Foundation — Who can invest, the on-boarding process, PAN and the KYC machinery

17.1.1 Who can invest?

Individual investors include resident investors who are competent to contract, minors through guardians, Hindu Undivided Family (HUF), Non-Resident Indians (NRIs) and Foreign Portfolio Investors (FPI) — foreign individual investors.

Their character: individual investors invest and transact from the funds that are owned by them or borrowed by them. Typically, the ticket-size of their investments is SMALL and these investors are SPREAD OUT GEOGRAPHICALLY.

Institutional investors include companies, trusts, charitable organizations and societies. They may be financial institutions, portfolio investors, pension funds, insurance funds and banks, among others.

How do they differ? They need to follow a FORMAL PROCESS for making and executing investment decisions. Specifically:

• The charter of the institution and the laws governing it should ENABLE INVESTMENTS AS A PERMITTED ACTIVITY.
• The apex governing body of the institutional investor, usually the BOARD (or TRUSTEES, as the case may be), has to APPROVE or AUTHORISE the investment decisions.
• There may be GUIDELINES that stipulate rules for asset allocation, choice of securities, management of risk and return, and the like. Investment decisions have to ADHERE TO THAT APPROVED PATTERN.
• Institutional investors transact through AUTHORISED SIGNATORIES who are designated to execute the documentation pertaining to investment decisions on behalf of the institution.

And a line worth remembering: the documentation, eligibility, tax treatment and process of investments also DEPEND ON THE INVESTOR CATEGORY.

Accredited investors

The eligibility list

The offer document of a product or scheme SPECIFICALLY MENTIONS the persons who are eligible to invest. Usually the following can invest, subject to limits and restrictions laid down by the SEBI regulations, RBI's norms if applicable, and the offer document of the particular scheme:

Resident individuals; Hindu Undivided Family (HUF); minors through guardians; registered societies and clubs; Non-Resident Indians (NRI); Persons of Indian Origin (PIO); banks; financial institutions; association of persons; companies; partnership firms; trusts; Foreign Portfolio Investors (FPIs); insurance companies; pension funds; mutual funds.

17.1.2 The client on-boarding process

Investors need to fulfil certain MANDATORY REQUIREMENTS to be eligible to invest. These pre-requisites come from two directions:

• Prevalent REGULATIONS — such as the need to be KYC compliant to be eligible to use any financial product or service
• The PRODUCT OR SERVICE PROVIDERS — specific to a particular product, specified in the terms of offer

Once these basic requirements are met, the specific conditions with respect to the instrument have to be completed. The workbook's example is a public issue: a public issue is open for subscription during a limited period as notified by the company. The date on which the issue will open for subscription and the earliest closing date are mentioned in the announcements about the issue. Investors have to make their application during this period.

And the payment rule, with its date:

SEBI has introduced the use of UNIFIED PAYMENT INTERFACE (UPI) with facility of blocking funds (ASBA facility), as a new payment mechanism for RETAIL INVESTOR applications submitted THROUGH INTERMEDIARIES.

17.1.3 Terms of offer

The offer document of a financial product specifies the conditions to be fulfilled by a prospective investor and the documentation that will be needed. Conditions may be laid down in terms of WHO CAN INVEST and HOW MUCH CAN BE INVESTED.

The workbook's examples of restrictions, all of which have appeared as exam options:

• Some products may EXCLUDE a certain category of investors. For example, NRIs CANNOT INVEST IN THE SMALL SAVINGS SCHEMES OF THE POST OFFICE.
• A product may be launched for a SPECIFIC category of investors such as provident funds and pension funds.
• Investment instruments may have a MINIMUM THRESHOLD amount which may exclude small ticket investors, or there may be a CEILING on the maximum amount.
• Pension plans of mutual funds may have an UPPER AGE RESTRICTION. Institutional investors, Hindu Undivided Family and individual investors not meeting the age criteria are NOT allowed to invest in these schemes.
• Insurance products may have specifications about AGE, ELIGIBILITY and HEALTH CHECK requirements.

17.1.4 Regulatory requirements

Barring these exempted transactions, providing PAN details is a MANDATORY requirement to invest in financial products and to access financial services such as banking, insurance, depository services and others.

The specific thresholds the workbook lists:

Similarly, the Know Your Customer process has to be undergone by ALL investors in compliance with the regulations of the PREVENTION OF MONEY LAUNDERING ACT, 2002. It imposes obligations on providers of financial services and products — banking companies, financial institutions, mutual funds, insurance companies and other intermediaries — to VERIFY AND MAINTAIN THE RECORDS OF DOCUMENTS THAT ESTABLISH THE IDENTITY of all their investors.

