Controversy has surrounded Aadhaar ever since it became compulsory to have one for the tax filing, opening a bank account, and opting services of a telecom operator.
Lately, this Unique Identification Number, Aadhaar, has landed financial institutions in a unique conundrum.
The public, sections of media, activists, and petitioners fighting against the compulsory use of Aadhaar did highlight the potential disadvantages of Aadhaar. Primarily, using Aadhaar as a KYC document posed a serious threat to the right to privacy.
Banks, insurance companies, and mutual funds have been accepting Aadhaar as a Know-Your-Client (KYC) document. With Aadhaar-based KYC, the process of on-boarding new customers was faster and cheaper.
But after the Supreme Court’s recent verdict, using Aadhaar as a KYC document is history for corporate entities now. In its landmark judgment, the Apex Court has categorically stated what Aadhaar can and cannot be used for.
In what instances do you need to provide your Aadhaar number?
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If you want to file an Income Tax Return (ITR), Aadhaar is still compulsory
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To apply for a new PAN card, Aadhaar is still compulsory
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To avail benefits under specified government schemes such as Direct Benefit Transfer or employment guarantee schemes
And you don’t need an Aadhaar to…
Please note that the lists above aren’t exhaustive.
The Supreme Court has tried to walk the tightrope between protecting individuals’ privacy and protecting the state’s interest.
In other words, the Apex Court has indicated that the right to privacy isn’t absolute but conditional.
Right to privacy can take a back seat if:
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There’s a law—to simplify, is there any provision in the law that permits the government or any other authority/entity to insist that a person provides an Aadhaar number?
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There’s a genuine case for the state’s interest—will the country at large be at a disadvantage if the Aadhaar isn’t made compulsory?
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The law is proportionate—is insisting on an Aadhaar number justified with the evidence, as long as the Aadhaar will make a substantial difference, if it made compulsory to avail a particular service/benefit.
For example, the Supreme Court was convinced with the government’s insistence on providing Aadhaar to file income tax returns. In other words, it has supported the existence of 139AA of the Indian Income Tax Act.
On the other hand, it has dismissed the government’s plea of allowing Aadhaar a compulsory KYC document for the financial services sector because, as it argued, it will help curb the money laundering activities.
Let’s not forget linking Aadhaar to PAN is compulsory. Isn’t this sufficient to discourage money laundering activities?
[Read: 3 Easy Steps To Link Your Aadhaar With PAN Card]
The Supreme Court didn’t find a merit in this argument based on the test of the three criteria mentioned earlier. According to it, allowing corporate entities to use Aadhaar for authentication might lead to “commercial exploitation of an individual’s biometric and demographic information by private entities.”
After Supreme Court’s judgment, Aadhaar’s relevance will take a back seat, but who will ensure the security and privacy of the information corporate entities have already collected from their customers?
We await more clarity on this issue.
Has anything changed for the mutual funds?
The jury is still out on how the decision of the Supreme Court will affect mutual funds. Some experts feel the Supreme Court hasn’t made the usage of Aadhaar as a KYC document by corporates such as mutual funds and financial intermediaries illegal. It’s just that, now investors have an option not to link it with their investments.
While the other clan opines that the financial services industry including banks won’t be able to use Aadhaar even for KYC verification since the Supreme Court has raised doubts about the possible “commercial exploitation of information”.
Some mutual fund houses were using Aadhaar-based KYC as the means to reach out to rural masses and offer them mutual fund products effortlessly. Now, this strategy might become redundant.
Others anticipated these developments and were following the full KYC mandate till date. Until now, Aadhaar-based KYC allowed investors to invest upto Rs 50,000 per mutual fund house per year.
Some forward-thinking Asset Management Companies (AMCs) have been allowing e-KYC with web-camera based In-Person-Verification (IPV). Of course this saves time, but it requires the investor to be a little more patient and tech savvy as well. Moreover, it’s not as cost-effective as the Aadhaar-backed KYC (for the AMCs).
Does this verdict affect mutual fund investor in any way?
The Securities and Exchange Board of India (SEBI) and Association of Mutual Funds in India (AMFI) are still to issue official circulars directing AMCs to stop using Aadhaar for the authentication purpose. However, to avoid any confusion in the future, AMCs have stopped accepting Aadhaar as proof of residence.
What investors shouldn’t forget?
Even if full-KYC is a slightly tedious process, the benefits of investing in mutual funds clearly outweigh the compliance hurdles.
Investing in mutual funds through Systematic Investment Plans (SIPs) can help you fulfil your financial goals.
To decide on how much to invest in mutual funds:
You should chalk out a personalised asset allocation plan which takes into account, your existing financial circumstances, future financial goals along with the tenure to achieve them, and your risk appetite.
Selecting the right mutual funds is the key though.
Watch this video to know the 8 steps of selecting a winning mutual fund
To ensure you are investing in worthy mutual funds, evaluate available options based on their track record across tenures and market phases. Those with a proven track record and offered by AMCs that follow sound investment processes and systems are your best bets.
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