Basic Contents of Audit Report
B. Stock Broking & Depository Participants
3. Stock Broking Technical Peculiarities
3.1 Client Registration
3.1.2 Client Account Opening Form & Documentation
SEBI Circular No. MIRSD/ SE /Cir-19/2009 dated December 3, 2009 on Dealings between a client and a stock broker (trading members included) has laid down the requirements governing client registration document:
Client
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a. The stock broker to make available a folder /book containing all the documents required for registration of a client.
b. The folder/book shall have an index page listing all the documents contained in it and indicating briefly significance of each document.
c. All the documents in both the mandatory and the non-mandatory parts shall be printed in minimum font size of 11.
d. The stock brokers having own web-sites shall display all the documents executed by a client, client’s position, margin and other related information, statement of accounts, etc. in the web-site and allow secured access by way of client-specific user id and password.
e. No term of the agreement, other than those prescribed by SEBI, shall be changed without the consent of the client. Such change needs to be preceded by a notice of 15 days.
f. The stock broker shall frame the policy regarding treatment of inactive accounts which should, inter-alia, cover aspects of time period, return of client assets and procedure for reactivation of the same. It shall display the same on its web site, if any.
g. Further, the folder/book shall have two parts:
i. Mandatory ii. Non-mandatory.
a. Mandatory Documents
The mandatory section of the account opening kit to include only the following:
- Account Opening Form
- Rights and Obligation Document - Risk Disclosure Document - Policies and Procedures
- Guidance note dealing with Dos and Donts - Tariff sheet
SEBI has, vide its Circular No. CIR/MIRSD/16/2011, dated August 22, 2011, devised standard formats for the Client Registration. In order to bring about uniformity in documentary requirements across different segments and exchanges and to avoid duplication and multiplicity of documents, SEBI has formulated uniform set of documents which are listed below:
a. Account Opening Form
KYC Form- Document captures the basic information about the constituent and an instruction/check list. It also captures the additional information about the constituent relevant to trading account and an instruction/check list.
b. Rights and Obligations
Document stating the Rights & Obligation of the stock broker/trading member, sub-broker and client for trading on exchanges (including additional rights & obligations in case of internet/wireless technology based trading).
c. Risk Disclosure Document(RDD)
Document detailing risks associated with dealing in securities market.
43 d. Policies and Procedures
Document describing significant policies and procedures of the stock broker (to be added by the stock broker).
e. Guidance note
Document detailing do’s and don’ts for trading on exchange, for the education of the investors.
f. Tariff sheet
Document detailing the rate/amount of brokerage and other charges levied on the client for trading on the stock exchange(s) (to be added by the stock broker).
Checklist for filling KYC form are as listed below:
A- Important Points:
- Self-attested copy of PAN card is mandatory for all clients, including Promoters/Partners/Karta/Trustees and whole time directors and persons authorized to deal in securities on behalf of company/firm/others.
- Copies of all the documents submitted by the applicant should be self-attested and accompanied by originals for verification. In case the original of any document is not produced for verification, then the copies should be properly attested by entities authorized for attesting the documents, as per the below mentioned list.
- If any proof of identity or address is in a foreign language, then translation into English is required.
- Name & address of the applicant mentioned on the KYC form, should match with the documentary proof submitted.
- If correspondence & permanent address are different, then proofs for both have to be submitted.
- Sole proprietor must make the application in his individual name & capacity.
- For non-residents and foreign nationals, (allowed to trade subject to RBI and FEMA guidelines), copy of passport/PIO Card/OCI Card and overseas address proof is mandatory.
- For foreign entities, CIN is optional; and in the absence of DIN no. for the directors, their passport copy should be given.
- In case of Merchant Navy NRI’s, Mariner’s declaration or certified copy of CDC (Continuous Discharge Certificate) is to be submitted.
- For opening an account with Depository participant or Mutual Fund, for a minor, photocopy of the School Leaving Certificate/Mark sheet issued by Higher Secondary Board/Passport of Minor/Birth Certificate must be provided.
- Politically Exposed Persons (PEP) are defined as individuals who are or have been entrusted with prominent public functions in a foreign country, e.g., Heads of States or of Governments, senior politicians, senior Government/judicial/ military officers, senior executives of state owned corporations, important political party officials, etc.
B- Proof of Identity(POI)
List of documents admissible as proof of identity
- Unique Identification Number (UID) (Aadhaar)/ Passport/ Voter ID card/ Driving license.
