Market regulator SEBI has ushered in a major overhaul of the way mutual funds are sold with the introduction of biometric cards and stringent licencing norms for distributors to weed out agents indulging in frauds.

Following directions from SEBI, mutual fund industry body AMFI has asked all fund houses in the country to comply with 'Know-Your-Distributor (KYD)' norms before the grant or renewal of registration of distributors.

The agents would be required to get biometric cards that would carry an impression of their right hand index finger and help in immediately checking the distributor's record for any possible irregularities in past.

The KYD norms, devised on the lines of KYC (Know-Your- Customer) norms already being followed by banks and other financial service providers for their customers, would require the distributors to submit proof of their identity and address, as well as PAN and bank account details.

The new rules would be applicable to new registrations and renewals with effect from September 1, while compliance is mandatory for already registered distributors within six months, or by the end of February, 2011.

The AMFI has asked the fund houses to suspend payment of commission to non-compliant distributors.

Besides checking agents indulging in fraudulent activities, the move is also aimed at weeding out non-serious agents and those indulging in mis-selling activities.

There are more than one lakh distributors working for about three dozen fund houses in the country.

Previously, the grant of registration required a certificate for having passed an AMFI certification examination, two photographs and payment of a registration fee.

However, pursuant to a directive from market regulator SEBI, the AMFI certification has already been replaced by a certification programme for distributors conducted by the National Institute of Securities Markets (NISM).

Furthermore, the new KYD norms would require distributors to go through a stringent verification process that would look into the past record of the distributors to minimise the risk of mis-selling and other potential fraudulent activities.

In a circular to the fund houses on the new KYD norms, AMFI said: "As you are aware, there are increasing numbers of instances of financial frauds played on the investors by Mutual Fund distributors/their employees.

"... As one of the measures to control this situation, Securities and Exchange Board of India (SEBI) has advised AMFI to tighten the procedure for distributor registration.

"On reviewing the current procedure for registration of distributors, it was decided by the board to introduce a more stringent Know-Your-Distributor (KYD) process involving obtaining relevant documents and validation of such documents, personal verification and biometrics."