The new year doesn’t seem to have started on a bright note for the Indian mutual funds (MF) industry. Besieged by the large number of the know-your-client (KYC) application forms beginning last week of December and well into January, many distributors are facing a tough time getting their clients KYC compliant. The sudden surge of KYC application forms is also resulting in a backlog of applications awaiting clearance.
Also See How It Planned Out (PDF)
Effective 1 January, KYC has been made compulsory, irrespective of the amount you invest. Earlier, KYC was required only for investments of Rs 50,000 and more.
The new norm is keeping distributors busy. Take the case of NJ India Invest Pvt. Ltd, one of India’s largest MF (retail) distributors that has a network across India. In Mumbai alone, NJ Invest has nine branches; six of which are points of sale (PoS) where KYC forms are officially accepted and uploaded directly into the servers of CDSL Ventures Ltd, a division of Central Depository Services (India) Ltd (CDSL), the nodal agency appointed to do KYC for MF investors.
Each branch gets about 100 applications daily, up from 50 till late last year. Sitting in a corner of its Mumbai’s Fort branch, its biggest, and amid at least three large piles, an employee—dedicated to complete the KYC work—is furiously punching in details. Despite a high-speed Internet connection, it takes her about 7-15 minutes to upload data from one form, even as fresh applications continue to pour in by the minute.
Says Manish Gandhvi, zonal sales head (Mumbai), NJ India: “In a day, we are able to upload only about 40 forms (per branch). That’s way less than what we’d expect if systems work well. Also, in times where distributors are forced to cut costs, we have to employ a dedicated person at our end for KYC. This puts us under pressure.”
Other distributors tell the same story. V. Krishnan, country head (distribution), Integrated Enterprises India Ltd, an MF distributor, says that the volume of forms have jumped “five-fold”. Though the announcement for KYC came around October, most investors chose to postpone their KYC documentation till 1 January, he says.
KYC norms help MFs know their investors better in order to keep a check on the legality of funds used for investments.
Are systems ready?
Some distributors blame lack of adequate infrastructure. Gandhvi claims that on some days the systems are down and work gets piled up. Few other distributors have similar claims, though most of them say they get in touch with CDSL every time the system gets slow. Distributors claim that it takes about 15 days to get a KYC registered, up from about five-seven days earlier. Also, the acknowledgement that your PoS gives you, upon successful submission of documents, “takes more than a day, at times, presently, up from half an hour”, says Samir Dhamankar, head (registrar services), Deutsche Investor Services Pvt. Ltd, a PoS. Dhamankar adds that they get about 20-25 application forms per branch a day, up from 10-15 until last year.
However, CDSL Ventures claims that it has improved its system to handle the additional load. Says Cyrus Khambata, senior vice-president, CDSL: “Barring one day in the middle, our systems are running fine. Yes, we have seen a big surge in applications, but we are confident that our systems can handle the load.” Khambata claims that CDSL gets about 12,000 KYC applications daily, up from about 4,000 in December and about 800-900 forms before that.
What should you do?
Distributors attached to the two stock exchange platforms, Mutual Fund Service System (National Stock Exchange) and BSE Star (Bombay Stock Exchange) are using this opportunity to advise customers to shift to these. In a letter dated 30 September sent to channel partners (online distributors, banks and brokers), the Association of Mutual Funds of India (Amfi), MF industry’s trading body, said that KYC done by investors at the time of joining the channel partner would be enough. For instance, stock brokers already mandate a rigid KYC check at the time of enrolling customers.
If existing investors of such brokerages wish to invest in MFs, they won’t need to do the KYC again. “As a brokerage house, we are encouraging our clients to move into MFSS,” says K. Venkitesh, national head distribution, Geojit BNP Paribas Financial Services Ltd. Krishnan says that since the pool account system has now been extended to the MF platform (MF units bought by investors first land in the broker’s account and are released after the investor honours his payment), MF platforms have become friendlier to brokers. “The risk has shifted back to investors where it rightly belongs,” he adds.
Some distributors are giving priority to salaried employees. As we approach the end of FY11, equity-linked saving schemes (ELSS) are sought after by retail investors as they allow income-tax deduction up to Rs 1 lakh under section 80C. Though you are allowed to invest till 31 March, many corporations insist their employees submit proof of investments by end of January. “These are special cases; we give priority to salaried employees who wish to invest in ELSS,” says Gandhvi.
If you haven’t yet done your KYC, you don’t have a choice. To get the best out of the delay though, ensure your documents are in order. Gandhvi suggests that latest documents must be provided as CDSL is known to reject applications supported by dated documents. Utility bills such as electricity and telephone are easiest to get, but if you’re staying in a rented accommodation, you’ll have to make do with other documents such as your passport, driving licence, bank account statement and so on. Though you can invest in an MF armed with just a KYC acknowledgement, your investment will get frozen (additional investments, switches and redemptions will not be allowed) till you get KYC approval.