The Securities and Exchange Board of India (“SEBI”) issued the Circular titled ‘Facilitating transaction in Mutual Fund Schemes through the Stock Exchange Infrastructure’ dated February 26, 2020. The crux of this Circular is the extension of facilities and infrastructure of stock exchanges (“SE”) to investors purchasing or redeeming units directly from mutual funds (“MF”)/ Asset Management Company (“AMC”), which was previously limited to Distributors (“MFD”) and Registered Investment Advisers (“RIA”).
Expanding the scope of transactions in MF Schemes through Exchange infrastructure
As early as in November 2009, SEBI vide Circular No. SEBI /IMD / CIR No.11/183204/ 2009 dated November 13, 2009 acknowledged the need to enhance the reach of MF Schemes. In this Circular, SEBI had noted that the then extant secondary market infrastructure through the SEs with wide presence could be used to extend the convenience available to MF Investors. Accordingly, this SEBI Circular enabled transaction of units of MF Schemes through registered Stockbrokers of recognized SEs and such stockbrokers were deemed as official points of acceptance per MF Norms.
In addition to this, the Code of Conduct requirements applicable to MFDs and the requirement regarding passing the AMFI Certification examination was extended to such brokers interested in availing such facility. Such brokers were thereafter considered as empanelled MFD/AMCs. It further also extended the requirements applicable to intermediaries engaged in selling and marketing of MF Units in India to such brokers.
A year later, SEBI Circular No. CIR/IMD/DF/17/2010 dated November 09, 2010 was issued with a view to providing more avenues for purchasing and redeeming MF Units, in addition to the existing facilities of purchasing and redeeming directly with the MF and Stock Brokers. Accordingly, this Circular extended the permission for making transactions in MF units through the SE to Clearing Members of the registered SE. Depository Participants of the registered Depositories were also permitted here forward, only for processing redemption request of units held in Demat form. Further, conditions stipulated for stockbrokers in the abovementioned Circular dated November 13, 2009 were also made applicable to such Clearing Members.
SEBI issued Circular no. CIR/MRD/DSA/32/2013 dated October 04, 2013 to enable the MFDs to leverage the SE platform so as to further improve the reach of MFs. Accordingly, it allowed MFDs registered with AMFI and permitted by concerned SE to use recognized SEs’ infrastructure to purchase and redeem MF units directly from MF/ AMC on behalf of their clients. This was in addition to the existing channels of MF distribution.
However, it provides that MFD shall not handle and pay in of funds as well as units on behalf of investor. The recognized SE shall put the necessary system in place to ensure that the pay in will be directly received by recognized clearing corporation and the payout will be directly made to investor account. In the same manner, units shall be credited and debited directly from the Demat account of the investors.
CIR/MRD/DSA/33/2014 dated December 09, 2014 expanded the scope of permitted transactions in the MF through SE to non-Demat transactions also.
February 26, 2020 Circular
The most recent Feb 2020 Circular allows direct access to the infrastructure of recognized SEs for purchase of and redemption of MF Units directly from the MF/ AMC to the investor. It implies that an investor can now invest in units of Direct Plans of MF Schemes from a SE platform, without going through any intermediary. Before this Circular, SEBI only permitted such transactions to be routed through MFDs /RIAs.
The change does meet the objective of SEBI which was a deeper penetration of MFs to two-tier cities. The change is also pivotal for being cost-efficient for investor who would approach the SE directly. It incurs a lower expense ratio since the investor is not compelled to bear commission expenditure payable to distributors by MFs.
Additionally, it could benefit HNIs who would want to beat the intermediaries to the cut off period as, for example, MFDs close their doors a little earlier than the official cut off time to ensure that SEs have time to collect their orders. The change would enable these investors to invest until the official cut off time, as they would be interacting with the exchange platform directly.
NSE and BSE both operate platforms facilitating transactions in MF. NSE operates two exchange platforms for this purpose, i.e. MFSS for Trading/Clearing Members and NMF II for MFDs. These platforms facilitate transactions through a web-based platform with pool account facility in former and without pool account facility in the latter.
Exchange enabled MF transactions are touted to have unparalleled value discovery for various reasons such as nil infrastructure cost and geographical barriers, elimination of time for execution and storage requirement.