NISM-Series-V-A: Mutual Fund Distributors Certification Examination

Mutual Fund Investors

 Eligibility to Invest 
The following categories of people/entities are eligible to purchase Units of most schemes of mutual funds:
Individual Investors They invest for their personal benefit or the benefit of their family. Examples:

1. Resident Indian adult individuals, above the age of 18: They can invest, either singly or jointly (not exceeding three names). 
2. Minors i.e. persons below the age of 18: Since they are not legally eligible to enter into a  contract, they need to invest through their guardians. 
3. Hindu Undivided Families (HUFs): Here, family members pool the family money (inherited) for investments.  The head of the family (called “Karta”) invests on behalf of the family.  Against his name in the application, he would add the letters “HUF” to show that the investment belongs to the family.   
4. Non-Resident Indians (NRIs) /Persons of Indian origin (PIO) resident abroad: Indian citizens, who are working abroad, and their family residing abroad, are typical NRIs who invest in India. Some Indians go on to become citizens of foreign countries such as US, Canada, New Zealand etc.  Since India does not permit dual citizenship, they need to give up their Indian citizenship.  However, their status as erstwhile Indians, entitles them to invest in mutual fund schemes on full repatriation or nonrepatriation basis.  As part of the documentation, they will need to provide their PIO (Person of Indian Origin) Card / OCI (Overseas Citizenship of India) Card.
5. NRI / PIO resident abroad have the facility of investing on repatriable basis i.e. when they sell the investment, the sale proceeds can be transferred abroad.  Alternatively, they can invest on nonrepatriable basis, in which case the proceeds from the sale of those investments cannot be remitted abroad.  The conditions related to making payments for repatriable investments are discussed later in this Chapter. 
6.  Foreign investors can invest in equity schemes of MFs registered with SEBI after completing KYC process. 

Non-individual Investors 

Here, the investments are made by institutions, and individuals who are authorized to do so sign the documents on behalf of organizations / institutions they represent, such as:

1.  Companies / corporate bodies, registered in India 
2. Registered Societies and Co-operative Societies 
3. Trustees of Religious and Charitable Trusts
4. Trustees of private trusts  
5. Partner(s) of Partnership Firms 
6.  Association of Persons or Body of Individuals, whether incorporated or not 
7. Banks (including Co-operative Banks and Regional Rural Banks) and Financial Institutions and Investment Institutions
8. Other Mutual Funds registered with SEBI
9. Foreign Portfolio Investors registered with SEBI 
10. International Multilateral Agencies approved by the Government of India 
11. Army/Navy/Air Force, Para-Military Units and other eligible institutions 
12. Scientific and Industrial Research Organizations 
13. Universities and Educational Institutions 

Foreign portfolio investors who meet KYC requirements to invest in equity and debt schemes of Mutual Funds can invest through two routes:

• Direct route - Holding MF units in demat account through a SEBI registered depository participant (DP).  
• Indirect route- Holding MF units via Unit Confirmation Receipt (UCR) 

Sources of Information on Eligibility 

The individual investors eligible to invest as detailed above, can invest in any mutual fund scheme, unless the mutual fund comes out with a specific scheme, or a plan within a scheme, that is not intended for any category of investors. 

The non-individual investors eligible to invest as detailed above, can invest in a mutual fund.  However, it is a good practice to check the ‘Who can Invest’ section of the SID, especially for a first time investor. 

Further, in some schemes, only specific classes of non-individual investors are permitted.  For instance: 

• Some gilt schemes have specific plans, which are open only for Provident Funds, Superannuation and Gratuity Funds, Pension Funds, Religious and Charitable Trusts and Private Trusts. 

KYC Requirements for Mutual Fund Investors 

All investors, both individual and non-individual, including joint holders, NRIs, PoA holders and issuers, and guardians in the case of minors have to be KYC compliant, irrespective of the investment value. This applies for transactions such as new/additional purchases, switch transactions, new systematic investment plan (SIP)/micro SIP registrations received from effective date, new systematic transfer plan (STP) registrations from effective date, new dividend transfer plan (DTP) registrations from effective date. 

