The Securities and Exchange Board of India (SEBI) has prohibited digital mutual funds (MF) advisory companies such as Paytm from charging implementation fees from asset management companies (AMCs) for their mutual fund advisory services to users. It also said that such investment advisory platforms must sign an agreement with the client before providing such advisory services, which might complicate the investment process for some consumers.
The clarification comes after the regulator rejected Paytm Money’s request to avail reimbursement from AMCs whose direct mutual fund plans the platform sells, according to a guidance note by SEBI issued on April 09, 2021
Paytm Money allows consumers and retail investors to compare the expense ratio of direct and regular plans of any mutual fund scheme and provides other services such as know-your-customer (KYC) processing, technology hosting, among others which are critical to enable investments. However, it does not charge advisory or any fees relating to the execution of such services, as per the SEBI rules around fees. Now, SEBI has clarified that Paytm cannot charge the AMCs any fees for the provision of these services.
“Paytm bears the cost that the AMC’s are bearing in case the said investments were directly routed through them. Digital mutual fund platforms can offer execution services for users on behalf of advisory clients without charging any commission or fees,” the regulator explained.
SEBI also added that mutual fund platforms are mandated to only provide advisory services after an investment advisory agreement is signed with the client, containing certain terms and conditions directed by SEBI.
“Mere online consent with a copy of the agreement emailed to the client’s inbox will not be sufficient,” the note added.
Launched in September 2018 as a mutual funds platform, Paytm Money is a SEBI registered investment advisor that sells mutual funds directly to consumers via a low-cost regular plan that eliminates the expense of distributor commissions. The company has a partnership with all 40 AMCs in India.
Online mutual fund investing has become a lucrative segment for major fintech players in the country. In December last year, SEBI relaxed the norms to allow fintech startups and other entities to enter the mutual fund business. Prior to this, the regulator mandated such firms to have at least five years of experience in the financial services business and demonstrate profitability for three years, while maintaining a net worth of INR 50 Cr.