Executive Summary:
This SEBI circular extends Two-Factor Authentication to mutual fund subscription transactions, mirroring the existing requirement for redemption transactions, to enhance investor security. It modifies previous circulars and mandates the use of Two-Factor Authentication for online subscriptions and signature methods for offline transactions, effective April 1, 2023. AMFI must revise its best practice guidelines and provide an implementation schedule by October 14, 2022, and bimonthly progress reports to SEBI starting December 1, 2022.
Key Points / Main Content:
* **Extension of Two-Factor Authentication:**
* Two-Factor Authentication is now required for subscription transactions in mutual fund units, in addition to redemption transactions.
* For non-demat transactions, one factor must be a One-Time Password (OTP) sent to the unit holder's registered email or phone number.
* Demat transactions should follow the Two-Factor Authentication processes laid down by the Depositories.
* For mandates/systematic transactions, Two-Factor Authentication is required only at the time of registration.
* **Modification of Previous Circulars:**
* Clause 4.4 of SEBI Circular No. SEBI/HO/IMD/IMD-I/ DOF5/P/CIR/2021/634 dated October 4, 2021, as modified on March 15, 2022, is further modified to include subscription transactions.
* All other requirements of the SEBI Circular No. SEBI/HO/IMD/IMD-I/ DOF5/P/CIR/2021/634 dated October 4, 2021 and SEBI Circular No. SEBI/HO/IMD/IMD-I/ DOF5/P/CIR/2022/29 dated March 15, 2022 remain unchanged.
* **AMFI Guidelines and Reporting:**
* AMFI's best practice guidelines for Two-Factor Authentication must be revised to include subscription transactions and followed by all AMCs.
* AMFI must furnish an activity-wise implementation schedule by October 14, 2022.
* AMFI must provide bimonthly progress reports to SEBI, starting December 1, 2022.
* **Effective Date:**
* The provisions of this circular are effective from April 1, 2023.
Impact Analysis:
* **Mutual Funds / Asset Management Companies (AMCs):**
* *Impact:* AMCs must implement Two-Factor Authentication for subscription transactions and follow revised AMFI guidelines.
* *Action Required:* Update systems and processes to incorporate Two-Factor Authentication for subscriptions by April 1, 2023 and adhere to AMFI guidelines.
* **Association of Mutual Funds in India (AMFI):**
* *Impact:* AMFI needs to update its best practice guidelines and provide implementation schedules and progress reports to SEBI.
* *Action Required:* Revise guidelines, submit the implementation schedule by October 14, 2022, and provide bimonthly progress reports to SEBI starting December 1, 2022.
* **Recognized Stock Exchanges, Depositories, Recognized Clearing Corporations, and Registrar to an Issue and Share Transfer Agents (RTAs):**
* *Impact:* These entities must support the implementation of Two-Factor Authentication.
* *Action Required:* Take necessary steps to implement the circular, including establishing required processes and systems to ensure compliance.
* **Trustee Companies / Boards of Trustees of Mutual Funds:**
* *Impact:* Oversight of the implementation by the AMCs.
* *Action Required:* Ensure AMCs adhere to the guidelines and implement the required changes.
* **Investors:**
* *Impact:* Increased security for mutual fund transactions.
* *Action Required:* Be aware of the new Two-Factor Authentication requirements for subscription transactions.
Key Entities Referenced
Securities and Exchange Board of India (SEBI): Regulatory body for securities markets in India, responsible for issuing the circular.
Mutual Funds: Investment vehicles subject to the regulations outlined in the circular.
Asset Management Companies (AMCs): Entities managing mutual funds, required to implement Two-Factor Authentication.
Association of Mutual Funds in India (AMFI): Industry body responsible for issuing best practice guidelines for AMCs regarding Two-Factor Authentication and submitting implementation schedules.
Two-Factor Authentication: Security measure being implemented for subscription and redemption transactions in mutual funds.
Registrar to an Issue and Share Transfer Agents (RTAs): Entities involved in processing transactions and maintaining records of unit holders.
