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.
Where this is taught
Free preparation for NISM Series SEBI-ICERelated 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 depository participant of NSDL or CDSL that holds your shares and other securities in electronic form. Since April 1, 2019, shares must be in demat form to be transferred.
- Integrally connected transactionsCash transactions that belong together as one dealing: under PMLA, a month's worth of individually small but connected cash transactions adding up above Rs 10 lakh must be recorded like a single large one.
- 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.
- Digital KYCKYC done by an authorised officer capturing a live photo of the customer and of the original OVD or Aadhaar proof, with the latitude and longitude of the place, through the entity's own authenticated app.
- V-CIPVideo based Customer Identification Process: identifying a customer through a live, secure, consent-based audio-visual interaction with facial recognition — treated on par with face-to-face identification.
- Know Your DepositorThe obligation on a Warehouse Service Provider to be able to identify, at any time, who deposited goods in its registered warehouses and who the actual beneficiary of those goods is.
- Tipping offTelling a client that a suspicious transaction report about them has been or will be filed — illegal, and the reason the broker reports to the Financial Intelligence Unit in silence.
- Officially valid documentsThe alternatives to Aadhaar accepted as identity evidence for KYC — driving licence, passport, voter ID and the NREGA job card — all of which the client supplies voluntarily.
- Change of addressThe investor service request to update the address on a folio — signed by the first named holder, backed by PAN and a fresh address proof, and confirmed to both the old and the new address.
- Change of bank detailsThe service request to update the bank account on a physical folio: signed by the first holder as per specimen, supported by an original cancelled cheque bearing the holder's name, processed within 15 days.
- PAN-Aadhaar linkageA demat account holder who fails to link PAN with Aadhaar in time has the account frozen for debits and credits, with the PAN itself treated as inoperative under SEBI's KYC rules.
- 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.
- Transmission of unitsThe transfer of mutual fund units after a unit holder dies — to the surviving joint holder, the registered nominee or a legal heir — with documents that depend on who claims and how much is at stake.
- Minor becoming majorThe change of status in a folio held in a minor's name when the minor turns 18 — the new major completes PAN, KYC and bank updates, and no transactions are allowed until the AMC's records show the change.
- PAN exemptionThe relaxation that lets small mutual fund investors invest without a PAN — up to a composite Rs 50,000 a year in micro-SIPs and lump sums — by quoting a PAN Exempt KYC Reference Number from a KRA.
- Institutional investorsOrganisations rather than individuals that invest in mutual funds — companies, partnership firms, associations of persons, societies and trusts, banks and FIs, and FPIs — each acting through authorised signatories.
- E-walletsDigital wallets that may be used to buy mutual fund units within a Rs 50,000 umbrella limit shared with cash, and only with money loaded by cash, debit card or net banking — never credit card or cash back.
- Cash investment limitMutual funds accept cash only up to Rs 50,000 per investor per mutual fund per financial year, from KYC-compliant resident individuals, sole proprietorships and minors through guardians.
- Change of nameThe non-financial request by which an investor updates the name on a mutual fund folio — for marriage, divorce or a corrected spelling — with documents that match the reason and a bank account already updated first.
- DigiLockerSEBI's digital-locker push to cut unclaimed mutual fund assets — storing account statements so a registered nominee gets an alert on the investor's demise, without replacing the folio's own nominee.
- Individual investorsInvestors who buy mutual fund units for themselves or their family — resident adults, minors through a guardian, HUFs, NRIs/PIOs and eligible foreign nationals — as distinct from institutions.
- NRI investment accountsThe NRE and NRO bank accounts through which an NRI must invest in an Indian mutual fund — one repatriable, one not — along with the extra KYC documents an NRI has to provide.
- PAN updationThe non-financial transaction by which an investor adds or corrects the PAN on a mutual fund folio, validated against the Income Tax database and required before any redemption can go through.
- 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.
- MAM formThe prescribed form a mutual fund folio holder must file, with PAN, KYC and a new bank mandate, to convert a minor's folio to a major's on turning 18 — before which no transaction is allowed.
- Power of Attorney holderThe person authorised to operate a mutual fund folio on an investor's behalf under a Power of Attorney — able to transact freely, but barred from making or changing the folio's nomination.
