eKYC: Overview

KYC or Know your customer is a mandatory compliance requirement for customers desirous of availing financial services ranging from new bank accounts to mutual fund investments. In order to complete the KYC registration process for making mutual fund investments, prospective investors are required to fill out and submit a prescribed KYC registration form along with copies of supporting documents such as PAN Card (Permanent Account Number) and acceptable Government Issued Identity Proof documents. These documents are verified and stored by a registered KRA (KYC Registration Agency) and once the process is completed all required KYC information is stored in a centralized database. Subsequently, the applicant can start investing in mutual funds of his/her choice with any Indian fund house or AMC (Asset Management Company). Earlier, this entire process was paper-based and physical copies i.e. paper documents needed to be submitted. This paper-based process underwent a radical change with the advent of eKYC for mutual funds which is powered by Aadhaar-based authentication.

What is eKYC

eKYC stands for electronic KYC and this process provides a simplified and streamlined method for completing KYC requirements from the convenience of your home or office. eKYC provides a completely online route for completing KYC using Aadhaar card number and an OTP sent by UIDAI, the Aadhaar card issuing authority. Other documents you would need as part of the eKYC for mutual fund investment process include PAN card number and a government-issued identity proof such as Voter ID card. All of these documents need to be submitted in the form of self-attested digital copies. Once the verification process is completed, an applicant can start investing in the mutual funds of his/her choice irrespective of the fund house or type of mutual fund.

How Online KYC Works

The earlier paper-based KYC process required submission of paper documents that included a filled out KYC registration form signed by the prospective investor and self-attested copies of Identity proof documents such as PAN card, Driver’s License, etc.  The subsequent step required in-person verification at the local office of the registered KRA or the broker the investor was planning to invest with. Needless to say, the whole process was slow and detracted a number of prospective investors from making mutual fund investments.
With the advent of Aadhaar-based KYC, the entire system was changed and KYC processing times declined significantly. The online KYC registration process has eliminated the need for cumbersome paperwork or the in-person verification requirement. However, the eKYC for mutual funds can only be completed through an SEBI-mandated KYC User Agency (KUA). A KUA is UIDAI-approved to utilize a prospective investor’s Aadhaar number in order to complete the online KYC registration using OTP (one-time password). The eKYC needs to be completed only once and subsequent to this, the investor can start making mutual fund investments with any broker, brokerage or fund house operating in India.

Paisabazaar.com eKYC

Paisabazaar.com offers a free-of-charge investment account which is backed by eKYC through integration with the CAMS eKYC platform. This is a key step in making mutual fund investments easier for the individual investor irrespective of how large or small an amount they intend to invest. Apart from being completely online, the process is swift hence an investor can start investing with any of our partner AMCs as soon as eKYC has been completed. Subsequent to this, the prospective investor has the option to complete an in-person biometric verification in order to override SEBI-mandated maximum mutual fund investment limits. Without biometric verification, eKYC compliant investors can at present invest only up to Rs. 50,000 per mutual fund each year.

Steps for completing eKYC for Mutual Fund

The online KYC for mutual fund process consists of 4 simple steps –
Step1. Provide your Aadhaar card number when prompted. In case you already have an Aadhaar Card, make sure that your mobile number is updated and registered with the Aadhaar UIDAI website. This is necessary for receiving the OTP. In case this is not the case, visit an Aadhaar Enrolment Centre to get your mobile number registered on the Aadhaar database. In case you don’t have an Aadhaar card as of yet, log on the UIDAI website to find out how to apply.  
Step2. Upon input of the Aadhaar number, as prompted, you can generate and receive an OTP from UIDAI on your registered mobile number which is valid for a limited time only. This OTP can only be received only the registered phone number so make sure that your cell phone is on and receiving a signal before requesting the OTP.     
Step3. Once you have provided the UIDAI OTP to the relevant text box on the eKYC page, a confirmation document will be provided to you. In the next step, the investors have to e-sign the verified document and send it to the KUA in question for completion of the Aadhaar eKYC process. The entire process takes only a few minutes and does not feature submission of any paper documents.
Step 4. The above eKYC process allows an investor to start investing in mutual funds almost immediately, however, there are a few limitations placed by SEBI in this case. As of now, eKYC verified investors can invest up to a maximum limit of Rs. 50,000 per mutual fund/year. Thus an investor making investments in 6 separate funds can invest up to Rs. 3 lakhs (50,000x6) during the year. There is, however, a way to increase this limit – biometric verification or biometric eKYC. Biometric verification requires the physical presence of the applicant at the service center of any KRA across India for verifying fingerprint data. On completion of biometric eKYC, an investor can invest in mutual funds without any limits.    
Another limitation of the online KYC procedure is that investors completing the process are as of yet not allowed to make offline investments. In case an eKYC-verified user wants to make an offline investment, a prescribed document with the applicant’s signature needs to be submitted to the registered KRA service center. Once this document is submitted and verified, the applicant can start investing via the offline route as well. Otherwise, an eKYC verified investor can only make online investments.

