Mutual Funds: SEBI Issues Framework for Execution-Only Platforms

Markets regulator the Securities and Exchange Board of India (SEBI) has introduced a framework wherein it is compulsory for providers of execution-only platforms (EOPs) for direct plans of mutual fund schemes to get registered if they wanted to offer their services.

An entity would not be allowed to operate as an EOP if they fail to obtain registration from SEBI or the mutual fund regulatory body Association of Mutual Funds in India (AMFI), as per the case.

The new framework would come into effect from September 1, 2023, as per SEBI. New regulations have been introduced in this regard for direct mutual fund investing. The aim is to protect investors dealing in such schemes.

Basically, an EOP refers to a digital or online platform that allows transactions like subscription, redemption, and switch transactions in direct plans of mutual funds without the aid of distributors.

Considering that direct plans of mutual funds are relatively cheaper as compared to regular plans, which involve a commission that is paid to distributors, investors have warmed up to such schemes in the past few years. This resulted in a spike in the number of various online platforms that offer facilitation for investing in direct plans.

SEBI has put forward the necessity to introduce a framework to facilitate EOPs for direct plans of mutual fund schemes in December 2022.

As per the new mechanism, an entity looking forward to offeingr execution-only services in direct plans of mutual funds can gain registration under either of the two categories: Category-1, wherein EOP as an agent of asset management companies (AMCs) registered with the AMFI or Category-2 as per which EOP as an agent of investor, registered as a stockbroker, who would be required to comply with the know-your-client (KYC), mandates while onboarding investors on their online platform. They would also be required to verify the identity of their investors by requiring them to furnish the necessary documents.

The move by the markets regulator would introduce convenience for investors to put investments via EOPs and would aid in ease of doing business for the platforms by introducing only such requisite regulatory compliances as is mandated for the EOP activity.

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