Compliance cannot override the investor’s interest

I have a piece with Parker Karia and Sudiksha Moorthi in today's Financial Express arguing that the Supreme Court went wrong in its recent ruling against Kotak Mutual fund and that the ruling wrongly elevates a timing rule over the very duty it was meant to serve. A regulatory philosophy that says outcomes are immaterial cannot govern actors whose defining legal duty is to produce good outcomes. This will hurt all mutual fund and other fund managers who will veer towards a box ticking exercise even if it hurts investors. Below if the full piece:

 

 

The Supreme Court’s recent decision in the Kotak mutual fund case has caused unease among not only the mutual fund industry, but across all fund managers, and those who owe a fiduciary duty towards their clients. The term “fiduciary duty” can be vague, and varies with the relationship between the person who owes the duty and the person to whom it is owed, but it invariably involves a duty of good faith, trust and honesty. In the specific context of fund managers, it requires them to act in the best interest, and for the benefit of the investors. 

Kotak MF launched six close-ended schemes, which were to mature during April to May 2019. Out of the Rs. 1,625 crore collected by the schemes, approximately Rs. 266 crore was invested in debentures of two Essel Group companies. This was secured by pledging shares of Zee Limited, to the tune of 1.5 times of the schemes’ exposure. When Zee's price collapsed in early 2019 and lenders across the market began invoking their pledges, the cover fell below the agreed level.

At that point, Kotak MF could either enforce its pledge at once, selling a large block of Zee into a falling market and crystallising a loss of approximately Rs. 376 crore for its unitholders, or extend the debentures and pursue an orderly recovery. The former option would have further lowered Zee’s shares, as well as harmed the other lenders, and the latter option, which Kotak MF chose, resulted in profits to the unitholders. 

By extending the debentures, the schemes were not wound up on their maturity dates in April to May 2019, resulting in a breach of the Mutual Fund Regulations. Instead, the unitholders were paid in part, and the balance was paid out by September 2019, about 4-5 months after the schemes should have been wound up. After completing its inquiries, SEBI penalised Kotak MF, its senior management, as well as the Trustees. The Securities Appellate Tribunal, while removing certain directions, largely upheld SEBI’s action, which was then affirmed by the Supreme Court as well.

The ultimate decision taken by Kotak MF and its officers is aligned with their fiduciary duties.

The SC relies on investors’ awareness of risk in investing in securities while arriving at its conclusions, and the obligations on Kotak MF under the regulatory framework. Surprisingly, the apex court has missed the central point that Kotak MF was required to act in the best interest, and for the benefit of its unitholders. In fact, the mutual fund regulations mandate that investments are to be taken in the interest of unitholders. Any fiduciary asked to choose between those outcomes on behalf of the people whose money it manages would choose what Kotak MF chose. That is their job. 

Per the SC, excusing a profitable breach would incentivise the next one, in a progression from profit to greed and from greed to systemic failure. But this reads conduct backwards, from result to motive. In early 2019 no one knew whether the standstill would hold or collapse. The decision had to be taken under uncertainty, on the information then available, as every investment decision is. A fiduciary who picks the course that appears least harmful to investors, and is later proved right, has not acted out of greed. Prudence is measured before the event, not after it. A court cannot call the outcome immaterial and, in the same breath, read culpability out of it.

The deeper flaw is the assumption that compliance and investor protection always run together. The winding-up rule exists to return unitholders their money on the promised date and to stop a closed scheme carrying open-ended risk. If applied to the letter, Kotak MF would have had to sell Zee’s shares in a collapsing market, resulting in the very harm the framework is intended to avoid. The fund's fiduciary duty pulled the other way. When a timing rule and the duty it serves point in opposite directions, the investor protection argument is far from puerile. The harshness of the judgment sends a message: it tells a fiduciary that the safe course is mechanical compliance even where compliance would hurt the investor. A regulatory philosophy that says outcomes are immaterial cannot govern actors whose defining legal duty is to produce good outcomes.

