Banning of mutual fund transactions through pool accounts: Sebi

(Commerce Rep) Mumbai, Ta. December 24, 2019, Tuesday

The Securities and Exchange Board of India (SEBI), the managing director of the capital markets, has issued a discussion paper stating the ban on the purchase and sale of mutual funds through brokers' pools or escrow accounts and online platforms.

It is worth mentioning that recently due to the alleged misuse of the pooling system in the case of Carvy Stock Broking, SEBI has suggested direct credit and debit from investor bank accounts for mutual fund transactions.

As per SEBI, Intermediary will collect the money of the consumers first and then pass it to the AMCs (likewise from WISA Versa for mutual fund redemptions). These transactions are called Pulled Transactions.

For example, mutual funds are bought through a stockbroker and deposited first in the money broker's pool account. Platforms like Mutual Fund Utility (MFU) also use an escrow account to raise investor money before remitting AMCs. Which is a pooled transaction.

Alternatively, through the clearing corporation on the stock market, AMC can reach the money flow. These transactions are called non-pull transactions. For example, distributors and investment advisers conduct transactions through the BSE Star MF platform, which is called the non-pull method.

Such transactions involve the raising of money through a clearing corporation, not through an intermediary. Pool transactions accounted for 51.4% and non-bridge transactions accounted for 48.5% in FY 2018-19. SEBI has suggested the end of pooled transactions. According to Sebi, AMCs and registrars and transfer agents do not see the details of funds and investors when pooling is taking place.

In addition, in case of purchase of mutual funds in demat accounts, the obligation of AMCs is fulfilled when the broker is paid. As a result, investors are forced to use the Exchange's Greens Redressal System in case their units or funds are not credited.

There have been cases in the recent past where clients' funds or securities have been misused by trading members / clearing members for margin liabilities or settlement obligations or other third parties or to obtain loans against shares in their own account.

In the meantime, experts have also shown problems in implementing Sebi's proposals. While not all exchanges currently have the facility to pay directly to clients through the exchange, brokers who charge a fee for mutual fund purchases (most of which offer direct plans) may face the problem of collecting these charges.