The recent Linkedin post by Himanshu Pandya, a registered investment adviser, said it all. He wrote, “Happy to inform you that I have successfully updated my KYC for the 18th time in my rather short adult life.” The latest KYC (know your client) update that Pandya highlighted pertains to his mutual fund account. Mutual funds have been asking investors to update their KYC with officially valid documents (OVDs), mainly Aadhaar, by 1 April to meet regulatory requirements. And, those unaware of the new KYC norms are being denied their upcoming investments.
Industry insiders say that some funds have already stopped accepting fresh investments till the KYC norms are met. Experts say that investments worth several crores of rupees have been stuck since 1 April and the number of transactions being rejected are on the rise. Fund houses, they said, are having a hard time explaining to distributors why their investments are not going through.
The controversy surrounding the current KYC drive started after two registrar and transfer agencies (RTAs) sent out email notifications to distributors in early March warning that accounts wherein KYC was done using proofs other than OVDs would be put on hold from 1 April. The seven OVDs are Aadhaar, driving license, passport, voter card, job card issued by NREGA, national population register, and any document notified by the central government. Investors have to update their KYC using only these OVDs in cases where it was earlier done using documents such as bank statements or utility bills.
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As the 1 April deadline drew closer, the RTAs modified their notification by introducing certain tags, such as ‘validated’ and ‘registered’. So, if an investor had used Aadhaar for their KYC, their account would be tagged as validated from 1 April. The validated tag ensured there was no restrictions on their investments. It also allowed investors to shift freely to other asset management companies (AMCs) without the need for redoing their KYC. To be sure, Aadhaar is the only OVD that can get investors the validated tag.
The ‘registered’ tag was attached to accounts of investors who had done their KYC using any OVD other than Aadhaar. This tag allowed them to invest or redeem from their existing accounts. However, investors would need to redo their KYC if they wanted to open an account with a different AMC, till such time that they used Aadhaar to get the ‘validated’ tag.
Read more: ‘KYC is a problem crying to be fixed’, laments Edelweiss MF’s Radhika Gupta
Investor complaints have been pouring in ever since. Many said the online process of KYC updates does not work. Netizens have taken to social media with screenshots of failed attempts at redoing KYC online. Some of them got messages about database error at KRA (KYC registration agency), and failure to generate e-signed PDF. Others said that the KYC was not validated even after Aadhaar submission, or received messages that KYC had been done with a different KRA, or that Aadhaar was not eligible for online KYC and they they had to submit a hard copy. Some investors claimed that there was no change in KYC status despite completing the update online. Some also reported failure on account of upper case and lower case mismatches in the name of their state.
Some KRAs do not have necessary systems in place for updating KYC online. Five KRAs are responsible for validating the KYC of investors. They are CDSL Ventures Limited (CVL), Computer Age Management Services (CAMS), NSDL, KFintech, and NSE (formerly Dotex). There is also no concept of interoperability with KRAs, meaning that if you have done KYC using CAMS, then you can only update the KYC with them.
“KYC update needs to be done in the physical format,” said the operations head of an AMC who did not want to be named. “The intent here was right but the infrastructure wasn’t ready for the change.”
What happens when the attempt to update KYC fails. The accounts are put ‘on hold’ and all transactions pertaining to such accounts get blocked. The ‘on-hold’ status also applies if the KRAs are not able to validate the account holder’s email or mobile number or if investors had submitted documents other than OVDs.
Interestingly, data from the Mutual Fund Utilities (MFU) platform showed that only 28% of its users were ‘validated’. A bulk of them (70%) had the registered status and the remaining 2% of users were put on hold, as per data available on the platform till 10 am on Monday. This means that 70% of investors cannot invest in AMCs other than the ones they have already invested in unless they update their KYC. MFU is a platform run by all AMCs under the aegis of the Association of Mutual Funds in India (Amfi), which has more than 1.4 million active users.
Fisdom, a mutual fund platform, said it tried reaching out to RTAs and KRAs as it felt the constant need to update KYC would make its business unviable. It’s now planning to write a letter to market regulator Sebi on this issue.
Zerodha’s Coin, the largest fintech MF platform. said it is not facing any issues as it had made Aadhaar a prerequisite for investors to open an account. Kuvera declined to comment saying they are awaiting clarity from RTAs and Amfi.
Meanwhile, some chief executives of mutual funds have expressed concerns about the implementation of the new KYC norms but are unwilling to talk about it in public forums.
Abhishek Mittal, co-founder ofProspurts, and a registered investment adviser said that many of his clients are overseas citizens of India (OCI) and do not have Aadhaar. So, they find it difficult to update the KYC and get the validated tag. Even if they do have Aadhaar, they still need to use the physical format for updating KYC.
Another KYC rule change from 30 April threatens to sow more chaos. “It is mandated to quote your Name(s) and date of birth as per PAN card. All Mutual Funds are mandated to validate the Name and date of birth against the PAN Card,” a notification on the CAMS website says. Financial experts say these frequent KYC changes have greatly disrupted the lives of mutual fund investors.