Solving the KYC mess: 5 steps that SEBI has taken to make things easy (2024)

In a relief to mutual fund investors, the capital markets regulator, the Securities and Exchange Board of India (SEBI), has taken measures to ease the KYC (know your customer) process. These measures would particularly help those whose KYC status has been ‘on hold,’ and non-resident investors. Below are the implications of SEBI's latest move.

PAN-Aadhaar Linkage

SEBI has said that even if your PAN (permanent account number) is not linked with your Aadhaar, your KYC will not be rejected or put on hold if parameters like the name, PAN, e-mail address or mobile number are validated. This means that those whose KYC is on hold because of pending PAN-Aadhaar linkage, their status shall now change to ‘registered.’

Mutual fund KYC explained

KYC ‘registered’ status prevents you from investing inÂfresh mutual fundsÂÂ(MFs) thatÂyou haven’t already invested in. To be able to invest across fund houses, your KYC needs to be ‘validated.’

KYCs fall into one of four categories: `validated' (Aadhaar-based KYC, mobile orÂemail validated — you can invest in any fund house); `registered’ (non -Aadhaar based KYC, mobile orÂemail validated — you can only invest in fund housesÂthat you are currently invested in, and need to re-do your KYC if you wish to invest in new fund houses); ‘on-hold (erstwhile; PAN-Aadhaar seeding not done, or email and phone number are incorrect — you cannot do any MF transactions and you need to re-do your KYC); and ‘rejected’ (your status if your ‘on hold’ status continues for 10-15 days — you cannot do any MF transactions and you need to re-do your KYC). <See: Graphic; for new and updated structure of KYC>

Per income tax laws, PAN–Aadhaar linkage is necessary, failing which aÂhigher tax deducted at sourceÂ(20 percent) is charged, your PAN becomes inoperative, and you will not be able to file your income-tax returns. For the sake of your MF investments though, SEBI has allowed you limited transactions, if your PAN is not yet linked with Aadhaar.

KYC on Hold? You can now redeem

Earlier, if your KYC registration agency (KRA) couldn’t verify your mobile number and email id, then your KYC status was put on hold. This meant that you could neither invest nor redeem. Some investors found their folios frozen on March 31, 2024Âwhen — per SEBI guidelines — investors’ KYCs were put in one of the four buckets. Those whose KYC was put on hold landed in a soup as their systematic investment plans (SIPs) and systematic transfer plans (STPs) came to a sudden standstill.

Now, SEBI has said that investors whose KYC is on hold can redeem their investments, provided mutual funds do some due diligence. This is to ensure that the money goes to the rightful owner.

Relief for NRIs

NRI investors can now invest across fund houses even if they do not have an Aadhaar card. SEBI has allowed this exemption because many NRIs had complained that in the absence of Aadhaar, their KYC status was considered as ‘registered.’ This had made them ineligible for investing in a fresh fund house. As Aadhaar is not mandatory for NRIs, many do not have one.

An April 26 Moneycontrol story had pointed out that for the KYC to get validated, the KRA needs to verify five things. Your name in your MF folio has to be as per your PAN card, your address has to be validated,ÂAadhaar has to be linked with PAN, and the email and mobile number have to be verified.

Your email and mobile number can be verified if your fund house sends you an OTP (one-time password). PAN and Aadhaar–PANÂlinkage can be verified from the income-tax website. But when it comes to verifying your address, only Aadhaar works. Your Aadhar is stored in DigiLocker, a cloud-based platform the government offers for the storage, sharing, and verification of documents. Data stored in DigiLocker is considered authentic.

Fund houses cannot pull other proofs of address,Âlike your passport details, from the Ministry of External Affairs to verify whether the proof you gave isÂauthenticÂor fudged.

Per SEBI’s latest directive, non-residentÂinvestors will be able to invest in fund houses other than the ones they are currently invested in. This exemption has been given till April 30, 2025.ÂPost that, here's what might happen.

MF industry officials told Moneycontrol that passport details may also be made available through DigiLocker. This would help NRIs to get their KYC validated if they don’t have an Aadhaar card. Some MF officials told us that KRAs have already started verifying the address based on one's driver’s licence on a pilot basis. This would help Indian investors who don’t wish to give their Aadhaar as address proof. Accepting more documents (including passport for NRIs) for address verification through DigiLocker would help validate more investors.

Email or mobile

In another relief given to investors, SEBI has said that either an investor’s mobileÂnumber or email address needs to be verified. Earlier, only if both were verified was your KYC status `validated' (if you had given Aadhaar as address proof) or ‘registered’ (if you had given any other valid address proof). Now, your KYC will be ‘validated /Âregistered’ if either your mobile or email can be validated.

Letters to investors
Many investors might not be aware of their exact KYC status. AMFI CEO Venkat Nageswar Chalasani told Moneycontrol that by the end of the week ending May 19, registrar and transfer agents (RTAs) would send emails to investors, updating them about their KYC status. The letter would also explain what it means and what investors can do to get their KYC validated

Instead of fund houses sending off such emails and swamping an investor’s inbox (an investor with multiple investments can get many such mails), your RTA will now send you just the one mail.

SEBI’s nudge

MF industry officials said, on condition of anonymity, that SEBI has been quietly nudging fund houses to encourage their investors to get their KYC status validated. Most investors, especially those that have been investing for a while now, would have their investments in at least one of the large fund houses. Even if their KYC status is ‘registered,’ it wouldn’t impact their investments with the existing fund houses. Hence, there might not be much incentive for such fund houses to nudge their investors to get their KYC validated.

One way SEBI has made validation easier is by mandating that your fund house must allow you to modify your KYC online, regardless of which of the five KRAs your original KYC is with. Earlier, some mutual funds were found to have an online integration only with CAMS KRA, because CAMS (Computer Age Management Services) is also the fund house’s RTA.

When this writer had attempted to validate his mother’s KYC a few weeks ago, it was found that one of the fund houses did not offer this flexibility. Eventually, another fund house did and the KYC was validated.

Mutual funds, on their part,ÂhaveÂupped their ante in getting more and more investors, KYCÂready. Navneet Munot, Managing Director and Chief Executive OfficerÂof HDFC Asset Management says that they KYC modification module has been made easily available on mutual funds' websites. In addition, AMCsÂhave made it possible for investors to check their KYC statuses on AMC websites instead of having to go on the KRA website. Aside from keeping the communication lines open with distributors to handholding them through the KYC process, "for any case where KYC is not complete, AMCs works with KRAs to ensure remediation instead of refunding the money immediately," said Munot to Moneycontrol.