SEBI Proposes Mandatory KYC Verification Before First Mutual Fund Investment to End Folio Compliance Issues
SDG 9: Industry, Innovation, and Infrastructure | SDG 17: Partnerships for the Goals
Institutions: Securities and Exchange Board of India (SEBI) | Ministry of Finance
The Securities and Exchange Board of India (SEBI) released a Consultation Paper on October 23, 2025, proposing to mandatorily standardize the process for opening mutual fund folios and executing the first investment. This move is aimed squarely at resolving persistent Know Your Customer (KYC) compliance issues faced by investors and Asset Management Companies (AMCs).
The Problem with the Current Process: Under the existing sequential system, an investor’s first investment is often processed immediately while their KYC documents are forwarded to the KYC Registration Agency (KRA) for final verification. If the KRA later finds discrepancies (e.g., incorrect bank details or addresses), the folio is flagged as ‘KYC non-compliant’. This non-compliance blocks the investor from receiving redemption or dividend payments and prevents AMCs from sending crucial communications, leading to a rise in unclaimed assets.
Key Proposal for Standardization:
SEBI’s main proposal is to enforce a sequential system where the first investment in a new folio will be permitted only after the KYC verification is fully completed by the KRA, and the folio’s status is officially marked as ‘KYC compliant’ in the KRA system. Furthermore, SEBI proposes that investors be informed at each stage of the KYC process through their registered email and mobile number.
This standardization effort represents a vital step toward safeguarding retail investor interests and improving the operational efficiency of the mutual fund industry. By moving KYC verification upfront, SEBI eliminates the systemic risk of having ‘dead’ or non-compliant folios that accumulate unclaimed assets. This structural reform, requested by AMCs, will boost investor trust, ensure financial clarity, and streamline operations, supporting the financial inclusion goals across the market.
What is a KRA (KYC Registration Agency)?→ The KRA is an independent intermediary registered with SEBI that centrally stores, safeguards, and retrieves KYC records of investors in the Indian securities market. AMCs and other financial intermediaries rely on the KRA system to confirm an investor’s compliance status before transacting business.
Follow the full paper here: Consultation paper on Standardization of process for Opening of Mutual Fund Folios and Execution of First Investment