For the past four weeks, fin-techs, broker, distributors and thousands of investors using the BSE StAR mutual fund (MF) platform are a harried lot since they have been facing agonising delays in their MF transaction processing, redemptions and refunds. Some have pending refunds of extremely large amounts stuck for over 26 days. Orders placed through direct investment platforms like Coin (Zerodha), Groww and Kuvera as well as MF distributors are routed through the BSE StAR MF platform.
It may be recalled that the market regulator Securities and Exchange Board of India (SEBI) had mandated three major regulatory changes for MF investments with effect from 1 July 2022:
1) Pool account discontinuation;
2) Contact details verification ;
3) Two-factor authentication (2FA)
In a circular issued in October 2021, SEBI had prohibited the pooling of funds for MF transactions from 1st April. However, the deadline was later extended to 1st July in order to facilitate an efficient technology overhaul and its smooth transition to serve the growing investor needs after many complained of failing systematic investment plan (SIP) transactions. A pool account is a kind of electronic wallet facility provided by the brokers. It is essentially a bank account where the broker pools money from the individual investors to buy MF units in a particular scheme.
After implementation of the changed rules, brokers are no longer allowed to accumulate investors’ funds and then buy the MF units under a particular scheme. Money from an investor's account now goes directly to the fund house routed through the platform and via the clearing corporation. The final units are only allotted once a fund house receives the money.
The source of the money is also verified before allotment. In many cases, banks had failed to submit details of the investors and, in some cases, there was a mismatch between the name in the bank account and the one in the folio. Investors have to update their contact details as SEBI has mandated double-factor authentication using a one-time password (OTP).
This is part of the initiatives taken by SEBI and the Association of Mutual Funds of India (AMFI) to bring about regulatory changes for retail investors, and to improve transparency, reduce instances of fraud and safeguard retail investors’ investments.
BSE StAR platform (through which a large share of MF orders are routed) is facing major challenges post implementation of points (1) & (3) above. Major issues as reported by the market are:
1) They are not able to reconcile and provide credit MIS on time to asset management companies (AMCs)/registrar and transfer agents (RTAs),
2) The BSE StAR platform engaged multiple payment aggregators without adequate testing which has resulted in reconciliation failure,
3) Bank account validation (which they were not doing before 1 July 22 to verify third-party authentication) failed resulting in investors' bank accounts not being able to be verified on time,
4) 2FA for redemptions/switch out not working resulting in transactions not getting processed,
5) Refunds are not being reconciled and paid since the 1st July implementation.
These five issues have resulted in significant problems for investors, intermediaries and financial losses (NAV, redemption, switch-out). As a result, major intermediaries (specifically Zerodha, Groww, NJ, IIFL Wealth, etc) are facing issues in transaction processing since 1st July for no fault of their own. This has resulted in significant business loss and dissatisfaction among intermediaries including distributors (who are fast losing face) & retail investors. Multiple intermediaries, distributors and retail investors have been laying the blame squarely on the platform for a messed up implementation.
The platform has also issued a notice on 13th July stating that they have stopped new systematic transfer plan (STP)/ systematic withdrawal plan (SWP) registrations with no clear indication about when they would be resumed. This is happening even as there is a series of rate hikes happening and equity is seeing heightened volatility; hence, this is the time, most MF investors opt for STP/ SWP. This, in turn, has created a major impact in current market conditions on intermediaries, distributors (whose business has also been severely affected) and retail investors who are suffering great hardship. Moneylife had reached out to BSE while writing this story but we have not received any response. We will incorporate their response as and when we receive it.
It is understood that almost 75% of BSE StAR MF transactions (before 1 July 2022), came through broker pool account and, hence, that platform has faced numerous challenges at the operational and system level.
Twitter is full of posts highlighting how retail investors' money is stuck and they are feeling helpless.
A SEBI-registered investment adviser (IA) told Moneylife that “the OTP is now mandatory to process an online transaction. In case the OTP verification is not done due to mismatch in the mobile number on which the OTP is sent and the mobile number in the AMC records, the transaction will not be processed. Hence it is very important to update your mobile number now.”
Zerodha has now issued a notice to its customers stating that “Coin is only an order collection platform that collects orders on behalf of clients and places them on BSE Star MF for execution. The funds for all purchase orders are directly debited from the client’s bank account (mapped to your trading account) and credited to ICCL’s (Indian Clearing Corporation) bank account. The amount for all redemption orders is directly credited to your bank account (mapped to your trading account) by ICCL as per the settlement time of the respective scheme.”
Despite being at the receiving end from annoyed investors who have taken to blaming the brokers for no fault of theirs, the head-honcho of a large brokerage (which is also affected in the process) batted strongly in favour of the Exchange and its platform. He justified the problems saying that these are 'teething issues' which were bound to happen, given the humongous volume of transactions that BSE StAR MF platform handles on a daily basis which is way higher than that handled by the other platforms. He also explained that the transition between the two systems would have always been painful since the platform could not run two different systems simultaneously and they had to stop using the old system on 30th June and switch over to the new one on 1st July. However, several people from the industry have pointed out that the MF platform did not do adequate testing and got barely 10 days to test it (when ideally they should have tested it for at least two months). In fact, everyone we spoke to admitted that the Exchange was not adequately prepared to go live with the changes on 1st July. It is also learnt that in the last week of June, the Exchange had reportedly requested SEBI for a short extension to roll out the changes but SEBI is understood to have denied the request.
Industry experts also explained how globally none of the exchanges deals directly with investors. They deal with intermediaries. Hence, they point out that the Exchange (or any exchange) is not equipped to handle this. For instance, if an exchange has 500 brokers registered with it, these 500 brokers, in turn, will have 50,000 employees who can talk to and handle investors' grievances but the exchange itself will have lesser staff and will not be able to handle investors directly. This leads to the question whether the decision to discontinue pool accounts and route transactions directly through the exchange is flawed. But given that a few mischievous brokers/ fin-techs were misusing their clients’ funds as free float or even misusing to buy other assets, it is indeed a well-intentioned move by SEBI to safeguard investors’ interests. As one MF expert summed up, it appears to be a case of right intentions, wrong implementation.
All non-exchange transaction platforms as well as the National Stock Exchange’s Mutual Fund Service System (MFSS) have also implemented the regulatory changes and some glitches and issues have been reported there too but on a comparatively smaller scale. MF investors and distributors have raised multiple issues such as delayed confirmations about allotment of units, inability to pay using cheque, RTGS and NEFT, and SIP transaction failures, among others. But the situation is improving and this may become error-free in the long run but, for those unfortunate customers who are waiting for their refunds or redemptions, these are going to be a painful few weeks.