The Securities and Exchange Board of India (SEBI) has barred asset management companies from launching any new fund offers for the coming three months as reported by Financial Express.
The market regulator cited its concerns over mutual fund companies in the country not complying with its norms regarding the pooling of funds by intermediaries and distributors. Despite the regulator’s warnings, brokers and other intermediaries facilitating investments into mutual funds tend to collect the investors’ money into their accounts before transferring the same to the clearing corporation or the fund management company.
The regulator had warned the industry against this practice of pooling investors’ money back in October 2021 to facilitate the money from the investors’ accounts to that of mutual funds. However, the industry has sought time to correct this anomaly and comply with the deadline given by the regulator.
The market regulator announced the extension of the deadline on March 31, 2022. This is the third time that the regulator has extended the deadline to allow asset management companies to fall in line with its guidelines. The decision to disallow fund houses from launching any new fund offers in a bid to encourage the industry, intermediaries, clearing corporations and payment gateways to focus on adhering to the regulatory body’s guidelines.
A Balasubramanian, Chairman of Association of Mutual Funds in India (AMFI) and CEO of Aditya Birla Sun Life AMC said, “There is a methodology around pooling of money by intermediaries, which needs to change. The regulator wants the system to be more efficient in the interest of the industry at large, which requires systems to change completely. The SEBI wants the industry to focus its energies on this. Anyway, a majority of flows come to the industry from existing schemes, so it is not a deterrent.”
In a prior circular issued by the SEBI in October 2021, the regulator had explicitly mentioned, “Pay-in/pay-out of funds shall not be handled by the stockbrokers/clearing members.” The directive had been mentioned to motivate the intermediaries involved in mutual fund transactions to ensure that the funds pay-in are directly received by the clearing corporation from the investor account and funds pay-out also are directly made to the investor account.
Currently, banks, stock exchanges, payment gateways and clearing corporations are working with asset management companies to implement this change. However, this would take a bit of time considering the need for a change in the way technology platforms, payment gateways and transaction platforms are designed. Now that the new fund offers have been put on hold, it is expected that the asset management companies will now redirect their focus on resolving the issue raised.