17.1.5 Mandatory investor information

An application must be complete with respect to certain mandatory fields, WITHOUT WHICH THE APPLICATION CAN BE DEEMED INVALID AND IS LIABLE TO BE REJECTED. The mandatory fields are typically marked or highlighted so that investors do not miss providing any such information.

Name, and the number of holders

The financial product or service is held in the name of the investor who is identified by name. The maximum number of holders varies by product, and the exam has tested these numbers:

Where an investment or account can be held jointly, the investors can decide on the MODE OF OPERATION. The holders may have the option to operate the investment either JOINTLY or on EITHER OR SURVIVOR basis.

The privileges of the first holder — a very examinable list:

• The name of the FIRST holder is used to CREATE THE INVESTMENT RECORDS.
• All PAYOUTS — dividend, interest and redemptions — are made in the name of the FIRST holder.
• The TAX BENEFITS from the investments and any TAX LIABILITY on the income accrue to the FIRST holder.
• CORRESPONDENCE regarding the investments is sent to the FIRST holder.
• NAMES OF ALL THE JOINT HOLDERS ARE HOWEVER MAINTAINED IN THE RECORDS.

Signature

The signature of the investor is the IDENTITY of the investor in the records of the issuer. It is VERIFIED FOR EVERY TRANSACTION. All valid transactions should carry the signature of the investor.

And the rule that catches candidates: in case of a joint application, the form must provide for signatures of ALL JOINT HOLDERS IRRESPECTIVE OF THE HOLDING PATTERN. So even where the mode of operation is "either or survivor", everybody signs the application.

As we have moved from physical to digital, means of verification have evolved.

Address

The address of the FIRST holder is mandatory in order to enable PHYSICAL IDENTIFICATION of the investor's location. Address of the investor MUST MATCH with the address and proof of address provided while completing the KYC formalities.

Bank account information

The application form may require bank account details of the SOLE OR FIRST holder at the time of purchase. The fields: account number, bank and branch details, type of account, IFSC code and MICR code. This is the account in which the interest, dividends and redemption proceeds will be credited.

Where it is required and where not:

• Required: mutual funds and other capital market investments such as demat investing, bonds and debentures in secondary markets or IPOs, and most company deposits.
• NPS: bank account details are OPTIONAL for the Tier I account but MANDATORY for the Tier II account.
• Post Office Savings Bank (POSB) products: bank account details are NOT required, though there is an option in products such as the Monthly Income Scheme (MIS) to get the interest credited to a post office savings bank account.

PAN

PAN has been notified as the SINGLE IDENTIFICATION NUMBER for all capital market transactions. Barring some exempted small value transactions, it is compulsory for ALL categories of investors to quote PAN in the application form. The ORIGINAL PAN card is verified against a SELF-ATTESTED PHOTOCOPY at the time of investment.

KYC compliance

KYC completion status of the applicant must be provided in the application form, and PROOF OF BEING KYC COMPLIANT also needs to be provided at the time of making the investment.

Risk profiling

17.1.6 The investor folio or account

A FOLIO NUMBER or ACCOUNT NUMBER, CUSTOMER IDENTITY NUMBER or CERTIFICATE NUMBER is allotted to the investor at the time of the initial purchase, investment or account opening. It is created by the investment product or service provider or their agent, such as the REGISTRAR AND TRANSFER AGENT, on receipt of a valid application.

The information provided in the application form is captured to create a UNIQUE CUSTOMER RECORD. ALL transactions pertaining to the investment, FINANCIAL OR NON-FINANCIAL, are recorded under this. The identity number assigned must be quoted at the time of initiating any transaction. A certificate, passbook or an account statement giving details of the number allotted, investment made and the investor information captured is given to the investor.

What the folio records: name, status, contact details and bank account information where mandatory; the mode of holding and operating the account in case of joint holders; and the nomination of persons entitled to receive the investment in the event of the death of the holders.

And an important consequence: the folio or account conditions such as ADDRESS, NATURE OF HOLDING AND OPERATING THE ACCOUNT, BANK ACCOUNT INFORMATION AND NOMINATION APPLY TO ALL INVESTMENTS HELD UNDER IT. Change the address on the folio and every holding inside it changes.

Additional investments and transaction slips

Some options — NPS, recurring deposits with banks and Post Office schemes, and mutual fund schemes — allow an investor to make ADDITIONAL INVESTMENTS in the same account over a period of time. The account or folio number must be quoted. In mutual funds, investors can make subsequent investments in the SAME SCHEME OR OTHER SCHEMES OF THE SAME SERVICE PROVIDER by quoting the existing folio number.

