KYC or &lsquo;Know Your Customer&rsquo; is the process of verifying the identity and address of all customers and clients by almost all financial institutions such as banks, brokerages, insurers, AMCs, depositories, lenders, card issuers etc. The RBI has made KYC mandatory for all banks, financial institutions and any other digital payment companies who carry out financial transactions. So, think of it like the license necessary to commence financial transactions.&nbsp;

As per the guidelines issued by the government Aadhaar, Passport, Driving license, PAN card, Voter ID, Utility bills (not more than three months old) or address proof issued by managers of scheduled banks, notary or a gazetted officer are among some other documents that are accepted as address proof. &nbsp; 
There are two types of KYC &ndash; Aadhaar-based eKYC and the offline in-person verification KYC. The former has limits up to which you can transact, whereas the latter has no such limitations. Even though you may be KYC verified, institutions may from time-to-time ask you to refresh your KYC.&nbsp; 
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What is KYC?

From time-to-time you may have come across advertisements by regulators that are mostly messaged around the &lsquo;buyer beware&rsquo; category; which basically means, regulators expect consumers of financial instruments to be involved with the financial decisions that they make. For instance, the 14-word mutual fund disclaimer: &lsquo;Mutual Fund investments are subject to market risks, read all scheme related documents carefully&rdquo; warns investors and at the same time informs them to read all scheme related information, lest they cry foul over a fund sold to them wrongly. Likewise, the RBI has in recent years warned banking customers to be careful not to share OTP information etc.

The Indian financial system is strongly regulated by five primary regulatory bodies &ndash; the RBI (Reserve Bank of India), SEBI (Securities Exchange Board of India), IRDAI (Insurance Regulatory and Development Authority of India), FMC (Forward Market Commission of India) and PFRDA (Pension Fund Regulatory and Development Authority).&nbsp;

Each regulator regulates their field, with certain overlaps that are managed mutually and with government intervention. Apart from controlling financial security; they also work towards development of the financial sector, which is the backbone of any economy. They also play an important role in mobilization and allocation of resources. With clear specialisation demarcation; regulators work towards ensuring there is a level playing field for entities regulated by them.&nbsp;

With evolving complexity in financial products, there is a need for inter-regulatory oversight. For instance, pensions were mostly regulated by IRDAI, until the setting up of PFRDA, which has meant that all thing related pensions, which are currently not directly under the PFRDA, will also over time fall under them. Likewise, with an increase in gold related financial transactions; Budget 2021 has designated SEBI as the designated regulator for gold exchanges to infuse transparency in gold transactions. 
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Role of Regulators

The RBI is an apex monetary institution which was established in April, 1935 and was nationalised in 1949 and falls under the government of India. The RBI is the issuer of the Indian Rupee and regulates the banking and financial system of the country by issuing broad guidelines and instructions. It also controls the money supply and monitors key economic indicators such as GDP and inflation.&nbsp;

The RBI also formulates the monetary policies such as inflation control, bank credit and interest rate control as the Indian central bank. For instance, the Monetary Policy Committee (MPC) constituted by the Central Government determines the policy interest rate required to achieve the inflation target based on stakeholder inputs and prevailing state of the economy.

Reserve Bank of India (RBI)

SEBI is the regulatory body for the securities market and was established in 1988 and got legal status in 1992 to regulate the functions of the securities market to keep a check on malpractices and protect the investors. The primary role of SEBI is to regulate all aspects of the Indian stock exchanges and securities markets as well as protect the interests of investors through proper education and guidance. 
SEBI also audits the performance of the stock market and works to check fraud in the capital markets.&nbsp; 
To ensure fair market conditions; SEBI regulates issuers of securities, investors and financial intermediaries. Issuers include entities that raise funds from various sources in the market, investors are those who subscribe to these securities and intermediaries are those who bridge the gap between issuers and investors for smooth and safe transactions. SEBI&rsquo;s role is for proper functioning of all the three segments. In 2008, SEBI introduced applications supported by blocked amount, or ASBA, with the intent to make the process of submitting applications for IPOs convenient for investors. With ASBA, one did not have to pay the entire fee upfront, it also intended to forego the long waiting period for refunds through cheques, which usually takes up to 45 days.

Likewise, in 2018; SEBI got issuers of securities after the IPO to reduce the listing time on stock exchanges from 6 to 3 days. In the case of market intermediaries such as brokers and even mutual fund distributors; SEBI has indicated prerequisites for one to become an intermediary including qualifications or networth conditions and fees.&nbsp; 
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Securities Exchange Board of India (SEBI)

The AMFI is not a regulatory body, but it is a not profit organisation which is a body of all SEBI registered asset management companies (AMCs) in India. The prime role of AMFI is to act as an industry body of AMCs and work towards developing the mutual fund industry on professional, healthy and ethical lines. It also works towards enhancing and maintaining standards in all areas with a view to protecting and promoting the interests of mutual funds and their unit holders (investors).

