Sebi's proposal on execution-only platforms to promote mutual fund penetration

Sebi's proposal to bring technology platforms providing transactions in direct plans of mutual funds schemes under its regulatory framework will help promoting mutual funds to a wider demography in the country, experts said on Friday.

Also, the move will provide sanctity to the execution-only business model which has substantially increased the mutual fund access to first time investors from smaller towns in the last five years, Swapnil Bhaskar, Head of Strategy at Niyo neo-bank for millennials, said.

Further, customers are going to get benefitted as the execution only business model will get tightly regulated, he added.

The Securities and Exchange Board of India (Sebi) last week, came out with a consultation paper on the framework for platforms providing "execution-only" services in direct plans of Mutual Funds (MFs).

Under the Sebi's proposal, such platforms will be required to act as a registered intermediary or an entity registered with Association of Mutual Funds in India (AMFI), or an entity with limited purpose membership with stock exchanges.

Agents of investors should charge fees directly from investors and agents of Asset Management Companies (AMCs) can get commission in the form of transaction fees. The regulator has sought comments from the public till August 12 on the proposals.

"It is a good initiative and will go a long way to promote mutual funds to the length and breadth of the country," Akhil Chaturvedi, Chief Business Officer at Motilal Oswal AMC, said.

Nikhil Kamath, Co-Founder of True Beacon and Zerodha, believes the new proposal will bring in more optionality for Sebi-regulated intermediaries and better accessibility to a wider demographic in the long term.

In addition, a revenue stream for those who sell direct plans will enable digital only platforms to invest in required digital infrastructure. This will in turn drive digital innovation in execution and investor interface, Chaturvedi of Motilal Oswal AMC said.

"Though such a measure may over time increase the cost of direct plans but in terms of cost benefit ratio, it would augur well for the Industry in terms of market penetration," he added.

According to him, registration of such platforms through Amfi or stock exchanges may be more feasible instead of such platforms being required to register with AMCs.

Direct plans are for those investors who prefer to invest directly in a mutual fund scheme without the help of any distributor or agent. Several technology platforms, including ET Money, Niyo, and Kuvera, provide such execution services to investors.

As per the consultation paper issued by the regulator, Execution-Only Providers (EOPs) may provide both financial services -- purchase, as well as redemption of mutual fund units and non-financial services -- change of email id, contact number, bank account details and complaints.

Further, only a body corporate may be eligible to obtain registration as EOP. Such corporate may or may not carry out other activities.

If carrying out other activities as well, EOPs may be required to maintain an arm's length relationship between their activities as EOPs and the other activities by providing EOP services through a separately identifiable EOP department or division.

"I believe since RIA (registered investment advisers) and Execution only are closely linked so Sebi should seriously consider the industry input on this paper especially regarding segregation of RIA and

Execution only business and making the latter sustainable by enabling businesses to charge AMCs for the execution services to the customers," Niyo's Bhaskar said.

Since EOPs mainly operate through digital/technological platforms, additional requirements related to cybersecurity should be followed.

MF industry has seen tremendous growth in the past decade and currently, the space has an Asset Under Management (AUM) of Rs 38 lakh crore and the AUM routed through direct plans of MF schemes stood at nearly Rs 17 lakh crore, which is 45 per cent of the total AUM.