TRANSACTION SLIPS are forms that can be used to carry out various transactions such as additional purchase, switch transactions, redemption and other such services IN AN EXISTING FOLIO. They require minimum details: name, folio number, scheme name and plan, plus the details of the specific transaction, striking off the other fields.

And the two conveniences that follow — both examinable:

• NO FURTHER INFORMATION of the investor needs to be provided.
• PROOF OF COMPLIANCE WITH REGULATORY REQUIREMENTS OF PAN AND KYC ALSO NEED NOT BE PROVIDED SEPARATELY.

An application form can also be used to make an additional investment in the same folio by quoting the folio number.

NPS: investors make periodic investments into their Tier 1 or Tier 2 account by quoting the PERMANENT RETIREMENT ACCOUNT NUMBER (PRAN) allotted at account opening. Investors can hold ONLY ONE Tier I and ONE Tier II account each in the NPS.

Demat consolidation: investors investing in the securities markets can CONSOLIDATE ALL THEIR INVESTMENTS into their demat account. Purchases and sales in the stock markets and mutual funds, investing in IPOs of shares and bonds, can all be routed to the same account by quoting the demat account at the time of transaction.

17.2.1 Permanent Account Number

The Income Tax department has tied up with some organisations such as the UNIT TRUST OF INDIA (UTI) and NATIONAL SECURITIES DEPOSITORY LIMITED (NSDL) who can accept Form 49A and verify the documents.

Most financial market transactions require PAN details for ALL categories of investors, INCLUDING NRIs AND GUARDIANS INVESTING ON BEHALF OF MINORS. Some investments may not require PAN for small ticket sizes, but for higher amounts it may have to be provided. Where the PAN card is mandatory, the ORIGINAL IS VERIFIED AGAINST THE ATTESTED COPY at the time of making the investment.

Who can attest for mutual fund transactions: the distributor, broker or mutual fund's office, or a BANK MANAGER or a GAZETTED OFFICIAL. The investor's financial advisor can also attest the PAN card, IF the advisor has complied with the KNOW YOUR DISTRIBUTOR (KYD) NORMS and registered as such with the ASSOCIATION OF MUTUAL FUNDS IN INDIA (AMFI).

An attested copy of the PAN card is maintained by the REGISTRAR AND TRANSFER AGENT. Any subsequent transactions require the investor to mention the PAN, which is then VERIFIED AT THE BACK-END from the investor records.

Exemptions from PAN

Now the restrictions on that exemption, which the exam loves:

• Micro investments made by INDIVIDUAL INVESTORS ALONE are exempt. HINDU UNDIVIDED FAMILIES AND NON-INDIVIDUAL INVESTORS ARE NOT ELIGIBLE for this exemption.
• Investments exempt from PAN may be made as a LUMP SUM investment OR through a SYSTEMATIC INVESTMENT PLAN.
• Such investors must enclose a copy of the KYC ACKNOWLEDGEMENT LETTER quoting the "PAN EXEMPT KYC" REFERENCE NUMBER obtained from the KYC Registration Agency along with the application form.
• Eligible investors must hold ONLY ONE PAN Exempt KYC Reference number.
• CASH INVESTMENTS NOT EXCEEDING RS 50,000 PER MUTUAL FUND IN A YEAR is permitted for investors who may not have a PAN.

Other PAN exemptions listed:

• Opening a BASIC SAVINGS BANK DEPOSIT ACCOUNT (BSBDA) does NOT require a PAN card.
• Insurance premium payments IN CASH up to Rs 50,000 per transaction.
• Cash contributions to the NPS account to the extent of Rs 50,000.
• The PAN card is NOT a prescribed proof of identity for investments in Post Office Savings Bank deposits, schemes and savings certificates by investors categorised as "LOW RISK", based on the value of the investment being made and the balance of all previous investments NOT EXCEEDING RS 50,000.

17.2.2 The Know Your Customer process

Where KYC applies: opening bank accounts, trading accounts, demat accounts, capital market investments, life and general insurance policies, investments in POSB products, fixed deposits, National Pension System (NPS) and other such financial transactions. Banks, depository participants, insurance companies, post office, brokers and other financial intermediaries conduct the KYC compliance process at the time of initiating a transaction with an investor.

The KYC process involves VERIFICATION OF PROOF OF IDENTITY AND PROOF OF RESIDENCE of the customer.

