SEBI plans to streamline process for opening mutual fund folios

The Securities and Exchange Board of India (SEBI) has put forward a proposal to streamline the process for opening new mutual fund folios and making the first investment. The move comes as part of an effort to tackle challenges faced by both investors and fund houses due to incomplete Know Your Client (KYC) verification. SEBI released a draft circular outlining the proposed changes on Thursday.

Under the current system, mutual fund folios are often created by Asset Management Companies (AMCs) before the final approval from KYC Registration Agencies (KRAs) is received. While AMCs carry out their internal KYC checks and accept investments, the investor documents are simultaneously sent to KRAs for final validation. If the KRA later identifies any discrepancies, the folio is flagged as non-compliant. This can result in delays, blocked transactions, and inconvenience for investors.

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New KYC Compliance Rules

SEBI’s proposed framework seeks to address these issues by ensuring that investors can only initiate transactions after their KYC verification is fully completed by the KRA and their folio is marked as compliant in the KRA system. The draft circular specifies, “First investment in a new folio shall be permitted only after KYC verification is completed by the KRA and the folio is marked as KYC compliant in the KRA system.”

Additionally, investors will be kept informed at every stage of the KYC process through their registered email and mobile number. This is expected to bring transparency and reduce confusion over the status of folios. By mandating that first investments occur only after full KYC compliance, SEBI aims to prevent the current situation where discrepancies lead to flagged folios and blocked transactions.

Investor-Friendly Approach

The proposed changes are part of SEBI’s broader effort to create a smoother and more investor-friendly environment in the mutual fund industry. By eliminating sequential verification issues, the regulator hopes to reduce delays, ensure compliance, and make the investment process more transparent. Investors and fund houses are now invited to review the draft circular and provide feedback before the rules are finalised.

If implemented, the standardised process is likely to improve overall efficiency in mutual fund operations while giving investors greater clarity and confidence in their transactions.