SEBI's New Norms on Execution-Only Platforms: What Investors Need to Know

In a significant move aimed at investor protection, the Securities & Exchange Board of India (SEBI) has recently introduced a regulatory framework for execution-only platforms (EOPs) in the mutual fund industry. These platforms, which facilitate transactions in direct plans of mutual fund schemes, will now be required to register with SEBI and are prohibited from offering regular plans.

SEBI's Regulatory Framework for EOPs:

SEBI has defined an EOP as a digital or online platform that enables transactions such as subscription, redemption, and switch transactions in direct plans of mutual fund schemes. The regulatory framework classifies EOPs into two categories: EOP 1 and EOP 2. Entities can choose to register under either category based on their business model and preferences.

EOP 1 Registration:

Entities opting for EOP 1 registration must register with the Association of Mutual Funds in India (AMFI), the industry body for mutual funds. These platforms will act as agents of asset management companies (AMCs) and integrate their systems with AMCs and/or Registrar and Transfer Agents (RTAs) to facilitate mutual fund transactions. EOP 1 platforms can also sell other financial products, provided they disclose this information adequately to their clients.

EOP 2 Registration:

Entities choosing EOP 2 registration need to register as stockbrokers with SEBI and can operate exclusively through the platforms provided by stock exchanges. Similar to EOP 1 platforms, EOP 2 platforms can sell other financial products, subject to proper disclosure to clients.

Impact on Investors:

The new regulations may raise concerns about increased costs for investors. However, SEBI has set upper limits for transaction fees, which will be borne either by AMCs (in the case of EOP 1 platforms) or by investors (in the case of EOP 2 platforms), as specified by the respective regulatory bodies. Additionally, onboarding fees, if applicable, will be borne by AMCs and/or investors. Importantly, AMCs are prohibited from charging any additional fees to investors for services provided by EOPs.

Experts believe that direct plan costs for investors are unlikely to increase significantly, as EOP platforms have various revenue models. EOP 1 platforms can earn a token amount from AMCs for each transaction, while EOP 2 platforms can charge clients directly. However, most direct platforms currently do not charge clients for mutual fund transactions due to competition in the market.

Choosing the Right EOP Category:

SEBI has granted the freedom to EOP platforms to decide under which category they wish to register. The choice primarily depends on the platform's ability to charge clients for services. EOP 2 registration may be preferable for platforms looking to charge clients directly, but it involves establishing a broking setup. EOP 1 registration allows platforms to receive a token amount from AMCs per transaction, making it suitable for platforms that do not anticipate client payments.

Conclusion:

SEBI's regulatory framework for execution-only platforms in the mutual fund industry aims to improve investor protection and streamline operations in this sector. While there may be concerns about potential cost increases, experts believe that direct plan costs for investors are unlikely to rise significantly. The flexibility provided by the new regulations allows EOP platforms to choose the category that best suits their business model. As the industry adapts to these changes, it is crucial for platforms to ensure compliance with regulatory requirements and maintain transparency in their operations, ultimately benefiting investors.