The mutual fund regulations do not contemplate a situation where a promoter-pledge structure collapses 90 days before maturity, because regulations cannot contemplate everything. When the unforeseen happens, we rely on fiduciaries to exercise judgment. Instead, the SC announced that it could not examine the commercial prudence of the decision, and then penalised the decision anyway. It refused to weigh the economics while punishing an economic choice.

Kotak MF used neither, and provided SEBI with limited information until it was asked, days after the first schemes had matured. That may not be ideal, but in the absence of a baby-sitter rule, is not a legal breach. A pathway similar to what was implemented by Kotak, which SEBI introduced in 2018, called side-pocketing, was not available to Kotak as it was prospective. In economic terms, what Kotak did was nearly the same. What Kotak did was act in a regulatory vacuum, implementing a solution the regulator itself recognised in 2018. Given the above, attaching personal responsibility to senior functionaries of the manager and the trustee is also over the top regulation. Outcomes cannot be immaterial when they would exonerate and decisive when they condemn. The rules exist to protect the investor, not the other way round.

16 years of Finsec Law Advisors

 

A breach of limits is not a fraud - SEBI v. Reliance

In Reliance v. SEBI (29 May) the Supreme Court sets aside a Rs. 447 cr disgorgement order. Reg. 2(1)(c) of the anti-fraud regulation of SEBI is so broad that, read literally, even running would qualify. The Court read it down.

A breach of limits is not a fraud. On 29 May, the Supreme Court set aside a Rs. 447 crore disgorgement against Reliance Industries and drew a line under SEBI's habit of dressing up rule-breaches as manipulation. Three points:

 

• Position limits are a disclosure regime. Breach attracts a penalty, not a fraud finding.

 

• Reg. 2(1)(c) is self-contradictory — one limb dispenses with intention, the other requires inducement. The Court read inducement as controlling.

 

• Concentration gives a trader the ability to manipulate. It is not, by itself, manipulation.

 

Judge Posner made the same point in Sullivan & Long v. Scattered Corp. in half a page. Our Reg. 2(1)(c) has taken twenty years and is still arguing with itself.

 

 My piece in today's Financial Express:

 

The Supreme Court has told the securities regulator something it did not want to hear: that breaking a position limit is not the same as committing a fraud. The reasoning in Reliance Industries v. SEBI, decided on 29 May, matters more than the Rs. 447 crore disgorgement order it set aside.

The dispute goes back to November 2007. Reliance Industries, then holding 75 per cent of Reliance Petroleum, decided to sell five per cent of that stake, some 22.5 crore shares, into a market that analysts thought overpriced. To hedge the risk of a price fall, it took short positions of 9.92 crore shares in the November RPL futures. It did so through twelve agent entities, because the client-level position limit set by SEBI's circular of 2001 would not have allowed a single client to hold a position of that size.

 

SEBI's case was that the twelve entities were a device to corner the futures market, that Reliance held up to 93 per cent of the open interest, and that it depressed the settlement price by selling 1.95 crore shares in the closing minutes of 29 November. All of this, the regulator said, was fraud under the Prohibition of Fraudulent and Unfair Trade Practices Regulations. The Securities Appellate Tribunal agreed, by a majority of two to one.

 

The Court's first move was to separate two ideas that SEBI had run together. A position limit is a risk-containment tool. The 2001 circular did not forbid crossing it; it required a trader who crossed it to disclose the excess, and penalised the failure to disclose. Breaching the limit, even through agents, was therefore a disclosure default that attracted a monetary penalty. It was not, on that fact, a fraud. The Court upheld the penalty and set the fraud finding aside.

