Last week, on 12 October, the Unique Identification Authority of India (UIDAI) wrote to the mutual funds industry—the registrar and transfer agents (R&T) and some online distributors—asking them to discontinue using Aadhaar-based authentication to complete the Know Your Client (KYC) norms. Mint has a copy of the letter.

UIDAI has said that the said firms will have to confirm in writing that they have closed the Aadhaar-based authentication and enumerate an exit plan by 20 October. N.S. Venkatesh, chief executive officer, Association of Mutual Funds of India (Amfi; the MF industry’s trade body) told Mint that they will “soon meet all the stakeholders, including fund houses and R&Ts and come up with an alternative."

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e-KYC to paper-based to paper-less KYC?

Apart from the physical KYC process where investors have to walk into the branches of their funds or R&Ts with copies of their original and duplicate ID and address proofs, fund houses also used Aadhaar to on-board investors faster. “Aadhaar-based authentication was used to on-board customers online and directly," said the head of compliance of a fund house who did not wish to be named as he is not the official spokesperson.

The OTP-based Aadhaar e-KYC: Using One-Time Password (OTP) was the fastest. Here, the investor needed to punch in the Aadhaar number at the time of investing. Once she got an OTP on her registered mobile phone, she could punch in the same and start investing. This method however came with its own limitations. An investor could only invest up to ₹ 50,000 per fund house per year.

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Biometric-based Aadhaar e-KYC: Aadhaar-based biometric also allowed investors to invest in mutual funds. Once you submit your fingerprint and it matches with the Aadhaar database, you could start investing in MFs.

Srikanth Meenakshi, co-founder and chief operating officer, FundsIndia.com, told us that the MF industry will now have to revert to paper-based KYC. However, scanned images can be used instead of mailing paper forms for speeding up the process. Even then, this will take longer than e-KYC. As per rules laid down by the capital market regulator, Securities and Exchange Board of India (Sebi), the fund house is mandated to do an In-Person Verification (IPV) for all their customers. An IPV is a process—a regulatory requirement actually—that shows an investor is alive and an actual person. An IPV is part of the KYC process. Once the fund house or the distributor did the IPV, the confirmation had to be still uploaded to the KYC Registration Agency. Experts say that this used to take time. So, the Aadhaar system not only used to authenticate customers faster, it also fulfilled Sebi’s requirement of an IPV.

A senior member of the MF industry, who too requested anonymity, said that the industry would most likely introduce “some sort of video conferencing facility" where fund houses will be able to see investors over a video call and thereby meet the IPV norms.

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While the video conferencing-based IPV was put to use by some fund houses in the past for investors who invested directly (those who came through distributors were authenticated by distributors in the pre-Aadhaar verification method), the MF industry would most likely contemplate implementing the video-based authentication, on a grander and if possible, quicker scale.

Now that the Aadhaar is to be de-linked from the databases of KRAs, what will happen to those investors who did their KYC using Aadhaar? While the industry is still deliberating on the finer details, Meenakshi believes the KYC ought to be still valid. “Only the Aadhaar number needs to be deleted, but investor’s KYC should still continue. We’ll have to wait to see what happens", he says.

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