Sebi proposes new KYC rules for mutual fund folios, ensuring folios are created only after verification, affecting first investments and investor transactions.

The Securities and Exchange Board of India (Sebi) on Thursday proposed new Know Your Client (KYC) norms for mutual fund investors, aiming to streamline folio creation and the first investment process. The move seeks to prevent operational issues arising from folios opened before completion of KYC verification by KYC Registration Agencies (KRAs).

Currently, mutual fund folios are required to be opened only after mandatory KYC verification. However, some cases have emerged where KYC non-compliant folios were created due to sequential processing by Asset Management Companies (AMCs) and KRAs. Sebi highlighted that while AMCs perform internal KYC checks, discrepancies identified later by KRAs result in folios being marked non-compliant, causing delays in investor transactions.

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Impact on Investors and AMCs

Incomplete or incorrect KYC details prevent investors from executing transactions, redeeming units, or receiving dividends. AMCs also face difficulties in communicating scheme information or crediting redemption proceeds, leading to a rise in unclaimed investor amounts.

Proposed Changes

Under Sebi’s new proposal:

• AMCs will create folios only after verifying all account opening documents as per KYC norms.

• Documents will then be sent to KRAs for final verification.

• The first investment will be allowed only after KRAs mark the folio as KYC compliant.

• Investors will receive updates at each stage via registered email and mobile numbers.

• AMCs and KRAs are required to align their systems and workflows with these standards to ensure seamless compliance.

Sebi emphasized that the changes aim to strengthen KYC compliance and ensure smooth processing of investments. Public stakeholders have been invited to submit comments on the proposed rules by November 14, 2025.