Know Your Customer
Also written KYC · KYC — Know Your Customer · Know Your Client · KYC process · e-KYC
The identity and address check every investor must clear before a bank, broker or depository participant will open an account — mandatory under the Prevention of Money Laundering Act, 2002.
In plain language
Before anyone in the financial system will hold your money, they have to be sure you are who you say you are, and that they can find you.
That is all KYC is: you hand over a photograph, a document that proves who you are, and a document that proves where you live. The institution checks them, records them, and opens the account.
It is not a test you can fail for being poor, or new, or small. It is a test of identity, and it exists because money laundering works by moving money through accounts nobody can trace back to a person.
How it works
KYC is mandatory under the Prevention of Money Laundering Act, 2002 and the rules framed under it. The workbook is specific about the mechanics:
- You submit Officially Valid Documents (OVDs) as proof of identity and proof of address — PAN card, UIDAI-Aadhaar, passport, voter ID card, driving licence and the like. Banks additionally accept an electricity bill for address.
- Once the KYC form is submitted, a unique KYC Identification Number (KIN) is generated and sent to you by SMS or email.
- KYC is a one-time process and is valid across all the intermediaries. Open an account with a second broker and you do not repeat it.
The electronic route, e-KYC, runs entirely online using UIDAI-Aadhaar or DigiLocker: fill the form on the broker's website, upload scanned proof of identity and proof of address, complete In Person Verification (IPV) over a video call, digitally sign, and the account activates.
The objective, in the bank's own words in Chapter 4, is "to enable banks to know and understand their customers better and help them manage their risks prudently".
A worked example
Meena, a 29-year-old schoolteacher in Nashik, wants to start a Rs 5,000 a month SIP and also buy shares directly. She needs three accounts — bank, trading and demat.
She walks into her bank branch with a photograph, a copy of her PAN card (proof of identity) and a copy of her Aadhaar (proof of address). The bank opens the savings account. A KIN is generated and texted to her.
Two weeks later she opens a trading and demat account with an online broker. Because her securities-market KYC is already on record, the broker does not ask for the documents again — she completes a three-minute IPV video call, digitally signs, and the account is live the same day.
The money side of that decision: at Rs 5,000 a month for 20 years, at an assumed 11% a year, her SIP builds a corpus of roughly Rs 43 lakh on total contributions of Rs 12 lakh. The paperwork that unlocked it took one afternoon and cost nothing. The commonest reason a household never starts is not the market — it is the belief that the paperwork is harder than this.
Why NISM asks about it
Chapter 4 (Savings Related Products) covers KYC norms for opening a bank account, and Chapter 5 (Investment in Securities Market) covers the KYC process for a demat and trading account, including e-KYC. Expect direct questions on which statute makes KYC mandatory (the PML Act, 2002), on whether KYC has to be repeated with each new intermediary (it does not), and on which documents count as OVDs.
Common exam traps
- KYC is mandatory; a Power of Attorney is not. The two are signed in the same account-opening kit, which is exactly why candidates confuse them. One is a legal requirement, the other is purely optional and voluntary.
- KYC is the process; a KYC Registration Agency is the institution that stores the record centrally. Do not use the terms interchangeably.
- "Valid across all intermediaries" means within the securities market. It does not remove a bank's own account-opening obligations.
- PAN is proof of identity, not proof of address. Aadhaar, passport, voter ID and driving licence can serve as both; PAN cannot.
- e-KYC still requires In Person Verification — the video call is not a formality that can be skipped.
- Completing KYC says nothing about whether an investment is suitable for you. It identifies you; it does not protect you.
Check yourself
1.Under which law is KYC mandatory for opening a demat and trading account?
