Thursday, December 9, 2010

Funds set to miss Jan 1 date to complete KYC process

It's a race against time for asset management companies (AMCs), as they try to complete the 'know-your-client' process before the regulatory deadline of January 1, 2011. It is a 'Herculean task' for fund houses, considering that less than 10% of the total unitholder base is 'KYC-compliant' at this point of time, industry officials say.

Capital market regulator the Securities and Exchange Board of India (SEBI) has made it mandatory for asset management companies to extend the KYC norms to investors, who have less than Rs 50,000 in funds. The regulator wants fund houses to verify identity and address of the investor, financial status, occupation and such other information to ascertain the source of money coming into the stock market through mutual funds.

Fund houses are finding it difficult to get investors to co-operate. "Investors are not comfortable providing these details," said the sales head of corporate-promoted fund house, adding, "Rich investors in smaller cities, who make several small investments in their close relatives' names, are worried that these details will be used for tax purposes."

Fund houses mobilising money through new fund offers currently, are the worst affected, officials said. "We're speaking to clients who have completed their KYC process to invest in recent NFOs," said a Bangalore-based fund distributor.

"Getting new clients and then forcing them to submit additional documents is a difficult task," the distributor said. Though retrospective in nature, existing investors - including SIP investors - will be able to continue with their investments after January 1, even if they are not KYC-compliant. However, they will not be able to switch their investments or make additional investments without being KYC-compliant.

The fund industry has appointed CDSL Ventures (CVL) to maintain the database of completed one-time KYC. CVL will also act as an additional counter to accept and verify documents and provide 'KYC-acknowledgement'. Investors need to submit address proof, proof of identity and passport size photograph, along with an application form, to complete the KYC process. Investors can make their submission with distributors, fund houses or CVL counters.

"Adhering to KYC norms for investors below Rs 50,000 is an expensive proposal for fund houses. We'll have to pay Rs 34-37 every time we access the CVL database and check credentials of the investor," said marketing head of bank-promoted fund house.

According to industry sources, several fund houses have written to SEBI and Amfi about practical problems involved in extending KYC norms below Rs 50,000 worth of investments. Retail customers dominate equity mutual funds, with over 90% of the investment volume coming from ticket sizes of less than Rs 1 lakh. More than 70% of overall investor folios have investments below Rs 50,000.

Often, small retail investors - with SIP amounts as low as Rs 500 - especially from tier-3 cities and villages, do not have documents to conform to the KYC process. This will hinder the growth of mutual funds in rural India, industry sources said.

Currently, around 5% of the country's gross domestic savings is invested in equities. As per industry estimates, MF investors constitute just about 2% of the entire population.

Out of 32 crore individual wage earners between the age of 18 and 59, only about 55 lakh invest in mutual funds. As on September 30, there were 3,94,39,302 equity folios holding investor money.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/Funds-set-to-miss-Jan-1-date-to-complete-KYC-process/articleshow/7068912.cms


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