 

The second move went to the definition of fraud itself. Regulation 2(1)(c) defines fraud to include any act, omission or concealment, whether deceitful or not, that induces another to deal in securities. The Court noticed what practitioners have long known: the definition is self-contradictory. Its first limb dispenses with intention; its second limb requires inducement, which presupposes intention. Read literally, the Court said, the provision is so wide that almost any act in the market could be called a fraud. The court relied on this author’s book to state that by the current definition of fraud, even running would amount to fraud. Faced with that absurdity, the Court read the two limbs together rather than against each other, treating inducement as the controlling element and the words 'whether deceitful or not' as descriptive of the act rather than dispositive of intent.

 

From that the Court drew a disciplined conclusion. Inducement remains a necessary ingredient of fraud, except where manipulation is itself proved so cogently that inducement can be presumed, as the Court held earlier in Rakhi Trading, where the manipulation was patent on the tape. Where inducement is not shown, the regulator carries a higher burden: it must prove a distinct act of price manipulation, not merely a motive or an opportunity. Concentration of positions gives a trader the ability to manipulate. It is not, by itself, manipulation.

 

Applied to the facts, the case collapsed. The futures positions were a genuine, if imperfect, hedge against a real cash-market exposure, and the law has never required a hedge to be perfect. The closing-minute sales were made into an unexplained price spike, at prices in line with what Reliance had accepted earlier in the month, while other participants sold similar quantities in the same window. On these facts, the Court found, fraud rested on suspicion rather than proof.

 

The significance of the judgment lies in what it does to SEBI's enforcement methodology. For years the regulator has treated the breadth of the fraud definition as a licence to convert regulatory infractions into charges of manipulation, because the latter carry disgorgement and a stigma that a fine does not. The Court has now drawn a line. A breach of an exchange rule is to be punished as a breach of an exchange rule. It becomes fraud only when the regulator proves the ingredients of fraud.

 

The Court's instinct here has good company abroad. In Sullivan & Long, Inc. v. Scattered Corp., 47 F.3d 857 (7th Cir. 1995), the legendary law and economics expert, Judge Posner faced a complaint that a broker had committed manipulation on an awesome scale by short-selling more shares of a company than existed. The conduct looked extreme, and the plaintiffs urged that the scale alone proved the wrong. Posner refused to accept the equation. What Scattered had done, he held, was arbitrage, not manipulation: its sales did not push prices away from underlying value but towards it, puncturing a balloon rather than launching one. He similarly found that breach of an exchange rule, may be a violation of that rule, and doesn’t make it a fraudulent position. 

 

There is a lesson for the rule-makers too. The Court was blunt that Regulation 2(1)(c) is a piece of inelegant drafting, and that an enactment with such consequences for the economy should leave no room for doubt. The criticism is fair. A definition that, on its own terms, could catch the innocent and the guilty alike is not really a definition. It is a discretion dressed as a rule.

 

The fraud definition needs rewriting so that it names what it forbids. Until it does, the regulator will keep winning at first instance and losing on appeal. Better to draft the rule clearly than to keep litigating its meaning. The Seventh Circuit took half a page to say what manipulation is and is not; our Regulation 2(1)(c) has taken twenty years and is still arguing with itself. That is a drafting problem, and drafting problems have drafting solutions.

SEBI’s Fix for a Broken Price Discovery

I have a piece with Manas Dhagat in the Financial Express of the 24th June 2026 which discusses discussing price discovery on exchanges. For long-suspended scrips re-listing on Indian exchanges, the call auction has for years produced opening prices that have little to do with value. A base price stuck at Rs. 10 and a narrow dummy band get genuine bids rejected, no equilibrium forms, and the scrip opens into a wall of upper circuits. SEBI's 21 May 2026 consultation paper proposes to fix this: base price tied to two independent valuations, dummy-band flexing made automatic and simultaneous across exchanges and extended through the random closure window, and at least five unique PAN-based buyers and sellers for a valid equilibrium. In our latest piece in the Financial Express, Manas Dhagat and I argue the reform gets the principle right. A price discovery mechanism should get out of the way while the market decides. Its success will turn on execution: the quality of the valuations and the latency of automated flexing. SEBI is not setting the price. It is finally letting the market do so.

