SEBI Stops Mutual Fund New Scheme Launches Till Pool Accounts Are Halted

SEBI, the capital market regulator, asked mutual fund distributors, investment advisers, stockbrokers and other entities involved in mutual fund transactions on their client’s behalf to stop pooling mutual fund units from April 01, 2022. However, SEBI subsequently extended the deadline to July 01, 2022. Many mutual fund distributors, stockbrokers, online platforms, investment advisors etc., pool investors’ money in bank accounts. Mutual fund entities transfer the money to mutual fund houses for buying scheme units on the investor’s behalf. However, SEBI wants to halt this approach to prevent the misuse of funds by mutual fund entities. Why has SEBI banned mutual fund scheme launches till the discontinuance of pool accounts?

SEBI stops NFO in mutual funds

SEBI, the capital market watchdog, has stopped the mutual fund industry from issuing New Fund Offers (NFOs). It had asked the mutual fund industry to implement its circular on two-factor authentication for mutual fund redemption and source accounts verification when investments are made in mutual funds. 

SEBI issued circulars in October 2021 and subsequently in March 2022, asking the mutual fund industry to comply with these rules and guidelines. However, many mutual funds have yet to meet these requirements. SEBI, to ensure compliance, has suspended mutual funds from launching New Fund Offers. 

SEBI’s two-factor authentication rule ensures that an additional One Time Password (OTP) is sent to you for mutual fund redemption. It reduces the risk of fraud, and source accounts verification prevents money laundering in mutual fund investments. 

SEBI issued a circular on pooled accounts to address the risk of stockbrokers, mutual fund distributors and other entities taking mutual fund investors’ money into their bank accounts and subsequently defaulting. The risk of defaulting mutual fund investors’ money by mutual fund entities and stockbrokers is eliminated if investors send funds directly to mutual fund houses. 

After the pooling is stopped, money meant for mutual fund investments will move directly from the investors’ account to the BSE or NSE Clearing Corporation and not to the stock brokers’ bank account. Moreover, mutual fund units are directly credited to the mutual fund investors’ accounts. 

How has the mutual fund industry reacted to this rule?

The Association of Mutual Funds in India (AMFI) had appealed to SEBI, stating the mutual fund industry needed time to implement an alternative mechanism. SEBI subsequently extended the deadline to comply with its pooled accounts circular to July 01, 2022. 

According to SEBI, new mandates are accepted only in favour of clearing corporations recognised by SEBI. Moreover, these mandates must exclusively be used to subscribe to mutual fund scheme units and not for other purposes. 

SEBI feels that the mutual fund industry had sufficient time to comply with its October 2021 order on pool accounts. It now wants to ensure the mutual fund industry complies with its rules by halting the launch of new mutual fund schemes. 

SEBI wants the mutual fund industry to act in the best interests of mutual fund investors. The two-factor authentication rule and the discontinuation of pooled accounts are a step in the right direction. In a nutshell, SEBI rules smoothen the path of mutual fund investors and ensure mutual fund entities and stockbrokers do not misuse their money. 

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in