Sales Practices and Investors Protection Services

1Good sales practice and warning signs

Customers have a right to good advice, and staff of financial firms have a duty to give it. Sales should be customer-led. Investors should watch out for:

• "High return" or "risk-free" offers: return comes with risk; no product gives high returns without risk.
• Advisers: they must act in the client's best interest, but clients should still review monthly statements and hold annual reviews.
• Unsuitable recommendations: for example a broker pushing F&O or penny stocks to a risk-averse senior citizen.
• Churning: excessive trading in a client's account just to earn commission.
• Investor seminars that push unsuitable products: avoid rushed decisions and get independent advice.

Conduct rules for sales agents:

• call only at reasonable times and between 9 a.m. and 8 p.m. unless the customer asks otherwise;
• identify themselves, their company and the purpose of the call at once;
• respect the customer's circumstances; leave immediately when asked, and stop contacting anyone who finds it unwelcome;
• leave a contact number on request;
• never exploit inexperience, vulnerability, credulity or loyalty;
• be courteous, make no false claims about returns and use no high-pressure tactics;
• the firm keeps records of contacts so the agent can be identified if there is a complaint.

Remember

• Churning = excessive trading for commission.
• Sales calls: 9 a.m. to 8 p.m.

Practise this concept (3 questions)

2Understanding the client's risk profile

Risk is not only the chance of losing capital but, more importantly, the chance of not getting the expected return. Fixed income gives fairly certain returns (apart from credit risk); market-linked investments do not. There is a risk-return trade-off: higher risk must offer higher expected return. Risk-averse investors hold more debt; less risk-averse investors hold more equity.

Profiling is hard: investors' goals are often vague or unrealistic, people find it hard to describe their attitude to risk, new investors may not understand risk concepts, and one model does not fit every life stage.

Factors affecting risk tolerance: age, personal and family income, dependents, occupation, marital status, education, existing liabilities and inherited wealth. The investment horizon matters too: the longer the horizon, the more risk can be taken.

Remember

• Longer horizon → more risk capacity.

Practise this concept (2 questions)

3The Risk Disclosure Document and SEBI's F&O findings

Equities beat other assets over long periods but can lose money in the short run, so risk depends on horizon. The Risk Disclosure Document (RDD) sets out the risks of trading on exchanges and the rights and obligations of brokers and clients. Brokers must explain derivatives risks and get the RDD signed by the client at onboarding. Options are more complex than futures because judging whether a premium is fair is hard.

Main risks:

• Market risk: prices move against you.
• Liquidity risk: you cannot exit a losing position (volumes often fall near expiry).
• Counterparty risk: generally not an issue on exchanges, because the clearing corporation guarantees settlement.

Leverage magnifies all of these: margins and premiums are small compared with contract value, which tempts clients into positions too large for them.

• Futures traders must pay daily MTM losses; if they do not, the broker can close positions and the client still owes the loss. Margins can rise suddenly in volatile markets, and liquidity can dry up.
• Option buyers hold a wasting asset and can lose the whole premium quickly if the price does not move as expected.
• Option sellers face losses many times the premium received.
• All traders face volatility, partial or missed fills, and system or communication failures.

Brokers must know their clients and recommend F&O only if they reasonably believe the client has the knowledge and experience to judge the risks and the means to bear them. They should collect and verify net worth, annual income, investment experience and knowledge.

SEBI's January 2023 study of individual F&O traders in FY 2021-22 found:

1. 9 out of 10 individual traders made net losses.
2. Loss makers lost about ₹50,000 on average.
3. Loss makers spent a further 28% of their losses on transaction costs.
4. Profit makers spent 15% to 50% of their profits on transaction costs.

Brokers must show these risk disclosures as a pop-up when clients log in, and clients can proceed only after acknowledging them. Brokers must keep P&L data of individual clients (including HUFs and NRIs, but not proprietary traders, institutions or firms) for at least five years. Exchanges and depositories also display the disclosures with a link to SEBI's study.

