SEBI mandates execution-only platforms for mutual funds to get registered

Securities and Exchange Board of India (SEBI) on Tuesday made it mandatory for execution-only platforms (EOPs) such as Paytm and Groww for facilitating transactions in direct plans of schemes of mutual funds. 

At present, there is no specific framework available for technology/digital platforms (including platforms provided by investment advisers/stock brokers to non-clients) to provide execution-only services in direct plans of mutual fund schemes and to obtain data feeds with respect to such transactions. "Thus, while the investors may find it convenient to avail the services of such online platforms, investors who are not clients of such intermediaries under the above-specified regulations may not have recourse or protection for the risks associated with respect to such transactions. Therefore, a need was felt to strike a balance between investor convenience and investor protection," SEBI said in a circular.

As per the new rules, these platforms can be granted registration under Category 1 EOP and Category 2 EOP. Under Category 1 EOP, these platforms will be registered from AMFI (Association of Mutual Funds in India) and will act as an agent of AMCs (asset management companies), and integrate their systems with AMCs to facilitate transactions in mutual funds. "The entity may act as an aggregator of the transactions in direct plans of schemes of mutual funds and provide services to investors/other intermediaries," the capital markets regulator said.

Under the Category 2 EOP, these platforms will obtain registration as stockbrokers and will operate as an agent of investors and operators only through the platforms provided by the stock exchanges. "The entity shall not act as an aggregator of the transactions in direct plans of schemes of Mutual Funds and shall provide services to investors directly," SEBI said. Moreover, according to SEBI, any entity that wants to register under Category 2 EOP must appoint a compliance officer and has appointed at least two qualified key managerial personnel with experience of at least three years each in the securities market.

"The entity shall not act as an aggregator of the transactions in direct plans of schemes of Mutual Funds and shall provide services to investors directly. The entity shall comply with the requirement of base net worth applicable for Trading Member, as specified under Schedule VI of SEBI (Stock Brokers) Regulations, 1992," the SEBI said.

Any entity, which wants to register under Category 1 EOP, must fulfil the criteria as specified by AMFI.

For onboarding investors, entities under Category 2 EOP shall comply with KYC (know your client) requirements and take necessary steps including verifying the identity of its investors by requiring them to submit necessary documents, according to SEBI. Entities under Category 1 EOP need to follow norms specified by AMFI for onboarding investors.

The capital markets regulator has directed BSE and National Stock Exchange and AMFI are directed to make necessary arrangements to their relevant bye-laws, rules and regulations for the implementation of the directions in this circular and provide the status of implementation regarding the same to SEBI on a monthly basis, and monitor the operations carried out by EOPs who have obtained membership under EOP segment.