SEBI clarifies on transactions in mutual funds units

In the last few months, there had been a lot of confusion among brokers, investors and mutual fund distributors about the October 2021 circular of SEBI.

The circular had stated that stock brokers and clearing members could not accept one-time mandates in their name for ongoing investments in mutual funds, like in the case of SIPs. The idea was to curb the practice of investors giving mandates to their brokers or aggregators for MF SIPs.

Now, SEBI has come out with some important clarifications on this subject pertaining to transactions in the units of mutual funds. In addition, SEBI has provided detailed and elaborate guidelines for authentication in case of redemption of units.

The clarifications specifically pertain to transactions in mutual funds units on the stock exchange platforms of NSE and BSE and also for online platforms other than the recognized stock exchanges.

In its latest clarification, SEBI has now permitted one-time mandates in favour of clearing corporations that are registered with and recognized by SEBI. These rules will be applicable from 01st April 2022.

Under the modified rules, new mandates can be accepted only in favour of SEBI recognized Clearing Corporations. In addition, such mandates shall exclusively be only for subscriptions to Mutual Fund units and cannot be used for any other purpose.
 

Now comes the question of existing mandates favouring brokers / clearing members. SEBI has now clarified that existing mandates for mutual fund transactions can continue in the name of stock brokers or clearing members.

However, clearing members must ensure that the payment aggregators (PA) put in place a mechanism such that the beneficiary of the mandate can only be the approved bank account of the clearing corporation.

In addition, SEBI has also called for a comprehensive and thorough investor grievance redressal mechanism or an arbitration mechanism for clients.

This would come into play in case there has been a breach of any of these conditions or any misuse of funds by the payment aggregator. This will also apply to mutual fund units where the transaction is facilitated by entities, including online platforms, other than stock exchanges.

SEBI has also stipulated that new mandates may be accepted in the name of the one-time mandate holders after 01st April, subject to compliance with SEBI conditions.

Importantly, SEBI has also clarified that the AMCs shall be liable to unit holders for breach of these conditions or misuse of funds by payment aggregator (PA) or one-time mandate (OTM) holder with respect to mandates covering Mutual Fund transactions.

SEBI has also clarified that in the event of redemption of units, 2-factor authentication be used for online transactions and signature method for offline transactions.

One of the factors in 2-factor authentication for non-demat redemption must be a one-time password (OTP) sent to the unit holders on their email / mobile registered with the AMC. In case of demat redemption, authentication process laid down by depositories will be followed.