Investment Series: Here is why you should know what KYC is and why you need it?

KYC or Know Your Customer regulations were put in place by SEBI a few years ago to prevent fraud and money laundering. This is part of a financial industry wide initiative to reduce fraudulent & criminal practices.

This is why you hear the term KYC often—in reference to your bank account, your stock trading account and even if a relative sends you money from overseas. This can be confusing so a little background should help.

Over the last couple of decades, criminals and terrorists have made use of the financial system to fund their activities. This was due to lax procedures in account opening. Criminals could open fictitious accounts and use those bank or stock trading accounts for their purposes. Even in India, there are a number of instances of widespread fraud. There was a particular case where the perpetrators opened a large number of bank accounts to steal and deposit dividend checks. There was another instance of IPO fraud where a large number of fictitious DEMAT accounts were used.

As a result financial institutions and regulators around the world have evolved with a set of practices to detect and prevent such acts. By law every financial institution is required to “Know” the customer for whom they are opening an account or handling a money transfer. The penalties for not doing a thorough job with the same are severe.

Common KYC initiatives by SEBI
For KYC, you will need to fill up forms and provide documents proving your identity and your address to every institution that you open an account with.

To prevent this, SEBI introduced a Common KYC across all entities regulated by SEBI. This includes stock brokers, depositories (who provide DEMAT accounts), mutual fund companies and portfolio management services.

Under this process, SEBI mandated:

• a common set of data that must be captured
• a common set of documents to prove the identity and address of the investor
• an in-person verification by a qualified entity

SEBI also created a set of independent record keeping bodies called KYC registration agencies (KRAs) to maintain an electronic record of investors and their KYC status.

As a customer, you only need to submit your data and documents once to any one of the four KRAs and all SEBI regulated entities will allow you to open an account with them by checking with the KRA. This makes things really convenient for investors.

In practice, this system hasn’t turned out to be as smooth and magical as promised, but it works 99% of the time. Please also note that this common KYC cannot be used by other financial entities like banks and insurance companies although steps are being taken to create a Common KYC across the entire financial sector.

Why do you need KYC?
You cannot invest or hold an account with any SEBI regulated entity in India without completing your KYC registration. So, if you want to invest in mutual funds, you must register with one of the KRAs. Your broker or mutual fund advisor will assist you in the process.

What do you need to do?

1. Complete the KYC form.
2. Attach a recent photograph.
3. Provide a copy of your PAN card.
4. Provide a copy of your address proof.
5. For NRIs a copy of passport also needs to be provided along with overseas address proof.
6. Have an authorised representative perform‘in-person verification’. In order to do this, you must be signing up for an investment account with that organisation.
7. Submit the form and documents to one of the KRAs
8. Track the status of your registration through the KRA website

Please note that you cannot (and do not need to) register for KYC if you have no intention of investing.
The Next Lesson on this series will be: Your First Mutual Fund Investment. If you would like to learn more, stay tuned.
(About the author: This article has been contributed by Sanjiv Singhal, CEO, scripbox.com.)