SEBI Introduces Framework for Execution Only Platforms (EOPs) for India Mutual Fund Transactions
SEBI, India’s capital market regulator, has introduced a regulatory framework for Execution Only Platforms (EOPs). These are digital platforms that enable direct mutual fund transactions without investment advice. Starting from September 1, 2023, these platforms will need to obtain an EOP license from SEBI or the Association of Mutual Funds in India (AMFI). They must meet requirements such as transparent disclosures and provision of grievance mechanisms. However, exemption of investment advisor and stockbroker platforms from EOP registration has raised concerns among experts as popular direct investment platforms like Groww, Zerodha Coin, and Paytm Money offer combined stockbroking and direct MF services.
Regulatory update as mutual fund schemes become more popular in India
The Securities and Exchange Board of India (SEBI) has introduced a regulatory framework for Execution Only Platforms (EOPs), addressing the growing demand for commission-free direct plans of mutual fund (MF) schemes. The framework, effective from September 1, 2023, aims to strike a balance between investor convenience and protection.
EOPs are digital platforms that facilitate transactions in direct plans of MF schemes without providing investment advice. The popularity of direct plans, which are more cost-effective compared to regular plans, has led to the emergence of numerous online platforms. However, concerns arose as SEBI-registered investment advisers and stock brokers provided execution services through their digital platforms to investors not covered by existing regulations.
Currently, there is no specific regulatory framework governing the provision of “execution only services” in direct mutual fund schemes, independent of the requirements applicable to investment advisers and stock brokers. SEBI’s new framework seeks to address this regulatory gap and provide clarity to EOPs. It outlines the obligations of these platforms, allows them to monetize their businesses, addresses investor concerns regarding associated risks, and establishes a mechanism for handling grievances.
This move aims to ensure that investors have access to transparent and regulated channels for investing in direct plans of mutual fund schemes, while also safeguarding their interests. By introducing this framework, SEBI aims to create a more balanced and protected environment for investors and the growing EOP industry.
How will the new EOP license framework work?
The new framework will require these online platforms to obtain an EOP license from either SEBI or the Association of Mutual Funds in India (AMFI). Currently, these platforms operate under licenses, such as stockbroker or investment advisor (IA).
EOPs that are registered with SEBI will be able to provide services to all investors, while EOPs that are registered with AMFI will only be able to provide services to investors who are already investing in MF schemes through AMFI.
Categories of EOPs
Under the new framework, an entity that wants to offer execution-only services in direct plans of mutual funds can obtain registration under either of the below two categories:
- Category 1 EOPs (registered with AMFI): These EOPs must be registered with the AMFI. They act as agents of asset management companies (AMCs) and integrate their systems with AMCs and/or Registrar and Transfer Agents (RTAs) authorized by AMCs. Category 1 EOPs can aggregate transactions in direct plans of MF schemes and provide services to investors and intermediaries.
- Category 2 EOPs (registered as stock brokers with SEBI): Category 2 EOPs operate as agents of investors and can only offer services through platforms provided by stock exchanges. They cannot aggregate transactions in direct plans of MF schemes and can only provide services directly to investors.
- Category 1 EOPs: For these entities, onboarding requirements will be specified by AMFI. They must enter into agreements with AMCs, defining their rights and obligations related to EOP services. The responsibility of ensuring compliance with Know Your Client (KYC) requirements for MF transactions executed through both categories of EOPs lies with the AMCs.
- Category 2 EOPs: These entities, registered as stockbrokers, must comply with KYC requirements during investor onboarding. They are required to verify investor identities by collecting the necessary documents. These EOPs must also establish clear rights and obligations by entering into agreements with the stock exchanges.
Transactions and onboarding fees
- Category 1 EOPs: AMFI-registered EOPs can charge a flat transaction fee, which will be borne by the AMCs within the upper limit set by AMFI. Onboarding fees, if levied, will be borne by the AMCs.
- Category 2 EOPs: They can charge a flat transaction fee, which will be borne by the investors within the upper limit specified by the stock exchanges. Onboarding fees, if applicable, will be borne by the AMCs and/or investors.
Risk management and compliance
Both categories of EOPs must have comprehensive risk management frameworks in place. They are required to ensure platform security, prevent unauthorized access, and maintain data integrity and privacy. To avoid conflicts of interest, EOPs performing multiple activities within the same entity must maintain an arm’s length relationship.
Advertising and disclosure requirements
EOPs are prohibited from displaying advertisements regarding MF schemes on their platforms. They must provide factual information on mutual funds, including past performance, in a user-friendly manner, while complying with minimum disclosure requirements. Interactive tools must be available for investors to screen and filter schemes based on selected criteria. The display of recommendations or rankings for any scheme is not permitted.
Are there any exemptions for platforms associated with investment advisors and stockbrokers?
Yes, platforms associated with investment advisors and stockbrokers are exempt from obtaining an EOP registration – if their services are exclusively available to their existing advisory or broking clients.
Experts have raised concerns about the potential ambiguity surrounding the mandatory EOP registration for popular direct investment platforms like Groww, Zerodha Coin, and Paytm Money, which offer both stockbroking and direct MF investment services to their clients.
Impact of the new framework
The new framework is expected to have a number of positive impacts for investors. These include:
- Greater clarity and certainty about the services that EOPs can provide.
- Increased competition in the MF distribution market, which could lead to lower costs for investors.
- Improved customer protection, as EOPs will be required to comply with certain risk management and customer protection norms.
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