KYC is an acronym for "Know Your Customer" and is a term used for Customer Identification Process as a part of Account Opening process with any financial entity. KYC establishes an investor’s identity & address through relevant supporting documents such as prescribed photo id (e.g., PAN card) and address proof and In-Person Verification (IPV).
KYC compliance is mandatory under the Prevention of
Money Laundering Act, 2002 and Rules framed
there under, read with the SEBI Master Circular on Anti Money Laundering (AML)
Standards/ Combating the Financing of Terrorism (CFT) /Obligations of
Securities Market Intermediaries Securities Market Intermediaries.
You cannot invest in a mutual fund
without completing your KYC process. KYC for mutual funds can be done online
through the KYC Registration Agency (KRA ) website or a mutual fund investment
portal. Once your KYC verification is successful, you can invest through any
mutual fund investment platform with the same KYC identification.
The online KYC process for mutual
fund investing takes around four to five days to be completed, whereas the
offline KYC process can take around a week.
You can login to any KRA online and
begin your KYC process by entering your PAN and Aadhaar details. You can change
your KYC for mutual funds in India offline and online. It can be done through
KRA, the office of Asset Management Company(AMC) or that of
Registrar and Transfer Agent.
Investors can verify their KYC status through any KRA
website. If any modifications are required, they can submit re-KYC through
their intermediary’s or mutual fund’s website, which are integrated with the
KRAs.
KRAs send communications to intermediaries and
investors, updating them on KYC status and any changes to the KYC records. This
communication process ensures that investors are kept informed and can take
necessary action if needed.
KYC Registration Agency (KRAs)
KYC Registration Agencies are central to the seamless
operation of financial services, providing a robust framework for KYC data
storage and verification. They play a key role in enhancing financial security
while ensuring ease of services for investors and intermediaries.
The circular requires the KRAs (SEBI KYC Registration
Agencies) to verify the KYC records of clients within two days of the document
being received.
During the process of validation, KRAs
will validate details of Aadhaar through Unique Identification Authority of
India (UIDAI) authentication, PAN using the Income Tax database, and mobile
number and e-mail ID using one-time password validation. This is applicable
only in cases where the mobile number and e-mail ID provided by the client are
not seeded with Aadhaar.
Post verification, the KRAs must
assign and inform the client about a unique client identifier called the ‘KRA
Identifier’. The client may use the KRA Identifier for opening of an account
with any other intermediary, without repeating the KYC process.
The SEBI KYC Process:
- Verification of Proof of Identity and Address (POI
& POA)
-Aadhaar document submission
(Aadhaar is verified through UIDAIs authentication/verification mechanism)
-PAN card submission (PAN is
verified online using the Income Tax Database)
- Consent from the investor
- E-sign/ wet signature/ digital signature/ cropping
signature
- Mobile & Email verification (Mobile and email are
verified through One Time Password (OTP) or other verifiable mechanisms)
- Bank account verification (Bank account details are
verified by Penny Drop mechanism or any other mechanism using API of the
Bank)
- VIPV (Video In Person Verification)
-Activity Log with credentials of
the person performing VIPV
-Investor (Client) in VIPV should be
recognisable and in a live environment
-Random question by the VIVP and
response from the investor
-Photograph of the customer to be
matched with the one on IDs
-Geo-tagging to ensure the customer
is in India
SEBI registered intermediary may
implement their application (App) for conducting online KYC of investors. The
RI (Regulated Intermediary) shall ensure that the process is a seamless,
real-time, secured, end-to-end encrypted audiovisual interaction with the
customer and that the quality of the communication is adequate to allow
identification of the customer beyond doubt.
The RI shall use a ‘liveliness
check’ to prevent spoofing and other fraudulent manipulations. It shall, before
rolling out and periodically, conduct software and security audits and
validation of its App. The RI may have additional safety and security features
other than as prescribed above.
SEBI’s master circular on KYCnorms 13 Oct 2023
1.
All Sebi-registered intermediaries
will use the same KYC form and supporting documents.
The account opening form for clients
will be divided into two parts. The Part I of the AOF will be the KYC form
which will capture the basic details of the client.
And part II of the form will obtain
the additional information specific to the area of activity of the intermediary
as considered appropriate by them. The master circular, however, deals with the
provisions of Part I of KYC form.
2.
To identify every participant in the
securities market with their respective PAN thereby ensuring sound audit trail
of all the transactions, PAN will be the unique identification number for all
participants transacting in the securities market, regardless of the
amount.
