The Securities and Exchange Board of India (‘SEBI’), by way of a Circular dated June 13, 2023 (‘Circular’), has introduced a regulatory framework for technology / digital platforms (including those provided by investment advisers /stock-brokers to non-clients) which provide execution services in direct plans of mutual fund schemes. This Circular will come into effect from September 1, 2023.
The Circular prescribes that any digital or online platform which facilitates transactions such as subscription, redemption, and switch transactions in direct plans of schemes of mutual funds will be known as ‘Execution Only Platform’ (‘EOPs’). The Circular inter alia provides for the categories of EOPs, eligibility criteria, on-boarding and integration requirements, rights and obligations, transactions and on-boarding fees, operational risk management, grievance redressal and technology and disclosure related requirements, to be followed by EOPs. The Circular further requires that the entities providing platforms facilitating transactions in direct plans of mutual funds schemes will also be required to apply for the relevant registration as per this Circular within three months from the date of this Circular coming into effect.
The key provisions of the Circular are highlighted below:
i. Categories of EOPs: A body corporate desirous of operating an EOP is required to be registered either as: (a) Category 1 EOP, or (b) Category 2 EOP. Category 1 EOPs must act as an agent of Asset Management Companies (‘AMC’), integrate its services with AMCs and / or Registrar and Transfer agents authorised by such AMCs, to facilitate the mutual fund transactions. Category 2 EOPs must operate as an agent of investors and only through the platforms provided by stock exchanges;
ii. Registration: Category 1 EOPs must obtain registration from the Association of Mutual Funds in India and Category 2 EOPs must obtain registration as a stock-broker under the SEBI (Stock Broker) Regulations, 1992, under the EOP segment of stock exchanges; and
iii. Regular Plans of Mutual Funds: EOPs cannot provide services related to regular plans of mutual fund schemes.