Have you ever wondered why stock brokers ask for your KYC details while opening a demat account?
Well, to maintain your record, but apart from this your KYC (Aadhar & PAN Card) details are required to ensure the security of your funds, transactions, and trading activities, and further ease the process of filing taxes.
Now just like you submit your KYC details, the broker needs to update it to the Central KYC Registry for security reasons and to help SEBI to keep track of all kinds of trading activity of each client.
But what if your broker does not follow the compliance? There are chances that your KYC details get misused. Right?
A similar case came into the picture when SEBI underwent an inspection of one of the stock brokers Jainam Broking Limited between October 4-5, 2023.
SEBI checked & inspected activities of the broker between the period of April 01, 2023, to July 31, 2023.
In their inspection, the regulatory body came across that the broker has violated multiple compliance-related issues including updating of KYC data, which are direct violations of the Prevention of Money Laundering (PML) Rules
What Regulatory Violations Did SEBI Raise?
Jainam Broking Limited, registered as a stockbroker with SEBI since 2004 and is found violating PML rules, including:
- Delayed KYC Updates: Jainam Broking failed to update the KYC details of 1,501 clients within the stipulated 10-day period on the Central KYC Registry (CKYCR).
- Non-Updating of KYC Records: The company completely neglected to update KYC records for 200 clients.
What Action Did SEBI Take?
On finding a violation of the above regulation, SEBI issued a Show Cause Notice to Jainam Broking. But even after giving multiple opportunities to the broker to file their response, SEBI didn’t receive any till July 2024.
Finally, in the response, the stock broker accepted that the KYC of 200 clients had not been updated however 15 accounts were closed, 1 changed to major, and 30 were dormant and corrective measures had been taken in the case of 96 accounts.
However, for the lapses in updating the KYC details, the broker was found guilty, and hence under section 15HB of the SEBI act, it imposed the penalty of ₹3,00,000/-.
What Retail Investors Must Check Before Opening a Demat Account with a Broker?
While opening a demat account with a stock broker, what’s the first thing you check?
Most of you would probably say – Brokerage, Right?
No doubt, brokerage is a crucial factor as it significantly impacts your overall gains and losses in trades. But have you ever considered checking for compliance with regulations?
Opening a demat account with a broker that doesn’t follow regulatory guidelines can lead to serious trouble.
Consider the above case of Jainam Broking Limited, which failed to provide and update the KYC details of its clients. This lapse could have led to major issues like money laundering.
Imagine your account being used for fraudulent activities. This could expose you to operational risks and even potential legal issues.
Therefore, it’s essential to consider these parameters, understand your rights, and choose broking services wisely.
