Coming soon: Well regulated execution-only platforms for investing in direct mutual fund schemes

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The Securities & Exchange Board of India (SEBI) in a bid to protect the investors’ interest dealing in units of direct plans of mutual fund schemes, announced the introduction of the regulatory framework for the execution-only platform (EOP) for direct mutual fund schemes. The announcement comes after the meeting of the board of directors of SEBI today. In August 2022, the regulator had sought feedback on the regulatory framework for transaction-only platforms, which allow transactions in mutual funds without the help of mutual fund distributors.

The regulator made it clear that the detailed framework and the modalities of the implementation of the EOP regulations, nature of services that may be offered by the EOPs, cyber security requirements, pricing of services, and grievances redressal mechanisms will be announced later through circulars.

The EOP for direct plans of mutual funds has three key objectives. First is to offer convenience to the investors in making investments through EOPs, and second is to put in place an appropriate investors protection mechanism. The third objective is to ensure ease of doing business with the EOPs by mandating only such appropriate regulatory compliances that are required for execution services. This should reduce the regulatory and compliance burden on such platforms.

“Under the approved framework, EOPs may be granted registrations under either of the two categories – Category 1 EOP as an agent of AMCs, registered with AMFI or category 2 EOP, as an agent of investor, registered as a stockbroker,” the press release said.

As of now many entities offering direct plans on their investment platforms are registered as stock brokers. The industry observers say that many of them would like to continue as Category 2 EOPs, as agent investors and registered as a stock broker. Since these entities are used to collect fees from the clients on an ongoing basis and there are agreements in place to that effect, they may find it easy to continue as it is.

However, there is a segment of direct mutual fund schemes transaction platforms, which may consider enrolling as Category 1 EOP, as an agent of AMCs. Vijay Kuppa, the cofounder of Orowealth, said, “We are contemplating registering with AMFI as an agent of AMCs. Collecting fees from the fund houses is relatively easy and cost-efficient than collecting it from individual clients.” After we see the final guidelines and the regulatory framework, we will initiate the process of registration, he said.

Though most stakeholders in the mutual fund distribution ecosystem will wait for the final regulations, they reiterate that these regulations not only protect investors but also define a profitable business model with revenue visibility. This should attract new entities in the platform business offering direct schemes of mutual funds. Investors in direct plans will eagerly wait for the circulars on EOP regulations.