SEBI bars online platforms, brokers from pooling money, MF units. All you need to know

The Securities and Exchange Board of India (SEBI) has barred mutual fund distributors, online investment platforms, stock brokers and investment advisers from pooling money and MF units in a bid to stop the misuse of investors' money.

The capital markets regulator has asked mutual fund houses to ensure that no distributor, online platform, broker or advisor pools in investors’ money in a bank account and then transfers it to the fund house to buy MF units. Instead, they will have to directly credit the money received from investors into the mutual fund’s bank account.

The new rules come into effect from April next year, SEBI said.

What are the existing rules?

In 2009 and 2010, SEBI had allowed registered stock brokers and clearing members to transaction in units of MF schemes by using the stock exchange infrastructure. Currently, funds and units of MF schemes move through stock brokers’ or clearing members’ pool accounts in an aggregate manner to client accounts or MF accounts.

In 2013 and 2016, SEBI had also allowed MF distributors and investment advisers, respectively, to use the infrastructure of the stock exchanges to buy and redeem MF units on behalf of their clients.

However, it subsequently noticed that some online MF platforms and brokers were pooling in money from the investors meant for buying MF units in a nodal account based on the arrangement with the MF house. This meant that the distributor, broker or the online platform was holding the investors’ money for some time. This resulted in counterparty risk for the investors.

So, what exactly are the new rules?

SEBI has now asked asset management companies to ensure that the investors’ money should be directly credited to the bank account of the MF scheme when an investor buys any units. Similarly, at the time of sale, the money will be transferred directly from the bank account of the mutual fund scheme to the investor’s bank account.

The same mechanism will apply to MF units. The units, whether held in demat mode or in physical mode, will be directly credited to the investors’ account without an intermediate pooling by the distributor.

At the time of redemption, the units will move from the investor’s account to the fund house’s account without any stop-over in any pooled account of the online platform, the distributor or the broker.

What happens to SIP transactions?

SEBI has also said that MF distributors or any entity involved in the distribution of mutual funds can’t accept payments using mandates signed by the investors in the names of such distributors.

Currently, the MF industry widely uses the E-Nach mandates to process systematic investment plans (SIPs) of the investors. SEBI said that some distributors got the mandate signed in their name.

However, such e-mandates can’t be used anymore. Such mandates can’t be accepted now in the name of the distributor. “Cheque payments from investors shall be made in favor of the respective MF schemes only,” SEBI said.

SEBI has also asked the Association of Mutual Funds in India (AMFI), the MF industry group, to issue norms for asset management companies (AMCs) to mitigate risks related to co-mingling of funds at the level of payment aggregators or payment gateways involved in MF transactions.

SEBI said AMCs will have to ensure that third-party bank accounts are not used to buy MF units. Effectively, the AMCs will have make ensure that the money used to buy MF units actually belongs to the investor.

What’s the new rule on redemption of MF units?

SEBI has made it mandatory to use two-factor authentication for redemption of MF units. One of the two authentication factors will be a one-time password sent to the email or mobile number of the unitholder.

In case of offline transactions, the signature validation method will remain in place to meet redemption requests.

Essentially, SEBI wants to make sure that redemption transactions can’t be started without the knowledge and approval of the unitholders.