‘Nominate or opt out’: SEBI directs mutual funds to set March 2023 deadline

Capital market regulator SEBI (Securities and Exchange Board of India) has directed all mutual fund houses to mandatorily implement norms related to nomination by mutual fund investors. In a fresh circular issued to mutual fund houses, SEBI says all the asset management companies (AMCs) must set March 31, 2023, as the deadline for stating nomination or opting out of it for all its unitholders.

"All the AMCs are advised to set deadline as March 31, 2023, for nomination/opting out of a nomination for all the existing individual unit holder(s) holding mutual fund units holder solely or jointly as mentioned at para 1 above, failing which the folios shall be frozen for debits," says SEBI circular.

As per the market regulator, new mutual fund investors will have to opt for one of these two options from August 2022. "Investors subscribing to mutual fund units on or after August 1, 2022, will have the choice of: a. Providing nomination in the format specified in the fourth schedule of SEBI (mutual funds) Regulations, 1996 (or) b. Opting out of nomination through a signed declaration form," SEBI adds.

The latest SEBI circular means that anyone who's a mutual fund investor, he will not be able to withdraw funds from April 1, 2023, if they don't nominate anyone while opting for a particular mutual fund scheme.

The market regular says that AMCs must provide an option to the unit holder to submit either the nomination form or the declaration form for opting out of the nomination physical or online as per the choice of the unit holder. "In case of a physical option, the forms shall carry the wet signature of all the unit holder and in case of the online option, the forms shall be using e-sign facility recognised under Information Technology Act, 2000, instead of wet signature of all the unit holder," the circular adds.

For this, all mutual fund houses will have to ensure that adequate systems are in place for providing the e-sign facility and take all necessary steps to maintain the confidentiality and safety of client records. SEBI, through this circular, aims to protect the interests of investors in securities and promote the development of and regulate the securities market.

In April, in a bid to safeguard the interest of mutual fund investors, SEBI had imposed a ban on the ‘intermediate pooling’ of funds and units by mutual fund distributors, investment advisers, and other entities. The rule, effective from April 1, 2022, is not applicable to SEBI-registered portfolio managers. The decision to ban intermediate pooling of funds was taken in consultation with the representatives of the association of mutual funds in India (AMFI) on the same. The action was taken in wake of increasing reports of investors being defrauded by fraudulent money pooling schemes.

SEBI also extended the deadline for discontinuation of usage of pool accounts for transactions in the units of mutual funds, and other processes, including third-party verification (TPV), two-factor authentication (2FA), and verification of key investor details as applicable to stock brokers/clearing members, and other entities operating online. The ban on such activities was proposed to be implemented from April 1, 2022, however, it will now be extended to July 1, 2022.