The Securities and Exchange Board of India (“SEBI”), vide a circular dated October 4, 2021 (“Circular”), has prohibited Mutual Fund Distributors (“MFDs”), Investment Advisers (“IAs”), Mutual Fund Utilities (“MFU”), channel partners and other entities including online platforms (together, “Service providers”/ “Platforms”) which provide services to investors to transact in mutual fund (“MF”) units, from pooling their clients’ funds or units for such transactions.

SEBI has observed that based on a bilateral understanding with asset management companies (“AMCs”) of mutual funds, a few Platforms pool clients’ funds into a nodal account and subsequently transfer to AMCs either on a ‘per transaction’ basis or on a lump-sum basis. SEBI has vide the Circular, mandated AMCs to put in place necessary systems to ensure the following with respect to transactions in the units of MFs undertaken through Service Providers/Platforms other than stock exchanges:

1. any transactions, whether financial or non-financial can be executed only if there is a service agreement between the AMC and the Platform;
2. intermediate pooling of funds and/or units in any manner by any Service Providers/ Platforms (except SEBI registered portfolio managers acting in compliance with applicable laws), by whatsoever name called, are discontinued for MF transactions;
3. for subscription/redemption, (a) funds should be credited directly from/to the investors’ bank account without any intermediate pooling and (b) MF units should be directly credited into/from the investor’s account for both demat and non-demat modes, without any intermediate pooling;
4. entities facilitating MF transactions shall not accept payment through one-time mandate or issuance of mandates/ instruments in their name for MF transactions; and
5. cheque payments from investor shall be made in favor of the respective MF Schemes only.

SEBI has also mandated certain conditions to be followed by AMCs to ensure detailed information sharing at all stages with the investors and all other stakeholders. Further, SEBI has mandated certain other measures to prevent third-party payments and to safeguard the interest of unitholders, such as requiring the AMCs to ensure that payment is credited directly to the registered and verified bank account of the investor mapped with the concerned folio, after due verification. 

In terms of the Circular, AMCs have been made liable to compensate for losses, if any, incurred by unit holders, on account of unauthorized transactions in the unit holders’ folios, due to fraud/ negligence/ deficiency on the part of an AMC, employee of AMC or the Service Providers/Platforms, irrespective of whether or not the fraud is reported by the unit holder. However, it has been clarified that any unauthorized transaction performed by the IAs while providing services to the unit holders would not be considered to be a liability of the AMC.

It is to be noted that the provisions of this Circular shall be applicable with effect from April 1, 2022.

Please find a copy of the Circular, here.

This update has been contributed by Smriti Tripathi (Associate).

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