SEBI's New Clarifications on Transactions in Mutual Funds Units; Check Complete Details

SEBI's New Clarifications on Transactions in Mutual Funds Units; Check Complete Details

On Tuesday, market regulator SEBI issued clarifications on transactions involving mutual fund units, as well as guidelines for authentication in the event of unit redemption. The clarifications apply to transactions in mutual fund units on stock exchange platforms as well as entities other than exchanges, such as online platforms. According to a circular issued in October 2021, stock brokers and clearing members shall not accept payment for mutual fund transactions via one-time mandates or the issuance of mandates or instruments in their name. A mandate is an instrument, authorization, or order in any form, including electronic means, that is used to effect a payment by a person for the purpose of mutual fund investment. However, the regulator has recently stated that one-time mandates in favor of SEBI-recognized clearing corporations may be accepted. "On or after April 01, 2022, new mandates shall be accepted only in favor of SEBI recognized Clearing Corporations and those mandates shall exclusively be for subscriptions to units of Mutual Fund schemes and not for any other purpose,” SEBI said. It also stated that existing mandates used for mutual fund transactions can be kept in the name of the stock brokers / clearing members as long as they ensure that payment aggregators (PA) put in place mechanisms that limit the beneficiary of the mandate to an approved account. This account shall only be the clearing corporation's bank account. It has also stipulated a number of other conditions. The regulator has imposed conditions on the processing of mutual fund transactions under such mandates. Stock exchanges and clearing corporations, for example, must ensure that PA has implemented adequate checks and balances to ensure that such approved account is that of a clearing corporation. They must also provide an investor grievance redressal or arbitration mechanism to clients in the event of a breach of these terms or the misappropriation of funds by the PA appointed by stock brokers or clearing members. SEBI has also issued similar guidelines for transactions in mutual fund units facilitated by entities other than stock exchanges, such as online platforms. According to the October 2021 circular, mutual fund distributors, investment advisers, mutual fund utilities, channel partners, and other entities facilitating mutual fund transactions, including online platforms (OTM holders), shall not accept payment through one-time mandates or issue mandates/instruments in the name of the OTM holders for such transactions. SEBI clarified on Tuesday that existing mandates in use can continue to be held in the names of such OTM (one-time mandate) holders. This is subject to AMCs ensuring that the PA implements mechanisms that limit the beneficiary of the mandate to an approved account, which must be the bank account of a mutual fund pool account or mutual fund scheme account. SEBI has established guidelines for the processing of such transactions. New mandates may be accepted in the name of OTM holders on or after April 1, 2022, subject to compliance with SEBI conditions, and the mandates must be for subscriptions to units of mutual fund schemes only and not for any other purpose. "AMCs shall be liable to the unit holders for breach of these conditions or misuse of funds by PA or OTM holder with respect to mandates covering Mutual Fund transactions,” SEBI said. When redeeming units, two-factor authentication for online transactions and the signature method for offline transactions are required. One of the factors for such two-factor authentication for non-demat redemption must be a one-time password sent to unit holders at their AMC-registered email/phone number. The depositories' authentication procedures must be followed for demat redemption, according to SEBI. The authentication guidelines will be in effect beginning April 15, 2022.