Aadhaar Act amendments take steps in right direction

Fintech players in India had effectively leveraged the Aadhaar-based know-your-customer authentication services (Aadhaar KYC) made available by the Unique Identification Authority of India (UIDAI) to onboard customers quickly and at a fraction of the cost involved in any paper-based onboarding method.

However, the Supreme Court, in September 2018, in the Justice KS Puttaswamy and Anr v Union of India (Aadhaar judgment) case, read down section 57 of the Aadhaar Act (act) prohibiting private bodies from using Aadhaar KYC in the absence of supporting legislation. The Aadhaar and Other Laws (Amendment) Ordinance, 2019 (ordinance), promulgated on 2 March 2019, seeks to introduce a legislative framework for the use of Aadhaar KYC by banks and financial institutions.

Key regulatory changes

The most significant changes introduced by the 2019 ordinance are the amendments to section 4 of the ct and the Prevention of Money Laundering Act, 2002 (PMLA), allowing private entities to use Aadhaar KYC to onboard customers (going back to the position that existed before Aadhaar judgment). However, the ordinance only permits banks and telecom companies to use Aadhaar KYC. Non-bank fintech players such as wallet issuers, digital lending platforms, and other non-banking financial services companies still do not have access to Aadhaar KYC, which has been one of the most common criticisms of the ordinance.

Shilpa Mankar Ahluwalia is a partner and Himanshu Malhotra is an associate at Shardul Amarchand Mangaldas & Co.

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