The Indian Securities Markets Infrastructure Leveraging Expert (SMILE) Task Force constituted by SEBI, has submitted its second report on ‘Infrastructure and Process Flows for Enhancing Distribution Reach in the Mutual Fund Industry’
Further to its first report with respect to the “Infrastructure and Process Flows for the Primary Market”, SMILE has presented its second report relating to the “Infrastructure and Process Flows for Enhancing Distribution Reach in the Mutual Fund Industry”. In the study, the Task force has identified four limiting factors, which could adversely affect the expansion of the mutual fund industry.
First, transaction cost constraints of setting up new collections centers in smaller towns as the existing investor base for mutual funds is highly skewed towards a modest number of cities.
Second, the complexities involved in applications collections in smaller cities, thereby adversely affecting a move to a post funds clearance NAV regulatory regime.
Third, the operational risks of expansion on the existing centralized processing model for registrars.
Fourth, the slowness of the inter-city payments system.
The SMILE Task Force has suggested two models for mutual funds transactions processing, one based on the depository network which has provided the bedrock for the recognition of ownership of capital market securities, and the other utilizing the distributor network. The SMILE task force has suggested the use of the depository model and the distributor model, or an adaptation utilizing the best features of both models for facilitating mutual fund transactions, as a possible alternative to the existing collection centre model.
As the depository system is wider in its reach and accessibility to investors than that of the mutual fund industry, it provides points of contact, which could be adapted for the infrastructure of the mutual fund industry.
The depository model is based on using not only the existing Depository Participant (DP) network, but also using the existing collection centre as limited purpose DPs, the point at which investors or distributors deposit application forms. Thus, the significant network of the depository system could be used to advantage, to eventually encompass the current collection centre infrastructure, which mutual funds now utilize.
While the existing collection centre-registrar model adopts centralized transactions capture and processing, the alternative DP-registrar model will provide for distributed transactions processing. Thus, electronic data capture (transcribed from the application form of the investor) will be the responsibility of DPs. Upon entry of data, information will be relayed by DPs to the registrars concerned, through the depository conduit. The registrars’ role will be to authorize the transactions based on the reconciliation between the data captured and the funds data received from the banks.