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Sebi halts NFOs in mutual funds as industry scrambles to comply with circulars

The circular on pooled accounts is meant to address the risk of a broker taking money meant for mutual funds into its own account and then defaulting. (Photo:  Mint)Premium
The circular on pooled accounts is meant to address the risk of a broker taking money meant for mutual funds into its own account and then defaulting. (Photo:  Mint)

  • The regulator had asked mutual fund houses to ensure that no mutual fund distributor, online platform, stockbroker or investment advisor pools accounts and then transfer it to the fund house for purchasing units of schemes for those investors

MUMBAI: The Securities and Exchange Board of India (Sebi) has stopped the mutual fund industry from issuing new fund offers (NFOs) for now, as the regulator provides time to the industry to comply with its new norms.

An NFO is the first step in the launch of a mutual fund.  

The regulator had asked mutual fund houses to ensure that no mutual fund distributor, online platform, stockbroker or investment advisor pools accounts and then transfer it to the fund house for purchasing units of schemes for those investors. This is to ensure that the money does not get misused.

In a letter issued to the Association of Mutual Funds in India (Amfi), the regulator has also called upon the industry to implement its related circulars on two-factor authentication for redemption of mutual funds and verification of source accounts when mutual fund investments are made. 

Fund houses can launch new schemes only after complying with the Sebi circulars mentioned above.

Circulars asking the industry to comply with the above rules were issued on 4 October 2021 and subsequently on 15 March 2022. However, compliance remains pending. 

Amfi had made various representations to the regulator, seeking extension of the deadline. On Thursday, Sebi extended the said deadline 1 July 2022. But to ensure ensure compliance, the regulator has also suspended new fund offers for the time being.

New Rules

The circular on pooled accounts is meant to address the risk of a broker taking money meant for mutual funds into its own account and then defaulting. Money going directly to the fund house or stock exchange allows for this risk to be ring faced. 

The two factor authentication rule will mean, for example, that an additional OTP (One Time Password) will be sent to the customer for mutual fund redemption. This is aimed at cutting down the risk of fraud in the industry. Similarly the verification of source accounts is targeted at eliminating the risk of money laundering in mutual fund investments.

ABOUT THE AUTHOR

Neil Borate

Neil heads the personal finance team at Mint. A former colleague called them 'money nerds' and that's what they are. They cover topics like mutual funds, taxation and retirement, all to improve your chances of building wealth. Neil graduated with a degree in law and economics. He passed the CFA Level I exam and began his writing career at Value Research, a mutual fund research firm in 2016. He joined the personal finance team Mint in 2019. Everyday, the Mint Money Team tackles personal finance questions such as where to invest and where to borrow, through articles, charts and reader queries. They also have a daily podcast - 'Why Not Mint Money' and an annual ranking of mutual funds - the Mint 20.
Catch all the Mutual Fund news and updates on Live Mint. Download The Mint News App to get Daily Market Updates & Live Business News.
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