Sebi halts NFOs in mutual funds as industry scrambles to comply with circulars
1 min read . Updated: 01 Apr 2022, 09:25 AM IST
Premium- 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.
