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Tuesday, December 4, 2012

KYC norms have made investments in financial instruments all but impossible

Writing in these columns some months ago (Please Give Me an Identity, ET, July 11, 2012), Janmejaya Sinha, chairman for Asia-Pacific at the Boston Consulting Group, described in graphic detail his travails trying to establish his identity after he’d shifted to a new address in the same city.

Well, that was before the recent tightening of know-your-customer (KYC) norms and Sinha at least had the consolation that he’d moved to a new and, presumably, better accommodation . There is no such consolation for millions of others who will have to endure similar, if not worse, travails; thanks to flawed KYC norms. Let me explain. I have not shifted residence. As a long-standing customer of a mutual fund (MF), all I wanted to do was invest in another plan of the same MF. But, like Sinha, I found it impossible to establish my identity.

The fact that I was already an investor with the same MF made no difference. I might have been KYC-compliant earlier , but not any longer. I was an old customer of the bank that was part of the same group and was fully KYC-compliant with the bank was no good either. MFs are governed by the Securities Exchange Board of India (Sebi), and Sebi requires a separate KYC for capital market intermediaries.

My troubles didn’t end with filling up a fresh KYC form with the necessary documentary proof. Reason? While I was KYC-compliant with one of the four Sebi-recognised KYC Record Agencies (KRA), my husband, a joint holder, was KYC-compliant with another.

Logically, that should not pose a problem. But under Sebi rules, each MF is required to tie up with one KRA and KRAs don’t operate on a common platform . So, there is no way an MF can directly check the status regarding KYC-compliance if it is done by a different KRA.

It’s a bit like saying if you are an Airtel subscriber, you can make calls only to other Airtel subscribers, not to subscribers on Idea or BSNL, etc. Or, as with ATM cards earlier, when you could draw cash only from ATMs of the same bank.

So, can one solve the problem by repeating the KYC drill with the designated KRA? Nah! The rule book — how we love to complicate matters! — also says that once you are KYC-compliant with one KRA, you cannot seek to be compliant with another KRA. Why? Because a single permanent account number (PAN) can be registered only with one KRA. On the telecom analogy, once you are an Airtel customer, you are stuck with Airtel. You cannot switch to Idea.

And, if, like a good south Indian , your name is prefixed with initials, there is more trouble. Reason: the PAN, like the passport , insists on the full name, never mind if it is a mile long and no one knows you by that name. Net result: as the rules stand, you can never be KYCcompliant since the name as per the PAN is not the same as in any other document.

So , what is an ordinary citizen to do? Turn to gold, maybe! There’s little incentive to invest in financial instruments in any case; not when real rates of return are negative. Add to that the endless KYC hassles and gold wins hands down.

MFs plead helplessness. It’s a Sebi requirement and they have to comply. Sebi, in turn, passes the buck to the RBI and government. The RBI (informally ) blames the government, particularly the absurd requirements of the Prevention of Money Laundering Rules.

It’s the same plea the branch manager of a nationalised bank took when I accompanied my maid to the bank to open a savings bank account in her name. She had an Aadhaar number , and I, as a customer with the bank, was willing to introduce her but the branch manager would have none of it.

The second bank also refused . But this time I stood my ground , threatening the branch manager with ‘dire’ consequences : writing to the chairman/ ombudsman, etc. Finally, I succeeded , but he was adamant saying instructions from his head office were clear. He needed an introduction from an existing account holder.

So what happens to financial inclusion, to new customers who don’t know an existing customer ? Isn’t Aadhaar sufficient ? No, said the manager, Aadhaar only certifies the person is the one mentioned on the Aadhaar form. It is not 100% foolproof. He showed me a thick file on an ongoing investigation in a case where a savings account had been opened and then used to collect stolen cheques . It was hard to convince him that one swallow does not a summer make. Or that the good should never become the enemy of the best.

Unfortunately, all this is set to get worse. From January 1, 2012, in a bid to ‘simplify’ KYC requirements, Sebi has made it mandatory for all existing MF investors to submit a KYC Details Change form to update missing information such as gross annual income/net worth , etc. Additionally, fund houses have to do an ‘in-person verification’ of each investor, which means each investor must present himself physically before MF officials.

Will all this end the scourge of money-laundering ? Not a chance ! We’ve had KYC rules for close to a decade now and as reports and allegations, as yet unsubstantiated, show, they did not stop Indians from stashing money abroad. How can we get out of this mess? Simple! Have one basic KYC rule with minimal information for all financial investments , with system-driven reporting of transactions above a certain pre-specified limit. Beyond that, as the 1980s rock band A Flock of Seagulls crooned , “Why can’t you just let me be, I’m an ordinary man.’
Source : http://blogs.economictimes.indiatimes.com

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