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SEBI bans pooling of money and mutual fund units by online platforms and brokers

Oct 04, 2021 / 08:01 PM IST

These rules will be effective from April 1, 2022.

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Soon, the online mutual fund transaction platforms will directly credit the money received from you to the mutual fund’s bank account. Securities & Exchange Board of India (SEBI), the capital market regular has asked the mutual fund houses to ensure that no mutual fund distributor, online platform, stock broker, or investment advisor pools in money of investors in a bank account and then transfers it to the fund house for purchasing units of schemes for those investors.

By-passing distributors and brokers

It has been observed that some online mutual fund transactions platforms and stock brokers were pooling in money from the investors meant for purchasing mutual fund units in a nodal account based on the arrangement with the mutual fund house. This arrangement means the distributor, stock brokers, or online transaction platform was holding the investors’ money for some time, which entails counterparty risk for the investors.

However, the SEBI has asked the fund houses to ensure that the investors’ money should be directly credited to the bank account of the mutual fund scheme when an investor purchases units of the mutual fund. When the investor sells the units of the mutual funds, the money will be transferred directly to the bank account of the investor, from the bank account of the mutual fund scheme.

The same is applied to the units of the mutual funds. Be it in Demat mode or otherwise, the units will be directly credited to the investors’ account without an intermediate pooling by the distributor. When the units are redeemed, the units so redeemed will travel to the account of the fund house, from the account of the investors, without any stop-over in between in the form of a pooled account of the online platform or the distributor or stock broker.

One-time mandates for SIP transactions

The mutual fund distributors, channel partners, or any entity involved in the distribution of mutual funds is not allowed to accept payments using mandates signed by the investors in the names of such distributors. E-Nach mandates are used widely by the mutual fund industry to process systematic investment plans (SIPs) started by the investors. Some distributors got the mandate signed in their name by the distributors and an agreement to debit the bank account of the investor whenever authorised by the investor for investments in mutual funds.

But going forward, such e-mandates won’t be used anymore. Also, no such fresh one-time mandates can be accepted in the name of the distributor by them. “Cheque payments from investors shall be made in favor of the respective MF Schemes only,” says the circular issued by SEBI on October 4.

SEBI has further asked the Association of Mutual Funds in India (AMFI) to issue guidelines for asset management companies (AMCs) with regard to mitigating risks of co-mingling of funds at the level of payment aggregators or payment gateways involved in mutual fund transactions.

The AMCs are asked to share the information pertaining to each stage of the relevant transaction, including the rejection of the transaction to all stakeholders involved. This ensures that investors, distributors, and registrar& transfer agents, and others involved will come to know about the status of the transaction simultaneously. Such information shall be system generated and secured and the costs incurred to develop such information-sharing systems cannot be passed on to the investors.

“The onus of compliance with PMLA provisions and not permitting usage of third party bank account payments continues to lie with the AMCs,” the circular said. The mutual fund houses continue to ascertain if the money used to purchase mutual fund units belonged to the investors. You cannot use someone else’s money to buy units of mutual funds for yourself, as is the case now.

Two-factor authentication mandatory for redemption of units

The regulator has asked for mandatory use of two-factor authentication for the redemption transaction of units. One of the two factors for authentication will be a one-time password sent to the email or mobile number sent to the unitholder. In case of offline transaction, the signature validation method continues for honouring redemption transactions. This should ensure that the redemption transactions cannot be initiated without the consent of the unitholder.

If an investor incurs loss due to unauthorised transaction arising out of fraud, negligence, or deficiency by the mutual fund house, employees of the fund house, or even the mutual fund distributor then the mutual fund house should make good such loss to the investor. The fund house is not liable for unauthorised transactions carried out by the investment advisor while providing services to the unitholders.

These rules will be effective from April 1, 2022.

Moneycontrol PF Team
first published: Oct 4, 2021 08:01 pm
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