SEBI Issues New Mutual Fund Norms For Execution-Only Platforms Like Paytm, Groww
Digital platforms facilitating investments in direct plans of mutual fund schemes will need to be registered by September 1.
The Securities and Exchange Board of India on Tuesday issued a circular on regulations for online platforms that offer transactions in direct plans for mutual fund schemes, which it calls execution-only platforms or EOPs.
SEBI regulations that govern mutual funds allow for the segregation of schemes into two types — direct and regular. In case of regular schemes, it is assumed that an individual is being advised by a mutual fund distributor. Here, a distribution commission is added to the total expense ratio of the scheme. The total expense ratio is described as a percentage of the net asset value or NAV of a mutual fund scheme and is the cost of investing in any given scheme of a mutual fund.
In direct schemes, on the other hand, for many years, it was assumed that an individual was not receiving any assistance and was transacting directly with a mutual fund. The disadvantage was that an individual had to transact on the website of each mutual fund they chose to invest in. This changed with the advent of digital platforms, which began to offer direct plans of various mutual fund schemes under a single roof.
The rapid growth of these digital platforms prompted the market regulator to issue the guidelines.
The regulations require such platforms to either register as an agent of asset management companies or as stock brokers. In case of the former, the platform would have to register with industry body Association of Mutual Funds in India, while if they opt for the latter, they need to register with the markets regulator. In both cases, the EOPs will be allowed to handle only “direct plans” of mutual fund schemes.
The most crucial guideline from the perspective of an individual investor is that no execution-only platforms will be allowed to provide services related to regular plans of mutual fund schemes on their platform.
“The market regulator has also clarified that companies that currently offer both distribution and EOP services will have to create investor-level segregation,” said Mohit Gang, co-founder and chief executive officer at Moneyfront. “What that means is that a firm servicing an individual under its EOP offering will not be able to offer distribution services to that person or to anyone within their family.”
In terms of transaction and on-boarding fees, the market regulator stipulates that EOPs operating as agents of AMCs will be allowed to levy a flat transaction fee and on-boarding charge, which will be borne by the AMC. The limit will be determined by AMFI.
EOPs operating as stock brokers will be allowed to levy a flat fee, which will be borne by investors. The limits in this case will be set by the stock exchanges. Any on-boarding fee will need to be borne by either the AMC or the investor or a combination of the two, according to SEBI.
Entities that are currently engaged in facilitating transactions in direct plans of mutual fund schemes will need to be registered by September 1 this year.