The Securities and Exchange Board of India (SEBI) has proposed to bring online bond platforms that are selling listed debt securities under its regulatory framework.
Currently, debt securities can be issued either through a public issuance or on private placement basis. A public issue of debt securities is made through the online system of the stock exchange and depositories.
For privately placed debt securities, it is mandatory that they be made through electronic book provider (EBP) platform, for issuers who are in existence for three years and more and where the issue size is of Rs100 crore or more. SEBI said data showed that a substantial number of issuances of debt securities is through private placement mode.
While non-QIB (qualified institutional buyers) investors authorised by the issuer are eligible for bidding on the EBP platform, there is no participation from non-institutional or retail investors as hardly any market participant other than QIBs invests through the EBP platforms.
“This perhaps explains why a number of online bond platforms have mushroomed over the past two to three years, which sell debt securities to investors, particularly non- institutional investors. Some of these platforms seemingly operate in a manner similar to organized avenues for trading a’la market infrastructure institutions, especially stock exchanges, bringing together buyers and sellers for executing trades in debt securities,” SEBI said in a discussion paper released late on Thursday evening.
“While these bond platforms do tap a group of investors, particularly non-institutional investors to invest in bonds, they do not come under any regulatory purview i.e. the platform providers are not registered with any regulator. This has given rise to a need to guide and regulate these platforms in order to bring about, inter-alia, regulatory oversight, common standard practices, investor redress mechanism,” the market regulator said.
In India, most of such bond platforms such as GoldenPi, BondsIndia, Harmoney, Altifi, Wintwealth,Bondskart, Indiabonds
are fin-tech companies or are backed by brokers. The majority of the investors registered on these platforms are non-institutional investors. SEBI said data showed that there has been a significant increase in the number of users registered on the bond platforms besides a noticeable increase in the volume of trades undertaken on the bond platform as well as in the number of users who have transacted on the bond platform.
This will also enhance confidence among investors, particularly non-institutional investors, as the platforms would be provided by SEBI-regulated intermediaries.
Additionally, the stock broker regulations will be applicable to these entities which would govern their code of conduct and other aspects related to their operations and risk management.
"The debt securities offered for buy/ sale by the online bond platforms shall be only listed debt securities," the market watchdog proposed.
It has been proposed that listed debt securities issued on a private placement basis, offered for sale on bond platforms, should be locked in for a period of six months from the date of allotment of such debt securities by the issuer. "It was observed that there is an imperative need to govern the operations of these online bond platforms, keeping in mind the core objective of facilitation of efficient trading and robust investor protection norms for investors, particularly non-institutional investors," SEBI said.
The transactions executed on the online bond platforms should be routed through the trading platform of the debt segment of exchanges or through the RFQ (request for quote) platform of the stock exchanges, where the transactions will be cleared and settled on a delivery versus payment (DVP-1) basis. Routing their trades through the trading platform of exchanges will help in mitigating settlement risk associated with these online bond platforms as the settlement is guaranteed on a T+2 (trading plus two) basis.
In addition, it will provide an exit opportunity to the investors and a well-defined framework for redressal of investor grievances. According to the regulator, registration of the bond platforms as stock brokers under SEBI rules will be beneficial to the market and market participants, as the standard know-your-customer (KYC) requirements will be applicable while registering clients on bond platforms.
In addition, the net worth and deposit requirements prescribed for stock brokers will ensure that the bond platform has sound and stable financial health and the applicability of the code of conduct mandated for stock brokers will ensure fairness in their dealings with clients. They will be subjected to regulatory inspection and oversight, providing more confidence to investors and, hence, will have the potential to attract more investors.
The regulator has sought comments from the public on the proposal till 12th August. The proposed regulatory framework would attempt to ensure retention of the business potential and opportunities for the bond platforms and efficient offering of services to non-institutional investors. The suggestions come at a time when there has been a significant increase in the volume of trades undertaken on the bond platform as well as in the number of users who have transacted on the bond platform.