Sucheta Dalal :KYC norms proving to be a hurdle for investors
Sucheta Dalal

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KYC norms proving to be a hurdle for investors  

February 15, 2010

The Indian government’s efforts towards strengthening identification norms have had an adverse impact in the most unexpected quarters. Apparently, the much talked about know your customer (KYC) norms are proving quite a deterrent for the population to put its money into various investment channels. The hassles of KYC documentation are creating obstacles in the path of investors and advisors alike.

Industry sources reveal that they have been having problems mobilising savings of individuals only because of the complications created by the necessity to adhere to KYC norms. An independent financial advisor (IFA) disclosed to Moneylife, “I have a customer who wants to invest Rs50,000 each in five different funds. For this, I have to give five different KYC documents for him and his wife, which is absurd. The issue here is, if you know the person’s surname and father’s name, date of birth and PAN card, there can only be one person whose details match. So why is the need for this unnecessary repetitive work?”

Another IFA questioned the need for advisors to have their own KYC when the banks already have their own KYC procedures in place. This amounts to unnecessary and repetitive work, which delays the operationalisation of the customer’s account.

Pointing to one particular case where a non-resident Indian (NRI) wished to invest money into the Indian stock markets, the IFA revealed, “The NRI has to have not only his passport, but an account which mentions his local address and his American address. On top of that, he is required to show his driving license, which of course he does not carry to India. So even though he comes with a cheque of Rs50 lakh, he can’t complete his KYC and ultimately the country ends up losing the investment.”

In 2002, KYC norms were introduced in India with the RBI directing all banks and financial institutions to put in place a policy framework to know their customers before opening any account. The basic purpose of KYC was to prevent identity theft, money laundering, terrorist financing, etc. This involves verifying customers' identity and address by asking them to submit documents that are accepted as relevant proof.

However, in most cases, KYC has only served to complicate procedures; requiring huge paperwork on part of service providers and making customers run from pillar to post for filing necessary or sometime irrelevant documents.

The mutual fund (MF) industry has been most hit as a result of this. Already, the MF industry is under a lot of strain post the scrapping of entry load by the market watchdog, Securities and Exchange Board of India (SEBI). Moneylife has been regularly updating you through various articles on the agony faced by distributors and advisors in maintaining a steady stream of revenues. Hidden until now was the role of KYC in further alienating an already miniscule investor population in mutual funds.

It remains to be seen whether the government wakes up to this menace and simplifies KYC requirements before these norms threaten to disrupt investments into and within the country.
Sanket Dhanorkar



-- Sucheta Dalal