Sebi halts NFOs in mutual funds as industry scrambles to comply with circulars

MUMBAI: The Securities and Exchange Board of India (Sebi) has stopped the fund industry from issuing new fund offerings (NFOs) for now, as the regulator gives the industry time to comply with its new standards.

An NFO is the first step in the launch of a mutual fund.

The regulator had asked fund houses to ensure that no fund distributor, online platform, stockbroker or investment adviser collects accounts and then transfers it to the fund house to buy shares of systems for these investors. This is to ensure that the money is not misused.

In a letter issued to the Association of Mutual Funds in India (Amfi), the regulator also urged the industry to implement its related circular on two-factor authentication for the redemption of mutual funds and verification of source accounts when making fund investments.

Fund companies can launch new systems only after following the Sebi circular mentioned above.

A circular urging the industry to comply with the above rules was issued on October 4, 2021 and thereafter on March 15, 2022. However, compliance remains.

Amfi had made various petitions to the supervisory authority and requested an extension of the deadline. On Thursday, Sebi extended the said deadline 1 July 2022. But to ensure compliance, the regulator has also suspended new fund offers for the time being.

New rules

The pooled account circular is intended to address the risk of a broker taking funds intended for funds into its own account and then failing. Money that goes directly to the stock exchange or the stock exchange makes it possible to avoid this risk.

The rule of two-factor authentication will, for example, mean that another OTP (One Time Password) is sent to the customer for redemption of fund units. This aims to reduce the risk of fraud in the industry. In the same way, the verification of source accounts is aimed at eliminating the risk of money laundering in fund investments.

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