The Association of Mutual Funds in India is in discussions with the Securities and Exchange Board of India to tackle issues related to the KYC rule changes that have created confusion for the industry and investors.
The new Know-Your-Customer rules, effective April 1, require investors to have specific criteria to transact in mutual funds. Many investors, unaware of the change, have complained about being unable to make fresh investments.
Mutual Fund Re-KYC Changes: What Happened?
To meet regulatory requirements, mutual fund investors had been asked to update or redo the KYC process by April 1 with officially valid documents, mainly Aadhaar, by submitting them to the nearest AMC/RTA branches.
Many investors have been unable to make fresh or upcoming investments after the re-KYC deadline, finding their KYC status invalid. This is based on the identity documents given at the time of registration. The KYC of the investors who did their registration using a document other than the seven officially valid documents (as per the norms) is put "on hold."
The OVDs include Aadhaar, driving license, passport, voter card, NREGA-issued job card, National Population Register, and documents notified by the central government. This excludes the earlier accepted documents like bank statements and utility bills.
The industry is in continued discussions with the market regulator to figure out the ways and means of coming up with a solution as this rule change has created hiccups for industry and investors, according to top industry figures who told NDTV Profit on the condition of anonymity.
Those falling under the second and third category in the above table will need to follow the re-KYC process and submit documents accordingly.
Inflows To Take A Hit
Even for the MF industry, the latest rule puts them at a significant disadvantage. Many funds have stopped accepting fresh funds till the KYC norms are met. This is going to impact the inflows in a big way, said a top executive of a domestic asset management company on condition of anonymity.
Customers who are KYC-registered can invest in funds in which they have folios. However, without getting a 'validated' tag, they cannot invest in new mutual funds.
"This is putting newer MF players at a major disadvantage. For MFDs (mutual fund distributors) who have to validate and comply with these rules again and again, the cost of doing business just goes up at a time when we should focus on market expansion," said Edelweiss CEO Radhika Gupta on social media platform X, formerly known as Twitter.
There are five KYC Registration Agencies, or KRAs, registered with SEBI responsible for validating the KYC of investors—CDSL Ventures, Computer Age Management Services, NSDL, KFintech, and NSE.
Unlike bank KYCs, one does not deal with just one bank but multiple in the MF industry and not many would also remember which fund house they did their first KYC with, which makes it difficult to track, said one of the persons cited earlier. The industry is exploring options on how to make an industry-wise KYC, which is a tough ask.
The chaos does not just end here, as there are further changes in KYC as of April 30. As per CAMS, the new norm to come into effect this month-end requires all MF investors to validate their name and date of birth as per their Permanent Account Number available with the Income Tax Department.
The industry is in talks and hopefully there will be a digital solution to the matter soon, according to people with knowledge of the matter.
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