- PAN card with photograph.
- Identity card/ document with applicant’s Photo, issued by any of the following: Central/State Government and its Departments, Statutory/Regulatory Authorities, Public Sector Undertakings, Scheduled Commercial Banks, Public Financial Institutions, Colleges affiliated to Universities, Professional Bodies such as ICAI, ICWAI, ICSI, Bar Council etc., to their Members; and Credit cards/Debit cards issued by Banks.
C- Proof of Address(POA)
- List of documents admissible as proof of address
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- Passport/ Voters Identity Card/ Ration Card/ Registered Lease or Sale Agreement of Residence/ Driving License/ Flat Maintenance bill/ Insurance Copy.
- Utility bills like Telephone Bill (only land line), Electricity bill or Gas bill - Not more than 3 months old.
- Bank Account Statement/Passbook -- Not more than 3 months old.
- Self-declaration by High Court and Supreme Court judges, giving the new address in respect of their own accounts.
- Proof of address issued by any of the following: Bank Managers of Scheduled Commercial Banks/Scheduled Co-Operative Bank/Multinational Foreign Banks/Gazetted Officer/Notary public/Elected representatives to the Legislative Assembly/Parliament/Documents issued by any Govt. or Statutory Authority.
- Identity card/document with address, issued by any of the following: Central/State Government and its Departments, Statutory/Regulatory Authorities, Public Sector Undertakings, Scheduled Commercial Banks, Public Financial Institutions, Colleges affiliated to Universities and Professional Bodies such as ICAI, ICWAI, ICSI, Bar Council etc., to their Members.
- For FII/sub account, Power of Attorney given by FII/sub-account to the Custodians (which are duly notarized and/or apostiled or consularised) that gives the registered address should be taken.
- The proof of address in the name of the spouse may be accepted.
D- In case of Non-Individuals, additional documents to be obtained from non-individuals, over and above the POA &POI as mentioned below: takeover Regulations, duly certified by the company secretary/Whole time director/MD (to be submitted every year).
Photograph, POI, POA, PAN and DIN numbers of whole time directors/two directors in charge of day to day operations.
Photograph, POI, POA, PAN of individual promoters holding control - either directly or indirectly.
Copies of the Memorandum and Articles of Association and certificate of incorporation.
Copy of the Board Resolution for investment in securities market.
Authorized signatories list with specimen signatures.
Partnership Firm Copy of the balance sheets for the last 2 financial years (to be submitted every year).
Certificate of registration (for registered partnership firms only).
Copy of partnership deed.
Authorized signatories list with specimen signatures.
Photograph, POI, POA, PAN of Partners.
Trust Copy of the balance sheets for the last 2 financial years (to be submitted every year).
Certificate of registration (for registered trust only).
Copy of Trust deed.
List of trustees certified by managing trustees/CA.
Photograph, POI, POA, PAN of Trustees.
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HUF PAN of HUF.
Deed of declaration of HUF/ List of coparceners.
Bank pass-book/bank statement in the name of HUF.
Photograph, POI, POA, PAN of Karta.
Authorized signatories list with specimen signatures.
Banks/Institutional Investors
Copy of the constitution/registration or annual report/balance sheet for the last 2 financial years.
Authorized signatories list with specimen signatures.
Foreign Institutional Investors
Copy of the constitution/registration or annual report/balance sheet for the last 2 financial years.
Authorized signatories list with specimen signatures.
Army/Government Bodies Self-certification on letterhead.
Authorized signatories list with specimen signatures.
Registered Society Copy of Registration Certificate under Societies Registration Act.
List of Managing Committee members.
Committee resolution for persons authorized to act as authorized signatories with specimen signatures.
True copy of Society Rules and Bye Laws certified by the Chairman/Secretary.
E- Additional Checks
i. For Dealing in Future & Options Segment:
The stock broker shall have documentary evidence of financial details provided by the clients who opt to deal in the derivative segment. In respect of other clients, the stock broker shall obtain the documents in accordance with its risk management system. In respect of clients trading in derivative segment, the member shall collect documentary evidence for financial information. The illustrative list of documents is as under:
- Bank account statement for last 6 months - Copy of demat account Holding statement.
- Any other relevant documents substantiating ownership of assets.
- Self declaration along with relevant supporting.
ii. Identification of Beneficial Ownership:
SEBI has laid down Guidelines on Identification of Beneficial Ownership vide its circular no.