And the registered intermediaries
will verify the PAN of their clients online at the income tax website without
insisting on the original or copy of the PAN card.
3.
There are a few exemptions to PAN
requirements including for the SIP of mutual funds up to ₹50,000 per year.
The name in the KYC form will match
the name as mentioned in the proof of identity submitted.
The documents that will be accepted
as proof of identity include passport, driving licence, aadhaar number, voter's
ID card, letter issued by the NPR and any other document as notified by
the Central Government in consultation with the regulator.
4. A document
shall be deemed to be an officially valid document even if there is a change in
the name subsequent to its issuance provided it is supported by a Marriage
Certificate issued by the State Government or a gazette
notification, indicating such change of name.
5. There is a requirement of additional documents
for non—individuals i.e., legal entities such as trust, partnership firm, HUF,
registered society, among others.
6. The registered intermediaries shall
upload the details of mobile number and email address on the
KRA system.
7. The in-person verification carried out by one
Sebi registered intermediary can be relied upon by another intermediary.
8. The e-KYC service launched by UIDAI will be
accepted as a valid process for KYC verification.
SEBI requested in October 2023 that all investors
in mutual funds link their PAN to Aadhaar by March 31, 2024. It said that the
KYC process would stop and investment operations would stop if there was a
connection failure. A bank passbook or account statement might potentially be
used as address verification for KYC.
The regulator asked KYC
registration companies to use PAN, name, address, email addresses, and
cellphone numbers to confirm the KYC of owners of mutual fund units.
Cross-referencing investor information based on PAN and Aadhar cards with
government databases, such as Income Tax (IT), was the aim. Investors that used
different papers had problems with validation and had to resubmit their KYC.
SEBI had made it mandatory for all mutual fund investors link their PAN with Aadhaar to complete the KYC process by March 31,
2024. If PAN and Aadhaar were not linked, the KYC process would be put on hold,
preventing any investment activity including systematic investment plans (SIPs)
or lump sum purchases.
Consequences
of not Linking Aadhar & PAN
If you fail to do pan card Aadhar card link
within the due date, you may have to face the below-mentioned consequences:
1. PAN becomes inoperative
If an individual does not link PAN to Aadhaar
within the due date, his/her PAN will become inoperative. Once PAN becomes
inoperative, it will not be possible to furnish, intimate, or quote the PAN
number anywhere. This may further result in:
·
Higher tax rate applied for income tax purposes
·
Higher TDS collection
·
Inability to file income tax returns, which can
further attract interest, penalty and even prosecution as a result of not
furnishing details of income generated
·
Penalty for not quoting PAN during certain financial
transactions
2. PAN-Aadhaar interchangeability is not allowed
If Aadhaar is linked to an individual’s PAN, the
Income-tax act allows the interchangeability of both. This means a person can
quote either Aadhaar or PAN where needed. However, if these are not linked, the
interchangeability of these numbers will not be permitted.
Additionally, since PAN will become inoperative
in the case of non-linking to Aadhaar, an individual will not be able to quote
Aadhaar in lieu of PAN or vice versa.
3. Penalty under Section 234H
·
In case an individual fails to link Aadhaar to PAN by
the due date, he/she will be held liable for charges of up to Rs. 1,000 for
while requesting for linking of PAN with Aadhaar.
·
A penalty of Rs. 10,000 will be applicable for
non-filing of returns of income.
Linking PAN and Aadhaar.
In a revised circular issued on
May 14, 2024, the capital markets regulator SEBI has done away with the
requirement of checking PAN and Aadhaar link.
In
the revised circular under the risk management framework, SEBI has mandated KYC registration agency (KRA)
websites to verify three attributes of records of all clients within two days
of receiving information — PAN, Name and Address, doing away with the need to
check PAN and Aadhaar linkage
Earlier if PAN and
Aadhaar were not linked, your KYC would be on hold. Now, if Aadhaar and PAN are
not linked and if you do Aadhaar-based KYC, then you will get ‘KYC-Registered’
status. However, for getting ‘KYC-Validated’ status, PAN and Aadhaar still
needs to be linked
Investors require a
“KYC-validated” status, which is only possible after linking PAN with Aadhaar,
for unconstrained transactions across all fund houses. A KYC-registered status
allows investors to only transact with the fund houses they already have
investments with
To identify every
participant in the securities market with their respective PAN thereby ensuring
sound audit trail of all the transactions, PAN will be the unique
identification number for all participants transacting in the securities
market, regardless of the amount.
