Will SEBI’s move to make mutual funds directly responsible, create issues for MF trade platforms?

Capital markets regulator, the Securities and Exchange Board of India (SEBI) has proposed to discontinue usage of pool accounts by all platforms in transaction of such schemes. The discussion paper was issued on December 23.

This proposal comes in the aftermath of the Karvy Stock Broking episode, wherein the broker allegedly misused clients' securities to the tune of over Rs 2,000 crore.

SEBI pointed out that asset management companies lose the sight of the source of funds as they receive funds from pool or escrow accounts.

The regulator noted that the scope of misuse of investments when mutual fund transactions were executed through intermediaries like stock brokers and clearing members and digital platforms provided by MF distributors and investment advisors.

So, is this proposal hinting at SEBI’s discomfort against mutual fund platforms?

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Some of the direct mutual fund platforms in India are Kuvera, Goalwise, CAMS & Karvy Website/Mobile App, AMFI’s Mutual Fund Utility, PaisaBazaar, Zerodha, PayTM Money, Groww and Clearfunds.

Direct MFs mean, investors buy directly from mutual fund companies through their respective portals, which offer such direct mutual funds online. Whereas regular mutual funds mean investors buy through middlemen (online or offline) like mutual fund advisers or brokers.

For various MF transaction methods between a stock broker or distributor or investor advisor and the investor, there are layers that get created before it is finalised with the concerned mutual fund.

For transaction between the Broker and the investor, it is routed from investor to broker to clearing corporation to the end-mutual fund. For transaction on stock exchange platform between investment advisor/distributor and the investor, it is routed to exchange clearing platform to the end-mutual fund.

These layering processes result in pooling actual funds flow or MF units flow being away from direct purview of the mutual fund that is responsible for the investor services. SEBI discussion paper feels this has potential scope of misuse of investor funds or the investor MF units pool.

That has driven SEBI to now look for discounting pooling practice and make exchanges create a dedicated platform for direct funds and MF units flow between end-mutual fund and the investor.

SEBI’s efforts are consistently aimed towards mutual funds being held directly responsible for investor matters even if that means some additional platform creation or due diligence by market intermediaries and exchanges, quipped an ex-SEBI DGM who worked in its MF department.