In a recently released draft circular, the Securities and Exchange Board of India (SEBI) has proposed a uniform procedure for opening new mutual fund folios and executing the first investment.

The purpose of introducing this uniform procedure is to address issues faced by investors and fund houses due to incomplete know your client (KYC) verification.

Under the new proposed rules, mutual fund investors can only start making transactions after their Know Your Customer (KYC) verification is fully completed and confirmed by the KYC Registration Agency (KRA).

Specifically, their investment accounts (folios) must be marked as "compliant" in the KRA's system.

This change is designed to eliminate errors and discrepancies that occur under the current system, where asset management companies (AMCs) sometimes open folios before the KRA's final review is finished.

Currently, asset management companies (AMCs), perform their own internal ‘Know Your Customer’ (KYC) checks and allow investors to proceed with transactions, even as the investor documents are sent to the KYC Registration Agency (KRA) for a final check.

If the KRA later finds any discrepancies or deficiencies, the investment account (folio) is flagged as non-compliant, often resulting in significant delays and transaction blockages for the investor.

The market regulator, SEBI, notes that these operational lapses have created substantial practical difficulties. Investors face the frustration of being unable to transact or redeem their investments.

Meanwhile, fund houses encounter hurdles when trying to communicate with unitholders, or when attempting to credit redemption proceeds and dividends due to incorrect or incomplete information.

Ultimately, these ongoing operational issues have also been a factor in the rise of unclaimed investor funds.