SEBI has proposed to regulate online bond platforms that have mushroomed over the past two-three years, which sell debt securities to investors, particularly non-institutional investors. In India, most such bond platforms are fintech companies or are backed by brokers.

“The sanctity of transactions executed on these platforms, especially by non-institutional investors may be a cause of concern as there is no statutory obligation on these platforms to ensure completion of the entire leg of the transaction including settlement. Moreover, in case of any infirmity in any transaction on the platforms, investors may not have any recourse,” SEBI said in a consultation paper.

Non-institutional trading rises

“There has been a significant increase in the number of users registered on the bond platforms. There has been 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. The majority of investors transacting on the bond platforms are non-institutional investors,” SEBI said.

While these bond platforms do tap a group of investors, particularly non-institutional investors, they do not come under any regulatory purview — 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, regulatory oversight, common standard practices, and investor redress mechanism.

Lock-in mooted

To address these issues, SEBI proposed that these bond platforms should register as stock-brokers (debt segment) with SEBI or be run by SEBI-registered brokers and should offer only listed securities. Besides, it has also proposed that listed debt securities issued on private-placement basis, offered for sale on bond platforms should have locked in for six months from the date of allotment.

All the transactions must be routed through the trading platform of the debt segment or through RFQ platform of the exchanges where the transactions will be cleared and settled on a Delivery Versus Payment (DVP-1) basis, SEBI further said.

Issue of debt securities

Currently, debt securities can be issued either through a public issuance or on a private-placement basis. A public issue of debt securities is made through the online system of the stock exchanges and depositories. For privately-placed debt securities, issue of debt securities have to be mandatorily made through the Electronic Book Provider Platform (EBP Platform). While non-QIB investors, authorised by the issuer, are eligible for bidding/participating on the EBP platform, there is no participation from non-institutional investors, as hardly any market participant (including non-institutional investors) other than QIBs invest through the EBP platforms. This explains why a number of online bond platforms have mushroomed over the past two-three years.

Persistently low-interest rates in recent years have reduced the interest of the investors in fixed deposits. Additionally, with the rise of digitalisation and increasing penetration of the internet, there has been a consequential growth in the technological temper of investors, making them more tech-savvy. Further, the offering of debt securities by online bond platforms provides an attractive and alternative investment option to non-institutional investors.

The market regulator said that there is a concern that down-selling of the debt securities issued on private-placement basis by bond platforms to a large number of investors may possess the characteristics of a deemed public issue (DPI).

To understand this concern better, data of listed debt securities issued on private-placement basis during FY 2021-22 subscribed by and further offered for sale by few bond platforms was analysed, wherein it was observed that in a couple of instances, the entire issue was down-sold to more than 200 investors within 15 days from the date of allotment.