SEBI ban on NFOs to hit mutual fund inflows

Suresh P. Iyengar | Updated on: Apr 03, 2022
The ban on NFO is expected to delay 15-20 issues that were waiting in the wings to hit the market after the start of the new financial year

The ban on NFO is expected to delay 15-20 issues that were waiting in the wings to hit the market after the start of the new financial year | Photo Credit: designer491

AMFI says it will provide time for the industry to upgrade to regulator’s norms

The first of its kind ban on launch of new fund offer (NFO) by mutual funds is expected to put the brakes on fresh inflows into the mutual fund industry, which had witnessed one of the highest flows from NFOs last fiscal.

Market regulator SEBI has been issuing a series of measures to protect mutual fund investors’ interest, however, the industry has sought pushing of the deadline for their implementation, each time.

On Friday, SEBI told mutual fund houses to ensure that no distributor, online platform, stockbroker or investment advisor use pool accounts and then transfer it to the fund house for purchasing units of schemes for investors. The regulator had also directed the industry to implement a two-factor authentication for redemption and verification of source accounts when mutual fund investments are made.

Delay in issues

The ban on NFO is expected to delay 15-20 issues that were waiting in the wings to hit the market after the start of the new financial year. Most of the new offers are from the debt fund category and exchange traded funds, said an industry source.

During the NFO period of 15 days, most retail investors subscribe to the issue by parking their money in the pool account of stock brokers and online platform. However, the amount is transferred to the fund houses only on the last day of NFO, said Rakesh Jain, an informed MF investor.

Since the pool account of market intermediaries hold money across different asset class, it is very difficult to track usage of MF investors’ money lying in pool account, sources said.

On the same page

A Balasubramanian, chairman of the Association of Mutual Funds in India (AMFI), told BusinessLine that mutual funds are on the same page with the SEBI on halting NFO as it will provide ample time for the industry to upgrade and test the technology for meeting SEBI norms.

Though the regulator has extended the deadline for meeting the norms to July 1, the industry is confident of achieving it much before as they are in the interest of investors and avoid potential frauds besides minimising operational risk, he added.

Sebi has been tightening mutual fund norms ever since the Karvy Stock Broking episode came to light where the latter had availed large amounts of loans by illegally pledging their clients’ shares worth about ₹2,800 crore and the loans have become non-performing.

Published on April 03, 2022
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