Mutual Funds – Know Your Customer

The advent of the digital age, aided by high-speed internet connectivity, has fueled a remarkable change in the common man’s way of life. This holds true for not just day-to-day stuff, such as buying and selling goods, booking airline and railway tickets or ordering a pizza, but also various financial activities such as filing your taxes, making banking transactions and investing in mutual funds. However, this ease of doing business digitally does pose a range of unique challenges for the governing authorities like the Income Tax Department, the apex bank – Reserve Bank of India, and SEBI (Securities and Exchange Board of India). One of these was to introduce a facility that allowed KYC status check online. In order to overcome these challenges, new legislation was introduced to manage ‘Know Your Customer (KYC)’ requirements for both offline and online investors.

The Importance of KYC

One of the key reasons for the introduction of KYC was to prevent as well as reduce the possibility of fraudulent transactions, money laundering, identity theft as well as financing of illicit and illegal activities such as terrorism. By maintaining robust KYC records, regulatory agencies are considerably better equipped to deal with the inherent risks of online investment transactions, which can improve compliance requirements for financial institutions including but not limited to mutual fund distributors and various securities market intermediaries. The process of KYC usually requires submission of some specific documents by the prospective investor to the Asset Management Company (AMC), mutual fund distributors or 3^rd parties such as brokerages or a registered KRA (KYC Registration Agency). Such documents are subsequently verified by the KRA and if all documents are found in order, the prospective investor is deemed to be mutual fund KYC compliant and their data is uploaded to a centralized database. After this, he/she can start investing in the mutual funds of his/her choice immediately.

KYC Status

The KYC records of individual investors are uploaded on to a centralized database, which ensures that various parties involved in the mutual fund investment process can access and update investor information as and when required. The additional consideration, in this case, is to ensure that the investor can also figure out whether he/she is KYC compliant before they approach a brokerage or intermediary for investing in mutual funds. This facility is termed as KYC status for MF (Mutual Fund) check and this feature is offered by various entities including securities market intermediaries involved in the mutual fund investment process. Allowing prospective investors to check their KYC status is a major step forward for making mutual fund investments through the online route. Additionally, this ensures that KYC verification is a one-time exercise for the investor and redundant KYC requests are not generated every time the investor decided to invest with a new fund house or intermediary.

When KYC is required

The following are some of the key financial transactions/services when KYC is mandatorily required:

• Investing in mutual funds: The KYC mandates, in this case, are provided by SEBI (Securities and Exchange Board of India).
• Opening a new bank account: The applicable KYC requirements, in this case, are provided by India’s Apex Bank, the Reserve Bank of India.
• Applying for a new loan or credit card: The KYC requirements in this case too are mandated by the Reserve Bank of India (RBI), India’s highest banking authority.
• Opening of lockers: Though the KYC documentation needs to be submitted by the bank, the requirements are prescribed by the RBI.
• Change in KYC status: KYC status includes some key personal information such as permanent address, communication address, authorized signatories, etc. which are liable to change periodically. In the case of such a change, a KYC change request in the prescribed format needs to be submitted along with applicable supporting documents.
• Additional KYC documentation: KYC norms and regulations may undergo periodic change as per the decisions of the governing authority such as RBI or SEBI. In such cases, the available documentation may no longer be sufficient for completion of KYC. In such an eventuality, additional documents may need to be submitted in order to maintain KYC status or KYC verification of the existing account/financial service.

It is important to note here that as per current norms, the centralized KYC database and online KYC status check benefits are only available for those making mutual fund investments. As of yet, such a centralized system has not been made available in case of banking services like opening of new accounts, lockers, credit cards, loans etc. Therefore a fresh KYC request needs to be generated whenever a new banker or NBFC is approached by the applicant. However, in the case of a few banks such as IDFC Bank and DBS Bank, Aadhaar-based eKYC with biometric verification has been introduced so as to ease the process of new account opening.

