– Security and Exchange Board of India (SEBI) now prohibits the usage of pool accounts. What’s the deal with the abrupt change? What is going to happen now?The Indian market regulator SEBI announced that it would phase out the usage of pool accounts and mutual funds from April 1, 2022. The deadline for redemptions and transfers has been extended until July 1, 2022, allowing investors and intermediaries more flexibility.
In 2009-2010, the regulator approved the trading of mutual fund units via licensed stockbrokers and clearing members through exchange infrastructures. It also allowed mutual fund distributors and investment advisers to utilize stock exchanges’ infrastructure to buy and sell mutual fund units on behalf of customers.
However, in light of the recent ‘Karvy Stock Broking’ incident (in which the broker allegedly misappropriated clients’ securities to the tune of over Rs. 2000 crores), SEBI has proposed that pooling of funds or units by stockbrokers, mutual fund distributors, investment advisors, and other stock exchange platforms for mutual fund transactions will be discontinued.
The aim is to allow the mutual fund sector to achieve a high degree of operational efficiency in the interests of investors and to ensure that mutual fund subscriptions and redemptions operate efficiently.
What are pooled funds/accounts?
Pool accounts (often called ‘escrow accounts’) are temporary money vaults or digital wallets held by trusted third parties (such as stockbrokers or financial distributors) on behalf of two contract-bound transaction parties.
Platforms for financial counselors, distributors, and brokers have all included the money pooling mechanism. The funds paid by an investor go into the pool account of the aggregator. The funds are consolidated there and then distributed to specific asset management firms.
Professionally managed pool funds include mutual funds, hedge funds, exchange-traded funds, pension funds, and unit investment trusts.
A Brief Overview Of Mutual Funds
A mutual fund is a type of trust that combines the funds of several participants who have a shared financial objective.
Individuals with as little as a few hundred rupees in investible excess might invest in mutual funds. These investors purchase units in a mutual fund scheme at the Best mutual fund app in India with a specific investing aim and strategy.
After which, the Fund Manager invests the funds raised in various assets, ranging from common stock to debentures to money market instruments. Investors receive a part of the income generated by the securities and the capital appreciation obtained by holding them in proportion to their holdings.
- Justification for Change
Previously, SEBI noted that a few cases have come to light in which trading or clearing members transferred customers’ cash and securities to meet margin or settlement requirements for themselves or for a third party or to raise a loan against shares on their account.
AMCs may lose track of where their funds come from when they receive funds through pool/escrow accounts, according to SEBI regulation. Since mutual fund transactions were carried out via intermediaries such as the top brokers in India and clearing members and through digital platforms supplied by mutual fund distributors (MFDs) and investment advisors (IAs.)
SEBI has suggested that stockbrokers, MFDs, IAs, and other platforms will no longer pool money or units for mutual fund transactions to address these concerns and foster a safe investment environment.
- Investor Perspective – Lumpsum And SIP Transactions
If your broker maintains a pool account, you will no longer be able to utilize it for mutual fund transactions such as lump-sum investments, redemptions, or SIPs.
To execute the payment, you must utilize a direct payment option such as a payment gateway (net-banking, UPI, or debit card), NACH, or NEFT/RTGS for your specific scheme. Following the transaction, BSE will transfer the funds from your bank account.
However, you may continue to utilize advisers and intermediaries in the same manner as previously for any other stock, bond, money market fund, and other investment product transactions.
- Orders for Redemption
With the new rule in effect, most traders, brokers, and platforms will require that you redeem your investment in their bank accounts/wallets rather than their bank accounts/wallets.
Since April 1, 2022, you will be able to redeem investments immediately into your bank account; and the reinvestment will be deducted directly from your bank account. Additionally, you may obtain answers on this from your fund firm or SEBI-registered members.
Additionally, the regulator is seeking proposals for ways to improve the convenience of trading mutual fund units via non-pool accounts, which are now only accessible through pool accounts.
What happens now?
In July, monies shall be credited straight from investors’ accounts to the mutual fund scheme’s account without any intermediary pooling.
The regulator instructed asset management firms (AMCs) to guarantee that monies are paid into the Clearing Corporation immediately from the investor account and that funds are paid out directly to the investor account.
The stockbrokers or clearing members must not be involved in the “pay-in or pay-out of money.” Additionally, it stated that the same procedure must apply to both Demat and non-Demat transactions.
After July 1, 2022, SEBI also stated that new mandates would be accepted only in favor of SEBI-recognized Clearing Corporations and will be used solely for subscriptions to units of Mutual Fund schemes.
The proposed structure requires exchanges to promote a more direct connection between customers and the clearing business, obviating the need for intermediaries.
Distributors and investment advisers that facilitate transactions are not permitted to collect remuneration through one-time mandates or instruments registered in their name. Additionally, investors’ checks should be made payable to the mutual fund scheme.
Portfolio managers registered with SEBI, on the other hand, are free from this new restriction.