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SEBI Imposes Ban on Intermediate Pooling for Mutual Fund Transactions

Ashish M. Shaji

| Updated: Oct 12, 2021 | Category: SEBI

SEBI Imposes Ban on Intermediate Pooling for Mutual Fund Transactions

The capital market’s regulator, Securities Exchange Board of India, asked the mutual fund houses to ensure that mutual fund distributor, online platform, stock broker or investment adviser shall not pool in money of investors in a bank account and transfer it to the fund house for purchasing units of scheme for investors. This new rule shall come into force from April next year and will not be applicable for SEBI-registered portfolio managers. Lets’ know the details of the said ban on pooling for mutual fund transactions.

SEBI’s ban on intermediate pooling for mutual fund transactions: Reason behind the ban

SEBI observed that there were some online mutual fund transactions platforms as well as stock brokers who were pooling in money from investors meant for purchasing the mutual fund units in a nodal account based on the arrangement with mutual fund house. This meant that distributor, stock brokers, or online transaction platform were holding investors’ money for some time, which involves counterparty risk for investors.

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

It is also applied to the units of the mutual funds. Whether in Demat mode or otherwise, the units would be credited to the account of the investor without an intermediate pooling by the distributor. When the units are redeemed, the units that are redeemed would travel to the account of the fund house, from the investors’ account, without any stop-over in between in the form of pooled account of online platform or the distributor or stock broker.

Ban on intermediate pooling for mutual fund transactions: One time mandates for SIP transactions

The mutual fund distributors or an entity that is involved in the mutual funds distribution cannot accept payments through mandates signed by investors in the name of such mutual fund distributors or an entity that is involved in the mutual funds distribution.

E-mandates are used by mutual fund industries in order to process SIPs started by investors. However, these e-mandates will not be used further, and no such fresh one-time mandates will be accepted in distributors name by them. The SEBI[1] circular stated that cheque payments from investors will be made in the favor of respective MF schemes only.

Guidelines for Asset Management Companies

Further, SEBI has asked Association of Mutual Funds in India to lay down guidelines for Asset Management Companies to mitigate risks of co-mingling funds at the level of payment aggregators/payment gateways involved in mutual fund transactions.

The Asset Management Companies should share the details of every stage of the relevant transaction, including transaction rejection to all stakeholders involved. With this, investors, distributors, and registrar & transfer agents, and others will know about the status of the transaction simultaneously. This information will be system generated and secured, and the costs incurred to develop the information-sharing systems can’t be passed on to the investors. The SEBI circular stated that the onus of compliance to the PMLA provisions and not allowing the usage of third party bank account payments would lie with the AMCs. The mutual fund houses will ascertain whether the money used to purchase mutual fund units belongs to investors. You can’t use money belonging to someone else to purchase units of mutual funds for yourself.

2-Factor authentication

The SEBI asked for 2-Factor authentication for the redemption of units. One of the 2-factors for authentication shall be an OTP which will be sent to the e-mail or mobile number of unitholder.

If it’s an offline transaction, the signature validation method shall continue for honouring redemption transactions. It should ensure that the redemption transactions will not be initiated without the unitholder’s consent.

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

Conclusion

The Securities Exchange Board of India, in a notification, said that the pooling of funds by stock brokers, Mutual Funds distributor and investment adviser will be stopped from 1st April next year. SEBI observed that there were some online mutual fund transactions platforms as well as stock brokers who were pooling in money from investors meant for purchasing the mutual fund units in a nodal account based on arrangement with the mutual fund house.

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Ashish M. Shaji

Ashish M. Shaji has done his graduation in law (BA. LLB) from CCS University. He has keen interests in doing extensive research and writing on legal subjects especially on criminal and corporate law. He is a creative thinker and has a great interest in exploring legal subjects.

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