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NPCI glitch leaves mutual fund investors empty handed

In an “unfortunate” incident, an upgrade to the National Automated Clearing House (NACH) system earlier this month left many mutual fund investors in the wind as their monthly payments did not go through. Thousands of investors have found that their payments to mutual funds got stuck due to a glitch in the NACH system which was being upgraded by the National Payments Corporation of India (NPCI), the Economic Times reported.

On January 31, the NPCI was upgrading the NACH system but this coincided with a new rule by the Securities and Exchange Board of India (SEBI) which mandated that mutual funds should receive investors’ funds and only then allot units to investors for orders up to Rs 2 lakh. The new rules came into effect from February 1, 2021.

“We have recently migrated our systems with an objective to scale the NACH infrastructure to meet the increasing volume requirements and industry demands. This was a planned migration activity and during which we faced some initial teething issues such as delay in settlement. Unfortunately our migration coincided with the regulatory rule effected from 1st Feb. 2021, that NAV [Net Asset Value] should be realised only after the funds received by the Mutual Funds,” NPCI said in a statement on Wednesday.

Due to the simultaneous upgrade by NPCI and SEBI’s new rule, lakhs of mutual fund transactions failed to go through leading to reconciliation issues for payment gateways. At least 500,000 to 1 million transactions from investors to mutual fund houses got held up due to the glitch and now many investors are asking fund houses for compensation, the report said citing unnamed sources.

NACH is an automated payments system through which loan borrowers, insurance customers and mutual fund investors can set up a one-time consent or standing instrument (mandate) against their account to automatically debit money towards monthly payments. While the majority of NACH Debit transactions take place for loan EMI payments, it is also used to debit monthly payments for mutual fund systemic investment plans and insurance policy premiums.

Earlier, mutual fund payments by investors would be processed in batches which would lead to some delay between the payment being received and the mutual fund units being assigned to the investor. SEBI sought to close this gap by instructing mutual funds to only allocate units to investors once the money is received in their account.

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Since the payments value chain involves the investors’ bank account, payment gateways, an intermediary escrow account and then the mutual fund’s bank account, the NPCI’s upgrade led to a pile up of payment transactions at the payment gateway part of the chain, which meant that mutual funds could not assign units to investors as SEBI’s new rule kicked, the sources said.

The NPCI said that most of these issues have been solved and the organisation is working with banks and fintech partners to resolve any other issues. “NACH has started exclusive clearing session for mutual funds since 1st Feb. 2021, which will support the regulatory objective to pass on funds on the same day and help banks and ecosystem for better compliance. We regret this unwarranted inconvenience caused to the investors and would work towards providing best of payment experience,” it said.

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