The markets regulator Securities Exchange Board of India (SEBI) recently announced that it will introduce a regulatory framework for execution-only platforms for direct plans of mutual fund schemes. This will be done in order to promote the penetration of these instruments as an investment vehicle.
Execution services are provided by a number of entities including investment advisers (IAs) and stock brokers. The services offered by these digital platforms include purchase and redemption of direct plans of mutual fund schemes through the digital mode.
There is no regulatory framework in place to facilitate the “execution only services” in direct plans of mutual fund schemes, independent of the regulatory requirements applicable to IAs and stock brokers, Sebi said in a statement issued after its board meeting.
The regulatory framework for these platforms will help achieve three goals, says the regulator in its statement.
The first is that it would provide convenience to investors in making investments through these platforms. The second is a robust framework will put investor protection mechanisms in place. And finally, these regulations will make things easier for these digital platforms as they would only need to adhere to such regulatory compliances as is required for these activities.
To lower the cost
The digital platforms offering direct mutual fund platforms such as Kuvera believe that this would bring down their cost of compliance and operations.
“Execution-only platforms, whether Category 1 or Category 2, will not have to bear the unnecessary burden of complying with Broking or RIA guidelines for clients who need merely an avenue to execute Direct Plan mutual fund transactions and do not require advisory services. It is likely that both the cost of compliance and operations will come down versus the existing framework under which these services were being offered,” says Neelabh Sanyal, COO, Kuvera.
He also says that the set of regulations will enable investors to access a secure and regulated environment to transact mutual funds.
“And for investors, they will have another secure and regulated environment from which to access Mutual Funds. Overall, the monetisation aspect can have a significant impact in penetration of Mutual Funds without increasing the long-term cost of investing,” he adds.
The detailed framework and the modalities of implementation of the same, nature of services that may be offered by the EOPs, cyber security requirements, pricing of services, grievance redressal mechanisms, among others, would be notified through circulars, Sebi said.
The 43-player mutual fund industry has witnessed tremendous growth in the past decade and currently, the industry has Asset Under Management (AUM) worth ₹40 lakh crore. As on April 30, 2022, AUM routed through direct plans of MF schemes stood at ₹16.94 lakh crore.