13.1 Payment Mechanism

Payments for mutual fund transactions need to be made through the banking channels that have been approved by the regulators. These modes of payment include online transactions, cheque, demand draft, cash payments (with limitations), and e-wallets (with limitations).

13.1.1 Electronic / Online Payments

Electronic payment systems allow investors to transfer funds and provide proof of transfer to the mutual fund. Various options include:

  • National Electronic Funds Transfer (NEFT): A nationwide system that transfers funds electronically. Available 24/7.
  • Real Time Gross Settlement (RTGS): A real-time system for transferring funds instantly, used for transactions above Rs. 2 lakhs.
  • Auto Debit and Standing Instructions (SI): For periodic payments like SIPs, funds are transferred automatically on the specified date.
  • Application Supported by Blocked Amount (ASBA): The investor blocks the amount in the bank account until the units are allotted.
13.1.2 Physical Payments

Physical payments include methods like cheques and demand drafts.

  • Cheque: Investors can pay via different cheque types (Transfer, Local, and Outstation cheques) depending on the bank and location.
  • Demand Drafts (DD): In cases where mutual funds cannot reach investors, DDs are accepted for payment.
13.1.3 Cash Payments

Cash payments are allowed up to Rs. 50,000 per investor per mutual fund per financial year for resident individuals, sole proprietorships, and minors (through guardians). Only KYC-compliant individuals can make cash payments. However, redemptions, dividends, etc., are only paid via banking channels.

13.1.4 E-Wallets

E-Wallets are allowed for mutual fund subscriptions, but there are limitations. Payments via e-wallets are restricted to Rs. 50,000 per financial year. The funds must be loaded into the e-wallet via debit card, net banking, or cash, and third-party transactions are not allowed.

13.2 Third Party Verification (TPV) and Payment to Valid Account

To mitigate risks associated with third-party payments, RTAs are required to validate transactions during the investment process through the following methods:

1. Physical Application Validation
  • Penny drop facility or PAN-based account validation: Provided by NPCI.
  • Original Cancelled Cheque: Cheque with name matching the investor’s name.
  • Self-certified copy of cheque/passbook: Verified with the original by AMC/RTA, matching the investor’s name.
2. Traceability of Payment

The investment amount will only be accepted through payment modes that ensure traceability of the end investor, with available source account details.

3. One-time Mandate (OTM)

The Payment Aggregator (PA) must provide the bank account number, remitter name, and relevant details to the AMC for each amount collected via OTM.

4. Online Payments

For net banking and similar modes, payments can only be made from banks that provide real-time account validation or a reverse feed of source account details by the following day.

5. Unverified Bank Accounts

If funds are received from a bank account that is not registered or verified in the investor’s folio, the transaction will be rejected, and the funds will be refunded to the original bank account.

6. Transaction Information

Detailed information about each transaction, including any rejections, must be provided to all stakeholders, including investors, RTAs, MFDs, IAs, etc.

7. Access to Documentation

Payment Aggregators must allow third-party auditors, appointed by AMC/AMFI, to verify compliance with guidelines on co-mingling of funds and approved accounts.

8. Redemption Proceeds

Redemption proceeds are credited only to verified bank accounts associated with the investor’s folio after thorough verification of account details.

9. Two-Factor Authentication (2FA)

2FA is required for both online subscription and redemption transactions. A One-Time Password (OTP) will be sent to the investor’s registered email/phone number for non-demat redemptions. For SIPs, 2FA is required only at registration.

13.3 Bank Accounts maintained by Mutual Funds

Mutual fund schemes maintain several bank accounts for different operational purposes. Below are the types of accounts maintained:

Collection Accounts

These accounts are maintained to receive investments into schemes from investors.

Investment Accounts

These accounts are maintained by the custodian bank to settle securities transactions.

Redemption Accounts

Specifically funded to pay-out investors who redeem their mutual fund units.

Expense Accounts

Used to meet regular fund running expenses.

Mutual funds need to manage their cash balances efficiently to ensure that all due payments are made on time. Banks provide a facility called Cash Management Service (CMS), which helps in optimizing the fund’s cash usage.

A mutual fund scheme may appoint one or more collecting bankers. These banks and their branches are listed in the NFO application form. Payment instruments from investors, collected at ISCs and AMC offices, are deposited into the collecting bank account. The depositing process is done manually or via the system using CMS codes.

Functions of Collecting Bankers
  • Collect payment instruments through the clearing process to realise the funds.
  • Provide reverse feeds showing the cleared or bounced status of the instruments.
  • Accept NFO applications during the NFO period and provide a collection confirmation certificate after the NFO.
  • Reconcile the bank’s collection figures with the R&T agent’s records before allotting units to investors.

13.4 Electronic Clearing Mechanisms

13.4.1 NPCI and NACH

The National Payments Corporation of India (NPCI) is an umbrella organization for all retail payments and settlement systems in India. It was set up with guidance from the Reserve Bank of India (RBI) and the Indian Banks’ Association (IBA). The primary aim of NPCI is to integrate multiple systems into a uniform and standard process for all retail payment systems.

NPCI’s services aim to benefit the common man across India and promote financial inclusion. It was incorporated as a Section 25 company in December 2008. NACH (National Automated Clearing House) is a centralized clearing system developed by NPCI to consolidate and replace the existing Electronic Clearing Service (ECS) systems. NACH enables efficient interbank high-volume electronic transactions like bill payments, loan installments, SIPs, and bulk payments such as salaries, pensions, etc. The service operates on a same-day presentation and settlement basis.

  • NACH Credit: For bulk credits such as dividends, salaries, and pensions.
  • NACH Debit: For automatic debits such as bill payments, SIPs, and loan installments.
13.4.2 Cheque Truncation System (CTS)

CTS is a project launched by the Reserve Bank of India (RBI) in 2010 to speed up the cheque clearing process. It eliminates the need for physical movement of cheques by sending an electronic image of the cheque to the drawee bank for payment. This reduces transit time, associated costs, and delays in processing, leading to faster cheque realization.

The CTS platform is currently used by all banks with core banking facilities. By truncating the physical cheque, this system reduces inefficiencies and expedites cheque collection and payment.

13.5 Role of Registrars and Transfer Agents (RTAs) in Banking Operations

Role in Transaction Handling

RTAs play a pivotal role in the smooth handling of banking operations related to mutual fund transactions. They ensure the efficient processing of cheque receipts, returns, and reconciliation of payment instruments.

For electronic payments made by investors for purchasing mutual fund units, RTAs reconcile the receipt of funds with the investor applications. Any discrepancy is flagged as ‘Not in Good Order’ (NIGO), and no units are issued until the discrepancy is resolved.

Cheque Handling and Reconciliation

When payments are made through physical modes, such as cheques, the RTAs are responsible for sending the payment instruments for clearing within the stipulated time frame. They also reconcile the cheques returned and ensure that units are not issued if the cheque is returned unpaid.

Liquid Funds and Unit Allotment

For liquid funds, RTAs ensure that clear funds are available before allotting units. This ensures that no investor is issued units until the payment has been cleared.

Dividend and Redemption Pay-outs

For redemptions and dividend (IDCW) pay-outs, RTAs ensure that the payee details are accurately captured in the system for electronic payments. In cases where electronic payments are not feasible, RTAs issue payment instruments and send them to the investor via registered mail.

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