Remember

• 9 in 10 individual F&O traders lost money (FY 2021-22).
• Option sellers' risk is unlimited; buyers' risk is the premium.

Practise this concept (6 questions)

4Anti-money laundering and customer due diligence

The Prevention of Money-Laundering Act, 2002 (PMLA) targets anyone who acquires, owns, possesses, transfers or conceals the proceeds of crime, or knowingly deals in them, and allows confiscation of such property. Every intermediary needs written AML procedures covering three things:

1. client acceptance policy;
2. client identification procedure;
3. transaction monitoring and suspicious transaction reporting (STR).

Customer due diligence (CDD):

• identify anyone who beneficially owns or controls the account (the beneficial owner is the natural person who ultimately owns, controls or influences the client);
• verify identity using reliable, independent documents;
• verify the beneficial owner's identity;
• carry out ongoing due diligence, checking that transactions fit what is known of the client, its business, risk profile and source of funds.

Client acceptance safeguards:

• no accounts in fictitious, benami or anonymous names;
• define risk factors (location, business, turnover, payment methods) to classify clients as low, medium or high risk;
• collect documents according to risk;
• do not open an account if due diligence cannot be done (identity unclear, suspect information, non-cooperation), and consider filing a suspicious activity report;
• define clearly when one person may act for another, with limits and verified authority;
• check that the client does not match anyone with a known criminal background or under a ban.

Risk-based approach: enhanced due diligence for higher-risk clients, simplified for lower-risk ones.

Clients of special category (CSC) include: non-residents; high net worth clients; trusts, charities, NGOs and bodies receiving donations; companies with close family shareholding; politically exposed persons (PEPs) of foreign origin; current or former heads of state and senior politicians and their connected persons; companies offering foreign exchange; clients in high-risk countries (weak AML controls, banking secrecy, narcotics, corruption, sanctions, tax havens, offshore centres); non-face-to-face clients; and clients with a dubious reputation. The list is illustrative.

Remember

• Three AML elements: acceptance, identification, monitoring and STR.
• PEPs are clients of special category.

Practise this concept (12 questions)

5KYC, in-person verification and UCC

The KYC policy sets out identification at the start of the relationship, while transacting, and whenever earlier data seems doubtful. Originals must be seen before accepting copies, and failure to provide proof is reported to senior management.

Individuals: identity proof, with PAN mandatory, plus documents such as passport, voter ID, driving licence, Aadhaar, NREGA job card, UIDAI letter or a letter from a public authority. Address proof: Aadhaar, passport, driving licence, voter ID, bank statement, ration card, utility bill or a public authority letter.

Companies: certificate of incorporation and memorandum and articles, board resolution to open the account and naming authorised signatories, powers of attorney, PAN allotment letter and a telephone bill.

Partnerships: registration certificate (if registered), partnership deed, power of attorney, identity and address proof of partners and attorney holders, and a telephone bill.

In-person verification (IPV) is compulsory for trading and demat accounts: a physical visit, a webcam check, or video IPV for e-KYC. It is not needed if KYC is done through Aadhaar authentication or the form is submitted online with documents verifiable online (for example through DigiLocker).

e-KYC: fill the form online, upload proofs, complete video IPV and sign digitally.

Unique Client Code (UCC): given after KYC, linked to the client's PAN, and uploaded to the exchanges and clearing corporation. The account is activated only after the UCC is mapped to the KYC details. UCCs are also mapped to demat accounts to detect diversion of client securities.

Digital KYC for persons with disabilities (after an April 2025 Supreme Court judgment): accounts can be opened with a guardian's signature, e-KYC must be accessible, and a person who cannot blink for the liveness check may use alternatives such as facial expressions, nodding, showing an OTP on screen or live video.

Remember

• PAN is mandatory. UCC is linked to PAN.
• No IPV needed with Aadhaar-based or fully online-verifiable KYC.