The KYC process involves establishing the identity and address of the investor as required under the Anti-money Laundering Laws. The application for investment must be accompanied by the acknowledgement for having completed the KYC process issued by the KYC registration agency (KRA). 

Broadly, mutual fund investors need to submit the following documents to the distributor or other capital market intermediary registered with SEBI, such as stock broker and depository participant. The information is updated in the central system of the KRA.  

KYC Documents 

For the KYC process (for establishing proof of identity and address) following documents are required: 

• Permanent Account Number (PAN) Card with photograph is mandatory for all applicants except those who are specifically exempt from obtaining PAN. This serves as the proof of identity. The following categories of investors are exempt from producing PAN: 
• In case of transactions undertaken on behalf of Central/State government and by officials appointed by court. 
• Investors residing in the state of Sikkim. 
• UN entities/Multilateral agencies exempt from paying taxes/filing tax returns in India. 
• Investments (including SIPs) in Mutual Fund schemes upto Rs.50,000/- per investor per year per mutual fund. 

These categories of investors however have to provide an alternate document such as the Aadhaar card, Passport, Voter’s Id, Driving License or other photo-identity card which serve as the proof of identity. 

• Proof of Address such as passport, Voter’s Id, Ration card, Driving License, bank account statement, utility bill and other specified documents. If address for communication and permanent address are different then documentary proofs have to be provided for both. The proof of address in the name of the spouse may be accepted. 

The copies of the documents produced have to be self-attested and the originals have to be provided for verification purpose. In case, the originals are not produced for verification then the copies of the documents must be attested by persons authorized to do so.  

KYC Registration Agencies 

Centralised KYC Registration Agencies (KRA)

  

SEBI has instituted a framework of Centralised KYC Registration Agencies (KRAs) for the benefit of investors. 

SEBI circulars dated August 22, 2011, October 5, 2011 and December 26, 2013, on uniform KYC norms prescribed a standard account opening form  (AOF).  Part I of the form contains the basic KYC details of the investor used by all SEBI registered intermediaries.   

Vide Notification dated November 26, 2015, the Government of India authorised the Central Registry of Securitisation and Asset Reconstruction and Security Interest of India (CERSAI) to act as and to perform the functions of the Central KYC Record Registry under the PML Rules 2005, including receiving, storing, safeguarding and retrieving the KYC records in digital form of a client.

   

As per the 2015 amendment to PML (Maintenance of Records) Rules, 2005 every reporting entity shall capture the KYC information for sharing with the Central KYC Records Registry (CKYCR) in the manner mentioned in the Rules as per the KYC template for ‘individuals’ finalised by CERSAI.

  

Accordingly the KYC template finalised by CERSAI has to be used by the registered intermediaries as Part I of the AOF for individuals. The registered intermediaries shall upload the KYC data  with Central KYC Records Registry (CKYCR) in respect of all individual accounts opened on or after August 1, 2016 where KYC is required to be carried out as per the circulars issued by SEBI from time to time. Some of the key functions of Central KYC Registry have been mentioned below: 

• It shall be responsible for electronically storing, safeguarding and retrieving the Know Your Customer (KYC) records and making such records available online to reporting entites or Director. 
• Information updated about a customer shall be disseminated on request by Central KYC Registry to any reporting entity that avail the services of the Central KYC Registry in respect of the customer.
• The services of the Central KYC Registry will be available on payment of prescribed fee, in advance. 
• It shall process the KYC records received from a reporting entity for deduplication and issue a unique KYC Identifier for each client to the reporting entity. 

Where a customer submits a KYC identifier to a reporting entity, then such reporting entity shall download the KYC records from the Central KYC Registry by using the KYC Identifier and shall not require a customer to submit the documents again unless:

•  There is a change in the information of the customer as existing in the records of Central KYC Registry. 
• The current address of the client is required to be verified.
•  The reporting entity considers it necessary in order to verify the identity or address of the client, or to perform enhanced due diligence or to build an appropriate risk profile of the client. 

