Long ago, fraudsters used to lay their hands on cheques and documents in transit and get them transferred in their names. Moreover, documents which got destroyed due to natural calamities such as fire, flood, earthquake, etc., posed problems — replacing them with duplicates was fraught with risk due to non-availability of the investors identity with the related financial institutions such as banks, NBFCs, public companies, MFs, et al. However, over time, advancement in technology presented a simple solution in the form of KYC (Know Your Customer/Client).

This enables the institution to verify the identity of its client to protect him from any fraudulent activity. It also enables the government to get hold of illegal intentions of the proponent intending to flout Prevention of Money Laundering Act Regulations. An excellent dream indeed.Unfortunately this dream has turned into a nightmare due to lack of proper planning for its implementation.

  • The RBI introduced KYC guidelines for all banks way back in 2002. In 2004, it directed the banks to ensure that they are fully compliant with the KYC provisions before December 31, 2005.
  • Accordingly, compliance officers and legislators can craft anti-money laundering policies that are both as effective and as least burdensome as possible. This is significant not only in terms of making the process less costly but also frees up compliance officers’ time, allowing them to focus on larger and more harmful violations of the law. Yes, the intention was good but then the KYC was required to be done by each branch of each bank and also each financial institution separately — colossal waste of time and energy of all the compliance officers’ time put together.
  • During his Budget speech for FY 14-15, Arun Jaitley recognising that compliance has become costly and cumbersome, had declared — “The financial sector is at the heart of the growth engine. The capital markets have been a source of risk capital for a growing India. I propose to take a number of measures to further energise these markets including:
  • Introduction of uniform KYC norms and inter-usability of the KYC records across the entire financial sector and
  • Introduce one single operating demat account so that Indian financial sector consumers can access and transact all financial assets through this one account.” A very wise intention.

Current situation: Four years thereafter

  • Finding that the compliance is not as desired, SEBI asked AMFI, the self-regulatory body of all the MFs vide its letter dated July 7, 2018, to withhold brokerage payable to agents of MFs where the investors’ KYC is not compliant. Again a wise move to rope in the agents to reach the target.
    The following is an extract from the communiqué sent by CAMS, the R&T agents for some fund houses to all the agents to clean the mess, with the ‘or else’ message.
    “KYC status has to be updated with each AMC separately. From 2012 onwards, this is typically being done at the time of first transaction of an investor with that AMC. Therefore, remediation list is also sent specific to each AMC.”

When the remediation list is examined, this is what I find —

  • The list is not AMC-wise but folio-wise.
  • If the first holder in a folio is KYC compliant, the same holder is not compliant when he is second or third holder and vice versa.
  • In some cases, the KYC doesn’t match due to data entry errors by the R&T agents. In terms of an example, the name of the same investor is misspelt by the R&T agent and hence comes out in the KYC exception list. However, the PAN is the same. Which means while issuing the list, they haven’t even filtered it for weeding out those entries with the same PAN thereby
  • KYC of minor is not compliant but that of its guardian is.

This is strange —

i) The investment is redeemed and the balance is nil.
ii) Investment was in capital gains bonds of NHAI or REC and even if these are redeemed.
iii) The investor has expired and the investment has already been transmitted to the next holder or the nominee. Yet, KYC compliance is called for.

Now comes the next colossal waste — Karvy, another R&T agent, needs the same KYC for the same investors and moreover those fund houses who have been managing KYC themselves need the same data for the same investors.  There are some houses that manage their own R&T. They will also need the same action to be taken by their agents.

And finally horror —

a) I have been told by my bank that I should receive all the cheques received by me drawn in the name as appears in the KYC, which is my full name. Cheques received in my name styled a little differently, say, A. N. Shanbhag will be bounced, a) I have been told by my bank that I should receive all the cheques received by me drawn in the name as appears in the KYC, which is my full name. Cheques received in my name styled a little differently, say, A. N. Shanbhag will be bounced, unless, I attach a self-declaration stating that I am the same person.

b) Change of the old bank account number, especially after the core banking was effected, causes humongous harassment. If the last 5 digits are not the same as the old account number a fresh proof is required to convince that the old account really belonged to the investor even if this proof was already provided and accepted by the MFs. It may be difficult to provide such a proof for very old accounts. This essentially means that the banks and/or MFs are either unwilling to go through their old files to get hold of the data or have destroyed the very old files.

What is the remedy for the harassed investor?
I wonder whether SEBI issued their circular in haste without caring to know the ground realities. ?
Is this the Central KYC (cKYC)? Where has it vanished? Can India afford this huge waste emerging from trying to implement the Finance Minister’s dream in such a shoddy manner and turn it into a nightmare?
Hope the Finance Minister will take corrective action.

The authors may be contacted at wonderlandconsultants@yahoo.com