The full piece is as below:

A market price is only as good as the interest that produces it. When regulatory design keeps part of the buying or selling interest out of the auction, the resulting price reflects the design, not the security. SEBI’s consultation paper of May 21, 2026 proposes to fix one such design, the call auction window for IPOs and re-listed scrips, which has for years produced opening prices that have very little to do with value.

When a new IPO lists, or a suspended scrip re-lists, a 60-minute Call Auction Session runs from 9:00 AM to 10:00 AM: 45 minutes for order entry, 10 minutes for matching and confirmation, and a 5-minute buffer before normal trading. The order entry phase closes randomly between the 35th and 45th minute, a design intended to deter manipulation.

During the session, there is formally no price band, and only limit orders are permitted. This requires participants to specify a price, which is intended to allow the market to find a genuine opening price. At the close of the session, unmatched orders in IPO scrips move to the normal trading session at their limit price. For re-listed scrips, if an equilibrium price is discovered, unmatched orders similarly move to normal trading. If no equilibrium is reached, all orders are cancelled and the scrip remains in call auction mode on subsequent trading days until a price is found.

Two constructs shape the session in practice. The first is the base price, the reference anchor. For IPOs it is the issue price. For re-listed scrips revoked within a year, it is the latest closing price on any exchange. For scrips suspended for over a year, it is the lower of the auditor-certified book value or face value, which usually leaves the base price at Rs. 10. 

The second construct is the dummy price band, set by exchanges as a guard against erroneous orders. The dummy band ranges from -50% to +100% for IPO scrips, -85% to +50% for re-listed scrips, and ±90% for SME IPO scrips. Orders outside this band are rejected and cancelled. The band can be flexed by 10% increments when the indicative equilibrium price presses within 10% of either edge. However, no flexing occurs from one minute before the random closure window begins. Further, no flexing is applied to SME IPO scrips at all.

For long-suspended scrips, a low base price and a narrow dummy band produce a predictable failure. With a base price of Rs. 10, the upper band for a re-listed scrip is only Rs. 15. Any investor willing to bid closer to the company’s actual value has the order rejected. No equilibrium emerges. When the scrip then moves to normal trading, the suppressed opening price draws persistent buying pressure and a series of upper circuits.

SEBI, acting on the recommendations of its Secondary Market Advisory Committee, proposes three reforms. On base price, the existing rule for re-listed scrips is replaced with a tiered framework. Where suspension was revoked within six months, the latest closing price on the relevant exchange is used; where revocation was after more than six months, the lower of valuations certified by two independent chartered accountants or valuation agencies is used as the base price. 

In terms of dummy price bands, the existing mechanism is retained but flexing is proposed to be made automatic and simultaneous across exchanges. Further, this is extended to operate through the random closure window. Additionally, a call auction shall be treated as successful only if orders from at least five unique PAN-based buyers and sellers contribute to the equilibrium price. If this threshold is not met, IPO scrips move to normal trading at the issue price, while re-listed scrips remain in call auction on the next trading day.

Dummy bands are a safeguard against erroneous orders, not an indication of value. They should therefore expand dynamically as genuine buying and selling interest emerges. Extending flexing through the random closure window follows from that principle. Since this is the final and most critical phase of price discovery, restricting flexing at that stage may exclude genuine orders and result in an equilibrium price that reflects only a portion of market interest.

The harder question is execution. In a session where minutes matter, real-time PAN validation and the simultaneous communication of flexing across exchanges will decide whether these are safeguards or bottlenecks. The framework will rise or fall on two things: the quality of the independent valuations used to fix the base price, and the latency of the automated flexing mechanism in practice.

The proposed framework gets one thing right. A price discovery mechanism is not meant to tell the market what a security is worth. It is meant to get out of the way while the market decides. For long-suspended scrips, the existing rules did the opposite, and the opening prices showed it. SEBI is not setting the price. It is finally letting the market do so.

