All you want to know about KYC rule relaxation for MF investors

Now, investors can continue to put in their hard-earned money into mutual funds without presenting additional documents to the fund house or unit registrar
All you want to know about KYC rule relaxation for MF investors

MUMBAI: As part of its efforts to increase “ease of investing”, the capital markets watchdog Sebi early this month did away with two cumbersome KYC requirements, both for the mutual funds sector. One is the withdrawal of the mandatory requirement of linking the PAN with the Aadhaar from May 14, and the other is the doing-away of the mandatory inputting of a nominee in case if the MF investment account is a joint account from April 30.

What’s KYC registration?

The know-your-client (KYC) regulation is the process by which financial entities such as commercial banks, mutual fund houses and stock brokers are asked to verify an investor’s identity before being allowed to invest in stocks or mutual funds or enter the equity markets through mutual fund schemes. In a revised circular issued on May 14, the regulator has done away with the requirement of the mandatory checking of PAN-Aadhaar link, offering a big relief to both existing investors as well as those looking to enter the market either directly into equities or passively through the mutual funds route—the two investment avenues which have been rocking in recent months. Linking these two official identity documents enables an investor the all-important ‘KYC-registered’ status. In the second relief, it had done away with the mandatory nominee demand for joint MFs investments from April 30.

And all that the regulator wanted from an investor was to prove her/his identity based on the ‘officially valid document (OVD) such as the Aadhaar, passport, the PAN number or the voter ID card.’

What’s the MF nomination?

Nomination is a process of appointing a person to take care of your assets in the event of your untimely death. In case if you do not wish to nominate, you have the option of opting out of the process while filling up the form but with attendant difficulties later. When you have a registered nominee or when you complete the nominee registration process, it facilitates easy transfer of funds to your nominee in the event of your death. In the absence of a nominee, your heirs/claimants will need to produce a host of documents like a will, legal heir certificate, NoCs from other legal heirs etc, to get your MF units transferred in her/his name.

Earlier, if your PAN and the Aadhaar were not linked your KYC would be on hold, which means your investment cannot be withdrawn. But now, if your Aadhaar and PAN are not linked and if you still do Aadhaar-based KYC, then you will get a KYC-registered status. This is what the regulator has done away with the May 14 circular. Another requirement pertained to optional nominations for joint mutual fund accounts, which it has done away with through the April 30 circular.

The Sebi circular dated April 30 states that the requirement for nomination in Clause 17.16 of the master circular for mutual funds is now optional for jointly held mutual fund folios. However, all other rules regarding nomination in the master circular from May 19, 2023, and the Sebi circular from December 27, 2023, remain unchanged. Had it not been done away with after June 30, 2024, which was the fourth extension, fund houses would have frozen those folios which don’t have a nominee in place, which means that the investor will not be able to switch or redeem investments.

Big reliefs/benefits

With the April 30 circular, the Sebi has altered mutual fund nomination rules under which failure to nominate or opt-out by June 30, 2024, will freeze folios. With this circular, the Sebi has said you no longer need to name a nominee for your joint MF accounts.

Till this circular was in place all individual MF unitholders had to nominate someone or opt out of the nomination process by June 30, 2024. If not, their folios would have been blocked from any transactions. But the nomination was a cumbersome process as MF unitholders were mandated to submit their nomination details in a specific format or opt out by filling out a set declaration form.

Investors were finding the new rules too cumbersome as it demanded a two-factor authentication for login both for submitting a nominee details or choosing to opt out of the nomination if the account was opened online. But if the account-opening was offline then one would have to make rounds to the fund house office filling up the nomination form, signing it, and submitting it to the registrar and transfer agent directly.

This decision has been taken after it has come to the notice that after the stricter KYC norms came to force form April 1, many retail investors could not put money into MF schemes afresh if their ID-linking was not done. The impact was most on non-residents who are a big source of fund-flow into the R57.3 lakh crore fund industry, as they were not required to have a Aadhaar card—rather cannot have one at all if they have any other local address and ID proof.

The biggest benefit from the doing-away of the PAN-Aadhaar linking is that you as an investor can continue to put in your hard earned money into MFs without presenting additional documents to the fund house or unit registrar and transfer agent.

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