Alerts & Updates 16th Dec 2024

Consultation Paper on the Draft IFSCA KRA Regulations – Analysis and Key Takeaways

Authors

Vinod Joseph Partner | Mumbai
Zaynali Badami Advocate | Gift City

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  • International Financial Services Centre Authority (“IFSCA”) has published a consultation paper dated December 6, 2024 seeking public comments on the Draft IFSCA (KYC Registration Agency) Regulations, 2024 (“IFSC KRA Regulations”), which sets out a framework for Know Your Customer Registration Agencies (“KRAs”) to operate in an International Financial Services Centre (“IFSC”). The Indian domestic securities market has had the SEBI KYC (Know Your Client) registration agency regulations, 2011 (“SEBI KRA Regulations”) for over 13 years now, and the introduction of the IFSCA KRA Regulations is a welcome step to address inefficiencies in the Know-Your-Customer (“KYC”) process within GIFT City, the only IFSC currently in existence. Absence of a centralised KYC records registry leads to inefficiencies, with clients having to undergo repetitive KYC processes for multiple regulated entities. The IFSC KRA Regulation aims to establish a centralized platform for streamlined KYC verification, reducing duplication, enhancing compliance, and promoting interoperability with SEBI KRAs and international best practices.

    The following are the salient features of the proposed IFSC KRA Regulations and an analysis of how they compare with the SEBI KRA Regulations:

  • Eligibility Criteria

    The IFSC KRA Regulations allow (i) wholly owned subsidiaries of recognized stock exchanges, (ii) depositories, and (iii) SEBI- registered KRAs in India or in foreign jurisdictions to be eligible to be registered as a KRA. The applicant must also have a minimum net worth of USD 1 (one) million. The SEBI KRA Regulations limit the eligibility to domestic entities and has a higher net worth requirement of INR 25,00,00,000 (Rupees Twenty-Five Crore).

  • Governance Requirements

    Just like the SEBI KRA Regulations, the IFSC KRA Regulations requires the KRAs to appoint a Compliance Officer (“CO”) for monitoring compliance with applicable laws, regulations, and guidelines. . Under the IFSC KRA Regulations, a KRA must also have Principal Officer (“PO”) who has at least five years of experience in financial markets. There are no references to a PO under the SEBI KRA Regulations. The IFSC KRA Regulations require the PO and the CO to be based in the IFSC.

  • Grievance Redressal

    Just like the SEBI KRA Regulations, the IFSCA KRA Regulations also emphasizes the importance of grievance redressal as a critical aspect of its regulatory frameworks. However, the IFSCA KRA Regulations differs from the SEBI KRA Regulations in structure, timelines, and specific procedures. The SEBI KRA Regulations, provide for a strict timeline of 21 (twenty-one) days for grievance redressal, whilst no such time-limit has been prescribed in the proposed IFSC KRA Regulations. Further, the SEBI KRA Regulations also mandate mediation, conciliation, and arbitration, for resolving claims or disputes between KRAs and intermediaries. The IFSCA KRA Regulations do not prescribe mandatory mediation, conciliation, or arbitration.

  • KYC Documents

    Just like the SEBI KRA Regulations, the IFSCA KRA Regulations also mandate that the KYC data must be stored electronically, ensuring that the data is safeguarded and easily retrievable when required. The proposed IFSCA regulations specify the use of appropriate data encryption and other cybersecurity measures to safeguard sensitive information. The KYC documents of the clients must be kept for a minimum period of at least 5 (five) years after the business relationship has ended with the client. As in the case of the SEBI KRA Regulations, the IFSC KRA Regulations also require the KYC documents to be backed up at a different location.

  • Registry

    The IFSCA KRA Regulations specify that a KRA in the IFSC will be connected to any central KYC registry authorised by the Central Government for the purpose of collation and sharing of the KYC information in the financial sector. The IFSCA KRA Regulations specifically refer to the Central KYC Records Registry (“CKYCRR”). However, the IFSCA regulations specifically exempt foreign nationals transacting in the IFSC from the requirement of storing, safeguarding, and retrieving their KYC records in the CKYCRR under the Prevention of Money Laundering (Maintenance of Records) Rules, 2005. Though foreign clients are not mandated to store their KYC records in the domestic CKYCRR, they are required to comply with the IFSCA’s KYC framework.

  • ELP Comments
    • The IFSC KRA Regulations require the PO and the CO to be based in the IFSC. This is in line with the IFSCA’s determination to persuade entities regulated by the IFSCA to have competent people on the ground in GIFT City. It also aligns with the IFSCA’s goal to create a distinct regulatory ecosystem for IFSC operations and facilitate close supervision of the KRA’s activities within GIFT City.
    • The SEBI KRA Regulations have a strict timeline for grievance redressal, but the IFSC KRA Regulations do not. Though KYC and compliance are also at the heart of the IFSCA KRA Regulations, the absence of fixed timelines shows that greater emphasis is placed on offering flexibility to KRAs operating within the IFSC.

    We hope you have found this information useful. For any queries/clarifications please write to us at insights@elp-in.com  or write to our authors:

    Vinod Joseph, Partner – Email – vinodjoseph@elp-in.com

    Zaynali Badami, Advocate – Email – zaynalibadami@elp-in.com

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.

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