Sebi plans to standardise mutual fund folio opening amid KYC woes

Market regulator Securities and Exchange Board of India (Sebi) is considering standardizing the process of opening mutual fund folios and executing the first investment amid KYC compliance issues faced by investors and asset management companies (AMCs).

Sebi released a consultation paper on Thursday, seeking comments on the matter and has set November 14 as the deadline to send the public feedback.

Under the current system, investors cannot make new investments in a different scheme until their KYC is marked as 'compliant' in the KYC Registration Agency (KRA) system. This deprives them of receiving redemption or dividend payments if their bank details are incorrect.


As for the AMCs, they are unable to send important physical or email communications to investors if the address is incomplete or wrong. Moreover, the AMCs cannot credit redemption or dividend amounts to investors’ bank accounts with incorrect details, leading to higher unclaimed amounts.

While SEBI mandates that new folios can be opened only after completion of mandatory KYC verification, certain instances of KYC non-compliant folios seem to have arisen due to the sequential nature of the verification process followed in the mutual fund industry, the consultation paper said.

At the time of folio creation, AMCs conduct comprehensive internal KYC checks and, upon being satisfied, process the investment while simultaneously forwarding the investor’s documents to the KRA for final verification. In some cases, where the KRA identifies discrepancies or deficiencies during its review, the folio is marked as KYC non-compliant until the time those deficiencies are rectified and the investor’s KYC status is updated to 'Compliant' in the KRA system.

The market watchdog has proposed following process for creation of new mutual fund folios and the first investment:

1) Folios shall be created by AMC upon receipt of account opening documents and verifications as per the Know Your Client (KYC) norms for the securities market dated October 12, 2023.

2) Upon satisfactory KYC compliance, KYC documents shall be sent to the KYC Registration Agency (KRA) by AMC, which will complete the KYC verification.

3) First investment in a new folio shall be permitted only after KYC verification is completed by the KRA and the folio is marked as KYC compliant in the KRA system.

4) Investors shall be informed at each stage of the KYC process through their registered email and mobile number.

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