The Securities and Exchange Board of India (SEBI), on 3 February 2023, issued a comprehensive Master Circular on Anti-Money Laundering (AML) Standards and Combating the Financing of Terrorism (CFT) for securities market intermediaries. The circular, bearing reference SEBI/HO/MIRSD/MIRSD-SEC-5/P/CIR/2023/022, consolidates and updates the obligations of registered intermediaries under the Prevention of Money Laundering Act, 2002 (PMLA) and rules framed thereunder.
Background
India's securities market intermediaries — stockbrokers, depository participants, mutual fund distributors, portfolio managers, and other entities registered under Section 12 of the SEBI Act, 1992 — have been subject to AML/CFT obligations since the extension of PMLA provisions to the securities market. SEBI had previously issued multiple circulars and guidelines on AML compliance, creating a fragmented regulatory landscape. The February 2023 Master Circular consolidates these scattered directions into a single comprehensive framework, aligning Indian securities market AML standards with the recommendations of the Financial Action Task Force (FATF).
Key Provisions
The Master Circular prescribes the following obligations:
Customer Due Diligence (CDD): All registered intermediaries must implement tiered CDD procedures — simplified due diligence for low-risk clients, standard CDD for medium-risk clients, and enhanced due diligence (EDD) for high-risk clients including Politically Exposed Persons (PEPs) and clients from high-risk jurisdictions.
Know Your Customer (KYC) framework: The circular mandates comprehensive KYC policies including identity verification, address verification, understanding the nature and purpose of the business relationship, and ongoing monitoring of transactions to detect suspicious patterns.
Suspicious Transaction Reporting (STR): Intermediaries must establish internal mechanisms to identify and report suspicious transactions to the Financial Intelligence Unit — India (FIU-IND). The reporting obligation extends to attempted transactions that raise suspicion, even if not completed.
Record keeping: All client identification documents, transaction records, and correspondence must be maintained for a minimum of five years from the date of the transaction or cessation of the business relationship, whichever is later.
Compliance officer appointment: Each registered intermediary must designate a senior management-level Compliance Officer responsible for AML/CFT compliance, with direct reporting access to the board or governing body.
Employee training programmes: Mandatory AML/CFT training for all staff, with specific training modules for front-office personnel who interface directly with clients.
Implications for Practitioners
This Master Circular significantly impacts compliance infrastructure requirements for securities market intermediaries. Compliance teams must review and update internal AML policies to align with the consolidated framework, particularly regarding the tiered CDD approach and enhanced scrutiny of PEPs.
For law firms advising stockbrokers and depository participants, the circular creates clear compliance benchmarks that can be used in regulatory audits and enforcement proceedings. The consolidation into a single master circular simplifies the compliance reference framework but raises the bar on overall AML standards.
Practitioners handling SEBI enforcement actions should note that non-compliance with AML/CFT obligations can attract penalties under both SEBI regulations and PMLA provisions, creating dual liability exposure. The circular's emphasis on STR obligations is particularly important, as failure to report suspicious transactions is a common ground for enforcement action.
Securities lawyers advising foreign portfolio investors should pay special attention to the enhanced due diligence requirements for clients from high-risk jurisdictions, as this may increase onboarding timelines and documentation requirements.