Documents Required for Mutual Fund KYC Verification

As per SEBI mandate, some key documents need to be provided by a mutual fund investment applicant. The following are the key documentation required in case of paper application submission for mutual fund KYC:

• Completely filled out KYC application
• Self-attested copy of PAN (Permanent Account Number) card
• Government Issued Identity proof document (self-attested copy)
• Government Issued Address proof document self-attested copy (may not be required if communication address and permanent address are the same)
• Colour photographs (passport size)
• A ‘cancelled cheque’ of the applicant’s registered bank account

The above list is designed to provide an illustration of what a prospective investor may be required to provide when undergoing mutual fund KYC. The exact requirements may vary depending on the intermediary/AMC approached or the existence of previous investments. In some cases bank account statement of past 6 months or other income proof documents may need to be submitted by the investor for completion of paper KYC formalities.

As might already be evident, the paper KYC requirements for mutual fund investments are quite extensive and time-consuming. However, the process has now been streamlined to a large extent with the introduction of the Aadhaar eKYC system. The following are the requirements for eKYC for mutual fund investments:

• Submission of online form
• Valid Aadhaar Card (only Aadhaar number is required)
• Valid Pan Card (Image of self attested copy)
• Image of self attested cancelled cheque of applicant’s registered bank account

Additionally, the applicant’s mobile phone number needs to be mandatorily registered with the Aadhaar database in order to receive OTP as part of the eKYC process. No paper documents need to be provided in order to complete the process though sometimes scanned self attested copies may need to be uploaded in order to complete the process. There is at present a key limitation with respect to the amount that an investor can make annually if he or she is eKYC compliant. Only Rs. 50,000 can be invested annually per mutual fund in case of completely online eKYC. In order to invest beyond this limit, the investor needs to complete in person biometric authentication at a registered KRA centre.

PAN Card – A Pre-requisite for Mutual Fund KYC

When an individual in India decides to make financial transactions such as applying for a new loan or credit card, making large cash deposits in the bank, making mutual fund investments, etc., the Permanent Account Number or PAN is of key importance. In fact, it has only in recent times been superseded in some cases by the UIDAI Aadhaar Card due to the new identity document’s biometric option and robust online database for verification. The PAN card is a mandatory documentation requirement in terms of an individual investor’s identity proof.

The PAN is a 10 digit alphanumeric code that is unique to the holder of the card. This code plays a key role in helping authorities track various financial transactions ranging from active loan/credit card accounts and large cash deposits to mutual fund investments. The PAN is also key information that is used by Credit Bureaus such as Experian, CIBIL, Equifax and CRIF Highmark in order to generate credit report and score. Additionally, the permanent account number also plays a key role in helping an investor determine his/her mutual fund KYC verification status.

How to Check KYC Status Using PAN Card

After submission of KYC forms either via the online or the offline route, the application undergoes various checks in order to ensure that the relevant KYC compliance requirements are met. Once the KYC status is verified and an individual is declared to be KYC compliant, the details of KYC compliance are uploaded to a centralized database as per SEBI guidelines. Once the KYC information has been updated on the central database, a prospective investor can check KYC status for MF using by providing their PAN number on the designated web page of registered KRAs operating in India. The following are the steps for checking mutual fund KYC on the CVL (CDSL Ventures Limited) KRA Database:

1. Go to the web page CVL KRA KYC PAN Inquiry page.
2. On that page, you can fill out your alphanumeric PAN and the captcha.
3. Alternate method without use of PAN includes input of details such as Applicant Name, Date of Birth and Exempt Category (if applicable, select from options provided otherwise select the “SIP of Mutual Funds” option)

On providing the above you will get an output similar to this:

 

Screenshot1. CVL KRA KYC Status Check Result

This includes a list of all official KRAs operating in India namely CVL KRA, NDML KRA, DOTEX KRA, CAMS KRA and KARVY KRA along with the individual KYC status. In most cases, individuals approach only a single KRA with their KYC application. When KYC is completed by the KRA in question, the KYC Status will read as “KYC Registered- New KYC”. As long as the applicant sees this entry with any one of the KRA on the list, the investor is SEBI KYC compliant and can start investing in mutual funds immediately.

In case there is a problem with KYC verification, details of that will also show up in the output obtained from CDSL Ventures Limited table as shown above in the “KYC Hold Reason” section of the table.

Alternately, individuals can also check their KYC status online using the KARVY KRA database. The following are the steps to check KYC status using the KARVY KRA database:

1. Log on the KARVY KRA PAN Search web page.
2. Input your PAN details and the captcha provided on the page to display the KYC Results as follows.