The bounce-back of Buy-back

A regulator reversing course within a year is unusual. SEBI's proposal to re-introduce open market buy-backs follows a tax change by Parliament, not a change of mind. My piece in the Financial Express on the reset and the one question it leaves open. My piece, co-authored with Pragya Garg, is in today's Financial Express.

Regulatory reversals are awkward when the premise that justified the original change has disappeared. SEBI’s buy-back framework is in precisely that position.

With effect from 1 April 2025, open market buy-backs through stock exchanges were completely phased out. The discontinuation rested on two concerns: tax neutrality and equitable shareholder treatment. 

On the tax side, companies bore the buy-back distribution tax while selling shareholders faced no tax liability on their gains. On the equity side, SEBI considered the mechanism arbitrary by design. A company’s entire purchase order could be matched against sell orders placed by a handful of shareholders, leaving others without recourse. The two concerns compounded each other: participation was a matter of chance, and those who happened to participate received a tax advantage that others did not. The asymmetry was real, and discontinuation was a defensible response, though removing the most market oriented and transparent process was overkill.

That position has shifted. The Finance Act, 2026 has rationalised the taxation of buy-back proceeds, which are now taxable as capital gains in the shareholder’s hands. The special tax advantage of selling into a buy-back is gone, and with it, a significant part of the rationale for phasing out open market buy-backs through stock exchanges.

SEBI has responded with two consultation papers. The first, dated 2 April 2026, proposes the re-introduction of the stock exchange route. The second, dated 8 May 2026 (“Consultation Paper”), proposes a wider revamp of the SEBI (Buy-back of Securities) Regulations, 2018 (“Buy-back Regulations”). The exercise is an attempt to rebuild the framework, not merely restore what existed before.

The most consequential design choice is the duration of the buy-back window. The Primary Market Advisory Committee (“PMAC”) recommended reinstating the original six-month limit. SEBI takes the view that six months is too long, and itself a source of uncertainty. It has instead proposed a maximum of sixty-six working days, roughly three calendar months, with at least forty per cent of the buy-back size to be deployed in the first half of the offer period. That condition prevents companies from dawdling and then rushing at the end, though fair, may be over-prescriptive.

The reinstatement also lets SEBI clear out structural residue. When the stock exchange route was phased out, exchanges had to maintain a separate trading window to identify shareholders selling into the buy-back so that the tax advantage could be applied to them. With tax parity now established, that identification function is redundant. SEBI proposes to scrap the separate window and let buy-back transactions flow through normal trading. PMAC has also proposed dispensing with the requirement under Regulation 17(i) of the Buy-back Regulations that a company’s identity as a purchaser be displayed on the electronic screen when orders are placed. Both proposals are sensible in the changed context.

The Consultation Paper also closes two gaps that warranted earlier attention. The first concerns promoter conduct. Promoters and their associates are already prohibited from dealing in the company’s securities during the buy-back period, but a prohibition is not the same as prevention. The Consultation Paper proposes to freeze promoter holdings at the ISIN level through depositories, making the restriction structurally enforceable rather than dependent on a disclosure regime.

The second gap concerns Minimum Public Shareholding (“MPS”). The Buy-back Regulations have never explicitly said that a company cannot announce a buy-back if completing it would push public shareholding below the MPS threshold. The two frameworks have existed in parallel without a cross-reference. The proposed explicit cross-reference is good housekeeping.

A significant proposal is the removal of the mandatory merchant banker requirement. At present, every buy-back must engage a merchant banker, regardless of size or complexity. The Consultation Paper proposes to reassign most of those functions to the company, the stock exchanges, and the secretarial auditor, depending on the nature of the activity.

The underlying argument is sound. The securities market has matured considerably since mandatory merchant banker involvement became standard practice. Many of the tasks currently assigned to merchant bankers are procedural, and requiring a paid intermediary for all of them adds cost and friction without commensurate benefit.

