Get prepared for a change in direct MF platforms

Direct mutual fund platforms have emerged as an necessary stakeholder in India’s mutual fund (MF) trade. However, latest incidents have raised questions on the place these platforms stand within the regulatory panorama.

Just a few months again, Paytm Money had introduced that will probably be transferring its direct MF enterprise from its advisory arm to its broking arm. More just lately, the Securities and Exchange Board of India (Sebi) in an adjudication order penalised one other platform for failure in complying with relevant laws.

These incidents, when checked out together with the Sebi  session paper on Execution Only Platforms (EOP), are a harbinger of great adjustments in the best way direct MF platforms are structured.

To get to the crux of the matter, you will need to first perceive how direct MF platforms function. For their functioning, these platforms want two capabilities. First, to push transactions to totally different MFs , and second, to have the ability to obtain information feeds from MFs on facets like transaction standing, cost processing, settlement updates, unit allotment, and many others. These information feeds are shared by Registrar and Transfer Agents (RTAs) of MFs, like CAMS and Karvy. However, there are restrictions as to who can obtain these information feeds.

A key query confronted by direct MF platforms throughout their inception was how one can get entry to information feeds from RTAs. The possibility earlier than these platforms was to both register as a mutual fund distributor (MFD), or as a registered funding adviser (RIA) or a dealer. Given that these platforms provide direct plans of MFs, the MFD registration was not appropriate. That leaves two registration choices—both as an RIA, or a dealer. Most platforms select to register as an RIA, barring a number of (like Coin by Zerodha, which already had a broking license).

Choosing an RIA license opened the door for the direct MF platforms to entry information feeds and in addition supplied an choice to upscale from being simply an execution platform to an advisory-cum-execution platform. But it additionally opened an entire new set of issues. What these platforms most likely didn’t anticipate earlier was how onerous the compliance burden of sustaining an RIA license would develop into—significantly after Sebi amendments in RIA laws in 2020.

For a platform that solely desires to execute MF transactions, the compliance burden didn’t make operational sense- except the direct MF platform was began with the target of graduating right into a full-fledged advisory enterprise. Most direct MF platforms don’t have any such aspiration.

Hence the transfer by Paytm Money to shift out of its RIA license, and transfer its MF enterprise to its broking arm. However, not all direct MF platforms have an in-house dealer registration emigrate to. 

This brings us to the latest Sebi session paper on EOP. The session paper proposes creating a brand new EOP registration which direct mutual fund platforms can apply for and use their EOP standing to entry transaction information feed from RTAs. However, the proposed laws on EOPs additionally deliver to the fore many points—essentially the most pertinent being on how the EOPs will earn income. 

There are two choices —first, EOPs can cost customers immediately. This is not going to be their first desire as this can be a robust hill to climb. Recall how Zerodha Coin needed to roll again a paltry charge of ₹50 per thirty days and make its platform fully free to be used.

The second possibility is for EOPs to be compensated by MFs—and herein lies many necessary questions. Will the MF firm cross on the associated fee levied by the EOP to the buyers? Can one MF firm further compensate the EOP for beneficial itemizing of its schemes? 

Another key challenge is that as an EOP, the scope of the platform can be lower—execution of transactions solely. But the place do you draw the road between offering solely transaction companies and recommendation? For occasion, if the EOP curates a listing of high mutual funds to purchase, is it solely offering execution companies? And whether it is prohibited from curating as which will entail recommendation, what would the platform provide?

There is little question that the proposed new EOP laws fill an necessary lacuna within the regulatory panorama. But there are necessary inquiries to be answered which is able to decide whether or not the brand new set of laws will finally profit the buyers or not.

Ravi Saraogi is a Sebi- registered funding adviser (RIA) and co-founder of Samasthiti Advisors

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