Know Your Client (KYC) is a fundamental compliance requirement for portfolio managers. This article provides a comprehensive overview of KYC requirements for PMS clients, including onboarding standards and documentation.
The Regulatory Framework
Legal Basis
Portfolio managers are required to comply with KYC requirements under the SEBI (Portfolio Managers) Regulations, 2020 and the Prevention of Money Laundering Act, 2002. KYC is a mandatory process while onboarding a customer on any SEBI registered intermediary.
Objective
The KYC framework aims to:
- Prevent money laundering and terrorist financing
- Verify the identity of clients
- Assess the risk profile of clients
- Maintain records of client transactions
KYC Documentation
For Individuals
Identity Proof (any one):
- PAN Card (mandatory)
- Aadhaar Card
- Passport
- Voter ID Card
- Driving License
Address Proof (any one):
- Aadhaar Card
- Passport
- Voter ID Card
- Driving License
- Bank Statement (not older than 3 months)
- Utility Bill (not older than 3 months)
Additional Documents:
- Latest six months' bank statement or passbook
- Photograph
For Non-Individuals
Entity Documents:
- Certificate of Incorporation
- Memorandum and Articles of Association (or Partnership Deed)
- PAN Card of the entity
- Board Resolution authorizing the investment
- List of directors/partners with their KYC documents
- Audited financial statements
Onboarding Process
Step 1: Document Collection
The portfolio manager must collect all required KYC documents from the client. The custodian handles KYC for PMS accounts.
Step 2: Verification
The portfolio manager must verify:
- PAN, name, address, mobile number, and email id
- Identity proof documents
- Address proof documents
- Financial information
Step 3: KRA Upload
KYC Registration Agencies (KRAs) must verify KYC records within 2 days of receipt of KYC records. KRAs will verify PAN, name, address, mobile number, and email id.
Step 4: Central KYC Registry
KRAs shall upload the verified/validated KYC information onto the system of Central KYC Records Registry (CKYCRR).
Risk Profiling
Mandatory Requirement
SEBI mandates the implementation of mandatory risk profiling for every PMS client. Providers must evaluate each investor's risk profile.
Risk Assessment
The portfolio manager must assess:
- Investment objectives
- Risk tolerance
- Investment experience
- Financial situation
Documentation
The risk profiling must be documented and maintained as part of the client records.
Digital Onboarding
Digital KYC
Portfolio managers can use digital KYC processes for onboarding clients. This includes:
- Aadhaar-based e-signature
- Video KYC
- Online document submission
Physical Presence
Currently, digital onboarding is partially allowed for NRIs, with major restrictions such as requiring the investor to be physically present in India during the process.
Ongoing KYC Compliance
Periodic Updation
Portfolio managers must:
- Review KYC records periodically
- Update KYC records when there are changes
- Conduct re-KYC as required
Record Maintenance
Portfolio managers must maintain:
- KYC records for all clients
- Records of verification
- Records of periodic reviews
Consequences of Non-Compliance
Regulatory Action
Failure to comply with KYC requirements can result in:
- Enforcement action by SEBI
- Monetary penalties
- Suspension or cancellation of registration
Business Impact
Non-compliance can lead to:
- Regulatory scrutiny
- Reputational damage
- Disruption of business operations
Expert Legal Guidance
Anuj Desai & Associates provides expert legal advisory services on KYC compliance for portfolio managers. Our securities law experts help clients understand KYC requirements, implement onboarding procedures, and maintain compliance. Contact us for guidance on KYC and other regulatory matters.