The certification that a buy-back offer complies with the Buy-back Regulations, presently provided by the merchant banker, would shift to the secretarial auditor. The quality and independence of secretarial audit practices varies across listed companies, and SEBI would do well to accompany this change with clarity on the scope of that obligation.

PMAC has also recommended, and SEBI has accepted, that companies send an electronic intimation of the buy-back offer to shareholders within one working day of the public announcement. Many retail shareholders do not monitor exchange or company websites daily. A direct communication reduces information asymmetry, which matters for a method where participation depends first on the shareholder knowing the buy-back is open, and second on the shareholder acting on it.

The proposals, read together, are a measured reset. They bring back a tool that market participants found useful while correcting structural weaknesses in the earlier version. The reversal is not the work of an uncertain regulator. It follows from a change Parliament has made to the tax law, and the speed of SEBI’s response reflects changed circumstances, not regulatory inconsistency.

What the framework does not resolve is the question of equitable shareholder participation. Parliament has fixed the tax. The shareholder inequality problem is a different matter. Under the reinstated route, buy-back transactions continue to flow through the open market on a price-time order matching mechanism. A shareholder who wishes to participate has no guarantee that their order will be matched against the company’s purchase order. SEBI appears alive to this, but has not yet offered a structural answer. However, not everything requires regulatory intervention.

 

Fraud, Manipulation and Insider Trading in the Indian Securities Market cited by the Supreme Court of India

Earlier this week the Supreme Court delivered its judgment in Reliance Industries Limited v. Securities and Exchange Board of India (29 May 2026). The Court set aside the finding of fraud under the PFUTP Regulations and the disgorgement of Rs 447 crore, while sustaining the penalty for breach of the position-limit disclosure requirement.

In construing the definition of fraud under Regulation 2(1)(c), the Court observed that the provision, read literally, is so wide as to be unworkable. It relied on the argument in my book, Fraud, Manipulation and Insider Trading in the Indian Securities Market, that on such a reading it is mathematically possible to show that even walking, jogging and cycling are securities frauds. The Court adopted a purposive construction, holding that inducement remains a necessary ingredient of fraud and that concentration of positions is not, by itself, manipulation.

It is a privilege to have the work engaged with at this level. Careful doctrinal writing can, in time, shape how the law is read. My thanks to the Bench for its consideration of the argument.

Gajini KYC - with a memory problem

Verify once, reuse everywhere,  that is the promise of portable KYC, and India has not yet kept it. The infrastructure exists: the CKYCR is live, KRAs have run for over a decade, and the PML Rules contemplate reuse with the client's consent. What is missing is legal comfort, Rule 9(2) leaves intermediaries on the hook even when they rely on a government-operated registry, so they re-verify instead. In our latest piece in the Financial Express, Pranjal Kinjawadekar, Yash Vardhan and I argue that fixing the liability rule and harmonising data standards across regulators will do more for portability than any further build-out of registry infrastructure. The full piece is as below:

An investor who has been verified once should not have to be verified again. That is the promise of portable KYC, and it is a promise the Indian financial system has not yet kept. Speaking at SEBI’s Foundation Day on April 25, Finance Minister Nirmala Sitharaman called on SEBI to deliver a seamless, secure, and portable KYC experience across the financial sector. The architecture to do so is already in statute. What is missing is the operational detail and the liability clarity that would make intermediaries willing to use it.  

India’s KYC obligations originate in the Prevention of Money-Laundering Act, 2002, and the rules framed under it. The Central KYC Records Registry (CKYCR), operated by CERSAI, was set up as a cross-sector repository. Every reporting entity that completes KYC must upload the record and generate a unique identifier, which any other reporting entity can retrieve with the client’s consent. The design is a shared identity infrastructure across the financial system. The practice is not. Duplication and friction persist.