• Investor's identity has to be verified with a DOCUMENT CARRYING THEIR PHOTOGRAPH — passport, driving license, voter's identity card, Aadhaar Card and the like.
• Proof of address can be verified from address as stated in the PASSPORT, RATION CARD, VOTER'S IDENTITY CARD, and LATEST UTILITY BILLS.
• The KYC process also requires VERIFICATION OF THE PAN CARD WHERE AVAILABLE.

It is MANDATORY for all investors who wish to invest in mutual funds to complete KYC formalities with a KYC REGISTRATION AGENCY (KRA). The e-KYC services of the UNIQUE IDENTIFICATION AUTHORITY OF INDIA (UIDAI) have also been recognised as a valid process for KYC verification. The client will have to AUTHORISE THE INTERMEDIARY TO ACCESS the identity and address data from the UIDAI system.

Investors making micro investments must comply with the KYC requirement through a registered KRA or UIDAI. The exemption available to micro investments from providing PAN details will CONTINUE TO APPLY for the KYC process; the investors will have to quote the "PAN Exempt KYC Ref No." in the application form.

eSign

e-KYC and technology

New guidelines came through a SEBI circular dated APRIL 24, 2020, covering the use of eSign, e-documents under DIGILOCKER and electronic signature. The process allows for the KYC to be completed THROUGH AN APP OR ONLINE, the in-person verification can be done THROUGH VIDEO, and online submission of documents under eSign.

The workbook sets out how each element is verified:

The online process is completed by the investor taking a printout of the KYC form and submitting it along with their WET SIGNATURE through a SCANNED COPY under eSign, or affixing the ONLINE CROPPED SIGNATURE and submitting the same to the RI by eSign.

The advantages the workbook lists: the investor does not have to submit a lot of physical documents; it can be done from the confines of the home of the investor, bringing a lot of people on board without spending time and effort physically; and it leads to saving of a lot of paperwork. THE ADVISER MUST ENCOURAGE THEIR CLIENTS TO USE THIS ROUTE.

Aadhaar based KYC and the sub-KUA route. A KYC User Agency (KUA) and sub-KUA need to follow the laid down procedure. AN INVESTMENT ADVISER WHO WANTS TO BE REGISTERED AS A SUB KUA NEEDS TO ENTER INTO AN AGREEMENT WITH ONE KUA. They also should be REGISTERED WITH THE UIDAI as a sub KUA. This leads to easier online onboarding of clients and saving of time.

In-person verification

The NAME, DESIGNATION, ORGANISATION and SIGNATURE of the person doing the verification have to be recorded in the form. The OFFICIALS OF THE ASSET MANAGEMENT COMPANY AND THE DISTRIBUTORS WHO ARE COMPLIANT WITH THE KYD NORMS are eligible to conduct the in-person verification.

At the time of making an investment, the investor needs to furnish a proof of being KYC compliant. This is the ACKNOWLEDGEMENT SENT BY THE KYC REGISTRATION AGENCY, or FROM THE UIDAI in case of e-KYC.

Risk categorisation by banks. Banks categorise investors as LOW, MEDIUM AND HIGH RISK based on the financial implications of the relationship to the bank and the profile of the account holders.

• For the LOW-RISK category, a proper introduction from an existing account holder and verification of proof of address will suffice.
• MEDIUM and HIGH-RISK categories have GREATER DILIGENCE exercised in establishing IDENTITY, ADDRESS AND SOURCE OF FUNDS.
• PERIODIC UPDATION of records is done, with MORE FREQUENT UPDATION for the higher risk category.
• INSURANCE COMPANIES ARE PERMITTED TO USE KYC COMPLIANCE PROCESS CONDUCTED ON AN INDIVIDUAL BY A BANK.
• The POS scheme also categorises investors based on risk perception, like banks. For the MEDIUM AND HIGH-RISK category, the PAN CARD OR FORM 60/61 DECLARATION IS MANDATORY. For the HIGH-RISK category, THE SOURCE OF FUNDS INVESTED HAS TO BE ESTABLISHED.

