Aadhaar may become mandatory for buying shares, mutual funds

Aadhaar may soon become mandatory for buying shares and mutual funds. The government and the Securities and Exchange Board of India (Sebi) are planning to link Aadhaar to financial market transactions to try and curb sharp practices such as conversion of black money into white through the stock market.  

Two people familiar with the development said the government has realized that the permanent account number (PAN) may not be enough to plug tax leaks. Top Sebi officials have informally sounded out select market intermediaries about the possibility of linking Aadhaar to financial market transactions, a top official with a financial services firm familiar with the development said.  

“We have been told that making Aadhaar compulsory is in the offing,” the official said. The timing of the move is still unclear. It is also not clear whether Aadhaar will replace PAN as the sole identification number for financial market transactions.

The government recently mandated that Aadhaar, launched in 2009 by the UPA government, be linked to PAN, bank accounts and mobile phone numbers. The deadline for existing bank account holders to provide their Aadhaar details is December 31.

The unique ID can be used for conducting the mandatory know your-client (KYC) check for mutual fund transactions online. In online KYC known as e-KYC is done with Aadhaar, MF investors do not need to go to fund houses to submit their forms and get their signatures identified in person.

Some stock brokers have been asking the regulator to get the government to extend e-KYC to their industry. Brokers said mandatory Aadhaar could play a key role in weeding out some of the ills of the stock market. “Linking financial market transactions to Aadhaar will be an important step to make India a corruption-free country,” said Nirmal Jain, chairman, IIFL Group.

Market participants said that PAN, though unique for every individual for income-tax assessment, has not been successful in preventing individuals from using the stock market for money laundering. Brokers say multiple PANs and fake demat accounts are still being used to push illegal money into the stock market.

Jain also said that the government should make Aadhaar the single identification document. “It is important that the government replaces PAN and other identification documents with Aadhaar in financial markets and all other services to make it convenient for people,” he added. The move could potentially shake up the brokerage industry.