Fulfilling ‘Know your Customer’ Guidelines in India

September 9, 2016 Posted by India Briefing Reading Time: 5 minutes

By Pritesh Samuel

Globally, the Know your Customer (KYC) process is a way for companies, particularly financial institutions, to verify the identity of their clients. The process is increasingly becoming common to prevent fraud, identify theft, money laundering, and terror financing activities. In India, the Reserve Bank of India (RBI) released KYC guidelines for all banks in 2002 and directed all banks to ensure they were fully compliant with KYC guidelines before December 31, 2005.

The RBI has clarified that banks must reconfirm KYC details every two, eight, or ten years depending on the risk profile of the customer. If a customer wants to open a bank account, they will need to provide one proof of identity, an address proof, and a recent photograph on the KYC form. The Aadhaar card (which represents a unique identification number), driving license, voters’ identity card, or passport serve as identity and address proofs, while a PAN card only serves as an identity proof.

RELATED: Pre-Investment Services from Dezan Shira & Associates

An individual can also open a bank account without KYC details; however, the balance in such accounts cannot exceed US$ 7,512 (Rs 50,000) at any time, and withdrawals and transfers in a month cannot exceed US$ 1,500 (Rs 10,000). Further, and in a setback for expats working in India, foreign remittances cannot be credited to such accounts. In addition, if a user does not have a bank account but needs to make a remittance transaction, they will need to comply with KYC guidelines.

In addition, individuals can opt for e-KYC. However, this is only for members who have Aadhaar cards. Users can then authorize the Unique Identification Authority of India (UIDAI) to release their identity and address to the appropriate bank. The UIDAI then transfers the data electronically to the bank, which makes it convenient for the customer as opposed to submitting documents.

Banks ask for KYC details periodically and customers are required to comply with the guidelines or risk their accounts being closed. Generally, banks will send a notice and partially freeze accounts until the KYC details have been updated.

Challenges Posed

While the RBI has mandated that banks must comply with KYC guidelines since 2005, tightening of the regulation only recently began in the past two to three years. Several market intermediaries like mutual funds, brokerages, and payment banks have started verifying KYC details from customers. Nevertheless, challenges remain. Most recently, the Securities and Exchange Board of India (SEBI) sought several changes after the government shifted to the central KYC process implemented by the Central Registry of Secularisation and Asset Reconstruction and Security Interest of India (CERSAI) from August 1, 2016. Among the changes, SEBI has asked for more time between opening an account and registering with the central KYC registry. As per current norms, every financial institution needs to make an electronic copy with the central KYC within three days of the account being opened. Most financial institutions have raised concerns over how difficult it is to achieve the task and have asked for an extension.

SEBI also wants to avoid duplication of work and wants to exempt individual clients whose accounts were opened before August 1 from undergoing the KYC process all over again. It has asked government authorities to allow transfer agents to do KYC on behalf of mutual funds, though ultimately it will be the responsibility of the mutual fund to ensure they have complied with KYC guidelines.

Other Players

Several other businesses such as payment banks PayTm and Mobikwik have also voiced concerns. Current regulations do not allow such companies to do e-KYC, but must manually use paper-based KYC forms for customer accounts that have more than US$ 1,500. This is likely to change in the future as more and more businesses become KYC compliant, but remains a tedious process for now.

Aside from financial institutions, telephone operators have begun to use e-KYC to activate new mobile sim cards. Recently, Vodafone and Airtel made use of the procedures allowing customers to get talking as soon as they receive new mobile connections. Reliance Jio – which is offering free phone connections – is also urging customers to use e-KYC, enabling them to activate their connections immediately.

Key Takeaways

While analysts agree that the KYC process should make it easier to avail services quickly, compliance is only part of the problem. Unlike Western countries like the U.S., where a social security number is a unique national identifier, India only recently adopted the Aadhar, with many still to get it. The use of multiple documents for identification is a concern as these can be forged. The e-KYC conforms with the country’s Digital India campaign, which ensures that government services are available to citizens online. However, resolving issues surrounding the KYC process may prove to be a long and difficult task. Regulators will have to iron out issues that crop up so that all industries can benefit without hampering economic growth. A systematic and transparent approach using government entities and vetted third party service providers will help businesses to meet KYC guidelines as the regulations are likely to be further tightened.

About Us

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email india@dezshira.com or visit www.dezshira.com.

Stay up to date with the latest business and investment trends in Asia by subscribing to our complimentary update service featuring news, commentary and regulatory insight.

Managing Your Accounting and Bookkeeping in India
In this issue of India Briefing Magazine, we spotlight three issues that financial management teams for India should monitor. Firstly, we examine the new Indian Accounting Standards (Ind-AS) system, which is expected to be a boon for foreign companies in India. We then highlight common filing dates for most companies with operations in India, and lastly examine procedures and regulations for remitting profits from India.

Using India’s Free Trade & Double Tax Agreements
In this issue of India Briefing magazine, we take a look at the bilateral and multilateral trade agreements that India currently has in place and highlight the deals that are still in negotiation. We analyze the country’s double tax agreements, and conclude by discussing how foreign businesses can establish a presence in Singapore to access both the Indian and ASEAN markets.

Passage to India: Selling to India’s Consumer Market
In this issue of India Briefing magazine, we outline the fundamentals of India’s import policies and procedures, as well as provide an introduction to engaging in direct and indirect export, acquiring an Indian company, selling to the government and establishing a local presence in the form of a liaison office, branch office, or wholly owned subsidiary. We conclude by taking a closer look at the strategic potential of joint ventures and the advantages they can provide companies at all stages of market entry and expansion.