SEBI Unveils Landmark Proposal to Allow Third-Party Payments in Mutual Funds, Revolutionizing Investment Access

SEBI Unveils Landmark Proposal to Allow Third-Party Payments in Mutual Funds, Revolutionizing Investment Access​

In a move set to significantly overhaul the mechanics of investing, the Securities and Exchange Board of India (SEBI) has released a consultation paper detailing plans to permit third-party payments in the mutual fund industry. This proposed circular seeks to strike a critical balance between ensuring robust investor protection and facilitating easier, legitimate financial transactions for investors and industry participants.

The guidelines aim to partially modify the existing Master Circular for Mutual Funds, which currently mandates that all investment payments must originate directly from the unitholder's bank account.

Scope of Third-Party Payment Exemptions​

The consultation paper identifies three primary, well-defined scenarios where third-party payments may be allowed. These proposed exceptions cover corporate payroll deductions, commission payments to distributors, and structured social contributions.

The first major exemption addresses employer-facilitated investments. Under this mechanism, employers would be permitted to process payments for mutual fund units through salary deductions on behalf of their employees. This facility would be available to all listed and EPFO registered companies, allowing employees who choose to opt-in to utilize salary savings for mutual fund investments.

Secondly, SEBI proposes allowing Asset Management Companies (AMCs) to pay commission to empanelled Mutual Fund Distributors (MFDs) in the form of mutual fund units. This is viewed as a seamless way to encourage MFDs to save and invest for the long term, providing units to the legitimate beneficiary.

Finally, the circular introduces a framework to enable structured donations. This permits investors to mandate a portion of their subscription or redemption amount to be contributed towards a social cause, thereby eliminating operational difficulties associated with identifying credible Non-Governmental Organizations (NGOs).

Mandatory Safeguards and Regulatory Oversight​

The core message underpinning the entire proposal is that any relaxation of payment norms must be coupled with stringent safeguards. To manage Prevention of Money Laundering Act (PMLA) risks, SEBI mandates multiple layers of compliance.

AMCs must ensure the validation of the relationship between the payee and the beneficiary in all third-party transactions. Crucially, the guidelines stipulate that AMCs must assume clear, defined responsibilities for both third-party KYC verification and due diligence to ensure PMLA compliance.

Furthermore, the system must maintain full auditability. All eligible payment proceeds, including dividends, must be credited exclusively to the beneficiary's account. These rules reinforce the principle that regulatory oversight remains paramount, regardless of how the investment funds are transferred.

Market Consultation and Compliance Mandates​

The consultative nature of the paper underscores SEBI's commitment to developing a market-friendly framework. The board has solicited expert views across various dimensions, including the potential for conflicts of interest and the best structural approach for charitable donations.

Stakeholders are specifically asked to comment on the suitability of the payroll deduction model and the commission payment structure. The proposals also require defining whether contributions can be directed only to NPOs registered with the Social Stock Exchange (SSE) or if broader recognition is warranted.

For the industry, the implementation of these guidelines will require AMCs and Registrars to update their internal compliance protocols. AMFI, in consultation with SEBI, is responsible for issuing detailed guidelines that will define key principles and eligibility for these exemptions, ensuring full adherence to Anti Money Laundering (AML) and Combating Financing of Terrorism (CFT) obligations.

The final circular, once approved, will provide the necessary structure for this operational shift, empowering the mutual fund industry to facilitate easier investment pathways while maintaining robust safeguards against fraudulent activities. Public comments on the detailed proposal are invited through the designated SEBI portal by June 10, 2026.