The MIN confusion has now reached the max level. Or perhaps it hasn't-perhaps there's still more to come. For those who came in late, here's a quick backgrounder. In 2002, the Government passed into law an act called the Prevention of Money Laundering Act. Under this act, mutual funds (among other financial players) are required to follow what are called 'Enhanced Know Your Customer' rules. Basically, this means that when investing more than Rs 50,000, you must present high quality proofs of who you are, where you live and your PAN number. Since this would mean that every single time you have to invest in a fund, the process would be approximately as elaborate as applying for a passport, involving attested documents and notary publics and whatnot.
MIN is (was ?) an effort by the mutual fund industry to arrange things in such a way that this Know Your Customer rigmarole has to be done only once for all the fund investments that an individual has to make. MIN came into effect on January 1 and apparently poured cold water on the rate of fund investments. Now, over the last few days, there's news that MIN is being 'suspended'. This talk is not in the form of some precise statement by any authority but generally anonymous statements in various news articles. It seems that the idea that is being floated is that the PAN number should be the basis of all transactions. For the purpose of tracking and linking up various transactions, this is unquestionably the right thing to do. Any disinterested party who has familiarity with any kind of data processing will vouch for the fact that having a single identifying number is the best way of linking up a range of diverse transactions of different
kinds. And surely the PAN number, with its infrastructure already in place, is the right choice.
But there's a big if. The PAN number is the right choice only if all the investor has to do is to quote his PAN in the fund application form. If suspending MIN means that each individual fund transaction will involve the full KYC ceremony with address and identity proofs and attested copies of PAN cards and myriad other documents then that will be a needless hindrance to mutual fund investments. The fact is that funds are the best way of channelising small investments into equities. The fund industry may have grown rapidly during the last few years but its reach is still quite limited. Fund holdings are spread across no more than a 100 towns and cities and of these, almost all holdings are concentrated in four or five. Multiplying needless paperwork needed for investing in funds will just make their spread tougher.
The reality is that of the various ways of investing, mutual funds are the one which are least susceptible to black money or cash-laundering. The reason is that mutual funds do not have any kind of a cash interface. It isn't possible to go to a mutual fund's office with a sack full of cash and buy units (in contrast to, say, real estate 'investing' where sacks full of cash are more or less routine). At the input as well as the output stages, fund investments necessarily have to flow through the banking system. Which really means that the use of mutual funds for parking benami money can happen only if the underlying bank account is a banami one or somehow has cash flowing in or out freely. Whether it's done through MIN or PAN, applying this enhanced KYC to funds will basically amount to inconveniencing ordinary investors in a means of investment which has very little to do with money-laundering anyway.