New Guidelines to Safeguard Investors and Streamline Direct Plan Transactions
In a significant move to safeguard investors and enhance transparency, the Securities and Exchange Board of India (Sebi) has announced a regulatory framework for ‘Execution Only Platforms’ (EOPs) in the realm of mutual fund schemes. This groundbreaking development aims to provide a protective environment for investors engaging in direct plans while eliminating the need for intermediaries.
Direct plans of mutual fund schemes have witnessed a surge in popularity among investors in recent years, primarily due to their cost-effectiveness compared to regular plans that involve distributor commissions. Consequently, numerous online platforms have emerged to facilitate investments in direct plans. However, the absence of a regulatory framework has posed potential risks to investors who do not have the protection associated with traditional intermediaries.
To address this concern, Sebi has outlined a comprehensive framework for EOPs, which will come into effect from September 1. This framework ensures that entities offering execution-only services for direct plans of mutual funds adhere to necessary regulatory requirements. EOPs will be classified into two categories: Category 1 EOP, operating as an agent of asset management companies registered with the Association of Mutual Funds in India (AMFI), and Category 2 EOP, operating as an agent of the investor, registered as a stockbroker.
By introducing this regulatory framework, Sebi aims to provide investors with a convenient and secure means of investing through EOPs. Moreover, these guidelines simplify the compliance process for EOP platforms by mandating only the necessary regulatory obligations associated with their activities.
The framework also specifies the permissible nature of services that EOPs can offer, including cyber security requirements, pricing structures, grievance redressal mechanisms, and technology-related provisions. Sebi emphasizes that EOPs must comply with Know Your Customer (KYC) requirements, with the responsibility lying with the AMCs for transactions executed through both categories of EOPs.
Under the new regulations, Category 1 EOPs are required to establish clear agreements with AMCs, delineating their respective rights and obligations regarding EOP services. These entities must also adopt an objective, fair, and transparent policy for executing transactions involving products offered by AMCs.
With the implementation of this regulatory framework, investors can confidently engage with EOPs, knowing that their interests are protected. The guidelines promote investor security, transparency, and the seamless operation of direct plan transactions, ultimately enhancing the overall experience of investing in mutual fund schemes.
Facts and Figures:
- According to industry data, direct plans of mutual fund schemes have gained significant traction in recent years, capturing approximately 40% of the total mutual fund assets under management (AUM) in India.
- The absence of a regulatory framework for EOPs has led to a proliferation of online platforms offering direct plan transactions, with estimates suggesting over 100 such platforms currently operating in the market.
- The new regulatory framework aligns with Sebi’s commitment to investor protection and fostering a conducive environment for the growth of the mutual fund industry in India.
- Experts predict that the introduction of EOP regulations will bolster confidence among retail investors and further boost the adoption of direct plans, driving their market share even higher in the coming years.
