Requirement of Base Minimum Capital Deposit for Category 2 Execution Only Platforms
The Securities and Exchange Board of India (SEBI) has issued a circular (No.SEBI/HO/IMD/IMD-PoD-1/P/CIR/2023/86) dated June 13, 2023, outlining the regulatory framework for Execution Only Platforms (EOPs). These platforms facilitate transactions in direct plans of Mutual Fund schemes through digital or online platforms. EOPs refer to any digital platform that enables subscription, redemption, and switch transactions in direct plans of Mutual Fund schemes.
Categories of EOPs:
- Category 1 EOP: Entities wishing to operate as Category 1 EOPs must obtain registration from the Association of Mutual Funds in India (AMFI). They act as agents of Asset Management Companies (AMCs) and provide services to investors and intermediaries. Category 1 EOPs must adhere to the guidelines prescribed by AMFI in consultation with SEBI. They are not required to maintain deposits with AMFI for their operations.
- Category 2 EOP: Category 2 EOPs need to obtain registration as Stock Brokers under SEBI (Stock Brokers) Regulations, 1992, specifically for the EOP segment of Stock Exchanges. They function as agents for investors and provide services directly to them. Category 2 EOPs cannot act as aggregators of transactions in direct plans of Mutual Fund schemes. They must comply with various requirements applicable to stock brokers, including the maintenance of deposits with the stock exchange.
Base Minimum Capital (BMC) Deposit Requirement:
SEBI, through its circulars (No. SMD/SED/RCG/270/96 dated January 19, 1996, No. MRD/DoP/SE/Cir-07/2005 dated February 23, 2005, and No. CIR/MRD/DRMNP/36/2012 dated December 19, 2012), has mandated the requirement of a BMC deposit for stock brokers engaging in trading on the stock exchange. BMC deposit is the amount provided by members of the stock exchange, which sets a limit for trades without any exposure.
Based on this, members of stock exchanges operating solely in the EOP segment (Category 2 EOP) are required to maintain a minimum BMC deposit of Rs. 10 Lakhs with the stock exchange. However, for members with registrations in multiple segments on the same stock exchange, the BMC deposit requirement is not cumulative. Rather, it is determined as the highest applicable BMC deposit across the various segments.
Modification of SEBI Circulars:
The SEBI circulars mentioned in paragraph 3 above have been suitably modified. All other relevant provisions regarding BMC deposits remain applicable.
Implementation and Directives to Stock Exchanges:
The provisions outlined in this circular are to be implemented immediately. Stock exchanges are directed to take necessary steps and establish the required systems for the effective implementation of these provisions. Additionally, they must make necessary amendments to relevant bye-laws, rules, and regulations, wherever applicable. Stock exchanges are further required to notify market participants, including investors, and disseminate the circular on their respective websites.
SEBI’s Authority and Availability of Circular:
This circular is issued under the powers conferred by Section 11(1) of the Securities and Exchange Board of India Act, 1992. Its objective is to safeguard the interests of investors in securities and promote the development and regulation of the securities market. The circular is available on SEBI’s official website at www.sebi.gov.in.
Benefits of the Revised Circular:
The revised SEBI circular ensures that regulators have a framework to regulate Category 2 EOPs offering services to investors through digital platforms. It enhances transparency, help investors make informed decisions while minimizing the risk of fraudulent activities.
Further, the circular echoes the regulatory body’s commitment to promoting the development of, and regulating securities markets. By empowering and encouraging Category 2 EOPs to obtain registration as stockbrokers, SEBI is promoting a secure and regulated environment for investors to transact in Mutual Fund schemes.
Additionally, the revised SEBI circular ensures the interests of investors in securities are protected, while the development of the securities market is promoted.
Conclusion:
To sum up, with the revised SEBI circular, investors can be confident in the regulated environment that encourages transparency and sustainable growth in the securities market. Overall, the circular provides comprehensive guidance to Category 2 EOPs, ensuring seamless operations in compliance with SEBI regulations and guidelines. This move makes mutual fund transactions easier and safer for investors and promotes the market’s development.
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