In a move that could considerably widen the distribution network for mutual funds, Securities and Exchange Board of India (SEBI) on Friday allowed registered stockbrokers to transact mutual fund units on behalf of their clients through the stock exchange mechanism.

The infrastructure that already exists for the secondary market transaction through the stock exchanges with its reach over 1,500 towns and cities, through over two lakh stock exchange terminals can be used for facilitating transactions in mutual fund schemes, the SEBI circular said.

Stockbrokers will be eligible to be considered as official points of acceptance, the circular said. These stockbrokers need to pass AMFIs (Association of Mutual Funds in India) certification examination, and become empanelled distributors.

Every mutual fund has to disclose the locations of its official points of acceptance in its offer documents and Web sites.

Selling through the stock exchange mechanism basically means an additional order routing system for buying or selling mutual fund schemes; there is no price discovery, said a senior official at a transfer agents office.

End-users can use the convenience of their neighbouring brokers office for their mutual fund transactions, said Mayank Shah, CEO of Anagram Stock broking.

Whether brokers can charge a fee for the service or not is unclear. But Shah felt a fee structure would evolve once the system is in place.

This issue must be seen in the light of SEBI abolishing the entry load on mutual fund investments for distributors, starting August 1. This affected distributor income as well as inflows into equity schemes.

Currently investors roughly pay 1.25% as commission to distributors; 0.75% is upfront commission and the rest in the form of trail commission (when an investor remains invested in his fund).

Once the broker starts acting as a distributor, there is an issue about what commission he might ask for and whether the client would be ready to pay that or not, said a broker.

The SEBI circular on Friday also said that investors can hold units of mutual fund schemes in dematerialised form, and that the demat statement given by the depository participants would be deemed adequate compliance with SEBI norms.

Further, the stock exchanges should provide for an investor grievance handling mechanism to handle disputes between brokers and their clients. The time-stamping for transactions would be in the form of a confirmation slip issued through the stock exchange mechanism. The markets regulator has asked the stock exchanges to provide detailed operating guidelines for facilitating transaction in mutual funds on their platform by their member-brokers.