6Suspicious transactions and social media disclosure

Under AML and CFT rules, suspicious transactions are reported to the Financial Intelligence Unit – India (FIU-IND). Examples:

• clients whose identity is hard to verify or who do not cooperate;
• funds whose source is unclear or out of line with the client's standing;
• sudden large increases in business without reason;
• large transfers to or from abroad with instructions to pay in cash;
• attempts to pass proceeds to unrelated third parties.

Suspicions are reported at once to the Money Laundering Control Officer (or designated officer). Dealings with the client continue as normal unless instructed otherwise, and the client must not be told (no "tipping off"). Accounts are suspended only in exceptional cases. The principal officer must have timely access to client data and records.

Social media: SEBI-regulated entities and their agents must show their registered name and registration number on the home page of their social media handles and at the start of every securities-market video or post.

Remember

• STR goes to FIU-IND. Never tip off the client.

7Investor grievance redressal and SCORES

Grievance redressal is a key regulatory function, and a working mechanism is a continuing condition of exchange membership. Investors can go to the exchange's Investor Grievance Division (IGD), which resolves disputes between the member and the client. Typical complaints: documents not received (agreement, contract notes, statements), margin not refunded, trades without adequate margin, delayed funds, squaring off without consent (or failing to square off), unauthorised trades, trades not at the price instructed by phone, order-entry errors, and service issues.

Filing rules:

• complain first to the exchange where the member is registered, then to SEBI;
• in writing, in English, Hindi or a regional language, signed by the client;
• no fee;
• vague, anonymous, pseudonymous or trivial complaints are not entertained.

SCORES is SEBI's web-based, centralised complaints system. A complaint gets an instant acknowledgement and a unique registration number; it is forwarded to the entity, which uploads an Action Taken Report and must resolve the complaint within 21 days.

Remember

• SCORES: SEBI's online complaints system; resolve within 21 days.

Practise this concept (5 questions)

8Online dispute resolution: SMARTODR

The SMARTODR portal, set up by the market infrastructure institutions under SEBI's framework, resolves disputes with listed companies, brokers, depository participants and other regulated entities through online conciliation and arbitration. It covers service complaints (statements, execution, account management, technology, customer service), trade disputes (execution errors, unauthorised trades, settlement), fee disputes, product misrepresentation, depository and registrar issues, compliance breaches and ethical violations such as insider trading or manipulation.

The process: file the complaint → conciliation → arbitration (binding) if conciliation fails. Advantages: one central system, digital-first, clearly defined stages and easy access.

Remember

• Conciliation first, then arbitration.

9How the ODR process runs

1. Complain first to the market participant directly.
2. If unsatisfied, escalate through SCORES (the ODR portal links to SCORES).
3. If still unsatisfied, start dispute resolution on the ODR portal.
4. The MII reviews the dispute and refers it to an empanelled ODR institution within 21 calendar days.
5. The ODR institution appoints a sole independent conciliator, who tries to settle within 21 calendar days; success ends in a signed settlement agreement.
6. If not resolved, the investor may go to online arbitration.
7. After the award, the market participant must pay within 15 calendar days (or perform as the award says).

A party wishing to challenge the award under Section 34 of the Arbitration Act must say so within 7 calendar days. If no stay is granted within 3 months, the award must be fully complied with. The MII monitors compliance.

Do's for investors: deal only with registered intermediaries; read the RDD; keep copies of all documents; fill forms completely; give clear instructions; insist on contract notes and verify doubtful trades with the exchange; pay only through banking channels; match strategy to risk capacity; be wary of sudden price spurts in low-priced stocks; remember there are no guaranteed returns; have the money before buying and the shares before selling; follow up promptly.

Don'ts: deal with unregistered entities; sign without understanding; leave your demat slip book with an intermediary; pay in cash; accept unsigned or incomplete contract notes; trade on tips or rumours; fall for promises of high or guaranteed returns or post-dated cheques; blindly follow ads, media or others; delay complaining.

Remember

• 21 days MII review; 21 days conciliation; pay within 15 days of the award.
• Challenge notice within 7 days; stay needed within 3 months.

Practise this concept (2 questions)