Have you been investing in mutual funds through stockbrokers or mutual fund distributors? If yes, there is a possibility that your money is first going into the intermediaries’ bank accounts but SEBI has now banned this practice in investors’ interests. The market regulator has also instructed fund houses not to launch any new funds for the next three months. In a recent webinar organized by Value Research, Dhirendra Kumar, CEO of the company explains what the new rules are about.
What do SEBI regulations say?
SEBI in a recent announcement prohibited a common pooled account by stockbrokers and mutual fund distributors. A ban has been imposed on mutual fund distributors barring them from coming out with any new fund offers (NFOs) before June 30 this year.
These regulations are not new and were announced in October 2021. The fund companies were supposed to comply with this by March 31st and it should have been effective by April 01, but they are not in readiness. The mutual fund houses have not been able to implement it.
What are pooled accounts?
What used to happen typically in earlier times or when we used to write cheques for writing or making an investment, we used to go to a fund website and choose the fund to make an investment or give instruction for investment, for example, I may want to invest ₹10,000 every month whether it be an investment instruction for a SIP. In these cases, my money used to get debited and the fund company used to get the money credited where it will get it directly. Now ever since the stockbrokers have started selling mutual funds through their network, there is a new platform at NSE and BSE.
The BSE Star has become a very large platform through which mutual fund investors invest in mutual funds through these stockbrokers. And most of this is digital as the fintech companies enabling transactions are using it. In this case, what happens is when I get my money, it is not specified that it is going for a specific fund. It is going to the stockbroker and the stockbroker distributes the money for the instruction I had given. Assuming I want to invest ₹10,000 in five funds. The money goes to the stockbroker. The stockbroker distributes the money to the five funds. Now the money is not going directly to the fund companies from my account. Now SEBI does not want this.
The SEBI wants that the money should be debited from my account and the mutual fund companies must be more intensely regulated. It will eliminate the money lying somewhere in between before it gets invested. So this is what SEBI wants to eliminate that one step in between. It should not get into what you call " omnibus " in financial jargon where the money is pooled and then the distributor decides where it must go. Likewise, the reverse is also true in the case of stocks, but then that does not happen in the case of mutual funds because SEBI’s operating prescription is that whenever you redeem your money, the money gets back into your bank account directly.
What was the need for this rule?
SEBI is extra careful with mutual fund investors because investments in mutual fund is on a rising tide. There is a lot of popularity surrounding mutual funds and SEBI wants to make sure that mutual fund investors never face any crisis of any kind, which can erode their confidence. That is why SEBI wants to be extra careful and there is a reason why it should be. There have been instances where stockbrokers have defaulted or have been penalized. Some of the biggest stockbrokers have access to your Demat accounts and many dormant investors have their securities lying in their Demat accounts. The stockbrokers have access to those accounts because we investors give an authorization that the stockbroker can access thesesecurities because they need access while selling the securities.
There have been instances where stockbrokers have defaulted and hence have been expelled by the stock exchanges. And there are at least 28 such brokers. Taking a lesson from that example, eliminating the possibility of any such chance of risk is a straightforward measure.
Will this change the way you invest?
It will not change the way investors invest and that is only when you invest through a stockbroker because so far the stockbroker used to operationalize your investments in mutual funds was typically get an authorization for the national automated clearinghouse which is run by the National Payment Corporation of India (NPCI) whereby you give the digital authorization to the bank vetting that the broker can withdraw the amount mentioned. For investment in mutual funds, they only needed the mandate unlike while dealing with stockbrokers who should have access to your money to buy your shares. Now the way you buy shares will change because now you must give specific instructions to buy a particular date at a particular rate on some particular date through SIPs.
What is the connection?
There is one small connection though it is not a direct connection with NFOs because when we invest in mutual funds, our money gets debited and we are allotted the units on that very day. In the case of NFOs, there is a period for which they are open. The money is debited from the investors’ accounts but does not go to the fund that very day. It can remain with the broker and can be given to the fund house only on the last date. There will not be any problem even if they hold back the money till the last date. So NFOs enable a mechanism wherein the money can lie with the brokers for a couple of days to a fortnight. That makes the investors vulnerable, which is a little risk. SEBI wants to eliminate the risk factor. The other is an incentive or a disincentive. NFO is a very important component of the mutual fund business. If there is a clampdown, which means that you cannot launch an NFO, mutual fund companies will take this clampdown more seriously since it is hurting their business and they can get on with their businesses more steadily only after implementing this. This is an incentive or disincentive (as you call it) for doing it hurriedly.