SEBI's New Proposal on Third-Party Payments: A Big Win for Mutual Fund Distributors

If you are a Mutual Fund Distributor (MFD), there's a SEBI draft circular you genuinely need to know about. On May 20, 2026, SEBI released a consultation paper titled "Enabling Third Party Payments in Mutual Funds in Certain Scenarios", and it directly touches how you could receive your trail commission in the future.

For years, the rule has been simple and strict: money going into a mutual fund must come from the investor's own bank account, and money coming out must go back to the investor's own verified account. This "own account only" rule exists for a good reason — it helps prevent money laundering under the Prevention of Money Laundering Act (PMLA). But it has also meant that certain genuine, useful arrangements — like an employer helping employees invest, or an AMC paying an MFD in mutual fund units instead of cash — haven't had a clear, compliant pathway.

SEBI's new draft circular proposes to change that. Let's break down exactly what's on the table.

1. The Current Rule: Why "Third-Party Payments" Are Restricted

Under Clause 17.4 of the Master Circular for Mutual Funds (dated March 20, 2026), every investment must be made from the investor's own bank account, routed only through RBI-authorized payment aggregators or SEBI-recognized clearing corporations. Similarly, every payout — redemptions, dividends, everything — must go back to that same verified account.

AMCs are required to check that the source account genuinely belongs to the investor and ensure every transaction has independent traceability and a full audit trail. This is the backbone of investor protection in the industry, and SEBI isn't removing it. What it's proposing is to carve out a few specific, well-defined exceptions — with strong safeguards attached.

2. Why Now? The Industry Asked For This

Following the issuance of this framework, the mutual fund industry made representations to SEBI, pointing out genuine situations where strict "own-account-only" rules create unnecessary friction. Two examples were specifically highlighted: employers wanting to deduct money from employee salaries to invest in mutual funds, and AMCs wanting to pay commissions to distributors in the form of mutual fund units rather than cash.

SEBI took this to the Mutual Fund Advisory Committee (MFAC), and based on the committee's recommendations, the regulator has now proposed three specific scenarios where third-party payments may be allowed.

3. Scenario 1: Employers Investing for Employees via Salary Deduction

The first proposal allows an employer to deduct a portion of an employee's salary and pay it directly to an AMC for mutual fund investments — on a consolidated basis.

• This would only be available to listed companies and EPFO-registered companies, as well as AMCs themselves.
• Participation is entirely opt-in — only employees who agree to the salary deduction arrangement, and choose their own MF schemes, would be covered.
• It formalizes something many employers already informally explore as part of employee benefit and savings programs.

SEBI has also flagged a related governance question: should an employer be restricted from directing employee investments into mutual funds of AMCs that are its own group companies? This is open for public comment, and the outcome could shape how this facility is eventually structured.

4. Scenario 2: AMCs Paying Commission to MFDs in the Form of MF Units

This is the proposal that will matter most directly to you as a distributor.

SEBI proposes allowing AMCs to pay trail commission — or part of it — to empanelled MFDs in the form of mutual fund units, instead of, or in addition to, cash. The arrangement would need to be agreed between the AMC and the MFD, and the units would be allotted directly to the MFD as the legitimate beneficiary.

Who would be eligible?

• Only MFDs registered with AMFI.
• Only for the schemes of the AMC that is actually paying the commission (i.e., schemes the MFD is selling for that AMC).

SEBI has also raised an important question for consultation here: could this create a conflict of interest, where an AMC's own commission structure nudges MFDs toward selling that AMC's schemes more (potentially leading to mis-selling)? This is genuinely something to think about and comment on — the final safeguards on this point could affect how the scheme is implemented.

5. A Related Question: Corporates Paying Their Own Distributors in MF Units

Separately, SEBI is also seeking views on a broader question: should corporate entities be allowed to pay commissions to their own dealers or distributors (under a principal-agent relationship) in the form of mutual fund units instead of cash?

This is distinct from the AMC-to-MFD scenario above, and is framed as a wider consultation question without a specific proposal yet — SEBI wants to understand what safeguards would be needed if this were extended to corporate dealer networks more broadly.

6. Scenario 3: Contributions/Donations to Social Causes Through Mutual Funds

The third scenario is about giving investors a clean, regulated way to donate to social causes through their mutual fund investments — specifically via Zero Coupon Zero Principal (ZCZP) instruments issued by Not-for-Profit Organisations (NPOs) registered on the Social Stock Exchange (SSE).

SEBI has proposed two possible structures, and is asking the public to weigh in on which is better:

Option A

A dedicated mutual fund scheme is created specifically for this purpose. Investors in this scheme can direct a portion of their dividend or redemption proceeds toward a ZCZP contribution (in their own name) or directly to an NGO specified in the scheme's offer document.

Option B

Instead of a dedicated scheme, all existing mutual fund schemes would be allowed to offer this as a feature — letting any investor mandate a portion of their subscription or redemption toward a ZCZP contribution or a specified NGO, regardless of which scheme they're invested in.

In both cases, contributions routed through ZCZP instruments or to specified NGOs would be exempt from the standard third-party payment restrictions — but only with strict disclosure, periodic reporting on end-use of funds, and explicit prior consent from the investor.

7. The Safeguards: This Isn't a Free-For-All

SEBI has been careful to balance ease of investing with the core objective of preventing money laundering. Across all three scenarios, AMCs will need to follow certain core principles:

• Validating the relationship between the person paying and the actual beneficiary (e.g., confirming the employer-employee or AMC-MFD relationship is genuine).
• Robust KYC for both the payer and the beneficiary.
• A clear written mandate for every such arrangement.
• An auditable, non-cash, electronic fund trail through segregated accounts, with regular reconciliation.
• Any payout (including dividends) credited only to the beneficiary's account.
• Full redemption liquidity guaranteed for the beneficiary at all times.

The detailed operational guidelines for all of this will be worked out by AMFI in consultation with SEBI — but the responsibility to comply with PMLA and perform due diligence will rest squarely with the AMCs.

8. Timeline: When Could This Take Effect?

This is currently a draft circular open for public consultation — nothing has been finalised yet. Once SEBI issues the final circular, the provisions would come into effect within 30 days of issuance. The legal basis for this circular is Section 11(1) of the SEBI Act, 1992, read with Regulation 22(7)(c)(k) and Regulation 84 of the SEBI (Mutual Funds) Regulations, 2026.

9. How You Can Participate — Submit Your Comments

This is genuinely your chance to shape policy that affects your income and your practice. SEBI has invited public comments on all five consultation questions, especially:

• Whether you support employers being allowed to invest on behalf of employees via payroll deduction, and whether group-company AMCs should be restricted from this.
• Whether you support AMCs paying commission in MF units, and what safeguards should prevent conflicts of interest or mis-selling.
• Whether corporate dealer/distributor commissions in MF units should be permitted more broadly.
• Which option — A or B — is better for facilitating donations through mutual funds.
• Whether the proposed safeguards are sufficient.