InvestorQ : Why SEBI has floated a discussion paper on banning the use of pool accounts for Mutual fund (MF) transactions by stockbrokers and MF distributors?
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Why SEBI has floated a discussion paper on banning the use of pool accounts for Mutual fund (MF) transactions by stockbrokers and MF distributors?

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12 months ago
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SEBI has floated a discussion paper on banning the use of pool accounts for Mutual fund (MF) transactions by stockbrokers and MF distributors. 

It may be recalled that investors put money in MFs via two routes - Direct and Regular. In a direct plan, the investor directly submits the application to the Asset Management Company (AMC) or to the registrar without a broker code. In a regular plan, the client submits the payment to the broker. That money remains in the pool account of the broker before it is credited to the individual bank account. This implies that there is a window of 2-3 days when neither the AMC nor the registrar has control over the investor funds. 

This may lead to a lack of traceability for 2-3 days as neither AMC nor their registrars are able to match the end buyer and seller with their order details. Similarly, when AMC makes a redemption payment to the broker's pool account and has no way to confirm if the money has indeed been transferred to the investor.

In the recent Karvy Stockbroking case, the pool account was misused by transferring funds and securities illegally. As per the consultation paper, SEBI apprehends that same can happen to MF units float of clients also in the broker pool account. It is in this light that SEBI wants to totally ban the concept of broker pooling accounts. 

This can be implemented in the following way:

(a) Any 'buy' investment would mean a debit to the investor account & a seamless credit to the AMC bank account (or clearing corporation)
(b) Any 'sale' of fund units mean money will directly move from the AMC account (or clearing corporation) into the client account. 

Currently, 52% of MF investments are routed through pooled units. 48% routed via non-pooled accounts is done via various clearing corporations like stock exchange platforms (BSE STAR-MF being the largest of them).

The current set up was convenient to the brokers as they control the whole process and don't need to share the client details with the AMC or the registrar. This has already generated a lot of hue and cry within broking circles. With the rise of many Fintech in the last couple of years, many digital platforms have come up with which routes the purchases and redemptions of investors through these pool accounts. It impacts their operations considerably. 

There is, however, one small issue in banning pooled accounts. Brokers charge for their services, an amount that is payable by the client based on the service provided. Such charges are deducted by the broker before paying out of the pool to the customer. SEBI needs to address how this transaction will take place without compromising the interests of both investors and brokers.
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