CIR/MIRSD/2/2013 dated January 24, 2013.
The guideline lay down the additional checks to be performed for non-individual clients in order to ascertain the ultimate beneficial owner.
The guideline is attached as Appendix 1.
46 b. Non-Mandatory Documents
In addition to the above mentioned documents a stock broker may seek voluntary documents from clients in order to ensure smooth operation of the business. However, the non-mandatory
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documents need to be separated and the authorizations from the client sought in non-mandatory document is separate & do have specific consent of the client
The clauses in the non-mandatory part shall not be in contravention of any of the clauses in the mandatory documents, as also the Rules, Regulations, Articles, Byelaws, circulars, directives and guidelines of SEBI and Exchanges. Any such contravening clause shall be null and void.
Few illustrative voluntary documents include:
a. Power of Attorney (POA)
A Power of Attorney (PoA) is executed by the client in favour of the stock broker/stock broker and depository participant to authorize the broker to operate the client’s demat account and bank account to facilitate the delivery of shares and pay-in/ pay-out of funds.
It was observed that the clients were compelled to give irrevocable power of attorney to manage their demat account and bank account so that the client is able to pay funds or deliver shares to its broker on time. In some cases, the PoA even allowed the broker to open and close accounts on behalf of the client and to trade on client’s account without the consent of the client.
In order to standardize the norms to be followed by stock brokers/ stock broker and depository participants while obtaining PoA from the clients SEBI has issued a circular prescribing guidelines for execution of Power of Attorney(PoA) by the client in favour of the Stock Broker / Stock Broker and Depository Participant.
Standardizing the norms for PoA must not be construed as making the PoA a condition precedent or mandatory for availing broking or depository participant services. PoA is merely an option available to the client for instructing his broker or depository participant to facilitate the delivery of shares and pay-in/pay-out of funds etc. No stock broker or depository participant shall deny services to the client if the client refuses to execute a PoA in their favour.
The SEBI guideline in this regard are mentioned in Appendix 2 & 3.
b. Running Account Authorisation
Unless otherwise specifically agreed to by a Client, the settlement of funds/securities shall be done within 24 hours of the payout. However, a client may specifically authorize the stock broker to maintain a running account subject to the following conditions:
- The authorization shall be dated.
- The authorization shall be signed by the client only and not by any authorised person on his behalf or any holder of the Power of Attorney.
- The authorization shall contain a clause that the Client may revoke the authorization at any time.
- The client shall bring any dispute arising from the statement of account or settlement so made to the notice of the broker preferably within 7 working days from the date of receipt of funds/securities or statement, as the case may be.
- For the clients having outstanding obligations on the settlement date, the stock broker may retain the requisite securities/funds towards such obligations and may also retain the funds expected to be required to meet margin obligations for next 5 trading days, calculated in the manner specified by the exchanges.
- The actual settlement of funds and securities shall be done by the broker, at least once in a calendar quarter or month, depending on the preference of the client. While settling the account, the broker shall send to the client a ‘statement of accounts’ containing an extract from the client ledger for funds and an extract from the register of securities displaying all receipts/deliveries of funds/securities. The statement shall also explain the retention of funds/securities and the details of the pledge, if any.
- Such periodic settlement of running account may not be necessary:
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a. for clients availing margin trading facility as per SEBI circular
b. for funds received from the clients towards collaterals/margin in the form of bank guarantee (BG)/Fixed Deposit receipts (FDR).
- The stock broker shall transfer the funds / securities lying in the credit of the client within one working day of the request if the same are lying with him and within three working days from the request if the same are lying with the Clearing Member/Clearing Corporation.
- There shall be no inter-client adjustments for the purpose of settlement of the ‘running account’.
- These conditions shall not apply to institutional clients settling trades through custodians. The existing practice may continue for them.
The FAQ in this regard are in Appendix 4.
c. Authorization for Electronic Contract Notes
The stock broker may issue electronic contract notes (ECN) if specifically authorized by the client subject to the following conditions:
− The authorization shall be in writing and be signed by the client only and not by any authorised person on his behalf or holder of the Power of Attorney.
− The email id shall not be created by the broker. The client desirous of receiving ECN shall create/provide his own email id to the stock broker.
− The authorization shall have a clause to the effect that that any change in the email-id shall be communicated by the client through a physical letter to the broker. In respect of internet clients, the request for change of email id may be made through the secured access by way of client specific user id and password.