SEBI proposes new rules to standardise mutual fund folio creation, tighten KYC verification

The Securities and Exchange Board of India (SEBI) has proposed a new framework to standardise the process of opening mutual fund folios and executing first-time investments, aiming to ensure that folios are created only after complete Know Your Client (KYC) verification.

The move is intended to plug gaps in the current system, where some mutual fund folios are opened before the completion of KYC checks by KYC Registration Agencies (KRAs) — a practice that has led to operational challenges for both investors and fund houses.

KYC non-compliance issues

Currently, SEBI mandates that new folios be opened only after successful KYC verification. However, in practice, Asset Management Companies (AMCs) often conduct preliminary KYC checks internally and forward investor documents to KRAs for final verification. If the KRA later finds discrepancies or incomplete information, the folio is marked KYC non-compliant until the issue is resolved.

This sequential process has led to transaction disruptions and investor inconvenience, SEBI noted. In such cases, investors are unable to redeem units, receive dividends or execute transactions from their newly opened folios. Fund houses, in turn, face difficulties in crediting redemption amounts, sending key communication, or updating investor information, often leading to an increase in unclaimed investor funds.

Key proposal

To prevent such lapses, SEBI has proposed that AMCs should open folios only after completing their internal KYC checks and verifying investor details as per the prescribed norms. The documents will then be sent to KRAs for final verification, and the first investment will be allowed only once the KRA confirms the folio as KYC-compliant in its system.

The regulator has also proposed that investors be kept informed at every stage of the KYC process through their registered email addresses and mobile numbers, enhancing transparency and investor awareness.

Operational alignment

Under the proposed framework, AMCs and KRAs will be required to synchronize their systems and workflows to ensure smooth implementation. The new standardisation is expected to reduce operational inefficiencies and improve compliance monitoring across the mutual fund ecosystem.

Industry experts said the proposal, if implemented, would strengthen the integrity of investor onboarding and help safeguard against identity-related risks. “This is a necessary step in cleaning up inconsistencies in folio creation and ensuring that no investment happens without verified credentials,” said a senior mutual fund executive.

SEBI has invited public comments on the proposal until November 14, 2025, before finalising the framework.

The regulator said the initiative aligns with its broader goal of ensuring seamless, secure, and transparent investor participation in mutual funds — reinforcing trust in one of India’s fastest-growing investment segments.