The Securities and Exchange Board of India (Sebi) has proposed to relax restrictions on third-party payments in the mutual fund ecosystem.
In a consultation paper issued on Wednesday, the markets regulator recommended third-party transactions for mutual fund investments in certain scenarios, allowing employers and fund houses to facilitate investments on behalf of employees and distributors under a regulated framework with safeguards.
Mint explains whether such a payment mechanism poses any risks to investors and why it has remained off-limits so far.
What are the proposed changes?
The proposal would permit employers to invest in mutual fund schemes on behalf of employees through payroll deductions. Employees' Provident Fund Organization (EPFO)-registered, listed and asset management companies (AMCs) would be eligible to offer the facility, provided employees sign up voluntarily.
The regulator has also proposed allowing AMCs to pay trail commissions, or a portion of them, to mutual fund distributors (MFDs) in the form of mutual fund units instead of cash. Only MFDs registered with the Association of Mutual Funds in India (Amfi) would qualify for the arrangement.
Sebi has also proposed enabling investors to donate a portion of their mutual fund investments or returns towards social causes through regulated structures linked to social stock exchange entities.
Why are the changes needed?
The existing framework restricting third-party payments was introduced to address money laundering, fraud and unauthorized transactions risks.
Sebi mandates that investments originate directly from the investor’s verified bank account and that redemption proceeds also flow back only to that account. This creates a clear audit trail and reduces the possibility of intermediaries diverting investor funds.
However, the mutual fund industry has made a representation to the regulator requesting that it allow payroll-linked investing and commission-linked investments for distributors. The proposal could support broader financial inclusion goals by integrating mutual fund investing more closely with workplace savings systems.
What are the risks the proposal poses?
The regulator’s earlier framework was specifically designed to prevent cases in which investments were made through intermediaries or agents who could misuse investor money or manipulate redemption flows.
“The problem with third-party payments came as investments were being made by people who were not the investors. Agents can take the investor’s cheque and take the redemption in their own name if there is no mandate to transact with the investor’s verified bank account,” said Deepak Shenoy, chief executive at Capitalmind mutual fund.
One major challenge will be verifying the relationship between employers and employees and ensuring that salary deductions happen only with explicit investor consent. Sebi has proposed safeguards such as third-party know-your-customer verification and due diligence obligations for AMCs and registrars and transfer agents (RTAs).
If the proposal is approved, distributors would be able to invest in mutual funds without going through a series of transactions. As of now, MFDs have to receive their commission in cash from the fund house and then invest a portion of it in mutual funds by themselves.
The donation proposal could also open a new channel for structured philanthropy. Investors may be able to direct part of their investments or returns towards verified social causes through regulated social stock exchange entities, reducing concerns around identifying credible non-governmental organisations independently.
How will this impact investors?
For salaried employees, the proposal could make mutual fund investing significantly more convenient by enabling automated deductions directly from monthly salaries. This may encourage disciplined investing and reduce the tendency to delay or skip investments during volatile market conditions.
The framework may also help first-time investors who are uncomfortable with navigating mutual fund platforms independently. Since deductions and investments would occur through employers within a regulated structure, participation could become simpler and more accessible.
“The norms for allowing employees to save through mutual funds should be extended to contractors, as they do not have any mechanism to save as of now. Eventually, it can also be extended to all companies, including smaller startups,” said Shenoy.