Execution Only Platforms – Has SEBI thrown a lifeline?

SEBI enforced Direct Plans of mutual funds over 10 years ago. For the first few years, investors hardly knew about the concept.

With time, direct plans caught attention with their lower expenses and higher performance combination vis-à-vis regular plans offered by mutual fund distributors such as banks, national distributors or even a friendly neighbourhood agent.

For the tech savvy investors, though, an option to track and execute in direct plans was non existent. Around 2015-16, several entities noticed the gap and launched execution platforms that catered to the direct plan investor.

However, to create a seamless experience through reverse transaction feeds from RTAs, they had to get registered as a SEBI RIA. That was too much to take on as regulatory compliance burden for someone trying to just offer transaction and tracking convenience.

Well, with no other choice, the platforms did register and kept growing. I am sure this exhorted the regulator to come up with the set of rules for this business model type. 

Finally, in June 2023, SEBI introduced a framework for these “execution-only” platforms (EOPs).

Such platforms are offered by Kuvera, Groww, PayTM, Zerodha-Coin, MF Utilities, MF Central and others.

Let’s see what the regulator has in mind for these platforms and what areas can benefit from more clarity.

What is an EOP?

As per the SEBI circular :

“Any digital or online platform which facilitates transactions such as subscription, redemption and switch transactions in direct plans of schemes of Mutual Funds.”

The definition is self-explanatory.

The EOP should be a body corporate. That means, an individual or partnership firm cannot offer EOP.

Does the entity need to get registered with SEBI?

SEBI introduced two categories of EOPs – Category 1 and Category 2.

Category 1 EOP has to obtain registration from the Association of Mutual Funds of India (AMFI).

Category 2 EOP has to obtain registration as a Stock Broker under the SEBI (Stock Brokers) Regulations, 1992 i.e. has to obtain registration from SEBI as a Stock Broker.

How does the entity decide under which category it falls?

Here is a comparative table with the relevant points :

Can an RIA offer EOP and charge for it?

Firstly, this circular is not applicable to an RIA entity providing a transaction platform to its existing advisory clients. Same for a Stock Broker who offers a platform to its broking clients.

As per the SEBI (Investment Advisers) Regulations, 2013, RIAs offering platforms to its advisory clients to execute transactions cannot charge any execution fee.

RIAs offering EOP to its non-advisory clients have to get registered under either of the one category for EOPs and follow the circular to charge transaction or on-boarding fee to the AMC / investors.

Can the same entity provide a platform for regular as well as direct plans of mutual funds?

The circular states that the entity offering EOP is not allowed to provide services related to regular plans of mutual funds on its platform.

That means that if any mutual fund distributor (MFD) wants to offer EOP too, it has to either have two different platforms or create another entity to offer EOP.

The MFD, offering EOP and distribution services, has to follow client level segregation compliance to handle conflict of interest.

What is client level segregation for MFD?

An investor, availing distribution services of the mutual fund distributor, cannot use EOP services offered by the MFD at entity or group level.

The same rule will apply to the family of the investor i.e to its dependent spouse, dependent children and dependent parents.

The PAN of each investor will be the control record for identification and investor level segregation at the entity’s end.

Do the EOPs need to provide disclosures on mutual fund schemes?

The EOPs have to provide factual information only about Mutual Funds as available on public domain including name of the fund manager, investment objects, risk-o-meter, the past performance of the schemes, etc.

EOPS also have to provide an interactive tool to screen or filter various schemes based on the criteria like past performance, AUM, etc.

Can SEBI registered intermediaries tie-up with EOP to offer services execution services to their clients?

EOPs cannot auto display recommendations or rankings of the scheme on their platform. The tool provided to the investors cannot itself offer research recommendation or investment advice.

However, one of the criteria for selection of schemes by the investors can include research reports or opinions.

The said reports can only be by SEBI registered intermediaries along with suitable disclosures regarding the source of the report. Such research reports or opinions have to disclose the methodology used for such recommendations.

What are the compliance requirements to be followed by the EOPs?

The EOPs have to establish necessary systems and frame suitable policies, in writing, for onboarding of investors on their platform, execution of transactions, rights and obligations/terms and conditions for the investor and the EOP, risk management and control, liability framework for EOP in case of breach of the policies, restrictions or other requirements that may apply for accessing the platform, etc.

While the eligibility criteria, net worth requirements and other operation requirements have been specified for Category 2 EOPs, AMFI is yet to issue guidelines and other directions for Category 1 EOPs.  

What about advertisements on EOP?

It is clearly mentioned in the circular that EOPs cannot display any advertisement regarding any Mutual Fund scheme on their platform.

Further, they cannot display any proxy / surrogate / common brand related advertisement on their platform.

Also, if EOPs advertise themselves on any website or media, then Category 1 EOP has to follow the advertisement code by AMFI and Category 2 EOP has to ensure compliance with the advertisement code by the Stock Exchange.

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So, what is the big change?

Or, should we ask, who will benefit from this?

MFDs stand to gain big. The service spectrum can go up and they can have another entity to offer EOP and cater to direct plan investors too. Of course, they have to follow the client level segregation as mentioned above.

Also, those entities, who had to register as an RIA only to receive RTA transaction feeds for direct plans of mutual funds, may surrender their registration and opt for an EOP license.

There are a few aspects which are not clear.

Like, what is the onboarding fee for? If any investor gets onboarded on two Category-1-EOPs, will the AMC be charged twice for the same investor?

Also, this – a Category 1 EOP is allowed to act as an aggregator and offer services to other intermediaries. Suppose a group company is offering regular plans of mutual funds, what will happen if the investor is using services of the group company as well as services of EOP through an intermediary? Will the EOP still have to maintain client-level segregation?

Also, will an EOP be allowed to provide basic, factual reports like capital gains or portfolio summary report to the investors?

We have to wait for the AMFI and Stock Exchange guidelines for further clarity.

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The framework is effective from September 1, 2023. The existing platforms have to obtain registration under either of the one category within 3 months of the effective date i.e. before December 1, 2023.