KYC through e-KYC service of UIDAI 

In consultation with Unique Identification Authority of India (UIDAI) and the market participants, it has now been decided to accept e-KYC service launched by UIDAI also, as a valid process for KYC verification. The information containing relevant client details and photograph made available from UIDAI as a result of e-KYC process shall be treated as sufficient proof of Identity and Address of the client. However, the client shall have to authorize the intermediary to access his data through UIDAI system. 

KYC through Intermediaries 

Where the investors choose to hold the units in demat form or for applicants who choose to invest through the stock exchange infrastructure, the KYC performed by the Depository Participant will be considered as compliance with the KYC norms. 

Additional details of the investor, namely occupation, Gross annual Income/Networth and Politically Exposed Persons (PEP) status are also captured in the application form by mutual funds. This is mandatory information and has to be provided both by individuals and non-individuals. 

Centralised KRAs have made the KYC process simpler for investors. Mutual funds, depositories, registrars and transfer agents, KYD compliant mutual fund distributors and brokers are authorised to facilitate the KYC documentation of investors. 

 KYC Process 

KYC Process entails the following 

• The requisite form has to be filled-in along with supporting documents (as discussed in 7.2.1). The supporting documents (identity and address proof) are verified with the original documents.  Alternatively, the investor can provide a True Copy attested by a Notary Public, Gazetted Officer or Manager of a Scheduled Commercial Bank. 
• The original documents of the identity and address proof are returned to the investor, after verification, while the forms and supporting documents are uploaded in the server of any centralised KRA. 
• The intermediaries mentioned above are also authorised to perform an In Person Verification (IPV) of the investor, which is mandatory. The name, designation and organisation of the person conducting the IPV has to be recorded on the KYC form. An IPV performed by Scheduled Commercial Bank is also acceptable for mutual fund investments. 

Once these processes are completed and the details are uploaded on the KRA’s servers, the KYC process is complete.  The investor does not need any further KYC for dealing in any part of the securities market (depository, stock exchange transactions, mutual fund transactions etc.). 

Similarly, in the event of change of address or any other information, the mutual fund investor needs to fill the standard form and follow the prescribed process only once, with any of the intermediaries mentioned above.  Based on that, the information will be updated with all the mutual funds and other capital market related parties where the investor has invested. 

KYC for Minors 

Where investment is made by a minor, KYC requirements have to be complied with by the Guardian. The proof of age of the minor has to be provided. On becoming a major, the erstwhile minor investor has to complete the KYC process and provide the acknowledgement to the mutual fund. 

KYC for Power of Attorney (PoA) holder on behalf of an investor 

In the case of investments by a Power of Attorney (PoA) holder on behalf of an investor, KYC requirements have to be complied with, by both, investor and PoA holder. A PoA holder cannot apply for KYC compliance on behalf of the issuer of the PoA. 

KYC  for NRIs

For NRI investors PAN is the sole identification number for KYC compliance. A copy of the passport/PIO card/OCI card and overseas address proof is mandatory. 

PAN Exempt Investments in Mutual Funds 

Providing Permanent Account Number (PAN) is compulsory for all mutual fund investments. Exception has been made for Micro-SIPs i.e. SIPs where annual investment (12 month rolling or April-March financial year) does not exceed Rs 50,000. Similarly, as discussed later in this chapter, small investors investing upto Rs. 50,000 per mutual fund per financial year do not need to provide PAN Card. Rs. 50,000 is a composite limit for the small investor’s Micro-SIP and lump sum investments together. 

Investment by individuals, minors and sole-proprietary firms within the limits specified above are exempted from the requirement of PAN card. However, the KYC norms have to be complied with a SEBI registered KRA. Investors must quote the PAN Exempt KYC Reference Number (PEKRN) issued by the KRA and submit a copy of the letter with the application form. 

