“Pooling of funds and/or units by stockbrokers/clearing members in any form or manner shall be discontinued for mutual fund transactions,” read a circular by the Securities and Exchange Board of India, meaning that online mutual fund platforms must credit the money received from investors to the mutual fund houses’ bank accounts directly and vice-versa. The circular has asked the asset management companies, recognised stock exchanges, and other parties to set up necessary mechanisms for stockbrokers to adhere to the new guidelines by April 1, 2022.
“Pay-in/pay-out of funds shall not be handled by the stockbrokers /clearing members,” the circular clarified. It added that the same principle will be applicable to the units which shall be “credited and debited directly to/from the investors’ demat account/ folio account without routing it through the pool account of the stockbrokers/clearing members”.
SEBI also restricted entities from passing the cost incurred during making system changes to ensure compliance with provisions to the investors.
The move stands to impact every distributor, stockbroker, or online platform facilitating mutual fund transactions. News reports suggest that SEBI’s provisions were precipitated by the actions of some platforms and stockbrokers which were pooling money from the investors meant for purchasing mutual fund units in a nodal account. This arrangement exposed investors to counterparty risk (It is the likelihood or probability that one of those involved in a transaction might default on its contractual obligation.) because the entity facilitating the mutual fund transaction was holding investor money for some time.
What else did the SEBI circular say?
The three-page circular dated October 4, 2021, also said that the stockbrokers facilitating mutual fund transactions will have to ensure the following:
- “Refuse to accept mandates for SIPs or lump sum transactions in their names”
- “Only accept cheque payments from investors issued in favor of the respective SEBI-recognized clearing corporations or mutual fund schemes”
- “Desist from handling funds or units of investors in their proprietary accounts or pool accounts in any form or manner”
- “Reject payments through one-time mandate or issuance of mandates/instruments in their name for mutual fund transactions.”
Responsibilities of AMCs
“The onus of compliance with PMLA provisions and not permitting transactions with third party bank accounts continues to lie with the AMCs,” the circular asserted.
In addition to drafting operating guidelines, mutual fund houses will continue to ascertain if the money used to purchase mutual fund units belonged to the investors, Moneycontrol reported. Investors cannot use someone else’s money to buy units of mutual funds for themselves, the report added.
SEBI’s crackdown on platforms indulging in digital gold
Stockbroking and fintech entities were asked to stop selling digital gold from September 10 as per a circular by the National Stock Exchange of India (NSE). The NSE circular was released in the wake of the SEBI’s concern that digital gold sales by NSE members amounted to a breach of the Securities Contracts (Regulation) Rules (SCRR), 1957. The investment asset, however, remains unregulated as it does not come under the purview of either SEBI or the Reserve Bank of India (RBI).
The stock market regulator believed that brokers may be using client funds to buy digital gold which is a non-broking business, according to an Economic Times report. The report highlighted the missing regulatory oversight for companies but added that the companies have a self-regulatory audit and diligence mechanism in place to make up for it.
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