Benefits of Mutual Fund eKYC

There are various benefits of eKYC that have been a key factor helping its quick adoption among mutual fund investors and distributors alike. The following are the key benefits of online KYC registration for mutual fund investments.
Information Security: The eKYC system is extremely secure as all the key applicant data including account information, demographic data, biometric data, etc. are stored as well as transmitted in an encrypted manner. This ensures the highest level of security for an investor’s personal information that can help reduce the incidence of illegal activities such as money laundering, loan scams, identity theft and fraud.
Consent-based System: The mutual fund eKYC mechanism is completely consent-based and it is dependent on the decisions made by the applicant. Moreover, the eKYC applicant also gets to choose regarding who can access his/her demographic and other personal data available from the Aadhaar UIDAI database. At any stage of the eKYC procedure, the prospective investor has an opportunity to change his/her mind and not complete the online KYC registration through mutual fund investment won’t be allowed without eKYC completion. Moreover, even if an individual is Aadhaar eKYC compliant, he/she does not necessarily have to make mutual fund investments. In the case of paper-based KYC, there is always the possibility that your self-attested paper documents may end up with unauthorized parties. This risk is substantially reduced, if not completely eliminated by the online KYC procedure.   
Paperless: By far the most obvious benefits of eKYC for mutual fund investments is the fact that there is no paper involved whatsoever. In the case of paper-based systems, manual checks needed to be carried out at the time of verification and there was the obvious possibility of human error that could delay the processing of the KYC request. With the advent of paperless Aadhaar KYC, the risks of human errors as well as document management system costs have decreased substantially. Moreover, this new process is green in nature hence it is a lot more environment-friendly as compared to the old school paper KYC system.
Information Technology Act Compliant: The eKYC for mutual funds process is compliant with all the requirements as specified by the Internet Technology Act of 2000. Any and all transfer of eKYC data over the internet is encrypted and validated using key technologies such as digital signatures that enhance the overall security of the system as well as ensures that the digital document is legally binding just like a paper document. As a result of this legal validity, identity theft protections and legal processes are applicable in the case of eKYC documents as well.    
Instantaneous: The entire online KYC process happens in an automated fashion without any human intervention to slow things down. Thus, the KYC data gets transmitted in real time without delays that may occur in the case of paper-based systems. This increases the overall efficiency of the system unlike in the case of paper KYC processes that can take a few days to a few weeks to get processed. The Aadhaar KYC system allows completion of the entire process in just a few minutes.  
Non-Repudiable: A common problem in the case of paper KYC was one or more parties claiming that they did not provide their consent for KYC. In the case of eKYC for mutual fund investments, the process requires one or more levels of authentication such as Aadhar OTP and biometric scan. Moreover, the transmission and validation of an eKYC document are completed through the digital signature of the parties concerned. This ensures that the document is non-repudiable i.e. cannot be denied as authentic by any of the parties involved in the process, which also ensures the legal validity of the online KYC documents.      
Transparent System: Stories of self-attested address/ identity proof documents ending up with local SIM card vendors, bank employees, loan/credit card agents, etc. were commonplace during the time when paper KYC was first introduced. Even today such incidents keep cropping up now and then. With the introduction of eKYC, the possibility of such incidents has decreased drastically and this is because the system is completely transparent. The online KYC for mutual funds stores all the relevant sensitive user data on specially configured and encrypted servers, hence the possibility of unscrupulous elements getting their hands on sensitive investor data is minimal at best. In the highly unlikely event of a data breach or any related illegal activity, illicit gain or misuse of such data, the source of the breach can be traced and the parties involved can be brought to justice swiftly by the relevant authorities.  
Efficient Communication: Filling out a paper KYC form by hand can lead to wrong information being provided by mistake and when such information does not match the documentation supplied, the application is liable to get rejected. In such a case, the entire exercise often needs to be started from the very beginning and this is mostly as a result of inefficient communication between the KYC applicant and the verifying authority. The automation of the eKYC form and overall online KYC system ensures that the data on the form gets validated in real-time i.e. as the form is being filled. Thus mistakes in the form, if any, get highlighted immediately and the KYC applicant can make swift corrections to the form. With the decline of the incidence of human errors, fewer KYC applications get rejected ensuring an overall improvement of the system’s efficiency.   
Zero Hidden Costs:  During the age of paper-only KYC, some brokers and brokerages were known to charge an extra amount often included in their commission as KYC registration fees. In many ways, this was no different from lenders charging prospective borrowers for their CIBIL Credit Report, a practice that is still prevalent today. With the advent of Aadhaar-based eKYC, this practice has declined significantly and prospective investors are not required to make additional payments in order to get their KYC applications processed.    
Simplified Regulatory Processes: Though this apparently does not influence the customer directly, simplified regulations do ensure that processing times and checks can be completed faster. The eKYC system is very suitable from a regulatory point of view as these requests and eKYC applications can be easily audited by the relevant authorities. For service providers too, the online system is much easier to handle as the relevant regulatory authority can be provided special online access to make their checks swiftly and at minimum cost. Such benefits have made it possible for India’s regulatory authorities such as RBI, IRDA, SEBI, and PFRDA to accept eKYC as an acceptable method of KYC compliance.