Instead of the PAN, the investors (including joint holders) can submit any one of the following 

PHOTO IDENTIFICATION documents for KYC verification: 

• Voter Identity Card 
• Driving License 
• Government / Defense identification card 
• Passport 
• Photo Ration Card 
• Photo Debit Card (Credit card not included because it may not be backed up by a bank account). 
• Employee ID cards issued by companies registered with Registrar of Companies) 
• Photo Identification issued by Bank Managers of Scheduled Commercial Banks / Gazetted Officer / Elected Representatives to the Legislative Assembly / Parliament 
• ID card issued to employees of Scheduled Commercial / State /District Co-operative Banks. 
• Senior Citizen / Freedom Fighter ID card issued by Government. 
• Cards issued by Universities/deemed Universities or institutes under statutes like Institute of Chartered Accountants of India, Institute of Cost Accountants of India and Institute of Company Secretaries of India. 
• Permanent Retirement Account No (PRAN) card issued to National Pension System (NPS) subscribers by CRA (NSDL). 
• Any other photo ID card issued by Central Government / State Governments /Municipal authorities / Government organizations like ESIC / EPFO. 

The Document must be current and valid. Document copy shall be self-attested by the investor/attested by the ARN holder mentioning the ARN number. 

Investors have to give a declaration stating that they do not have any existing Micro SIPs which together with the current application will result in aggregate investments exceeding Rs. 50,000 in a year. 

It may be noted that the relaxation in documentation requirements for micro-SIPs is not available for HUFs and non-individuals. Such relaxation is available for NRIs, but not PIOs. In case of joint holding the first holder must not possess a PAN to be eligible for this exemption. 

Additional Requirements applicable for Institutional Investors 

Documentation required for Institutional Investors

Since institutional investors are not natural persons, authorised individuals invest on behalf of the institution. Therefore, the following additional documents are essential: 

• Eligibility for the investing institution to invest.  For instance, a company/trust is eligible to invest under the laws of the country, but the company’s own incorporation documents (Memorandum of Association and Articles of Association or Trust Deed) may not have provided for such investments. The company / trust cannot invest if its incorporation documents do not provide for investments of this type. 

Similarly, in some states, permission of the Charity Commissioner is necessary, before Religious and Charitable Trusts can invest. 

• Authorisation for the investing institution to invest. This is typically in the form of a Board Resolution. 
• Authorisation for the official to sign the documents on behalf of the investing institution.  This again is provided for in the Board Resolution. In case of other non-individual investors, too the list of authorised signatories would be required. The mutual fund can allow transactions only if the transaction form/slip carries the signature of any (one or more, as required) of the authorised signatories. 
• SEBI has mandated that investors other than individuals have to provide details of the ‘Ultimate Beneficial Owner’ (UBO) of the investments and submit documents to establish their identity of such UBOs through any of the identity proofs acceptable under the KYC norms.  An UBO of a company is one who owns or is entitled to more than 25 percent of its shares or profits, more than 15 percent in case of partnerships and body of persons. In case of a trust, this includes the settler, the trustees, the beneficiaries who are entitled to 15 percent or more of the benefits. The UBO requirements are not applicable to listed companies or subsidiaries of the same.  
• These documentation requirements for institutional investors are in addition to the normal KYC documentation, discussed earlier. 

Legal Information and Mandatory Declarations 

As part of the Client Due Diligence (CDD) process under Prevention of Money Laundering Act, all categories of investors of SEBI registered intermediaries, which includes mutual funds, except individual investors and a company that is listed on a stock exchange or is a majority owned subsidiary of such a company is required to provide the information required to establish and verify the identity of the persons who beneficially own or control the securities account. The proof of identity of the Ultimate Beneficial Owner (UBO) such as Name/s, Address, PAN/Passport together with self-attested copy along with the UBO declaration form has to be submitted to the AMC/RTA. In case there is a change in the UBO then the same should be intimated to the AMC/RTA. 

Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standards (CRS) 

To comply with the requirements of Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standards (CRS) provisions, financial institutions, including mutual funds, are required to undertake due diligence process to identify foreign reportable accounts and collect such information as required under the said provisions and report the same to the US Internal Revenue Service/any other foreign government or to the Indian Tax Authorities for onward transmission to the concerned foreign authorities. The application form requires information to be provided if the citizenship/nationality/place of birth/tax residency are places other than India for all categories of investors. The countries of tax residency and respective tax payer reference ID has to be provided. Once an investor is identified as covered under the said regulation, the entire investment value of all the folios held will be reported. The identity of the investors and their direct and indirect beneficiaries and controlling persons will be reported. If there is a change in the status of the investor after the information is first provided then the same has to be reported to the mutual fund within 30 days. 

Demat Account 

Dematerialisation is a process whereby an investor’s holding of investments in physical form (paper), is converted into a digital record. Benefit of holding investments in demat form is that investors’ purchase and sale of investments gets automatically added or subtracted from their investment demat account, without having to execute cumbersome paperwork. Settlement of most transactions in the stock exchange needs to be compulsorily done in demat form. 

In order to avail this facility, the investor needs to open a demat account with a depository participant. 

The access of demat facility for mutual fund investors has increased, with National Stock Exchange and Bombay Stock Exchange making available screen-based platforms for purchase and sale of mutual fund schemes.   

Mutual funds are required to provide investors the option to hold the units in demat form. The mutual fund has to obtain an ISIN for each option of a scheme and make the information available in all the account statements sent to the investor. The application form for mostly all schemes have an option to provide the demat account details in case the investor chooses to hold the units in demat form. The demat facility is typically initiated by the mutual fund, which would tie up with a Depository (like National Securities Depository Ltd or Central Depository Securities Ltd).  On the basis of this tie-up, investors can open a demat account with a Depository Participant and dematerialize their investment holding i.e. convert their physical units into demat units. Usual KYC documentation is required for opening the account. However, once the KYC including IPV is performed for opening a demat account, no separate KYC is required to be done by the AMC or distributor or any other capital market intermediary.  If KYC has already been done by any other capital market intermediary, then the DP will not insist on another KYC. 

The option to apply for the units in dematerialized form is provided in the application form.  The name of the Depository Participant with whom the investor holds the account, DP ID number and Beneficiary Account Number has to be provided. A copy of the DP statement enclosed with the application form may help the mutual fund verify the information provided in the application form. The name(s), mode of holding of the demat account and PAN of the holders are matched with the application for units and the units will be directly credited to the demat account after the realization of funds. If the data provided in the application form does not match the depository data then the application will be considered as invalid for processing under demat mode and instead the investor may be issued units in physical mode, provided the application is otherwise valid. All details such as address, bank account details, nomination for the units held in demat form is according to the information available in the depository’s records. Any changes to the said information has to be made by contacting the depository. Redemption requests for units held in demat mode has to be submitted to the depository or through the stock exchange platform. 

Investors can also choose to get their existing units (as represented by the statement of account) dematerialized. On dematerialisation, the investor’s unit-holding will be added to his/her demat account.  As and when the investor sells the unit-holding, the relevant number of units will be reduced from the investor’s demat account. The proceeds of redemptions as well as the dividend payouts will be credited to the bank account linked to the demat account. The investor benefits from a demat account are as follows: 

• Less paperwork in buying or selling the Units, and correspondingly, accepting or giving delivery of the Units. 
• Direct credit of bonus and rights units that the investor is entitled to, into the investor’s demat account. 
• Change of address or other details need to be given only to the Depository Participant, instead of separately to every company/mutual fund where the investor has invested and holds demat units. 
• Consolidate all investments in mutual funds, direct equity, debentures and others under one account. 

The investor also has the option to convert the demat units into physical form.  This process is called rematerialisation.