SEBI Proposes Standardised KYC Process for New Mutual Fund Folios

The Securities and Exchange Board of India (SEBI) has issued a consultation paper proposing a standardised process for opening new mutual fund folios and executing the first investment. The move aims to address operational and compliance issues caused by incomplete Know Your Customer (KYC) verification at the time of folio creation.

Current Challenges in KYC Verification

At present, Asset Management Companies (AMCs) often process investments immediately after internal KYC checks, even before a KYC Registration Agency (KRA) completes verification. This can result in folios being marked as KYC non-compliant later if discrepancies are found, delaying redemption, dividend credits, and investor communication.

KYC-related delays have impacted both investors and AMCs. Investors may face restrictions on transactions or delays in receiving redemption proceeds and dividends due to incorrect bank details. AMCs also encounter difficulties in communicating with unitholders and processing payments, leading to unclaimed dividends and redemptions.

Proposed Process for New Folios

·       AMCs will create new folios only after receiving account opening documents and conducting internal KYC verification.

·       Documents will then be sent to the KRA for final verification.

·       The first investment can be executed only after the KRA marks the folio as KYC-compliant.

·       Investors will receive email and mobile notifications on their KYC status at each stage.

Expected Impact and Timelines

The new process is expected to reduce errors and improve compliance, investor communication, and transaction accuracy. However, it may introduce a slight delay in executing the first investment compared to current practices, as KRA verification can take an additional 2–3 working days beyond AMC-level checks.

Currently, first investments can be made immediately after AMC checks, which are usually completed in 1–2 days. Under the proposed system, the first transaction will wait for KRA verification.

Public Feedback and Implementation

SEBI has invited public comments on the draft procedure until November 14, 2025, through its web portal. AMCs, KRAs, and other market intermediaries will need to update internal systems and workflows to comply with the new standard once implemented.

Read More: SBI Mutual Fund Filed Draft for Business Cycle Fund.

Conclusion

SEBI’s proposal to standardise KYC verification for mutual fund folios aims to enhance compliance and reduce operational risks. While the process may slightly delay first investments, it is expected to improve accuracy and investor experience in the long term.

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