The Securities and Exchange Board of India (Sebi) is considering allowing third-party payments—such as employers investing on behalf of employees—in mutual funds, as it looks to ease transaction norms while retaining safeguards against risks such as money laundering.
In a consultation paper issued on Wednesday, the market regulator said third-party payments in mutual funds can be allowed in certain scenarios such as payment of employee benefits by employers and payment of commissions to distributors by asset management companies (AMCs).
The proposal marks a departure from current regulations that require that all mutual fund transactions must happen with the investor’s verified bank accounts, to enable maintenance of a digital trail. The rules, which are in accordance with the Prevention of Money Laundering Act (PMLA), were framed to mitigate third-party payment risks among AMCs.
The market regulator has proposed allowing payout deductions by employers towards employees who have opted as a savings avenue. The option would be available for all listed and EPFO-registered companies and the AMCs themselves.
“This mechanism would allow AMCs to accept consolidated payments for mutual fund investments through salary deduction,” said the regulator in the draft paper.
The regulator has invited comments until June 10 on the draft regulations.
Third-party payments are also allowed for the purpose of payment of commission by mutual funds to their empanelled distributors. The provision allows AMCs to pay their distributors in the form of mutual fund units instead of cash, in a system similar to salary deductions for employees.
The mutual fund units are allotted only in the distributor’s own name, ensuring that the actual beneficiary receives the investment benefits. Only Association of Mutual Funds in India (AMFI)-registered distributors selling schemes can avail of this option. AMCs and RTAs (registrar and transfer agents) must also follow proper KYC verification, maintain compliance with anti-money laundering laws, and ensure that all dividends or redemption proceeds are credited only to the beneficiary’s account.
The proposal also aims to help investors contribute to social causes through mutual funds in a regulated and transparent manner. Investors can now donate a part of their investment amount, dividends, or redemption proceeds towards verified Non-Profit Organizations (NPOs) through zero coupon zero principal instruments listed on the social stock exchange.
Mutual fund industry executives said AMCs earlier had schemes and commission payout mechanisms that enabled third-party payments. The paper now formalizes these with a clear framework.
“The norm for paying employees for their savings should be made available for unlisted firms as well, as there is a need for organized investing in such companies. Further, the recommendation on contribution to social causes, though well-intended, may pose a restriction as not many NGOs are listed on stock exchanges and not many NGOs have issued ZCZP (zero coupon, zero principal) instruments,” said Jimmy Patel, managing director at Quantum Mutual Fund.
Non-government organizations (NGOs) listed on social stock exchanges raise funds through zero coupon, zero principal instruments, which neither pay interest nor return the principal at maturity.
The framework reduces the difficulty of identifying trustworthy NGOs independently and ensures better transparency and investor protection. may either create dedicated schemes for donations or allow all existing schemes to provide this facility.