And the registered
intermediaries will verify the PAN of their clients online at the income tax
website without insisting on the original or copy of the PAN card.
There are a few
exemptions to PAN requirements including for the SIP of mutual funds up
to ₹50,000 per year.
The three shades of KYC
|
Registered or Verified |
Validated |
Hold |
|
Transact with that particular Intermediary only |
Transact with any Intermediary in the market |
Deficiency in documents submitted |
PAN–MF
Folio Name Mismatch
Effective April 30, 2024, your name on a mutual
fund application must match your income-tax permanent account number. But only
fresh folios will be impacted.
In a move to harmonise how your name appears across official
records (the spelling, order, initials), the Securities and Exchange Board of
India's KYC rules mandate that your name must be uniform. As a result, if you
are investing in a mutual fund folio for the first time, your name and date of
birth must be identical to the name on your PAN, and by extension, on your
income-tax records.
Earlier, after you submitted an MF application, your fund
house’s Registrar and Transfer Agent (RTA) used to send your name and date of
birth to Protean (the erstwhile NSDL database) or UTITSL, the two
government-sponsored agencies in charge of issuing PAN cards.
These agencies would then revert to your fund house (RTA,
to be precise) with your name as per Income-Tax Department records, name as per
PAN card, PAN valid status, PAN-Aadhaar status and a few more details.
Your RTA used to then match the reverted details with the
name on your application. A match used to be drawn using fuzzy logic. For
instance, if you had written SK Raja on your MF application, and your PAN has
you as Suresh Kumar Raja, it was considered a match and your investment was
approved. If you had written your name as Mohd. Irfan in the MF application,
and your name as per the Income-Tax department was Mohammed Irfan, it was
considered a match. Under this fuzzy logic, at least 60-70 percent of the name
had to match.
That’ll change. From now on, the two PAN agencies will
not revert with details of your name to your RTA. They will just get
back with a ‘Y’ or ‘N’ (yes or no) indicating whether your name as per
your MF folio matches your income-tax records. If your name doesn’t match, then
your application will be rejected.
New vs existing folios
Existing investors will not be impacted. That is because
validation of your name (folio and income-tax records) is a one-time exercise.
For existing investors, your MF (through its RTA) would have already done the
validation (using the fuzzy logic outlined above). Any subsequent investments
in the same folio will not require name validation.
However, if you are investing afresh in a brand-new
folio, then your mutual fund will run a name validation.
But there’s a twist. Since the RTA does the check, the
validation will be good for all mutual funds that it supports. Assume, for
instance, that you have invested in Fund House A, which is serviced by CAMS,
one of the two largest RTAs in the Indian mutual funds industry. If you wish to
invest in Fund House B, and are doing so for the first time, your name
validation will hold if Fund House B is also serviced by CAMS. Hence, your name
as per your folio doesn’t need to match exactly with the income-tax record.
But if you were to invest in Fund House C, which is
serviced by another RTA, say K-Fintech, and you have never invested in any fund
house that K-Fintech services, than you will be subjected to name validation.
In such a case, you should ensure that your name matches your
PAN.
|
EFFECTIVE FROM APRIL 30, 2024, YOUR NAME AS PER MUTUAL FUND
APPLICATION MUST MATCH INCOME –TAX RECORDS(PAN) |
||
|
NAME AS PER MF APPLICATION |
NAME AS PER INCOME-TAX DEPT/PAN Card |
How it will be considered after April 29, 2024 |
|
Suresh Metha |
SURESH METHA |
Matched |
|
Mark Anthony |
MARK ANTHONY |
Matched |
|
SK Raja |
SUPER KRISHNA RAJA |
Not Matched |
|
XYZ Industries Pvt. Ltd |
XYZ Industries Private Limited |
Not Matched |
|
R K Singh (HUF) |
R K Singh HUF |
Not Matched |
|
Mohd. Irfan |
Mohammed Irfan |
Not Matched |
|
ABC & Co |
ABC AND CO |
Not Matched |
|
Kumar Babu |
BABU KUMAR |
Not Matched |
|
Srinivasan Kumar Kannan |
Kannan Srinivasan K |
Not Matched |
|
Kumar S Shah |
Kumarbhai S Shah |
Not Matched |
Source: FAQ on PAN validation by CAMS
Your name in your MF application must
match with that on your income-tax records
Happy Investing
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