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Why KYC is mandatory now

By Ashish Pai
October 18, 2010 12:14 IST
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There is no escaping the paperwork while investing in financial products. Be it, opening a new bank account, demat account or buying insurance, filling the Know Your Client (KYC) documents is a mandatory procedure today.

KYC is a client identification program that verifies and maintains records of the identity and address of investors.

KYC norms were introduced in 2002 by the Reserve Bank of India (RBI). It directed all banks and financial institutions to put in place a policy framework to know their customers before opening any account. The purpose was to prevent money laundering, terrorist financing, theft and so on.

Today other regulators too have made KYC mandatory. The Securities and Exchange Board of India (Sebi) has mandated it for mutual funds and broking accounts, the Insurance Regulatory Development Authority (IRDA) while buying insurance and the Forwards Markets & Commission (FMC) for commodity trading. You need to submit it even for making post office deposits.


* KYC is mandated by most regulatory authorities

* Documents for proof of identity and address are needed.

* Certain investments may need PAN card details

* Duplication of documents in some cases is possible

* Investee firms may also incur compliance cost

Documents needed: The mandatory details required under KYC norms are proof of residence and identity.

A person's ration card, passport, utility bills or a letter from the employer or his housing society is accepted as residence proof. For proof of identity, passport, voter ID card, Permanent Account Number (PAN) card or driving licence too could work. Nowadays,most institutions ask for the customer's PAN too.

Impact: Although the effort towards strengthening identification norms has helped in preventing money laundering and reducing fraud, it has had a negative impact in an unexpected quarter. The growth in investor numbers in various instruments is either stagnating or reducing. Apparently, the KYC norms are proving restrictive because of the hassles of documentation.

The KYC requirement sometimes leads to unnecessary and repetitive work, delaying operations. Customers complain about the paperwork involved. Ultimately, it means customers have to run from pillar to post for complying with the KYC norms. Investors complain of being asked to provide details repeatedly or face a freeze on their accounts

Impact for service providers: Companies and distributors say, KYC requirements have burdened them with substantial administrative obligations. The verification rules place a financial burden on banks, insurance companies and mutual funds due to the involved costs. Currently, every entity has to individually conduct this verification which results in duplication of effort for customers as well as the institutions.

There is a need to simplify KYC requirements . The authorities could opt for centralisation of the KYC norms to make investing easy for those not well versed with paperwork. Mutual funds have done this at an industry level by giving the mandate to a single entity, CDSL Ventures.

A uniformity in requirements for KYC prescribed by all authorities would help make the filing easier. One important document that will make life simpler is - 'Aadhar', the unique identification number to be provided to each citizen by Unique Identification Authority of India (UIDAI), a government initiative.

But there is still some time before it will be implemented. By making KYC norms simpler, it will make investments simpler. It is especially required if investing is to become more inclusive.

The writer is a freelancer.

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Ashish Pai
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