing entity on somebody else's behalf must still trace back to whoever really owns it.

KYD sits inside a wider set of WSP obligations: a compliance officer who declares compliance to the clearing corporation at prescribed intervals, absolute control over the storage facility, segregation of exchange-delivered from non-exchange goods, and the requirement that the WSP accepts goods for deposit only at the instruction of the concerned clearing corporation — after the clearing corporation has run its transparent, time-bound process to identify the warehouse and told the participant where and when to deposit.

So the chain is: client asks the clearing corporation, clearing corporation nominates a warehouse and instructs it, warehouse assays and accepts, warehouse identifies the depositor and the beneficiary under KYD, and the repository issues an electronic negotiable warehouse receipt that the Repository Participant has separately run KYC on.

A Farmer Producer Organisation in Rajasthan deposits 10 MT of mustard seed for delivery against a short futures position. At Rs 5,500 per quintal:

10 MT = 100 quintals
Value = 100 x Rs 5,500 = Rs 5,50,000

The FPO asks the clearing corporation, which nominates a warehouse and instructs it to accept the deposit after assaying. The goods pass quality testing and an eNWR for Rs 5,50,000 of mustard seed is issued.

But the FPO deposited on behalf of 34 member farmers, who collectively own the seed. Under KYD the WSP and the clearing corporation must be able to identify both the depositor (the FPO) and the actual beneficiaries (the farmers) at any time.

Why it matters in rupees: the FPO pledges the eNWR to a bank for a crop loan of Rs 4,00,000. If the FPO later defaults, three parties assert claims on the same Rs 5,50,000 of seed — the pledgee bank, the clearing corporation holding it for delivery against the futures short, and the 34 farmers. KYD is the record that lets the clearing corporation say, without litigation, whose goods those were before any of it happened.

Chapter 7 (Clearing, Settlement and Risk Management), section 7.4.5, in SEBI's warehousing norms for agricultural and agri-processed commodities. Expect an expansion question — KYD is Know Your Depositor — and a distinguishing question separating it from the broker's KYC obligation and from the Repository Participant's KYC on demat account holders.

• KYD is Know Your Depositor, not Know Your Dealer or Know Your Depository. The expansion itself is asked.
• It is a WSP obligation, prescribed by the clearing corporation. Not a SEBI obligation on brokers, and not a WDRA registration condition.
• Depositor and beneficiary are two separate identifications. The rule expressly covers the case where they differ.
• KYD is not KYC. Repository Participants run KYC on depositors opening demat accounts for eNWRs; KYD is about the goods in the shed.
• The WSP accepts deposits only on the clearing corporation's instruction — a depositor cannot simply turn up at an accredited warehouse.
• KYD sits alongside, not instead of, the compliance officer, the 33-times exposure cap and the trading prohibition.