SEBI's Framework Facilitating Mutual Fund Direct Plans Invested Through Execution Only Platforms

• Published date: 08 August 2022
• Subject Matter: Finance and Banking, Compliance, Financial Services, Commodities/Derivatives/Stock Exchanges
• Law Firm: Khaitan & Co LLP
• Author: Ms Achint Kaur and Shruti Gupta

Introduction

As on 30 April 2022, the assets under management of the mutual fund (MF) industry in India stands at INR 38.04 lakh crore, with 45% of the total assets being routed through direct plans. With increasing focus on financial literacy, digitization, online banking, smartphones, and awareness about MFs, investors can leverage technology and directly invest in MFs, thereby necessitating the need to regulate the domain, especially the digital / technology platforms through which the execution of MF investments is undertaken for a direct plan.

Background

Investment in MFs is made via two mechanisms: (a) a regular plan which requires routing the investment through an intermediary (a mutual fund distributor (MFD)); and (b) a direct plan in which the investment does not involve any distributor / agent. Understandably, investors prefer the direct plan having a lower expense ratio, without any commission being paid to the distributor / agent, which is added to their returns. Investors who prefer the direct plans, have the following channels available for investment through:

• the office / website / mobile app of the asset management company (AMC), in physical or digital mode;
• the SEBI registered stockbroker (SB) / investment adviser (IA) / portfolio manager (PM) in digital mode using the MF transaction platform provided by the stock exchanges;
• SEBI registered IA / PM directly with AMCs as their clients or
• platforms like MF Utilities India Pvt. Ltd., MF Central etc.

Several investors execute their MF investments through the technology / digital platforms provided by stock exchanges / registrar and transfer agents of MFs (RTAs) and IAs / SBs / PMs. Some investors who use the platforms provided by IAs / SBs / PMs do not avail their advisory and broking services, and only use the platforms for execution of their MF transactions. Investors usually prefer platforms provided by IA / SB / PM over those provided by stock exchanges / RTAs, due to their convenience. However, there is no specific framework exists governing the usage of platforms of IA / SB / PM for investors seeking execution only services.

Legal lacunae and rationale

Under the existing SEBI framework, the IAs / SBs / PMs, onboarding an investor as a client are required to enter into an agreement or secure the client's signature on mandatory terms, as prescribed by SEBI. The investors who use such platforms only for execution related services, i.e., non-clients, without availing any advisory /...