Within the securities market, SEBI established its own infrastructure as early as 2011 through KYC Registration Agencies (KRA), governed by the SEBI (KYC Registration Agency) Regulations, 2011 and the Master Circular on Know Your Client (KYC) norms for the securities market. Under this framework, the first SEBI-registered intermediary onboarding a client conducts due diligence, uploads the records to a KRA, and retains the documents, following which subsequent SEBI-regulated intermediaries retrieve these records instead of initiating the process afresh. The KRA system has been in place for over a decade and has materially streamlined onboarding within the securities market. That said, the framework continues to be subject to certain structural constraints.

The first constraint arises at a cross-sector level. Portability under the KRA framework is confined to SEBI-regulated intermediaries, with no seamless mechanism to extend this across other regulatory domains. As a result, a client whose identity has already been verified by an RBI-regulated bank cannot have those records readily accessed by a SEBI-regulated broker through the same channel. The CKYCR was intended to address this gap and, in principle, provides the necessary bridge. In practice, however, its effectiveness across sectors remains limited. The reasons are operational: data standards are not aligned across regulators and there is no standardised digital consent mechanism for retrieval. This results in investors continuing to re-submit documents at multiple regulatory boundaries.

The second constraint arises within the securities market, at the level of financial groups. A group offering distribution, advisory and broking services typically operates through separate SEBI-registered entities. Each is required to retrieve the client’s KYC record from a KRA on onboarding. Market practice is not uniform. Some groups initiate separate KRA pulls for each entity; others rely on a single pull and share the record internally. Neither approach has clear regulatory backing, and the framework does not settle the point. The result is multiple identical pulls of the same record across a group’s product suite, with cost and delay but no regulatory benefit.

Different categories of KYC information are governed by different sharing rules. Core identity and verification data uploaded to KRAs can be accessed only through a KRA pull. Other due diligence information, such as risk assessments and source-of-wealth documentation, sits outside the KRA framework and may be shared internally under group policies. The boundary is not clearly drawn, and market participants do not apply it consistently. Both constraints reduce to the same point: the records exist, the verification has been done, and what is missing is a mechanism to reuse them.

The Finance Minister’s push must translate into reform at two levels. At the cross-sector level, the CKYCR must be made to work. The infrastructure is in place: CERSAI operates the registry, reporting entities are required to upload to it, and the PML Rules contemplate retrieval by any reporting entity with the client’s consent. What is required is alignment. Data standards across regulators must be harmonised so that a record acceptable to an RBI-regulated bank satisfies a SEBI-regulated broker. The consent mechanism must be standardised and made digitally operable, so the client can authorise retrieval once at onboarding rather than separately for each pull. 

Most importantly, the liability question needs to be addressed directly. Under Rule 9(2) of the PML Rules, a reporting entity that relies on a third party’s due diligence continues to bear full responsibility for compliance with its KYC obligations, even where the underlying records have been verified by a regulated entity and uploaded to a government-operated registry. This allocation creates a disincentive, as intermediaries may prefer to undertake fresh verification rather than rely on third party records. A clear regulatory position is required on the extent to which reliance in good faith on verified CKYCR records can satisfy KYC obligations. Such clarity would materially improve portability, more so than incremental improvements to registry infrastructure.

Within the securities market, SEBI may consider issuing clear guidance on the conditions under which a single KRA pull by one group entity satisfies the obligation for other entities in the same group. Clarity on the distinction between KRA-stored information and other due diligence information, along with the applicable sharing channels for each, would further support consistency in practice. Without this, divergent market practices will persist, with the conservative players bearing unnecessary costs and the aggressive ones operating without a clear legal basis.

Portable KYC is not a technology problem. The registry exists, the records exist, and the statute already contemplates reuse with the client’s consent. What is missing is the legal comfort that reliance in good faith on those records will not be second-guessed. Fix the liability rule, harmonise the data standards, and the rest will follow. The infrastructure has been built. It is time to let it work.