Sebi proposes to permit third-party payment in mutual funds in certain scenarios

Sebi proposes allowing third-party payments in mutual funds under certain conditions, such as employer-employee investments and AMC commission payments, with adequate safeguards in place.

Markets regulator Sebi on Wednesday proposed allowing third-party payments in mutual funds in certain scenarios, such as investment by an employer on behalf of its employees and payment of commissions by AMCs, provided adequate safeguards are in place.

The current regulatory framework mandates that all payments for investments in mutual funds must originate directly from the investor's own bank account and be routed exclusively through RBI-authorised payment aggregators or Sebi-recognised clearing corporations.

After receiving feedback from the industry, Sebi felt a need to review the existing framework for third-party payments in mutual funds by permitting specific, well-defined scenarios where such payments may be allowed without compromising the overarching objectives of investor protection and compliance with the provisions of the Prevention of Money Laundering Act (PMLA).

''The intent is to strike a balanced approach that facilitates ease of investing in genuine cases while reinforcing robust safeguards against potential misuse,'' Sebi said.

Accordingly, in its consultation paper, Sebi proposed a third-party payment scenario where an employer can pay for employee investments in mutual fund units through payroll deduction.

''The proposed scenario acknowledges the established practice of employers offering various benefits and savings avenues to their employees. This mechanism would allow asset management companies (AMCs) to accept consolidated payments for mutual fund investments through salary deduction,'' Sebi said.

Further, the regulator suggested another scenario involving third-party payment, where AMCs can pay mutual fund distributors (MFDs) in the form of mutual fund units instead of trail commission.

The proposed scenario -- allotting mutual fund units instead of trail commission, as agreed between AMC and the mutual fund distributor -- will provide a convenient, seamless and disciplined way for the MFD to invest in MF units and will encourage MFDs to save and invest for the long term, it added.

Additionally, Sebi has proposed to permit investors to contribute a portion of the subscription amount or a scheme's return toward a social cause. This aims to facilitate investor contributions to social causes through a regulated, transparent and investor-protected framework.

To manage PMLA risks in third-party payments, Sebi has suggested safeguards like robust KYC for both the payee and beneficiary, a clear written mandate, and an auditable, non-cash electronic fund trail via segregated accounts with regular reconciliation.

AMCs must perform due diligence and ensure transparency, guaranteeing beneficiaries full redemption liquidity, Sebi suggested.

The Securities and Exchange Board of India (Sebi) has sought public comments till June 10 on the proposals.