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INDUSTRY
Sebi's penalty on research analyst triggers KYC compliance
fears
Neha Joshi 3 min read 30 Oct 2024, 04:31 PM IST
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Sebi-registered intermediaries are required to comply with 2023 regulations for KYC registration.
(PTI)
https://www.livemint.com/industry/sebi-penalty-on-research-a pliance-fears-11730274841021.html?giftCode=6a-25521872b09 11/1/24, 11 44 AM
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SUMMARY
Research analyst Arun N was fined ₹7 lakh by Sebi for not conducting proper KYC and
misleading clients about returns. While analysts say there is regulatory ambiguity on
KCY, legal experts said they are expected to comply with the requirement.
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The market regulator’s recent penalty on research analyst Arun N has left his peers
worried as they fear that the requirement of adequate know-your-customer checks would
be a compliance challenge.
On 24 October, the Securities and Exchange Board of India (Sebi) fined Arun N ₹7 lakh for
misleading clients by promising assured returns and failing to conduct KYC.
KYC is an unclear area as there is no clarity on whether analysts need to verify client
credentials, a senior research analyst told Mint on the condition of anonymity. “The
regulator may issue a circular clarifying the specifications of KYC and timelines."
Sebi-registered intermediaries are required to comply with 2023 regulations for KYC
registration. However, there is no specific provision for research analysts to maintain
records of client identification and services provided. In August 2024, Sebi proposed that
research analysts also follow KYC procedures for their fee-paying clients and maintain
records. But this is still under discussion.
The case of Arun N
Sebi began investigating Arun, a registered research analyst, in March to assess
compliance with regulations for the period between 1 April 2022 to 29 February 2024.
Sebi suspected he violated rules by outsourcing KYC activities and promising assured
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returns.
Read more: Mutual funds develop a sweet tooth, more than
double sugar stock purchases
During its probe, Sebi found that Arun onboarded clients through Gap-up, a Rigi-owned
Telegram-based forum, where investors received trade advice from Sebi-registered
experts. While he collected names, mobile numbers and emails from most of his clients,
Arun admitted to not conducting any direct KYC and instead relied on Gap-up for client
onboarding and outsourced his core responsibilities.
Sebi concluded that Arun violated its master circular specifying KYC requirements,
resulting in a penalty of ₹2 lakh, part of the overall fine of ₹7 lakh.
Arun N did not respond to Mint’s queries sent to him through LinkedIn.
Violation of KYC regulations
Sebi’s order underscores increased scrutiny over the use of third-party platforms,
particularly for client onboarding and payment processing, said Ravi Prakash, head of the
litigation team at law firm Corporate Professionals.
He clarified that Sebi has not discouraged third-party verification of KYC as it is not
considered a core activity for research analysts. Many intermediaries across the industry
use third-party verification platforms like CERSAI for KYC purposes, he said.
The lawyer, who represented several analysts, said the regulator expected intermediaries
to conduct sample checks periodically to ensure the integrity and accuracy of KYC
records. “Sebi could issue additional circulars to clarify specific KYC requirements for
intermediaries, even though numerous circulars have already been released on the
subject."
But Prakash said that if “there is an account-based relationship" between an analyst and
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the client, the KYC is required. But if the analyst is only engaging in public appearances
and has no account-based relationship, KYC may not be mandatory, he said.
According to Anand K. Rathi, co-founder of MIRA Money, Sebi-registered research
analysts are required to conduct KYC for onboarding clients, preferably without
outsourcing this activity, to make appropriate recommendations to clients.
Read more: Why this rural India-focused RIA wants to build an
account aggregator platform
Sebi’s action served as a “serious caution" for all research analysts, said Sangeeta
Jhunjhunwala, partner at Khaitan Legal Associates, and demonstrated that failure to
perform KYC can lead to financial penalties, legal repercussions, reputational damage, and
even suspension or cancellation of their licence. “Repeated KYC failures could directly
impact the RA’s business by restricting access to Sebi registration privileges, possibly
disqualifying them from client-facing roles within the regulated market."
Misleading investors on returns
Sebi penalized Arun with ₹5 lakh for specifically making tacit promises of assured returns
and claims of “75% accuracy".
Instead of specifics, Jhunjhunwala suggested that research analysts could consider
restricting their communication to market trends or generalized insights to attract clients
without breaching Sebi’s advertising code.
Rathi said promising guaranteed returns is a violation for any Sebi-registered
intermediary, not just research analysts. “You could be penalized, barred from marketing
activities, or your licence itself can be revoked."
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