Distributors concerned about potential liabilities arising out of conducting in-person verification (IPV) of new investors.
SEBI’s new KYC rule has become a roadblock for new investors coming in mutual funds. SEBI’s new KYC rules says that in-person verification (IPV) has to be done by distributors or by scheduled commercial banks in case of direct investors.
Distributors are worried over the possibility of facing the music in the event of any irregularity committed by new investors who have been vetted by them. So far SEBI has not defined any liability on distributors if any fraudulent practices are perpetrated by investors whose IPV may have been done by distributors. Top officials from AMCs inform us that there are concerns in the distribution community over this issue.
Similarly, they point out that SEBI has allowed stock brokers to do ‘in-person’ verification through web camera. However, such an option is not extended to mutual fund distributors. “Things would have been better if technology can be used efficiently and IPV can be done through a web camera like it is expressly allowed for a trading account with a stock broker,” says Jimmy Patel, CEO, Quantum Mutual Fund.
Clarity is still awaited on how NRIs and online distributors will do IPV.
“How will an NRI do IPV? It is proving to be a major hindrance for new investors. There are many distributor-driven issues on KYC. What if a new investor who has come through IFA commits a fraud in derivatives market? Will IFAs be held responsible since they have done the KYC and IPV? There is no clarity on the actual liability of a distributor. Distributors are not willing to take the risk of doing IPV of new investors whom they don’t know. Further, the new rule makes it mandatory for investors to invest, even if they want to just update their KYC status,” says a top official from a leading fund house.
Another burning issue is that private banks will have to share their balance sheets if they wish to invest in mutual funds. The new KYC guidelines require some additional details from non-individual investors like net worth, balance sheets for the last two financial years which needs to be submitted every year and a copy of the latest shareholding pattern.
“The intermediary shall ensure that the details like name of the person doing IPV, his designation, organization with his signatures and date are recorded on the KYC form at the time of IPV. In case of mutual funds, their asset management companies (AMCs) and the distributors who comply with the certification process of National Institute of Securities Market (NISM) or Association of Mutual Funds in India (AMFI) and have undergone the process of ‘Know Your Distributor (KYD)’, can perform the IPV. However, in case of applications received by the mutual funds directly from the clients, they may also rely upon the IPV performed by the scheduled commercial banks,” states the SEBI circular issued on Dec 23, 2011.
