Background:

On July 21, 2022, the Securities and Exchange Board of India (“SEBI”) issued a consultation paper for a  regulatory framework for online bond trading platforms in India. At the outset, SEBI observed that such bond platforms, which are mostly fintech companies or are backed by brokers, sell debt securities to investors (particularly non-institutional investors) whilst operating in a manner similar to market infrastructure institutions, especially stock exchanges, bringing together buyers and sellers for executing the said trading, without coming under any regulatory purview. SEBI observed that as of January 31, 2022, there are at least 9 (nine) such trading platforms in India with over 1,00,000 (one lac) registered users engaging in trading activities on them. Probing further, SEBI noted that the majority of the investors registered on such platforms are non-institutional investors and over the last 3 (three) financial years from 2019-2020 to 2021-2022, there has been a significant increase in the volume of trade by non-institutional investors on such bond platforms from nil to Rs. 120.54 crores. Thus, the rationale behind this consultation paper was to bring the increasing volume of trade on such platforms under the ambit of a SEBI-led regulatory framework.

Issues concerning the online bond platform:

The major regulatory concerns raised by SEBI as regards to the functioning of the online bond platforms were listed as follows:

1. Lack of regulatory oversight

All transactions executed on these platforms, especially by non-institutional investors, are not governed by any regulatory framework and lack of statutory obligations might result in entire leg of the transaction not been completed, including settlement, leaving limited options for recourses to the investors.

2. Listed and unlisted securities offered together:

Both listed as well as unlisted debt securities are being offered on the same webpage of the said platforms, without any distinction offered between the two investors. Although the listing status is mentioned by the said platforms, SEBI was the opinion the present template followed by the said platforms compels the investor to be discerning in order to distinguish between the two types of securities and stated that there was a need to separate the two.

3. Absence of KYC norms:

Although each platform has its own KYC norms, SEBI in its consultation paper observed that the platforms do not abide by the Prevention of Money Laundering Act, 2002 guidelines or SEBI KYC requirements as envisioned under SEBI KYC (Know Your Client) Registration Agency Regulations, 2011.

4. Ambiguity in redressing investor grievances:

An Investor Services Cell is absent, that is applicable to all stock exchanges, which is involved in handling all investor related grievances for trades executed through all such regulated platforms. This leaves the investors without any established redressal mechanism to rely on, for any grievances arising out of any trade executed through the said platforms.

5. Possibility of misrepresentation:

There is a possibility of investors having a false sense that reporting of the transactions by the platforms to stock exchanges would mean that the stock exchange investor protection framework is applicable and that the exchange will address any investor grievances arising from these transactions.

6. Conflict of interest and possible mis-selling:

Lack of any regulatory framework could lead to the possibility of mis-selling of offerings by the online bond trading platforms due to a lack of appropriate product disclosures or the said platform’s involvement with issuers by way of cross holdings/management linkages.

7. Concerns regarding Deemed Public Issue (“DPI”)

Here is a possibility that down selling of debt securities issued on a private placement basis to an increasingly growing number of investors may possess the same characteristics of a DPI if the same is left unchecked and not brought under any regulatory framework.

8. Reporting of trades

As per the SEBI Operational Circular dated August 10, 2021, with reference number SEBI/HO/DDHS/P/CIR/2021/613, all persons trading in debt securities are required to report transactions to the trade reporting platform and settle such transactions through Clearing Corporations of the stock exchanges. Bringing online bond platforms under the regulatory purview as established by the above circular, will ensure compliance of the said platforms with the aforesaid provisions.

SEBI’s proposed regulatory framework

1. Mandatory SEBI Stock-Broker registration

Online bond platforms should register as stockbrokers (debt segment) with SEBI or be run by SEBI registered brokers, with the SEBI (Stock Brokers) Regulations, 1992 governing the said platforms.

2. Eligible securities

Debt securities offered by the online bond platforms should only be listed securities.

3. Proposed lock-in period for the eligible securities

Listed debt securities issued on a private placement basis, offered for sale on bond platforms should be locked-in for a period of 6 (six) months from the date of allotment of such debt securities by the issuer.

4. Execution of transactions

Transactions executed on online platforms should be routed through the trading platform of the debt segment of stock exchanges, which will enable mitigating settlement risk associated with these online bond platforms. Further, such transactions could also be routed through the Request for Quote Platform of the stock exchanges, where such transactions will be cleared and settled on a delivery versus payment basis.

Please find a copy of the consultation paper, here.

This update has been contributed by Adity Chaudhury (Partner) and Srijoy Deb (Associate).

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