The revised know-your-customer (KYC) norms have unleashed a chaotic situation in the mutual fund industry. A large section of investors has been barred from initiating new investments or redeeming old ones from April 1, 2024. The genesis seems to have been SEBI’s circular issued in August 2023, which had stipulated that the KYC process for investors transacting in markets should be based on both proof of identity and proof of address for which the official requirement was the client’s Aadhaar-linked PAN with updated email addresses and mobile numbers.

KYC-registration agencies (KRAs) were duly asked to validate all existing investor records, if KYC was earlier completed with other documents. The initial deadline for validation of KYC records on these lines was set for December 2023, and subsequently extended to March 31, 2024. Meanwhile, a master circular issued in October 2023 clarified that documents that are valid proof for KYC are Aadhaar, driving licence, voter ID, job card or any other document specified by the Central government in consultation with the regulator. This meant that investors who had submitted bank statements or utility bills as proof of address had to re-do their KYC. The regulator’s move was well-intended as it was trying to standardise and simplify the KYC process, while ensuring compliance with anti-money laundering rules.

But the moot question is, with all PAN numbers already linked with Aadhaar cards and KRAs having access to these records, why was the re-KYC process left undone until the nth hour. Investors are now being forced to check the KYC status on their own and upload physical documents or physically visit the offices of the KRAs or mutual funds to update records for investments that they have held for years. Barring investors from redeeming their existing investments or making fresh ones in a new AMC because of changing goalposts on KYC, is also causing unnecessary hardship. A good part of the blame for the current state of affairs must also be laid at the doors of the fund industry and AMFI.

They could have suo motu informed investors of the upcoming change and facilitated their seamless re-KYC any time between August 2023 and March 31, 2024. Such proactive action could have prevented the ongoing disruption in flows. KRAs too could have checked the records at their end and sent emails to customers whose accounts needed re-KYC, well before the March deadline. Intermediaries such as online execution platforms and mutual fund distributors also need to take some blame. At a time when India is winning global accolades for digitisation of financial services, there is no reason why investors should be made to jump through so many hoops for the KYC process. Financial regulators need to come together to operationalise a centralised portal where a customer can complete both his initial KYC, and subsequent updates on address, mobile number, email ID, etc., so that such situations do not recur.