SEBI bars NFOs till regulations are complied with

Over the last few years, SEBI has ensured that the fund industry remains on its toes by bringing in regulations to standardise the industry workings and protect the investors' interests. In another of its attempts, SEBI has banned AMCs from launching new funds till they ensure implementation of proposed regulations - suspension of pooled accounts by distributors, two-factor verification for redemptions and verification of source account details.

However, according to an industry representative, this rule will not apply to the NFOs that are underway. They will remain unaffected.

What are these regulations?
In October 2021 (with additional clarifications issued in March 2022), SEBI had asked fund companies to ensure that mutual fund distributors, stockbrokers, investment advisors, and other intermediaries stop using pooled accounts for funds and mutual fund units. This ruling came out in the aftermath of the fallout of the Karvy Stock Broking.

Wondering what does pooling of funds mean? Well, it's like a wallet with intermediaries, through which all funds and units on investment and redemption amount pass. A simplified version of how this works is that your money moves to the intermediary's pooled account when you put in a purchase request, and the broker then credits your money to the AMC. So, here your money passes through an intermediary.

To eliminate the chances of diversion by intermediaries and make investors' money safer, SEBI had mandated the prohibition of such accounts, ensuring a direct flow of funds and units between investors and the AMC. For further risk mitigation, the regulator also asked AMCs to ensure a two-factor verification to authenticate online redemption transactions and verify source bank account details.

Let's now understand what two-factor authentication is. For example, when you transact online, you typically need to log into your bank account by providing a password, which is the first instance of verification. Then when you need to make a transaction, one has to go through an OTP authentication to validate further.

These norms were supposed to kick in from today. However, at the request of AMFI, the capital market regulator extended these timelines till July 1, 2022. But as they say, there are no free lunches. This extension has come at the cost of suspending any further NFOs until AMCs comply.

Impact on investors
By barring AMCs from launching any new funds until they adhere to these rules, the regulator has clearly signalled the criticality of the new rules in protecting investors' interests.

As far as you, the investor, is concerned, the suspension of NFOs shouldn't be a cause of much botheration. You were, anyways, getting bombarded by a flurry of new funds that you don't really need. So, if at all, this will only bring welcome relief for some time.

Regarding the suspension of pooled accounts, there could be some consequences depending on your intermediary's transaction mechanism. So, it is best to check with the intermediary about the implications on your ability to transact through them.