SEBI Proposes Auto-Withdrawal Mechanism For Demat MF Units

In a consultation paper issued on 5 February 2026, the Securities and Exchange Board of India (SEBI) has proposed to enable Systematic Withdrawal Plans (SWPs) and Systematic Transfer Plans (STPs) for demat-held mutual fund units without the need for manual intervention.

The proposal seeks to bring demat holdings on par with units held in statement of account mode, where such facilities already work automatically.

The change targets an issue that affects a growing base of investors who buy mutual funds through demat accounts. However, they faced repeated paperwork each time they wanted to withdraw or move money on a schedule. Here are the proposals laid by SEBI.

No More Manual Instruction Delivery Slip

SEBI said the current requirement for manual delivery instructions has become a barrier for investors who want to plan regular withdrawals or transfers.

This means every instalment of an SWP or STP needs a fresh instruction, even if the amount and frequency remain unchanged. According to SEBI, this process discourages systematic financial planning and adds avoidable friction for retail investors.

The regulator said this gap has widened as more investors use demat accounts to hold mutual funds alongside shares, Exchange-Traded Funds (ETFs), and bonds.

Direct Control Without Power Of Attorney

To avoid repeated paperwork, some investors opt to give brokers a Power of Attorney (PoA) or use Demat Debit and pledge instructions. SEBI flagged this as a trade-off between convenience and control.

The consultation paper noted that while such authorisations allow brokers to act on behalf of investors. However, in the case of PoA, this reduces the direct control of investors on their investments.

SEBI said the proposed standing instruction facility would sit within the depository system itself. This would allow automation without transferring control to intermediaries. The aim, the regulator said, is to let investors keep custody of their assets while still accessing automated redemptions.

Review Of High-Friction Settlement Process

The regulator also highlighted the complexity of the current settlement cycle for demat-held mutual funds. Under the existing framework, every STP instalment triggers a chain involving multiple entities. The depository participant passes instructions to the stockbroker.

The broker then executed buy and sell orders on the exchange. The broker then submits instructions to transfer units to the clearing corporation for pay-in. SEBI said this entire sequence must be repeated for every single instalment.

Brokers must also monitor each transaction closely to ensure the pay-in happens on the scheduled date. The paper said this structure increases the risk of delays, errors, and missed transactions, especially when instructions are processed manually.

Automating The Link With RTAs

SEBI said the current process also places a reconciliation burden on registrars and transfer agents. At present, after settlement of the pay-in, transaction details are shared with the mutual fund RTA. The RTA then confirms the number of units to be credited to the clearing corporation.

The proposed framework would allow these steps to happen automatically based on pre-registered instructions. Data would flow directly between depositories and RTAs on fixed dates, without brokers having to initiate fresh orders each time.

According to SEBI, this would ensure that payouts reach investors’ bank accounts on schedule and reduce dependence on manual follow-ups.

Impact On Investors

The proposal follows recommendations from a SEBI-appointed working group. It included representatives from stock exchanges, depositories, and RTAs.

If implemented, the proposal could remove a key operational difference between demat and non-demat mutual fund holdings. It may make demat accounts more practical for long-term investors. Particularly those who rely on regular withdrawals or systematic transfers.

For brokers, exchanges, and RTAs, the change could reduce manual processing and operational risks. For investors, it could mean fewer forms, fewer missed dates, and more predictable cash flows.

Sources:

Financial Express

Livemint

Outlook Money