India’s markets regulator has proposed tighter know-your-customer (KYC) checks for mutual fund investors, but stopped short of creating a single centralized verification system—something the industry has long sought for seamless onboarding across the country’s financial platforms.
In the draft rules, released on Thursday, the Securities and Exchange Board of India (Sebi) said fund houses can accept a first-time investment or open a new folio only after an investor’s KYC is fully verified and marked “compliant” by the KYC Registration Agency (KRA), a move to prevent rising cases of unclaimed dividends and blocked redemptions and to improve compliance among mutual funds in the country.
But the absence of interoperability between Sebi’s PAN-based system and the government’s Central KYC (CKYC) means investors will still need to complete multiple verifications across banks, insurance, and mutual funds.
Operational impact for mutual funds
Currently, asset management companies (AMCs) often open a folio and start the KYC registration process simultaneously. If the KRA detects discrepancies, such as the absence or mismatch in documents, the folio is marked as KYC “non-compliant”. This often blocks redemptions or dividend payouts, forcing such funds into the “unclaimed” category.
Though mutual funds are happy that these changes are being made, the lack of a unified verification mechanism, such as a Central KYC, remains an issue. The Central KYC system is managed by the government through the Central Registry of Securitization Asset Reconstruction and Security Interest of India (CERSAI), which assigns a single KYC number usable across banks and other financial entities. Yet, this isn’t fully interoperable with the capital market’s PAN-based verification.
“Suppose I am opening a bank account in State Bank of India and I have my CKYC. And tomorrow I go and I want to open a fund in ICICI Bank also. With the same KYC number, I can do that. But that I cannot do in a mutual fund today. That is a gap,” said D.P. Singh, deputy managing director at SBI Mutual Fund.
India’s has seen strong growth over the years, with return-conscious investors moving away from traditional sources of savings such as bank deposits. The industry manages assets worth ₹ 75.61 lakh crore as of end September, an increase of about ₹8.5 lakh crore from a year ago.
This fiscal year’s Union Budget had also announced a revamped CKYC registry to unify KYC processes across banks, mutual funds, insurance and pension systems. The new system is expected to be launched in March.
Experts said they have had several rounds of talks with Sebi and the Union government on Central KYC.
“Why do multiple KYCs exist? The process remains the same, submission of documents remains the same. Your bank account remains the same, and your bank is linked with Aadhaar. But unfortunately, the regulators ( and the Reserve Bank of India) are not in a position to shake hands for whatever reasons,” said Jimmy Patel, managing director at Quantum AMC.
The RBI did not respond to Mint‘s queries on the issue till press time. “Talks between the RBI and Sebi have not yet been initiated,” according to a Sebi spokesperson.
Sebi’s proposal is expected to help reduce instances of unclaimed dividends and redemptions. Today, investors can begin transacting before their KYC is fully approved. If a mismatch is found later, fund houses have to suspend redemption proceeds or dividends. A rise in unclaimed funds can also be caused by mark-to-market growth in equity funds, according to fund houses. Mark-to-market means the fund records the current market value of its holdings on the balance sheet daily or periodically, rather than the purchase price.
Unclaimed investor money rising
Unclaimed investor money in surged 21% in FY25 to ₹3,452 crore, according to Sebi. Of this, unclaimed dividends rose 26%, and redemptions by about 10%.
“In any other industry, one cannot deposit money until compliance is complete, regardless of how long it takes. Why should mutual funds be different?”, said an official from one of India’s largest mutual funds on the condition of anonymity.
The expectation is that once KYC is verified upfront, investors’ bank and address details will be more accurate, reducing transaction failures. Some believe this will curb the flow of new unclaimed amounts in the coming years.
“There is a customer whose money is not invested. He should have ideally got this money, or he should have invested that money in the appropriate kind of investment. But because this money is unclaimed for long periods, it is prone to a lot of frauds,” said the official.
The executive added that frauds, in such instances, often include claiming of the fund by someone who has the same name as the investor. The perpetrator could show their KYC documents and withdraw the money intended to be invested by the actual investor.
But some experts also believe there might not be any immediate relief in unclaimed funds as most of the money is from older investments, made when KYC registration was not vigilant.
“Unclaimed (funds) are those where the KYC is not there at all or KYC is included in old cases. We are talking about the money which has been there for more than 5-7 years,” said Singh.