Don't want Paytm-like contamination in stock markets, says Sebi chief

Decision on mandatory ASBA for secondary market soon

The Securities and Exchange Board of India (Sebi) opposes delegating the responsibility of conducting know-your-client (KYC) formalities to individual entities due to fears of “Paytm-like contamination”.

In response to a question about centralising KYC across the financial system, Sebi Chairperson Madhabi Puri Buch said, “The current KYC registration agency (KRA) system is widely acknowledged and robust. If you have a validated KYC by a KRA, you don’t need to repeat the KYC process in the capital markets.”

KRA is a Sebi-regulated body responsible for conducting and maintaining KYC records within the capital market ecosystem.

A long-pending proposal seeks to implement a similar structure across the entire financial market ecosystem, including banks, insurance companies, and capital market intermediaries.

The Sebi chief hinted that this proposal would only be feasible with a KRA-like system. Sebi is not in favour of diluting KYC norms by allowing individual intermediaries to empanel new investors.

“This is why we have said that we will not permit Paytm-type contamination in our market. We all saw what happened with Paytm. Since the banking system lacks a KRA-type system, the problem with Paytm stays with Paytm. It does not spread to other banks. However, if we allowed Paytm into our system without a KRA, it would contaminate the entire system. We cannot allow that,” she explained at an event at the National Stock Exchange.

“We will always have our KRA sitting in the middle to ensure that things are validated. Otherwise, any mischievous player could come in and contaminate the entire system,” she added.

On January 31, the Reserve Bank of India imposed restrictions on Paytm Payments Bank due to multiple lapses, including irregularities in the KYC process.

The Sebi chief also mentioned that the regulator will soon consider mandating large brokers to offer block facilities, or application supported by blocked amount (ASBA), for the secondary market. Currently, this framework is optional and not provided by any of the major brokers.

“It has been some time. We should address this in our next board meeting. We will consider making it mandatory for the qualified stockbrokers,” said Buch.

Under the block facility, also known as ASBA, investors can block funds in their bank accounts, which will only be debited upon trade confirmation. On being mandated, this facility will be available for the equity cash segment.

The move to ASBA in the secondary market is expected to benefit investors by Rs 2,800 crore. This mechanism has already been successfully implemented in the primary market.