The KYC disruption: Investors deserve better than this

According to a joint release by India’s five KYC registration agencies, as many as 12% of the over 108 million investor accounts under Sebi’s oversight have been put “on hold.”  (iStock)
According to a joint release by India’s five KYC registration agencies, as many as 12% of the over 108 million investor accounts under Sebi’s oversight have been put “on hold.” (iStock)

Summary

  • It’s unfortunate that so many investor accounts have been put ‘on hold’ for identity data gaps. Yes, compliance matters. But companies and mutual funds could’ve put in much more effort to help out

New Know-Your-Customer (KYC) regulations effective from 1 April have sent many investors into a tizzy, as they find their accounts locked for failing to meet yet another demand by authorities for verifiable data to establish their identities. Yes, we had a fresh round of KYC compliance. Under revised rules, holders of securities regulated by the Securities and Exchange Board of India (Sebi) had to validate their email IDs in addition to phone and Aadhaar numbers, the latter duly linked with PAN cards issued for taxation. Past KYC okays obtained with utility bills or bank documents were left invalid by this exercise. As the number of people affected by the lock-out is substantial, this is large-scale disruption. 

According to a joint release by India’s five KYC registration agencies (KRAs), as many as 12% of the over 108 million investor accounts under Sebi’s oversight have been put “on hold." These can no longer be operated by investors, as their KYC data was found to have gaps. As a result, they can neither invest further at these windows, nor withdraw funds for any exigency. Even if it is temporary, it’s harsh. By and large, we can assume these are their own reserves—assets acquired with hard-earned and tax-paid money—that they have been barred from. That too, with less than fair notice, as the high lockout proportion indicates. So many accounts cannot all be fraudulent, surely.

With scarce information on what exactly went wrong, locked-out investors have fumbled around to figure out how to rectify the situation. To be sure, KYC rules are necessary. Equity and mutual fund (MF) holdings must not end up in the wrong hands. Fake accounts need to be nabbed and asset fraud stamped out. Our digital identity system, which hosts biometric details, is designed to aid this endeavour. 

To the extent tax authorities need to check tax evasion, the PAN link could be justified too. But coercive action of this sort is best avoided. Rather than a shuttering, even if done only after repeated deadline extensions, a gentle policy nudge may have achieved the purpose. Accounts that lack a KYC update could have been slapped with an extra fee, for example, the payment call of which would have shaken asset holders into action. This would especially have been of help to elderly investors, many of whom are neither tech-savvy nor attuned to regulatory shifts and find it difficult to keep up with frequent resets of the maze that online validation is.

Given the puzzle that KYC can be for so many of us, a better approach would be for the onus to be shared more widely. Not just KRAs, which have helplines, even companies should make a greater effort to ensure law-abiding investors do not get barred from their holdings just for KYC neglect. In the case of MF investors, for instance, fund houses should take it upon themselves to see that people’s folios are compliant. 

Similarly, publicly listed companies should display the grace to keep all their shareholders in the loop of changes that have a bearing on their ownership status, guide them on what exactly is needed, and work with them to get the requisite updates done. These guidance efforts need to go well beyond the mass despatch of confusing and perfunctory messages that are dense with jargon. Regardless of how tiny the stakes of investors in these companies are, they happen to be part-owners, after all, and deserve the courtesy of a proper heads-up—via personal engagement over the phone, if it comes to that. Asset ownership must not be taken lightly.

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