Online bond platforms have increased significantly over past 2 to 3 years, which sell debt securities to investors, particularly non-institutional investors. Some of these bond platforms seemingly operate in a manner similar to organized trading avenues like stock exchanges bringing together buyers and sellers for executing trades in debt securities. However, these bond platforms do not fall under any regulatory purview. This has given rise to need to guide and regulate these platforms to bring about inter alia, regulatory oversight, common standard practices and investor redressal mechanism etc.
Some of the issues observed with the online bond platforms are :-
1) Lack of regulatory oversight
At present, these platforms are not governed by any regulatory framework. The sanctity of transactions executed on these platforms especially by non-institutional investors is a cause of concern as there is no statutory obligation on these platforms to ensure completion of entire leg of the transaction including settlement.
2) Listed and Unlisted securities
Presently, it is observed that both listed and unlisted debt securities are being offered on the same webpage. There is a need to separate the two on the basis of listing status of security for ease of identification for the investors.
3) Absence of standards for Know Your Client (KYC) norms
Each of these platforms have their own KYC norms. It has also been observed that many of these platforms do not comply with the Prevention of Money Laundering Act, 2002 or SEBI KYC requirements.
4) Ambiguity in redressing investors grievances
It is not certain as to how investor grievances are handled by these platforms and each of the platform may have their own processes for the same.
5) Possibility of misrepresentation
A major concern also arises from the possibility of investors having a false sense that reporting of the transactions by the platforms to the Stock Exchanges would mean that the stock exchange investor protection framework is applicable while it is not.
6) Clearing and Settlement
On a cursory look at the details of the processes followed by the online bond platforms, inconsistencies in certain procedural norms were observed. The role of stock exchanges/clearing corporations also appeared to be bypassed in many instances.
In view of the above-mentioned issues observed with online bond platforms, the Securities and Exchange Board of India (SEBI) on July 21, 2022 has issued Consultation Paper on Online Bond Trading Platforms - Proposed Regulatory Framework.
The key points of the proposed regulatory framework are mentioned below:
1) Mandatory SEBI Stock-broker registration
Bond platforms play the role of facilitators, thereby facilitating transactions by investors on their websites. Therefore, it is proposed that these bond platforms should register as stock brokers (debt segment) with SEBI or be run by SEBI registered brokers. This will also enhance the confidence among the investors, particularly the non-institutional investors, as the platforms would be provided by SEBI regulated intermediaries.
2) Eligible Securities
The debt securities offered for buy/sale by the online bond platforms shall be only listed debt securities.
3) Proposed lock-in period for the Eligible Securities
It is proposed that listed debt securities issued on private placement basis offered for sale on bond platforms should be locked in for a period of 6 months from the date of allotment of such securities by the issuer.
4) Channelizing transactions through either of the following 2 (two) options –
a) Exchange Platform – Debt Segment – The transactions executed on the online bond platforms are to be routed through the trading platform of the debt segment of Exchanges. Routing their trades through the trading platform of the Exchanges will help in mitigating the settlement risk associated with these online bond platforms.
b) Request for Quote Platform – Alternatively, the transactions executed on the online bond platforms can be routed through the RFQ platform of the stock exchanges where the transactions will be cleared and settled on a Delivery versus payment (DVP-1) basis.
Benefits of the proposed regulatory framework:
a) Registration of the bond platforms as stock-brokers with SEBI will be beneficial to the market and market participants in the following manner:
i. The standard KYC requirements will be applicable while registering Clients on the bond platforms
ii. The net worth and deposit requirements prescribed for stock-brokers will ensure that the bond platform has a sound and stable financial health
b) The applicability of code of conduct mandated for stock-brokers will ensure fairness in their dealings with clients
c) They will be subjected to regulatory inspection and oversight, providing more confidence to investors, and hence will have the potential to attract more investors.
d) Routing of transactions through the trading platform of Exchanges will provide the following benefits:
i. Robust risk management framework and surveillance mechanism
ii. Fair and transparent pricing
iii. Guaranteed settlement
iv. Exit opportunity to the investors
v. Augment market making
vi. Well defined framework for redressal of investors grievances
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.
These suggestions from SEBI have 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.
Please find attached a copy of the Consultation Paper. Comments have been sought by SEBI from the public on the proposed regulatory framework till August 12.
This update has been contributed by Prashanth Sabeshan (Partner) and Swati Rawat (Senior Associate).
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