Role of KRA in eKYC

The KRAs or KYC Registration Agencies were originally provided a very simple mandate – to act as a registered authority for verifying and collating all applicable KYC data. These agencies were first registered with the Securities and Exchange Board of India (SEBI) under the SEBI KYC Registration Agency Regulations Act, 2011. As part of these regulations, the KRAs were responsible for maintaining all investor records on a central database on behalf of various capital market intermediaries registered with SEBI. The leading KRAs registered with SEBI in India are CDSL Ventures Limited (CVL KRA), Karvy Data Management Services Limited (Karvy KRA), CAMS Investor Services Private Limited (CAMS KRA), NSDL Database Management Limited (NDML KRA) and DotEx International Limited (DotEx KRA).
With the advent of online KYC system, the role of KRA hasn’t changed as they still maintain and operate a centralized KYC database and verify KYC applications received capital market intermediaries such as mutual fund distributors. However, unlike sifting through reams of paper documents, the KRA now provide integration of their database with the Aadhar UIDAI database enabling mutual fund distributors and brokers to complete the KYC compliance requirements in a swift and easy fashion. The introduction of KRA has definitely made the entire KYC process much easier for the investor as the earlier system of duplicate and sometimes multiple KYC has been replaced by a uniform KYC procedure whether completed through the offline or the online route.

Roles and responsibilities of Intermediaries in the Online KYC process

The advent of eKYC has made the process of making investments much easier even when these are made through an intermediary such as Paisabazaar.com. The following are the key roles to be performed by intermediaries in the offline as well as online KYC process as defined in the SEBI KRA Regulations 2011.
  • The intermediary is required to perform the initial due diligence/KYC of the client. Subsequently, all relevant KYC documents/information have to be uploaded by the intermediary to the KYC system of the KRA. Original paper KYC documents if any, have to be sent to the KRA within a specified time.
  • If the investor subsequently approaches a different intermediary, it is optional for the new provider to download and verify the details of the client from the KRA. Alternatively, the intermediary may ask the investor to submit fresh KYC documents. However, with the advent of eKYC, the latter practice has grown less common.
  • If changes in the KYC information of an investor become known to the intermediary at a later date, such updated data needs to be uploaded on to the KRA system as soon as possible. Additionally, sending physical documents within a predetermined time is also required in case of such data updates.
  • The intermediary cannot use a client’s paper/ eKYC data for any purpose other than compliance with Know Your Customer requirements. Commercial gains through the use of such data are forbidden and is a punishable offense. Such data cannot legally be shared even with affiliates or associates of the intermediary.