- a)The Companies Act, 2013
- b)The Prevention of Money Laundering Act, 2002
- c)The SEBI Act, 1992
- d)The Reserve Bank of India Act, 1934
Show the answer
Answer: (b) The Prevention of Money Laundering Act, 2002
"KYC is MANDATORY UNDER THE PREVENTION OF MONEY LAUNDERING ACT, 2002 and Rules framed there under." This is worth contrasting with Chapter 4, where bank KYC was described as a process enabling banks "to know and understand their customers better and help them manage their risks prudently" — a risk-management purpose, without a statute named. In the securities market the obligation has an explicit statutory basis. The chapter also specifies the documents and the modes: "Officially Valid Documents (OVDs) as proof of identity and proof of address such as PAN card / Unique Identification (UID) (Aadhaar)/ Passport/ Voter ID card/ Driving license", and the process "may be done ONLINE through Aadhaar based E-KYC mechanism or OFFLINE by visiting or sending the documents to the registered address of the intermediary." The SEBI Act, 1992 is the statute establishing SEBI itself.
Where this is taught
Free preparation for NISM Series X-ARelated terms
- KYC Registration AgencyA SEBI-created agency that holds an investor's verified KYC record centrally, so that one KYC completed with any securities market intermediary works with all the others.
- Power of AttorneyA legal document by which you authorise somebody else — often your stock broker or depository participant — to operate your demat and bank account on your behalf. It is optional, and revocable.
- Basic Services Demat AccountA low-cost demat account for a small investor who holds only one demat account and whose holdings stay within Rs 2 lakh of debt and Rs 2 lakh of non-debt securities — its annual charge can be nil.
- NomineeThe person you name to receive custody of your money or securities when you die — a custodian who must pass the asset to the legal heirs, not the owner of it.
- Demat accountAn account with a SEBI recognized Depository Participant of a Depository, for holding securities in dematerialised or electronic form.
- ControlIn the beneficial-ownership tests, the right to appoint a majority of directors or to control management or policy decisions — the limb that catches an owner holding no shares at all.
- Enhanced Due DiligenceThe additional customer due diligence a Regulated Entity must perform where ML/TF risk is high — including source of wealth, Senior Management approval and enhanced ongoing monitoring.
- Folio numberThe unique account number a fund house allots to an investor, under which the registrar holds that investor's units across every scheme of the fund, along with the bank mandate, address and signature.
- Third-party chequeA payment for a mutual fund investment drawn from a bank account of which the first holder is not an account holder — not acceptable, and the reason registrars run third-party verification on every subscription.
- Central KYC RegistryThe Government's central digital store of KYC records for the whole financial sector, operated by CERSAI, which de-duplicates records and issues each client a unique KYC Identifier.
- FATCA and CRSTwo cross-border tax transparency regimes — one American, one OECD — under which a mutual fund's registrar identifies foreign-taxable investors and reports their accounts to the CBDT for automatic exchange.
- Specified transactionThe class of transactions under section 12AA of the PMLA that a reporting entity may not begin until it has completed enhanced due diligence on the client undertaking them.
- Politically exposed personsA higher-risk class of client that SEBI treats as a client of special category: the intermediary must detect them, obtain senior management approval to deal with them, and verify their source of funds and wealth.
- Suspicious Transaction ReportA report a SEBI intermediary must file with FIU-IND within 7 days of concluding that a transaction or connected series of transactions is suspicious — and must never disclose to the client.
- Client Due DiligenceScreening and verifying a client using reliable, independent sources — identity, beneficial owner, purpose of the relationship — and then continuing to scrutinise it for as long as it lasts.
- Client Identification ProcedureThe written procedure each registered intermediary must frame and run to establish the true identity of a client — at onboarding, during transactions, and whenever earlier identification data is doubted.
- Clients of Special CategoryA named list of client types — NRIs, HNIs, trusts, NGOs, PEPs, non-face-to-face clients and others — on whom SEBI requires enhanced due diligence rather than the ordinary standard.
- Risk Based ApproachApplying each due diligence measure in proportion to the money-laundering risk a client poses — enhanced diligence for higher-risk clients, simplified for lower-risk, never simplified where suspicion exists.
- In-person verificationThe mandatory step in which an authorised official physically confirms that the person opening the account is the person in the KYC documents, and records who did it, when, and in what capacity.
- Video In-Person VerificationIPV conducted over a live, recorded video interaction through the intermediary's own app — with informed consent, random questions, a liveliness check and a tamper-proof time-stamped recording.
- Retention periodsHow long AML records must be kept: five years from the transaction for transaction records, and five years after the relationship ends or the account is closed, whichever is later, for identity records.