The Securities and Exchange Board of India (Sebi) on Wednesday issued a draft circular, seeking public comments on enabling third-party payments in mutual funds (MFs) in certain scenarios. One of the key proposal is to enable the payment of an employee’s MF investment through salary deduction by an employer, similar to that of provident fund and national pension system deductions.
“Such facility would be available to all listed and EPFO registered companies and the AMCs themselves and only interested employees may opt for such an arrangement and agree for salary deduction for MF schemes of their choice,” Sebi said in a consultation paper. Public comments are to be submitted to the regulator by June 10.
Shift from Direct Sourcing
Currently, payments for MF investments must mandatorily originate directly from the investor’s bank account and are routed exclusively through the Reserve Bank of India (RBI)-authorized payment aggregators or Sebi-recognized clearing corporations. All pay-outs are currently credited to the investors’ verified bank accounts.
Another proposal is that AMCs’ commission payment to MF distributors can be done in the form of MF units instead of cash commissions. Only those distributors who are registered with the Association of Mutual Funds in India and selling AMC schemes will be provided an option to receive MF units in lieu of trail commission, as per Sebi’s proposal.
Unit-Based Payouts
For this, AMCs will have to validate the relationship between the payee and the beneficiary. Meanwhile, the regulator also raised concerns on whether such unit-based commission will lead to potential mis selling if distributors favour such compensations and sought comments on what measures should be taken in such cases.
Sebi also proposed permitting investors to pay a part of their subscription for such social cause through MFs. This will eliminate the operational difficulties and the burden on investors to independently identify credible non-governmental organisations, the regulator said.
These proposals come after the MF industry requested the regulator to relax the conditions for third-party payments in certain cases, including payment of salaries by employers and payment of commissions by asset management companies (AMCs), with adequate safeguards in place. Sebi said it has discussed the industry’s concern with the Mutual Fund Advisory Committee which then reviewed and gave recommendations to enable third-party payments in select scenarios.