Aadhaar no longer binding, but instant e-KYC uncertain

After several months of confusion, the Supreme Court last week clarified on use of Aadhaar. Broadly, Aadhaar will be compulsorily required to avail welfare services and subsidies from the government. It will also be required to be linked to PAN cards, which means it will be required for filing your income tax returns. At the same time, it is now clear that you do not need to link your mobile connection, bank account and other financial services accounts with Aadhaar. 

However, over the past couple of years, many financial services had started using Aadhaar-based electronic KYC to get new customers on board. For instance, banks had started opening bank accounts through apps, based on Aadhaar KYC—an individual could open these accounts on their own, and upgrade them to a full KYC-compliant account later. Similarly, Securities and Exchange Board of India (Sebi) allowed mutual funds to allow investments up to ₹ 50,000 on the basis of Aadhaar KYC through the OTP method. 

The Supreme Court declared the portion of Section 57 of the Aadhaar Act that enabled private companies to use Aadhaar for establishing the identity of an individual, “unconstitutional”. At present, this aspect of the judgment is being interpreted in at least three ways by financial services companies. One, private companies cannot use Aadhaar for KYC at all. Two, private companies can use Aadhaar for KYC if an individual shares it voluntarily. Three, private companies cannot take the 12-digit Aadhaar number from the customer, but can instead use the Aadhaar QR code or Aadhaar virtual ID, which is a 16-digit temporary number that masks the Aadhaar number. 

While most financial services companies have made Aadhaar optional for KYC now, what will happen to the services that relied on Aadhaar KYC for getting a customer on board instantly? 

Mutual funds 

Sebi had allowed mutual fund companies to let new retail investors invest up to ₹ 50,000 instantly after they produce PAN and undergo an Aadhaar plus OTP-based e-KYC. “Post Supreme Court judgment on Aadhaar, that circular is in a grey area and we are awaiting clarifications,” said Jimmy Patel, CEO, Quantum AMC, adding that a new investor might not be able to avail this facility at present. Other fund houses are also disabling the facility, said another senior executive of an AMC, on the condition of anonymity. 

Sebi mandates that all fund houses should ensure that their investors are alive and real persons through a process called in-person verification (IPV).

Distribution and advisory platforms like FundsIndia are continuing with Aadhaar-based onboarding of new customers, as of 2 October. “We are still doing Aadhaar e-KYC. We have not received any communication from Amfi (Association of Mutual Funds of India) or UIDAI (Unique Identification Authority of India) till now. We do not mandate Aadhaar and provide multiple KYC channels for new customers. Different people are taking different calls at this point. Probably by the end of the week, we will have clear directions on what is to be done,” said Srikanth Meenakshi, chief operating officer, FundsIndia. 

If you are a new investor, you can fill a physical form. Some AMCs, like Quantum Asset Management Co. Pvt. Ltd and Reliance Nippon Life Asset Management Ltd, offer web-camera-enabled IPV. This too is a paperless process, though it may not be as quick and smooth as Aadhaar e-KYC using OTP. The other method of e-Aadhaar-based using biometric may also go away, experts said.

Bank accounts 

After the Supreme Court ruling, banks have made Aadhaar as a KYC requirement optional. However, banks are still opening bank accounts online using KYC through Aadhaar-plus-OTP and biometric verification.

“We are governed by the Prevention of Money Laundering rules and RBI guidelines, and there has been no change in either of the two till now. But RBI’s April notification that made Aadhaar mandatory had said that it is subject to the Supreme Court verdict and, hence, customers opening an account are now being given a choice if they want to submit Aadhaar or not. If they do, their account opening process is instant. If they don’t, the process might take a few days so that all details are verified,” said a senior private sector banker, who did not want to be named. 

Insurance policies 

Insurance companies too are awaiting clarification from the Insurance Regulatory and Development Authority of India (Irdai). “The regulator made Aadhaar mandatory for KYC, but policyholders found some practical challenges. So we eased up on it especially since the matter was sub-judice. We asked for Aadhaar but if someone didn’t have Aadhaar then we made do with other KYC documents like PAN or passport. The practice continues even now,” said Vighnesh Shahane, CEO and whole–time director, IDBI Federal Life Insurance . “Our interpretation of the verdict is that Aadhaar will be optional and those who are willing to give Aadhaar as KYC can do so,” he said. 

Other services

Then there are services that might not use Aadhaar e-KYC but will use the Aadhaar-enabled ecosystem for other services. For instance, zero brokerage trading platform Zerodha uses Aadhaar e-Sign to process an account opening application form. To open an account with Zerodha today, you need to give PAN, proof of identity and address.

“If a customer does not have or does not want to use Aadhaar at all, it is not possible to open an account on Zerodha through a completely paperless process. The only way in which we can digitally open an account is if people are able to digitally sign the account opening form, which can be done either through Aadhaar or dongle-based e-Sign services,” said Nithin Kamath, CEO and co-founder, Zerodha. So while Aadhaar is not mandatory, it’s needed if the customer wants to open an account online.

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No clarity on delinking accounts yet

If you have already linked your Aadhaar with bank accounts, mutual funds or insurance policies, there is no online process yet to delink them. “It’s very clear for mobile phone companies that they can’t use Aadhaar and will have to delink the number, but I don’t think the same is applicable for insurers and we are waiting for clarity,” said Vighnesh Shahane, CEO, IDBI Federal Life Insurance Co. Ltd. 

A process may be put in place only after all the regulators issue guidelines and clarifications around the use of Aadhaar.

Deepti Bhaskaran contributed to the story