SEBI Proposes Payroll-Linked Mutual Fund Investment Programme

SEBI Proposes Framework for Third-Party Payments in Mutual Funds

The Securities and Exchange Board of India (SEBI) has floated a draft framework to permit certain forms of third-party payments in mutual funds, marking a significant shift from the existing regime that requires investments to originate strictly from an investor's own bank account. The consultation paper, issued on Wednesday, proposes allowing employers, mutual fund companies, and social contribution structures to participate in regulated third-party payment mechanisms, while ensuring anti-money laundering safeguards and investor protection norms.

As part of SEBI's broader effort to modernize mutual fund operations and improve ease of investing without weakening compliance standards under the Prevention of Money Laundering Act (PMLA), the proposals aim to enhance operational flexibility in genuine payment arrangements. The mutual fund industry has long been seeking operational flexibility in payment arrangements, and SEBI's draft circular is a step in that direction.

Payroll-Linked MF SIP

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One of the key proposals would allow employers to invest in mutual fund schemes on behalf of employees through salary deductions. According to the draft paper, the facility would be available only to listed companies, EPFO registered firms, and Asset Management Companies (AMCs) themselves. Employees would have to explicitly opt in to the arrangement, and the investments would continue to be credited in the employee's own name.

The proposal recognizes the established practice of employers offering savings and wealth-creation products through payroll structures. However, SEBI has also sought public feedback on whether employers should be barred from directing employees toward schemes run by group AMCs to avoid conflicts of interest.

Distributor Commissions in MF Units

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SEBI has also proposed allowing AMCs to compensate empanelled Mutual Fund Distributors (MFDs) using mutual fund units instead of cash commissions. Under the proposal, only AMFI registered distributors would qualify, and the units would be allotted directly to the distributor as beneficiary. The regulator believes the mechanism could encourage long-term investing discipline among distributors and align their incentives more closely with market performance.

However, SEBI has acknowledged concerns around potential mis-selling if distributors begin favouring schemes that increase unit-based compensation. The consultation paper specifically asks whether such a model creates a conflict of interest and what safeguards may be necessary to mitigate risks.

Social Donations via MFs

In another proposal, SEBI has suggested allowing investors to contribute part of their mutual fund investments or returns toward social causes. The framework contemplates donations either through subscription to Zero Coupon Zero Principal (ZCZP) instruments issued by Social Stock Exchange-listed non-profits, or directly to specified NGOs. For this, two models have been proposed: a dedicated 'social contribution' mutual fund scheme, or donation functionality embedded across all existing schemes.

SEBI believes the proposal may help investors contribute through a regulated, transparent, and investor-protected framework, while reducing the burden of independently identifying credible NGOs.

Anti-Money Laundering Controls

Despite opening the door to third-party payment structures, SEBI has emphasized that anti-money laundering controls would remain central to the framework. The draft circular proposes robust KYC verification for both payer and beneficiary, validation of relationships between parties, mandatory electronic fund trails, and segregated reconciliation mechanisms. SEBI has also proposed routing of all redemption or dividend proceeds only to verified beneficiary accounts.

SEBI has invited public comments on the consultation paper until June 10, 2026.