SEBI Asks Mutual Fund Distributors to Remove Unfair Clauses from Client Agreements

The Securities and Exchange Board of India (SEBI) has taken a significant step to safeguard investor rights by scrutinising the client agreements signed between Mutual Fund Distributors (MFDs) and investors. In particular, SEBI has found that certain clauses in these agreements provide undue indemnification to distributors, effectively shifting the burden of responsibility onto the investor, even in cases where investment advice has been offered.

AMFI Asked to Ensure Compliance Among Distributors

Following SEBI’s intervention, the Association of Mutual Funds in India (AMFI) has issued a directive to MFDs, especially large distributors such as banks, national distributors, and wealth management firms. These entities are now required to revise their client agreements to remove any unfair indemnity clauses that could be detrimental to investors.

This move comes in response to SEBI’s letter dated 9 January 2025 (SEBI/HO/OW/IMD/SEC-Div3/P/2025/194/1), where the regulatory body explicitly stated the need for amending these contracts.

Unfair Clause Highlighted in SEBI’s Review

SEBI cited a specific example of a clause found in one of the agreements: “If notwithstanding anything stated herein the bank or any employee of the bank gives any advice or representation to me/us, the bank shall have no liability for any such advice or representation made, as it will be my/our responsibility to make an independent assessment.”

According to SEBI, such clauses are problematic because they relieve the distributor of accountability, even when advice has been actively provided. This goes against the fundamental principle of investor protection and creates an imbalance in the distributor-investor relationship.

RTAs Communicate the Mandate to Distributors

Registrar and Transfer Agents (RTAs) have also played a role in disseminating SEBI’s guidance. In a recent communication to distributors, an RTA reiterated the requirement to eliminate or amend any clause that unreasonably indemnifies distributors for the investment advice offered.

This ensures consistency in practice across the mutual fund distribution ecosystem and reinforces SEBI’s stance on fair and transparent dealings with investors.

SEBI’s Directive to AMFI: Key Expectations

SEBI has clearly instructed AMFI to take the following actions:

• Remove or suitably amend any clause that offers undue indemnification to distributors.
• Sensitise members of AMFI to proactively identify and rectify similar clauses in all client agreements.
• Ensure compliance across the mutual fund industry, particularly among large-scale distributors who frequently formalise client relationships through written contracts.

Conclusion

This directive is a continuation of SEBI’s broader efforts to increase transparency and fairness within the mutual fund distribution framework. By holding distributors accountable and ensuring that clients are not unfairly burdened, SEBI aims to foster greater trust and protection for retail investors. While this move may require procedural changes on the part of distributors, it reinforces a much-needed culture of responsibility in financial advisory relationships.

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