Market regulator Securities and Exchange Board of India (SEBI) has issued a draft framework proposing to allow limited third-party payments in mutual funds, marking a notable shift from the current rule that mandates investments be made only from the investor’s own bank account.
The consultation paper released on Wednesday suggests permitting employers, mutual fund houses, and certain social contribution arrangements to use regulated third-party payment channels, subject to strict anti-money laundering safeguards and investor protection requirements.
Created with AI. Errors are possibleThese proposals form part of SEBI’s wider initiative to modernise mutual fund operations and enhance ease of investing, while maintaining robust compliance with the Prevention of Money Laundering Act (PMLA).
Salary-linked mutual fund SIP
One of the key proposals would permit employers to invest in mutual fund schemes on behalf of employees through salary deductions. As per the draft paper, this facility would be restricted to listed companies, EPFO-registered entities, and Asset Management Companies (AMCs). Employees would be required to give explicit consent to opt into the arrangement, and all investments would continue to be recorded in the employee’s own name.
SEBI stated that the proposal acknowledges the long-standing practice of employers providing savings and wealth-creation options through payroll systems. At the same time, the regulator has invited public comments on whether employers should be restricted from steering employees toward schemes managed by group AMCs, in order to prevent potential conflicts of interest.
Mutual fund unit distributor commissions
SEBI has also proposed permitting Asset Management Companies (AMCs) to compensate empanelled Mutual Fund Distributors (MFDs) in the form of mutual fund units instead of cash commissions. As per the proposal, only AMFI-registered distributors would be eligible, and the units would be credited directly to the distributor as the beneficiary. The regulator believes this approach could promote long-term investment discipline among distributors while better aligning their incentives with market performance.
The SEBI paper read, “the proposed scenario for allotment of MF units in lieu of trail commission or part thereof as agreed between the AMC and MFD shall provide a convenient, seamless and disciplined way of investing in MF units for the MFD and encourages the MFDs to save and invest for the long term. The units would be allotted to the legitimate beneficiary namely MFD himself/herself.”
SEBI has also flagged concerns that such a structure could lead to mis-selling if distributors start preferring schemes that offer higher unit-based compensation. The consultation paper has specifically sought views on whether this arrangement could create conflicts of interest and what safeguards would be needed to address potential risks.
Social donations via MFs
In another proposal, SEBI has suggested enabling investors to allocate a portion of their mutual fund investments or returns to social causes. The framework considers donations either through subscriptions to Zero Coupon Zero Principal (ZCZP) instruments issued by non-profits listed on the Social Stock Exchange, or directly to designated NGOs. For this, two models have been proposed: a dedicated “social contribution” mutual fund scheme, or a donation feature integrated into all existing schemes.
SEBI believes the proposal could enable investors to contribute through a regulated, transparent, and investor-protected framework, while easing the burden of independently identifying credible NGOs. The paper stated, “Enabling donations through Mutual Funds will eliminate the operational difficulties and the burden on investors to independently identify credible Non-Governmental Organisations (NGOs).”
The regulator has also invited feedback on whether such donations should be limited exclusively to Not-for-Profit Organisations (NPOs) registered with the Social Stock Exchange.
Even while proposing the introduction of third-party payment structures, SEBI has stressed that strong anti-money laundering safeguards will continue to be a core requirement of the framework.
The draft circular proposes stringent KYC verification for both the payer and beneficiary, validation of relationships between the parties, mandatory electronic fund trail tracking and segregated reconciliation processes. The SEBI paper has also suggested that all redemption or dividend payouts be routed only to verified beneficiary accounts.
SEBI has suggested that detailed operational guidelines be developed by the Association of Mutual Funds in India (AMFI) in consultation with the regulator. The proposal comes in response to several representations from the mutual fund industry requesting greater operational flexibility for legitimate payment arrangements.
Earlier, SEBI had proposed permitting gift prepaid instruments to be used for mutual fund investments. The regulator has now sought public comments on the consultation paper, with the feedback window open until June 10, 2026.
(Disclaimer: The above article is meant for informational purposes only, and should not be considered as any investment advice. ET NOW DIGITAL suggests its readers/audience to consult their financial advisors before making any money related decisions.)