 

Screenshot2. Results of the KARVY KRA check KYC status

Similar to the CVL KRA results, in the KARVY KYC verification status results too, one can find a table with a list of different KRA operating in India along with the “Status Description” for the PAN number provided. Additional information available on the page includes PAN and Name of the applicant as well as the date of KYC information upload as well as Status Date of the record. As long as the data available includes the “KYC Registered” entry for one of the above, you can easily go ahead and invest in the mutual fund of your choice.

Short Profiles of Various KRAs Operating In India

After the need for a centralized database for maintaining KYC records was first envisaged, the Securities and Exchange Board of India (SEBI) introduced the SEBI KYC (Know Your Client) Registration Agency Regulations Act 2011. As part of this Act, a few key agencies were identified as registered KRA capable of servicing the various compliance needs as mandated by SEBI. As of now, these registered KRA organisations are – CAMS KRA, KARVY KRA, CVL KRA, NDML KRA and DOTEX KRA. The following are the short profiles of these registered KRAs.

CAMS KRA

CAMS KRA operates as the one stop shop engaged in providing the complete range of mutual fund KYC services to investors. CAMS KRA is SEBI-registered and engaged in preventing duplication of KYC efforts when investors decide to invest in a new mutual fund or fund house while having existing investment relationships with other brokers operating in the mutual fund investments market. Officially licensed by SEBI as CAMS Investor Services Pvt. Ltd., it is a wholly owned subsidiary of Computer Age Management Services and was issued the KRA license in July 2012. The KRA uses best in class technologies to process, store and retrieve KYC documentation in line with its commitment towards ensuring consistent implementation of various compliance requirements. Additionally, CAMS KRA also provides interface capabilities to various intermediaries in order to facilitate related services such as online KYC status CAMS check, which is available through various intermediaries including Paisabazaar.com.

KARVY KRA

KARVY KRA, a unit of KARVY Data Management Services Limited, is SEBI-licensed KRA registered under the SEBI KYC (Know Your Client) Registration Agency Regulations Act of 2011. The primary responsibilities of this agency include the use of available technologies in order to ensure completion of KYC verification for mutual fund investors. In line with this goal, KARVY KRA plays a key role in processing, storage and retrieval of KYC records in compliance with various SEBI mandated criteria. Officially, the KRA operates a completely owned subsidiary of Karvy Stock Broking Limited, which operates out of its headquarters in Hyderabad and was incorporated in the year 2008.

CVL KRA

Another SEBI-recognised KYC Registration Agency through which an applicant can check his/her KYC status online is the CVL KRA. CVL KRA is the KRA arm of CDSL Ventures Limited (CVL), a completely owned subsidiary of CDSL (Central Depository Services (India) Limited). CDSL is considered to be a leader among the various securities depository services providers currently operating in India. The company boasts a technically sound team with long term expertise in the key domain of securities markets. CVL aims to be a globally recognised player in the ITES sector and to that effect, it has placed a range of stringent policies as well as systems that ensure complete protection of various confidential data including all investor KYC status information loaded on its data vaults as well as the central database.

NDML KRA

NDML KRA is another leading KYC Registration Agency operating in India which offers check of KYC status for MF and is part of the NSDL Group which includes NSDL (National Securities and Depository Limited), NDML (NSDL Data Management Limited) and NSDL e-Governance Infrastructure Limited. The NSDL Group came into existence in 2006 and its key objective was to pioneer India’s securities depository services. Its key achievement till date includes the establishment of TIN (Tax Information Network), Central Record Keeping Agency (CRA) for the New Pension Scheme (NPS), KYC Registration Agency for SEBI, SEZ Online and much more.

DOTEX KRA

DotEx KRA is popularly known as NSE KRA as DotEx or M/s. DotEx International is a completely owned subsidiary of the NSEIL (National Stock Exchange of India Limited) with SEBI-registration to operate as a KRA. DotEx KRA is engaged in providing a centralized database for maintaining investor KYC information on behalf of India’s securities market. As a result of this centralized system, the records are readily available to intermediaries operating in the mutual fund sector and multiple KYC verification requests need not be made at later dates.