Any bank, lending institution, investment platform, mutual fund company, insurance firm—basically any company that provides financial services needs to do a background check on its customers. This is mainly done to prevent money laundering, fraud, and criminal activities. KYC is another name for such background checks.
For mutual funds too, certain KYC norms have been formulated by the regulatory authorities. Investors can complete an online KYC for mutual funds or choose the offline route.
SEBI has recently announced a few changes and circulated some new regulations to redo the KYC. Let’s explore the details here.
KYC status is categorized into ‘validated’, ‘registered’, and ‘on hold’.
Validated: these investors do not face any issue related to mutual fund transactions. These are users who have done KYC via Aadhaar card (Digilocker or aadhaar card with QR code).
Registered: these investors can only invest in or redeem from their existing mutual funds. They are not allowed to invest in any other mutual fund. These are users who have done KYC via driving license, voter ID, or passport. Such investors are requested to redo their KYC now with Aadhaar card – this will allow them to be shifted to ‘validated’ status.
On hold: these investors can not invest in any mutual fund. After the revised rules, they will be allowed to redeem their investments (based on due diligence done by fund houses). They will still not be able to invest anywhere.
Based on the feedback received from stakeholders and for ease of transaction by clients, SEBI has announced some important changes.
Users who had completed their KYC using driving license, voter ID, or passport are currently under ‘registered’ status. This allowed them to buy or sell units from their existing mutual funds but they are not allowed to invest in any other mutual fund.
Such investors are requested to redo their KYC now with Aadhaar card – this will allow them to be shifted to ‘validated’ status.
Once the status changes to “KYC Validated”, the investors will be allowed to invest with any fund house.
Investors whose KYC status was ‘on hold’ due to non-linking of Aadhaar and PAN will now be moved to ‘registered’ KYC status.
This will allow these investors to continue buying or selling units in the mutual funds where they have already invested. Earlier, they were not allowed to invest in or redeem from even their existing mutual fund investments.
But note that these investors will still not be able to buy or sell units of any other mutual fund.
To invest in other funds, they will be required to link Aadhaar and PAN and complete their KYC using Aadhaar card. They will then be shifted to the ‘validated’ status once they update this information on the Know Your Client Registration Agency (KRA) portal.
If your KYC is ‘on hold’ because you are not able to verify KYC using your mobile number and email ID, you will now be allowed to redeem your existing investments.
Earlier, investors with an ‘on hold’ KYC status were not allowed to redeem their investments.
The existing clients, as on March 31, 2024, will be allowed to exit (sale/redemption) from existing investment in securities market subject to adequate due diligence by intermediaries.
The client’s email, in this case, will be considered as an optional attribute.
Some investors were facing problems due to non-verification of mobile number or email address. Investors were required to verify both email address and phone number for KYC.
Now, either one of these can be used for verification. Both will not be mandatory.
If either email/mobile is verified then KYC will move to either ‘Registered’ or ‘Validated’ depending on which document was used to do the KYC.
Non-Resident Indian (NRI) investors will now be allowed to invest in any fund house even if they don’t have an Aadhaar card. Many NRI investors do not have Aadhaar cards since Aadhaar is not mandatory for them.
In the absence of Aadhaar card, KYC status of such investors was considered as ‘registered’ and not ‘validated’. Non-resident investors will now also be able to invest in fund houses other than the ones they are currently invested in.
For NRIs, a copy of passport /Persons of Indian Origin (PIO) Card/Overseas Citizenship of India (OCI) Card and overseas address proof are required.
NRIs who do not have Aadhaar are exempted from linking of PAN-Aadhaar only on updating their residential status as Non-Resident in the Income Tax portal.
For Hindu Undivided Family (HUF) investors, new orders and existing SIPs or redemption will not be affected even if they are not in ‘KYC validated status’.
Many investors might not be aware of their exact KYC status. According to a Moneycontrol report, registrar and transfer agents (RTAs) will soon send emails to investors updating them about their KYC status and will also inform them about the steps to get their KYC validated.
Note: all changes mentioned above (other than the revised rules for NRIs) will come into effect after 31st May, 2024.