New Delhi: A new Securities and Exchange Board of India (SEBI) proposal could enable contributions, routed through mutual funds, to certain NGOs listed on the social stock exchange, and also pave the way for employers making mutual fund investments on behalf of employees through payroll deductions.
The proposal forms a part of a consultation paper, which aims to relax restrictions on “third party payments” in mutual funds in certain scenarios, released last week.
SEBI has invited comments and suggestions on the proposal by 10 June.
Currently, the regulatory framework mandates that all payments for investments in mutual funds must originate directly for the investor’s own bank account. These payments are to be routed exclusively through RBI-authorised payment aggregators or SEBI-recognised clearing corporations. This is done to ensure such investment instruments do not become tools facilitating money laundering or terror financing.
The proposal permits investors to contribute to a social cause through a part of the subscription amount of the mutual fund or the scheme’s return.
It says that enabling donations through mutual funds will “eliminate the operational difficulties and burden on investors to independently identify credible non-governmental organisations (NGOs)”.
Additionally, it also proposes a mechanism that would allow employers to make consolidated mutual fund investments on behalf of employees. The paper says that the proposed scenario acknowledges the established practice of employers offering various benefits and savings avenues to their employees.
The employees would have the option to opt for such an arrangement and agree for salary deduction for mutual fund schemes of their choice. Any payments through the mutual funds, including dividend, will only go to the employee’s account.
Varuna Bhanrale, Partner at law firm Trilegal, said the proposal for employers to deduct mutual fund investments from employees’ payroll “is a welcome step as it creates a systematic savings mechanism (similar to EPF), and could lead to an increase in the number of retail investors in the mutual funds market”.
While Bhanrale termed the proposal a positive move overall, she cautioned that its success will depend on practical guardrails imposed by the SEBI.
“Additionally, any detailed regulations on this issue must seek to address potential contentious areas such as consequences of non-compliance or wrongdoings by third parties who are expected to invest on behalf of employees and MF distributors,” she told ThePrint.
Delhi-based lawyer Deepak Joshi explained that the proposal for payroll deduction for mutual fund investments mirrors the existing statutory systematic deduction model for EPF, NPS, and group insurance. “This proposal has the possibility of expanding MF penetration to non-metro, digitally not so adept employees who rely on employer supported financial products,” he added.
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Additional infrastructure
Leelavathi Naidu, senior partner at IC RegFin Legal, said the mutual fund industry has permitted third-party payments since 2010, to a limited extent, in accordance with guidelines issued by the Association of Mutual Funds in India (AMFI).
“The recent SEBI consultation paper proposes to formally recognise third-party payments, but in a considerably narrower form,” Naidu, who is an award-winning adviser with expertise in SEBI compliance, and advising top mutual funds and global asset managers, told ThePrint. The development, she said, “creates uncertainty regarding the continued permissibility of other forms of third-party payments that are presently followed by AMCs under the existing AMFI framework.”
There may also be additional steps necessary to ensure the infrastructure for implementation of such a proposal on payroll deduction.
For instance, Joshi explained that a safeguard should be included that redemption proceeds cannot be withheld by the employer under any contractual arrangement.
He also pointed out that under the Income Tax Act, 2025 the employer deducts TDS from salary. “If a portion of gross salary is directly invested in MF before credit to the employee’s account, the characterisation of the deducted amount for TDS purposes must be clarified by the CBDT,” he told ThePrint.
Besides, Section 18 of The Code on Wages, 2019 restricts permissible deductions from wages. Therefore, payroll deduction would have to be expressly brought within “authorised deductions”—a change that would require an amendment to The Code on Wages, 2019 or a notification under Section 18.
Bhanrale also pointed out that the paper raises the question of whether the employer should be restricted from facilitating investment in mutual funds of those Asset Management Companies (AMCs) which are its group companies. “From a practical standpoint, an outright bar may be quite extreme, but employees must have the ability to make a conscious and informed choice and any such group-AMC relationship must be fully disclosed to them by the employer,” she explained.
Donations through mutual funds
The consultation paper proposes facilitating donations towards a “social cause” through mutual funds. It allows contributions, routed through mutual funds, to NGOs listed on the social stock exchange.
Joshi said that, for the NGO sector, “this proposal leverages MF distribution infrastructure for social impact with no additional donor acquisition cost for NGOs”.
“The institutional framework also eliminates the burden of independently vetting NGOs and reduces the risk of misutilisation of donation,” he added.
However, Naidu asserted that this calls for “careful evaluation”.
“Donations qualifying under Section 80G of the Income-tax Act are, during tax assessments, generally expected to be directly traceable from the donor’s bank account. In this context, close coordination between the Income Tax Department and SEBI would be essential to minimize the risk of subsequent adverse consequences or disputes for investors, particularly in relation to the tracing and evidentiary expectations of the tax authorities,” she explained.
The PMLA compliance
Currently, AMCs have to ensure compliance with the Prevention of Money Laundering Act (PMLA).
The restrictions placed on third party payments for mutual funds were to ensure that these funds are not misused for fraudulent or money laundering transactions.
However, as per the consultation paper, requests were made by the mutual fund industry to relax the conditions for third party payments in certain cases.
To facilitate opening up of restrictions, the consultation paper also talks about “stringent precautions” to manage PMLA risks.
These safeguards, it says, would include, among other things, validation of relationship between payee and beneficiary, a robust KYC for both payee and beneficiary, and an electronic fund trail. “AMCs must perform due diligence and ensure transparency, guaranteeing beneficiaries full redemption liquidity. The final guidelines and modalities for these precautions may be specified by AMFI, in consultation with SEBI,” the consultation paper says.
The draft circular also says that AMFI, in consultation with SEBI, shall also issue detailed guidelines defining key principles and eligibility of entities for the exemption. It also has to ensure guidelines for compliance with anti-money laundering standards and combating financing of terrorism, as well as the Obligations of Securities Market Intermediaries under Prevention of Money Laundering Act, 2002.
The paper emphasises on striking a balanced approach that facilitates ease of investing in genuine cases, while “reinforcing robust safeguards against potential misuse”.
Apart from payroll deduction for employees, the SEBI has also proposed that mutual fund distributors receive commissions in the form of ‘mutual fund units’, instead of cash.
(Edited by Amrtansh Arora)
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