Market regulator Securities and Exchange Board of India (SEBI) has allowed mutual funds to maintain current accounts in an appropriate number of banks for receiving the subscription amounts and for payment of redemption to investors. Interestingly, banking regulator Reserve Bank of India (RBI) had directed all banks to implement the directions issued in its circular to allow the opening of current accounts of customers who have not availed any cash credit or overdraft (CC/OD) facilities. As of now, RBI has extended the deadline till 31 October 2021 for banks to follow its directions.
In a circular, SEBI says, "Based on the request of the mutual funds industry, it is clarified that mutual funds should maintain current accounts in an appropriate number of banks for the purpose of receiving subscription amount and for payment of redemption, dividend, brokerage or commission to facilitate financial inclusion, convenience of investors and ease of doing business."
"This circular is issued in exercise of powers conferred under Section 11 (1) of the SEBI Act, 1992, read with the provisions of regulations 77 of SEBI (Mutual Funds) Regulations, 1996, to protect the interest of investors in securities and to promote the development of, and to regulate the securities market."
At present, mutual funds maintain current accounts in multiple banks including banks that have a presence beyond the top-30 cities for receiving subscription amounts and for payment of redemption proceeds, dividend, brokerage and commission. This enables investors to transact with the banks of their choice and facilitates faster transfer of funds.
Mutual funds industry informed SEBI that RBI had instructed banks not to open current accounts for those customers who have availed credit facilities in the form of CC/OD from the banking system.
On a review, however, RBI has provided an indicative list of accounts stipulated under various statutes and instructions of other regulators that can be opened without such restriction, including accounts for the purpose of new fund offerings (NFOs), dividend payment and share buyback.
Mutual funds industry pleaded that subscription in units of open-ended mutual fund schemes is akin to continuous NFO and redemption of units of mutual fund schemes is akin to buy back or repurchase of shares.
"Considering the above, the MF industry requested SEBI to issue instructions for mutual funds in respect of maintenance of current accounts in multiple banks," the market regulator says.
On Wednesday, paying heed to the outrage on social media and requests by banks, RBI has extended the deadline to 31st October from 31 July 2021 for the implementation of its guidelines for banks on current account opening.
In August 2020, RBI issued a circular
asking the banks to follow its revised instructions for current accounts. The circular states, "No bank shall open current accounts for customers who have availed credit facilities in the form of CC/ OD from the banking system and all transactions shall be routed through the CC/OD account."
From the plain reading of the RBI circular, it appears that the central bank wants to regulate and keep track of all CC and OD facilities availed by customers. It also wants banks to maintain records of bifurcation of the working capital facility into loan component and cash credit component.
However, while doing so, RBI ended up with increasing pains for current account-holders. While extending its deadline to 31 October 2021 for implementation of the circular on current accounts, the central bank has asked banks to utilise the extended time line to engage with their borrowers to arrive at mutually satisfactory resolutions within the ambit of the circular.
“Such issues, which banks are unable to resolve themselves, shall be escalated to Indian Banks’ Association (IBA) for appropriate guidance. Residual issues, if any, requiring regulatory consideration shall be flagged by IBA to the Reserve Bank for examination by 30 September 2021," RBI had said. (Read: Current Account ‘Discipline’: RBI Extends Deadline to 31st October