InvestorQ : Why were the mutual fund NFOs under a ban and what is likely to change from July 2022 onwards?
Arti Chavan made post

Why were the mutual fund NFOs under a ban and what is likely to change from July 2022 onwards?

Rutuja Nigam answered.
2 months ago

One of the major events in the regulation of the capital markets in terms of ensuring investor safety was the Karvy fiasco in 2019. In that case, client funds and client shares had been misused by the promoters of the company and transferred into their own accounts to pay off other dues. That led to several changes including the way power of attorney was given to the online brokers. One such major change came in the way the pool accounts were used to pool the investments from a number of small investors to make a single application.

The SEBI had given the Mutual funds a deadline of March 31, 2022 to wind up the pool account system, and when that was not done, the NFOs were banned by SEBI till a proper system was in place and approved by AMFI. The 3 month deadline is coming to an end on 30th June, and mutual funds will be allowed to again launch fresh new fund offerings or NFOs. However, this will be subject to the AMC demonstrating that it had resolved the contentious pool account issue for NFO and only after AMFI confirms, the NFO can happen.

The pool account is an interesting subject. It is when an intermediary like a mutual fund advisor, aggregator or an online broker collects funds from a number of clients and uses it to make a single application for the sake of convenience. The problem for SEBI is that the float remains with the advisory or distributor and not with the AMC, which is not a very healthy practice. To curb that practice, SEBI had banned the use of pool accounts in NFOs. The onus is on the AMC to show that it had put a system in place and get ratified by the AMFI.