For instance, the AMFI introduce guidelines on the nomenclature of MFDs (mutual fund distributors), which bars them from having words such as &ldquo;Independent Financial Adviser or IFA or Wealth Adviser or any other similar name&rdquo; unless they are registered with SEBI as an Investment Adviser. MFDs with such names have been extended a window to change their registered names. 
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Association of Mutual Funds in India (AMFI)

The CBDT is part of the Department of Revenue in the Ministry of Finance of the Government of India. The essential function of the CBDT is to provide essential inputs, ideas and requirements for planning and policy in India, with regard to direct taxes in India. CBDT helps in the administration of direct taxes throughout India through the Income Tax Department. CBDT also deals with matters relating to levy and collection of direct taxes. It also proposes legislative changes in direct tax enactments and changes in rates and structure of taxation in tune with the policies of the Government.

It is a Statutory Authority, which used to handle both direct and indirect taxes. The CBDT website has a lot of information and data, including deadlines to file tax, tax rates and even step-by-step process to file income tax returns. 
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Central Board of Direct Taxes (CBDT)

A Depository is a place where financial securities are held in dematerialised form, which is basically a digital or electronic holding. A Depository Participant (DP) is an agent of the depository and is registered with the SEBI. There are two depositories which are functional in India &ndash; National Securities Depository Ltd (NSDL) and Central Securities Depository Ltd (CDSL). Both these entities are responsible for maintenance of ownership records and facilitation of trading in dematerialised securities.

Depositories are entities through which investors can buy and sell securities. For example, stocks and bonds in a paperless form can be sold and bought at the depository, which can be assumed to be similar to how banks safely keep cash, but in this case they keep shares in companies in paperless form.

Depository

To address investor complaints pertaining to the securities market, SEBI launched SCORES, an online platform designed to help investors to lodge their complaints. This provision is for all investors against listed companies and SEBI registered intermediaries. All complaints received by SEBI against listed companies and SEBI registered intermediaries are dealt through SCORES.

All complaints arising out of issues that are covered under SEBI Act,Securities Contract Regulation Act, Depositories Act and rules and regulations made thereunder and relevant provisions of Companies Act, 2013 are handled by SCORES. Complainants have to furnish their name, address, email address, PAN and mobile to register and be updated with their complaint. To further strengthen SCORES; SEBI has mandated companies to resolve investor complaints within 30 days from the receipt of such complaints. In case the company fails to do so, such direct complaints shall be forwarded to Designated Stock Exchange (DSE) through SCORES and the companies will be fined by the stock exchanges Rs 1,000 per day per complaint on the listed entity for failure to redress investor complaints within stipulated time.

SEBI Complaints Redress System (SCORES)

A Mutual Fund Distributor (MFD) could be an individual or an institution such as a bank, brokering house or on-line distribution channel provider etc. As per SEBI Mutual Fund Regulations, all MFDs need to obtain relevant certification from National Institute of Securities Management (NISM) and register with AMFI and obtain AMFI Registration Number (ARN) to operate as an MFD. Likewise, all employees of MFDs engaged in sales of mutual funds are required to obtain the relevant NISM certification and register with AMFI and obtain an Employee Unique Identification Number (EUIN).

It is mandatory for MFDs to use the ARN code assigned to them on clearing the mandatory mutual fund distributor examination conducted by the National Institute of Securities Markets (NISM), which allows them to sell mutual funds. Once an MFD clears the exam, they must register with AMFI to obtain the AMFI Registration Number (ARN). The ARN is a must for distributors to be empanelled by mutual fund companies, and it also must reflect in the mutual funds that are sold by them to investors.

Mutual fund distributor

The RIA could be an individual or an organization and give investment advice to individuals. RIAs are registered with SEBI and have more obligations towards their customers than mutual fund distributors. They have fiduciary duty towards their clients to give financial advice in the best interest of their clients. The role of RIAs involves preparing a financial plan for their clients taking into consideration their financial goals, besides current and future financial situation. They also charge a fee for their services which could be a flat fee or as a percentage of the assets they advise on.

From October 1, 2020, financial advisors can provide investor advice only if they are registered investment advisors (RIAs) by the SEBI. This regulation has been introduced to separate investment advice from financial distribution. What effectively it means is that an advisor cannot act as a mutual fund distributor. Think of this like a doctor, who cannot also act like a chemist. Example of an RIA institution is HDFC Securities. One can find the entire list of RIAs on the SEBI website.

Before You Start Investing

What is KYC?