KYC AND THE INVESTMENT JOURNEY: IT IS NOW TIME TO INTRODUCE KRACENTRAL
The Association of Mutual Funds in India (Amfi) and Boston Consulting Group (BCG) published a report in August 2019 titled Unlocking the ₹100 Trillion Opportunity. The mutual fund (MF) industry had under ₹25 trillion of assets under management (AUM) in July 2019. It has more than doubled to ₹55 trillion as of March 2024 and mutual funds have millions of new investors now. The journey was made possible by a strong regulatory framework, which safeguards the interests of investors.
The mutual funds industry has seen many regulatory changes, such as updated scheme categorization, segregated portfolios norms, risk-o-meter, discontinuation of pool accounts, and the requirement of nomination/opting out in MF folios. One such recent change was around KYC (know your client) norms where MF investor needs to be KYC-compliant by submitting one OVD (officially valid document) for PoI and PoA (proof of identity and proof of address), respectively. This KYC rule is applicable retrospectively, effectively meaning that if you were KYC-compliant by using rent agreement as your address proof, your KYC status changes from “valid” to “on hold”, and you cannot transact in mutual funds. No fresh investment is allowed, ongoing SIP will stop, and most important, redemptions will be blocked, too.
This is where the MF ecosystem is facing challenges on how to communicate to affected investors that they have lost access to their hard- earned money invested in MFs, although temporarily, till they update their KYC.
To be sure, asset management companies (AMCs) and registrar and transfer agents (RTAs) provide the facility to modify KYC on their websites. But social media is flooded with investor testimonials attesting that such online options do not work. The problems faced range from KRA (KYC registration agency) database error; KYC with different KRA; Aadhaar not legible for an online Aadhaar KYC; hard copy not received for online Aadhaar KYC; and online KYC modification completed but no change in KYC status. Some investors have also reported failure on account of upper case and lower case mismatch in name of their state.
That there can be half a dozen or more KYC status flags does not help. Imagine a do-it-yourself investor with ₹2,000 monthly systematic investment plan (SIP) having to make sense of KYC flags with terms such as validated, verified, registered, on hold, under process, rejected, and Sebi hold. KRAs also have a matrix that helps with KYC status remediation, but it is not comprehensive. It makes you doubt the preparedness of the KRA infrastructure to manage the changed KYC environment. It should be a standard practice to gauge system preparedness before any major change is rolled out. It should consider number of PANs or investors affected, make rules uniform for participants, standardize remediation guidelines, stress test existing infrastructure, and provide an online option for investors to comply.
Make no mistake, this is not only for MF investors. KYC is mandatory to access all capital market products. Investors have taken to social media to vent their frustration about not being able to exit their stocks and futures and options positions owing to their trading account being blocked.
In all this, non-resident Indians (NRIs) have been truly left high and dry. There is no option for NRIs to modify their KYC online with the new set of OVDs. NRIs wishing to modify their KYC to comply with new KYC norms actually have to travel across countries and suffer hardship to get their KYC in order physically.
KYC status flags such as validated and registered have unintended consequences. With a validated flag you can invest across but with a registered flag you can invest only in those MFs where you already have a folio. This will force investors to make fresh investments in the same AMCs till the physical process to get the validated flag is completed. How is this fair to new and small AMCs? How is this a level playing field?
Sebi’s KYC master circular states: “The usage of Aadhaar shall be optional and purely on voluntary basis by the client.” However, only Aadhaar can get you KYC validated status. Not really optional or voluntary.
What is the way forward? Under the nomination rules, the regulator—after receiving feedback from various stakeholders— extended compliance timeline a few times. In fact there is now a consultation paper that discusses making of nominations optional for the investors. This is in contrast with the previous position, where submission of nomination details or declaration for opting out was made mandatory.
Similarly, KYC for all on-hold and rejected cases should be reinstated to their 31 March 2024 status, and new KYC rules should be implemented at a later date once KRAs are ready with a common online solution for all investors in one URL
There was a time when the MF industry did not have a single investor services hub. Now we have MFCentral, the unified online platform for all mutual fund related needs, which is operated by both RTAs of the MF ecosystem. Origins of MFCentral can be traced back to a Sebi circular of 26 July 2021 which saw the need for an RTA inter-operable platform.
Just like MFCentral, it is time for a KRACentral.