Securities and Exchange Board of India Act, 1992: The Act under which SEBI derives its powers to issue regulations.
SEBI Mutual Funds Regulations, 1996: Regulations pertaining to mutual funds, under which the circular is issued.
CIRCULAR
SEBI/HO/IMD/IMD-I DOF1/P/CIR/2022/132 September 30, 2022
All Mutual Funds
All Asset Management Companies (‘AMCs’)
All Recognized Stock Exchanges
All Depositories
Association of Mutual Funds in India (‘AMFI’)
All Trustee Companies/ Boards of Trustees of Mutual Funds
All Registrar to an Issue and Share Transfer Agents (‘RTAs’)
Sir / Madam,
Subject: Two-Factor Authentication for transactions in units of Mutual Funds
1. SEBI Circular No. SEBI/HO/IMD/IMD-I DOF5/P/CIR/2021/634 dated October 04, 2021
introduced various measures to prevent third-party payments and to safeguard the
interest of unitholders. The Circular, inter-alia, required all AMCs to authenticate
redemption transactions using Two-factor Authentication (for online transactions) and
signature method (for offline transactions). Two-Factor Authentication for redemption
of Mutual Fund units has been implemented with effect from June 01, 2022 for
transactions outside stock exchange platforms and from July 01, 2022 for transactions
on stock exchange platforms.
2. In order to further safeguard interest of investors, it has now been decided to extend
the Two-Factor Authentication for subscription transactions in the units of Mutual
Funds as well. Accordingly, Clause 4.4 of the SEBI Circular no. SEBI/HO/IMD/IMD-I
DOF5/P/CIR/2021/634 dated October 4, 2021, as modified vide the SEBI Circular No.
SEBI/HO/IMD/IMD-I DOF5/P/CIR/2022/29 dated March 15, 2022, stands further
modified as under:
“4.4. In case of subscription and redemption of units, Two-Factor Authentication (for
online transactions) and signature method (for offline transactions) shall be used for
authentication. One of the Factors for such Two-Factor Authentication for non-demat
transaction shall be a One-Time Password sent to the unit holder at his/her email/
phone number registered with the AMC/RTA. In case of demat transaction, process of
Two-Factor authentication as laid down by the Depositories shall be followed. It is also
clarified that in case of mandates/systematic transactions the requirement of Two-
Page 1 of 2Factor Authentication shall be applicable only at the time of registration of
mandate/systematic transactions.”
3. AMFI’s best practice guidelines issued for AMCs with regard to Two-Factor
authentication for redemption transactions of Mutual Funds shall be revised suitably
to include subscription transactions of Mutual Funds. It shall be mandatory for all AMCs
to follow such guidelines.
4. All other requirements of the Circular No. SEBI/HO/IMD/IMD-I DOF5/P/CIR/2021/634
dated October 04, 2021 and SEBI Circular No. SEBI/HO/IMD/IMD-I
DOF5/P/CIR/2022/29 dated March 15, 2022 shall remain unchanged.
5. Implementation Schedule:
5.1. Based on discussions with stakeholders, it has been decided that the provisions of
this Circular shall be applicable with effect from April 01, 2023.
5.2. The AMCs, AMFI, recognized Stock Exchanges, Depositories, recognized Clearing
Corporations and Registrar to an Issue and Share Transfer Agents shall take
necessary steps for implementing the circular, including putting required processes
and systems in place to ensure compliance with the provisions of this circular.
5.3. AMFI shall furnish by October 14, 2022, the activity wise schedule for
implementation so as to ensure compliance with para 2 above. AMFI shall also
furnish progress report on implementation of provisions of this circular to SEBI on
a bi-monthly basis, starting from December 01, 2022.
6. This circular is issued in exercise of powers conferred under Section 11 (1) of the
Securities and Exchange Board of India Act, 1992, read with the provisions of Regulation
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.
Yours faithfully,
Manaswini Mahapatra
General Manager
Investment Management Department
Tel: 022 - 26449375
Email: manaswinim@sebi.gov.in
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