- Qualified Foreign InvestorA sub-category of Foreign Portfolio Investor, open to foreign individuals or associations from an FATF-member and IOSCO MMOU-signatory country, investing through a demat or Unit Confirmation Receipt route.
- Resident Foreign Currency (RFC) accountA bank account a returning NRI may open to hold foreign currency, transferring in balances from an NRE or FCNR(B) account and continuing to receive foreign-currency income from investments held abroad.
- Voluntary lock-in / debit freezeA facility letting an investor voluntarily lock a mutual fund folio, demat or non-demat, so no units can be debited until the investor unlocks it — a defence against unauthorised redemption fraud.
- 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.
- Basic Savings Bank Deposit AccountA zero-balance bank savings account, needing no opening deposit, introduced to bring everyone into the banking system. A holder cannot open any other savings account in the same bank.
- Trading accountThe account you open with a SEBI-registered stock broker to buy and sell securities on a stock exchange. You get a Unique Client Code, a contract note within 24 hours of each trade, and alerts.
- Annual Maintenance ChargesThe yearly fee a depository participant charges to keep your demat account running, linked to the value of your holdings. In a Basic Services Demat Account it can be nil for small holdings.
- Credit cardA card that lets the holder pay using a lender's credit line rather than their own account balance, with interest charged if the outstanding amount is not paid on time.
- Savings Bank (SB) accountAn ordinary bank savings account paying low, liquid interest, with no TDS on the interest itself — distinct from the zero-balance Basic Savings Bank Deposit Account.
- Transaction alertsThe SMS and email messages banks send after every transaction — mandatory under RBI rules and built to let you reply and report fraud immediately, though registering for the SMS service itself may carry a charge.
- 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.
- Uniform KYC formatSEBI's rule that every registered intermediary uses the same KYC form and supporting documents — Part I of the account opening form built on CERSAI's templates, Part II left to the intermediary.
- Temporary ceasing of operationsUnder Rule 9(17) of the PML Rules, the temporary suspension of all transactions in an existing client's account for failing to submit PAN, its e-document or Form No. 60 by the notified date.
- SARAL accountA simplified account for resident individuals trading only in the cash segment — no internet, margin or derivatives trading and no power of attorney — needing just one documentary proof of address.
- Third-party correspondence addressAn address belonging to someone other than the client, which SEBI lets a client use for correspondence only if the intermediary also completes full KYC and Rule 9 due diligence on that third party.
- KUA and sub-KUAThe Aadhaar e-KYC structure for the securities market: nine notified entities register with UIDAI as KYC User Agencies, and SEBI intermediaries authenticate clients through one of them as sub-KUAs.
- Illustrative suspicious circumstancesSEBI's own list of seven fact-patterns — a client resisting identity checks, large overseas transfers paid in cash — offered as illustrations of a suspicious transaction, not an exhaustive test.
- Positive confirmationSEBI's way of checking a declared address without any document — the intermediary gets a response from the address, by a welcome-kit or statement acknowledgment, a telephone call, or a visit.
- Client risk categorisationClassifying each client as Low, Medium or High risk under SEBI's AML Master Circular, based on location, business activity, turnover, nature of transactions and manner of payment, so monitoring can match the risk.
- PMLAThe Prevention of Money Laundering Act, 2002 — the core of India's legal framework against money laundering, in force from 1 July 2005, binding banks, financial institutions and intermediaries.
- Direct onboardingThe option portfolio managers must give clients to join a PMS directly, without a distributor. It must be prominently disclosed, and only statutory charges may be levied at direct onboarding.
- GuardianThe adult who transacts on behalf of a minor investor, completes KYC in their own name, and signs the application and payment instruments, because a minor cannot contract.
- Form 49AThe Income Tax form used to apply for a Permanent Account Number, submitted with proof of identity and proof of address, the entry point to every PAN-linked financial transaction.
- Form 60/61The declaration an investor without a PAN must submit for a transaction that would otherwise require one, giving details of the transaction in place of the PAN itself.
- Form 61BThe form a Reporting Financial Institution files under India's CRS rules to disclose a foreign-taxable account it has identified through due diligence, enabling automatic exchange of information between countries.
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