When IPV is NOT required. The April 2020 circular modifies the requirement:

Video In Person Verification (VIPV)

To enable ease of completing IPV, an intermediary may undertake the VIPV of an INDIVIDUAL investor through their App. The seven-point process:

1. The intermediary, through an authorised official SPECIFICALLY TRAINED for this purpose, may undertake LIVE VIPV of an individual customer, AFTER OBTAINING HIS OR HER INFORMED CONSENT. The ACTIVITY LOG along with the CREDENTIALS of the person performing the VIPV shall be STORED FOR EASY RETRIEVAL.
2. The VIPV shall be in a LIVE ENVIRONMENT.
3. The VIPV shall be CLEAR AND STILL, the investor shall be EASILY RECOGNISABLE and shall NOT BE COVERING THEIR FACE in any manner.
4. The VIPV process shall include RANDOM QUESTION AND RESPONSE from the investor, including displaying the OVD, KYC form and signature, or could also be confirmed by an OTP.
5. The RI shall ensure that the PHOTOGRAPH OF THE CUSTOMER DOWNLOADED THROUGH THE AADHAAR AUTHENTICATION MATCHES WITH THE INVESTOR IN THE VIPV.
6. The VIPV shall be DIGITALLY SAVED in a SAFE, SECURE AND TAMPER-PROOF, EASILY RETRIEVABLE manner and shall bear DATE AND TIME STAMPING.
7. The RI may have ADDITIONAL SAFETY AND SECURITY FEATURES other than as prescribed above.

KYC for NPS subscribers

Investors subscribing to the NPS will have the KYC process conducted by the POINTS OF PRESENCE SERVICE PROVIDERS (POP-SP). TWO SETS of the proofs of identity and address along with a PHOTO-IDENTITY are handed over to the POP-SP. After verification, the POP-SP RETAINS ONE SET while the OTHER SET IS SENT along with the account opening forms to the CENTRAL RECORDKEEPING AGENCY (CRA) of the NPS. The banks functioning as POP in NPS also play a pivotal role in enabling the subscriber to get his or her KYC verification done for their PRANs generated under eNPS.

Inclusive digital KYC for persons with disability

SEBI vide circular Ref. No. SEBI/HO/MIRSD/SECFATF/P/CIR/2025/74 dated MAY 23, 2025 has reiterated its commitment to enabling EQUAL ACCESS to financial services through its registered intermediaries by ensuring that digital KYC processes are INCLUSIVE AND ACCESSIBLE TO PERSONS WITH DISABILITIES, INCLUDING THOSE WITH VISUAL IMPAIRMENTS. Intermediaries are now MANDATED TO OFFER ASSISTIVE DIGITAL SERVICES.

Uniform KYC for the securities markets

Investors deal with multiple capital market intermediaries — mutual funds, Depository Participants, stock brokers, portfolio managers, venture capital funds and others. Thus far, investors were required to undergo the KYC process at the time of initiating transactions with EACH intermediary.

The new KYC form has TWO PARTS. PART ONE will have information to establish IDENTITY AND ADDRESS, COMMON TO ALL INTERMEDIARIES. ADDITIONAL INFORMATION as required by each intermediary can be collected using PART TWO.

SEBI has introduced the system of KYC REGISTRATION AGENCY (KRA) to enable this. Intermediaries covered under the uniform KYC norms include MUTUAL FUNDS, DPs, STOCK BROKERS, PORTFOLIO MANAGERS, VENTURE CAPITAL FUNDS AND COLLECTIVE INVESTMENT SCHEMES.

17.2.3 Centralised KYC Registration Agencies

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) as per the KYC template for "individuals" finalised by CERSAI. The Registered Intermediaries are required to UPLOAD the KYC records with CKYCR in respect of ALL INDIVIDUAL ACCOUNTS OPENED ON OR AFTER AUGUST 01, 2016.

Key functions of the Central KYC Registry:

• ELECTRONICALLY STORING, SAFEGUARDING AND RETRIEVING the KYC records and making such records AVAILABLE ONLINE to reporting entities or the Director.
• Information updated about a customer shall be DISSEMINATED ON REQUEST to any reporting entity that avails the services of the Central KYC Registry in respect of that customer.
• The services will be available ON PAYMENT OF PRESCRIBED FEE, IN ADVANCE.
• It shall PROCESS the KYC records received from a reporting entity FOR DE-DUPLICATION and ISSUE A UNIQUE KYC IDENTIFIER for each client to the reporting entity.

The Central KYC Record Registry, which STARTED OPERATING FROM 2016, caters to Reporting Entities of ALL FOUR MAJOR REGULATORS OF THE FINANCIAL SECTOR — RBI, SEBI, IRDAI AND PFRDA.

When documents can be demanded again. Where a customer submits a KYC identifier, the reporting entity shall DOWNLOAD the KYC records from the Central KYC Registry using the KYC Identifier and SHALL NOT REQUIRE A CUSTOMER TO SUBMIT THE DOCUMENTS AGAIN — UNLESS:

1. There is a CHANGE IN THE INFORMATION of the customer as existing in the records of Central KYC Registry.
2. The CURRENT ADDRESS of the client is required to be verified.
3. 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.