In a significant move aimed at safeguarding investors’ interests, the Securities & Exchange Board of India (SEBI) has introduced a regulatory framework for execution-only platforms (EOPs) in mutual fund investing. The new regulations mandate registration for EOPs and prohibit them from providing regular plans to investors.
SEBI defines EOPs as digital or online platforms facilitating transactions, such as subscription, redemption, and switch transactions, exclusively in direct plans of mutual fund schemes. This move is expected to have an impact on players like private wealth platforms, as they will be unable to offer regular mutual fund plans.
The regulatory framework outlines two categories for EOP registration: EOP 1 and EOP 2. EOP 1 entities must register with the Association of Mutual Funds in India (AMFI) and act as agents of asset management companies (AMCs). These platforms will integrate their systems with AMCs and/or Registrar and Transfer Agents (RTAs) to facilitate mutual fund transactions. On the other hand, EOP 2 entities need to be registered as stockbrokers with SEBI and can operate solely through platforms provided by stock exchanges.
An important provision for EOPs is the allowance to sell other products apart from mutual funds, provided adequate disclosure is given to clients. This offers a revenue model for these companies, unlike the previous restrictions on cross-selling products.
Concerns have been raised regarding potential increased costs for investors due to the new regulations. However, SEBI specifies that EOPs registered with AMFI can charge a flat transaction fee, borne by AMCs within the upper limit set by AMFI. Onboarding fees, if applicable, will be the responsibility of the AMCs. Broker-based EOPs, on the other hand, can levy a flat transaction fee within the limit set by stock exchanges, which will be borne by the investors. In this case, onboarding fees will be borne by the AMCs and/or investors.
Industry experts and platforms like Kuvera assert that direct plans will not become more expensive for investors after the implementation of the norms. Platforms like Kuvera utilize existing transaction processing entities, which already charge a transaction fee to AMCs. EOP 1 entities are expected to create parallel infrastructure to share in the existing AMC expenses, while EOP 2 platforms can continue offering free services using exchange infrastructure.
The choice between EOP 1 and EOP 2 registration depends on whether a platform intends to charge its clients for services. While EOP 2 offers flexibility in charging clients, establishing a broking setup can be a challenge for entities not already equipped. The exclusion of regular mutual plans by EOPs is likely to impact players in the private wealth sector.
Ambiguities exist in the circular, particularly regarding onboarding requirements and transaction fee limits, which are expected to be clarified by AMFI in due course. EOP 1 platforms will undergo significant operational migration as they must directly engage with AMCs or RTAs, potentially creating complexities for existing platforms reliant on BSE or NSE infrastructure for transactions.
As the regulatory framework takes effect, investors and industry players will closely monitor the implementation and impact of SEBI’s regulations on execution-only platforms in the mutual fund industry.
