 "Are KYC norms preventing mutual funds from emulating the success of e-commerce?")
It has been just over four years since the Securities and Exchange Board of India (Sebi) made KYC – Know Your Customer – norms mandatory for consumers wishing to invest in mutual fund products.
Then there were intermittent updates that made the whole KYC process more cumbersome, such as In-Person Verification (IPV).
As things stand today, the capital markets watchdog takes pride in coming up with a first-of-its-kind move for the industry it regulates. And often, the example of the mutual fund industry is presented when it comes to advocating common KYC for a financial sector.
It is widely believed that the KYC rule is now well settled and that fund houses have accepted the norms in letter and spirit.
If that’s the case, why are fund houses still jittery about KYC a full four years after of implementation? Why do they prefer to talk about it only in private, fearing the regulator’s whip as if it is a norm forced upon them and one which sector executives do not agree with, at least when it comes to the process part.
Recently, Sebi chairman U K Sinha urged MFs to learn lessons from what’s happening around them in other industries. He cited three examples worth emulating: the success of Pradhan Mantri Jan Dhan Yojana; the more-than 50% of railway bookings that come the Railways’ online portal IRCTC; and the exponential rise in e-commerce businesses.
But what is interesting is that he failed to mention the KYC part in any of these. Do any of the above sectors demand the same KYC norms that need to be met before becoming an MF investor? The answer is a resounding ‘No’.
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All of us know it takes very little to open a Jan Dhan account or to open an IRCTC account. Moreover, e-commerce sites like Flipkart, Amazon or Snapdeal do not demand a PAN, address proof, or an Aadhaar card to either register or to get products delivered.
However, one could argue that these are all ‘necessities’ for consumers, which mutual funds are not, or at the very least, not yet.
In short, there can’t be any comparison between these and mutual funds until the first and foremost criteria for MFS – KYC – is suitably toned down. Though the past year has been terrific for the MF industry in terms of inflows, one must remember that mutual funds are still so-called ‘push’ products rather than ‘pull’ products.
According to a senior fund manager, most of the fund houses’ online process of investment has “flopped” due to the KYC needs.
“Why do we need to do a KYC for a person who has a bank account? Isn’t that enough?” he said. “As if money is coming from Mauritius,” he quipped.
Dhirendra Kumar, chief executive of fund tracking firm Value Research, has been quite vocal about how KYC has been a hurdle for the growth of the fund industry.
“We have regulators – RBI and Sebi – having different KYC norms. Why is it that a person having a bank account is forced to undergo KYC process if he chooses to invest in MFs? KYC norms are very complicated and it appears these are made to keep investors away by making it inconvenient for them. There is a need to revamp the fundamental structure and it is for the regulator to enable it,” he said.
This brings up the idea of a common KYC for all financial products, an idea that was first floated in late 2011 after Sebi brought in common KYC for investment across mutual fund houses.
But the question of a common KYC will become a reality remains. In between, there has been a bombardment of identity numbers – be it Universal Account Number (UAN), Common Account Number (CAN) or Aadhaar number.
The UPA-II as well as the current government made promises on the common KYC issue, but it appears that despite tremendous investments in technology by various market intermediaries and regulators themselves, we are still far from the day when a simple bank passbook will be enough for the ‘verification hungry’ fund industry.
By the way, given the best KYC processes for the sector, can anybody answer how many unique investors there are in the mutual fund industry? Amfi, can you help?