SEBI Proposes Framework To Regulate Mutual Fund Platforms

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SEBI said the framework is envisaged to promote penetration of mutual funds and to ensure adequate investor protection and a grievance redressal mechanism

SEBI has proposed additional cybersecurity-related requirements as mandated by stock exchanges and AMFI on the EOPs owing to digital nature of the business

The move will affect investech platforms like Zerodha, Groww and Paytm Money which offer direct mutual fund plans

The Securities and Exchange Board of India (SEBI) has proposed a regulation framework for investech players offering execution-only services in direct plans offered by mutual funds.

The market regulator has sought comments from the public on the consultation paper till August 12.

Currently, users can route their investments via a direct plan or a regular plan, which differ in expense ratios and the requirement of a distributor. 

The move may mandate platforms, such as Zerodha, Groww, Paytm Money, to register as an  intermediary for selling direct plans of mutual funds. Currently, there is no framework in place to enable these platforms to provide execution-only services in direct plans of mutual fund (MF) schemes and to obtain data feeds with respect to such transactions.

“To promote the penetration of MFs and to ensure that ease of investment comes with adequate investor protection and grievance redressal mechanism, a framework for working of these platforms may be the stepping stone towards strengthening the investors with the power of technology along with the ability to invest directly in MF schemes,” SEBI said in a consultation paper.

The draft framework has suggested three separate frameworks to regulate entities desirous of undertaking execution-only services in direct plans. The paper suggested that such entities may be mandated to act as a registered intermediary or as a player registered with the Association of Mutual Funds in India (AMFI) or as a company with limited purpose membership with stock exchanges.

The consultation paper also said that the execution-only providers (EOPs) may be allowed to provide both financial services such as purchase of mutual fund units as well as non-financial services such as change of email id and contact number.

SEBI has proposed that these platforms be subject to additional cyber security requirements as per norms set down by AMFI and stock exchanges. It has also invited additional cybersecurity-related comments from the public to formulate the policy.

Highlighting the contours of the framework, the paper also noted that such firms may or may not be allowed to carry out other activities, adding that EOPs may be required to maintain an arm’s length relationship between their activities as EOPs and the other activities. Essentially, these players could be mandated to ensure client level segregation with respect to their activities.

“The minimum net worth should be prescribed in such a manner that it is not prohibitively high to deter small serious players or be anti-competitive,” the consultation paper said.

It also envisages companies to set up a dedicated grievance redressal mechanism depending on the framework adopted.

SEBI, in its document, said that the mutual funds industry has grown manifold in the last decade, adding that the industry had INR 38 Lakh Cr worth of assets under management (AUM) by the end of April 2022. The market regulator also noted that AUM routed through direct plans of mutual fund schemes stood at INR 16.94 Lakh crore by the end of April 2022, with the rest routed through regular plans.

According to an Inc42 analysis, the Indian investech market stood at $6.4 Bn in 2021 and is projected to soar to $14.3 Bn by 2025, growing at a compounded annual growth rate (CAGR) of 22.4%.

The space is populated by players such as Zerodha, Groww, ETMoney, Upstox, Paytm Money, among others. 

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