This week, we attempt to explain the concept of third-party cheques and the implications of not accepting such cheques in the context of mutual fund investments.

What is a third-party cheque?

A third-party cheque can be defined as one which has been issued by another person other than the investor himself / herself.

Why has it assumed importance now?

It has become important now because mutual funds cannot accept cheques for investments from anyone other than the investor. This is to be in line with the Anti-Money Laundering (AML) policy of the Government of India.

How does the mutual fund ensure that there are no third-party cheques involved?

The investor needs to submit a proof of holding an account in a particular bank indicating that he is the holder of the account, or the instrument that he gives must have his name printed on it.

Can an investor pay by demand draft?

Yes, the investor can invest by means of a demand draft in a mutual fund. The DD must, however, be accompanied by a certificate / letter from the bank that the said DD has been purchased out of the funds from the investor's account and that he is the holder of the account in that bank.

How is the compliance ensured in case of an electronic transfer?

In the case of Electronic Clearing Service (ECS) or National Electronic Fund Transfers (NEFTs), the investor should attach along with the application form, an acknowledged copy of the instruction to the bank, stating the account number to be debited.

What happens if it is a joint account?

If the investments in the mutual fund are made in the joint names, then the cheque / DD can be issued or obtained from the joint account; in other words, the investment holdings in the mutual fund must mirror the holding pattern in the bank account. It is also acceptable if the order of names (first and second holder) is different in the bank account and in the mutual fund holding.

Can it be rejected if the cheque is issued from some other account?

Yes, the mutual fund will reject the subscription if the amount is invested from some other account other than the investor's own account. However, there are a few exceptions to this.

One can make payment of up to Rs 50,000 on behalf of a minor. Employers are also allowed to make payments on behalf of their employees under a SIPfacility through payroll deductions. Custodians are also allowed to pay on behalf of a Foreign Institutional Investor (FII) or a client.

(The author is CEO, Sundaram BNP Paribas Fund Services)

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