The Securities and Exchange Board of India (SEBI) has proposed a limited relaxation of third-party payment restrictions for mutual fund transactions, aiming to resolve persistent operational hurdles for investors and intermediaries. Released in a draft consultation paper, the market regulator’s proposal seeks to balance the industry’s demand for flexibility with the necessity of maintaining stringent anti-money laundering safeguards.
The Evolution of Third-Party Payment Rules
For over a decade, Indian capital markets have operated under strict rules regarding the source of investment funds. To combat financial crimes and tax evasion, SEBI historically mandated that the bank account used to purchase mutual fund units must belong to the primary folio holder. This zero-tolerance policy on third-party payments acted as a critical shield against money laundering but created unintended friction for legitimate corporate and familial transactions.
Over the years, the Association of Mutual Funds in India (AMFI) and various financial institutions have advocated for policy modifications. Industry leaders argued that the rigid framework prevented employers from offering mutual fund contributions as structured employee benefits and restricted mutual fund distributors from seamlessly reinvesting their commissions.
Targeted Exemptions for Payroll and Distributors
The newly released consultation paper proposes carving out specific, highly monitored exceptions to the third-party payment ban. The first major exception targets corporate payroll deductions. Under this provision, employers will be permitted to deduct mutual fund contributions directly from an employee’s salary and remit those funds to the respective asset management company (AMC) on the employee’s behalf.
The second key exemption addresses mutual fund distributors (MFDs). The regulator proposes allowing distributors to channel their earned commissions directly into mutual fund schemes. This mechanism eliminates the need for commissions to first be credited to the distributor’s bank account and then manually reinvested, thereby reducing transaction costs and operational delays.
SEBI’s proposal also hints at potential relaxations for specific family-related transactions, such as parents investing on behalf of minors, provided that clear custodial relationships are documented. However, the primary focus remains on institutional and professional use cases that possess pre-existing institutional verifications.
Robust Safeguards and Compliance Mandates
To prevent these relaxations from becoming loopholes for illicit fund flows, SEBI has coupled the proposals with rigorous compliance mandates. Any AMC opting to accept allowed third-party payments must establish an uncompromised, end-to-end audit trail. This trail must clearly link the ultimate beneficial owner of the mutual fund units to the entity making the payment.
Furthermore, all transactions must strictly comply with the Prevention of Money Laundering Act (PMLA) and standard Know Your Customer (KYC) protocols. Both the paying entity—such as the employer—and the beneficiary employee must have fully verified KYC profiles. Industry analysts point out that the success of this initiative depends heavily on the technological preparedness of Registrars and Transfer Agents (RTAs) to validate these multi-party transactions in real time.
According to compliance experts, fund houses will need to develop sophisticated APIs capable of cross-referencing corporate PANs with individual employee folios. This technological requirement could initially increase operational costs for smaller AMCs, though larger players are expected to transition smoothly due to existing robust digital infrastructures.
Industry Implications and What to Watch Next
The proposed changes are expected to democratize micro-investing and structured savings plans across corporate India. By allowing direct payroll deductions, companies can integrate mutual fund SIPs into standard compensation packages, potentially bringing millions of salaried individuals into the capital markets for the first time.
For financial intermediaries, the direct reinvestment of commissions will likely boost capital retention within the mutual fund ecosystem. However, the immediate focus for the industry will be navigating the administrative complexity of establishing verified payment channels that satisfy the regulator’s stringent audit requirements.
Moving forward, market participants should closely monitor the public feedback phase, which will shape the final regulatory draft. The industry will be watching for the specific technical guidelines SEBI issues regarding automated audit trails, as well as the official implementation timeline for AMCs to upgrade their transaction verification systems.
