SEBI’s framework facilitating mutual fund direct plans invested through execution only platforms

Introduction

As on 30 April 2022, the assets under management of the mutual fund (MF) industry in India stands at INR 38.04 lakh crore, with 45% of the total assets being routed through direct plans. With increasing focus on financial literacy, digitization, online banking, smartphones, and awareness about MFs, investors can leverage technology and directly invest in MFs, thereby necessitating the need to regulate the domain, especially the digital / technology platforms through which the execution of MF investments is undertaken for a direct plan.

Background

Investment in MFs is made via two mechanisms: (a) a regular plan which requires routing the investment through an intermediary (a mutual fund distributor (MFD)); and (b) a direct plan in which the investment does not involve any distributor / agent. Understandably, investors prefer the direct plan having a lower expense ratio, without any commission being paid to the distributor / agent, which is added to their returns. Investors who prefer the direct plans, have the following channels available for investment through:

Several investors execute their MF investments through the technology / digital platforms provided by stock exchanges / registrar and transfer agents of MFs (RTAs) and IAs / SBs / PMs. Some investors who use the platforms provided by IAs / SBs / PMs do not avail their advisory and broking services, and only use the platforms for execution of their MF transactions. Investors usually prefer platforms provided by IA / SB / PM over those provided by stock exchanges / RTAs, due to their convenience. However, there is no specific framework exists governing the usage of platforms of IA / SB / PM for investors seeking execution only services.

Legal lacunae and rationale

Under the existing SEBI framework, the IAs / SBs / PMs, onboarding an investor as a client are required to enter into an agreement or secure the client’s signature on mandatory terms, as prescribed by SEBI. The investors who use such platforms only for execution related services, i.e., non-clients, without availing any advisory / broking services of IAs / SBs may find it inconvenient to execute agreements having provisions mandated for IAs / SBs, as they may not be relevant for such non-clients. Generally, for investors, IAs / SBs / PMs typically use their registration codes to obtain the data outlining an overview of their investment transactions; however this benefit is not available to non-clients and they do not have any recourse or protection available under any regulatory framework. In light of the above, SEBI has on 22 July 2022, issued a consultation paper, proposing a new framework for execution only platforms (EOPs), to maintain a balance between convenience and investor protection. The stakeholders are required to provide their comments latest by 12 August 2022.

Overview

EOPs may consider various structural approaches, of either – (a) registering with SEBI as an intermediary; or (b) registering with the association of mutual funds of India (AMFI); or (c) obtaining a limited purpose membership with the stock exchanges.

Salient Features –

Comments

The various approaches recommended by SEBI, would need to be considered bearing in mind the intent to reduce any intermediary involvement, eliminate any layering or superstructure in the implementation of EOPs, and fully implement the direct plan of MFs. In the interest of the investors, a robust cyber security and cyber resilience framework for the EOPs is recommended, and their use of client data must be in compliance with the agreement executed with the client and the data protection framework. The framework aims at an investor centric mechanism to ensure the EOPs only function as agents of the investors, and their fee structure is based on investor pay model.

The proposed framework will affect the investech platforms like Paytm Money, Zerodha, and Groww, which offer direct MFs requiring them to register as intermediaries. This move seeks to promote the ease of doing business in MFs, coupled with adequate investor protection and grievance redressal mechanism, by providing an impetus to the investors’ direct investment in MFs, through use of digital technology platforms.

-        Achint Kaur (Counsel) and Shruti Gupta (Associate)

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