While India has certainly warmed up to equity culture, the lure of high-yield bonds on the other side of the spectrum has been an uncomfortable truth that stared at many for quite some time. Markets regulator SEBI has now taken decisive steps so that investors bond with the best. To curb the menace of mushrooming online bond platforms and preserve the sanctity of transactions executed on these platforms, SEBI has specified norms that will bring Online Bond Platform Providers (OBPPs) under its purview, thus ending the free hand that many enjoyed in the absence of regulatory oversight.

In the process, such platforms will now have to place more checks and balances, usher in higher transparency in operations, mitigation of payment and settlement risks and provide greater disclosures to investors as also have a robust grievance redressal mechanism. Let us take a detailed look.

Rise and rise of OBPPs

During the past few years, there has been a surge in the number of OBPPs. They typically offer debt securities obtained through subscriptions to public issues/private placements and through secondary market. The target buyers are non-institutional investors, including retail. This apart, some platforms also sell revenue-financing based or invoice discounting investments.

Most of OBPPs are fintechs or are backed by stockbrokers or SEBI-registered intermediaries. The number of users transacting through them has risen steadily. OBPPs’  deployment of attractive marketing initiatives and sleek user interfaces for their platform to appeal to younger investor target group have been a hit.

For instance, Wint Wealth claims 38,000+ people have invested via its platform and bonds worth over Rs 600 crore have been subscribed. GoldenPi claims over Rs 1,500 crore total transactions have been done and counts over 2.5 lakh registered users.

Stockbroker in debt segment

To regulate such online bond platforms, SEBI has directed entities operating or desirous of operating as OBPPs under regulation 51A of the SEBI NCS Regulations, 2021 to be a company incorporated in India. They must register as a stockbroker in the debt segment of the stock exchange(s). This step will ensure they have to comply with broker norms and are regulated, thus making your bond investments safer. This will also put in place better grievance redressal mechanism for investors.

To be registered as a stockbroker in debt segment, an OBPP will have to comply to many norms such as appointing a company secretary as compliance officer, appointing at least two qualified and experienced key managerial personnel, obtaining a SEBI Complaints Redress System (SCORES) authentication etc. These apart, there are requirements pertaining to technology, access & participation etc.

Such registered entities will be monitored, and the operations carried out by an OBPP will be closely scrutinised. Any failure to comply to rules shall make the platform liable for action.

Also, execution of debt security orders must be mandatorily routed and settled through the stock exchange mechanism.

Simple product basket

Next, the regulator has said that an entity acting as an OBPP now or previously must cease to offer products / services / securities on its platform other than listed debt securities and debt securities proposed to be listed through a public offering. Some platforms do market themselves as alternative investment portals and offer various type of options, apart from debt on the OBP.

Privately placed listed bonds come with a higher ticket size than publicly issued listed bonds. This step will ensure that only listed debt is bought by retail investors. Unlisted bonds are not as liquid as listed bonds, and hence are best avoided by investors.

Third-party seller norms

SEBI has specified that when OBPP entities allow third-party sellers of debt securities to use the platform to sell such securities, the entity before taking up an assignment has to enter into an agreement with sellers.

Such a written pact will have to clearly define the inter-se relationship and set out their mutual rights, liabilities and obligations relating to such assignments.

Also, OBPPs must verify the identity of its investors and sellers by requiring them to submit necessary documents.

These norms will go a long way in preserving the sanctity of transactions executed on these platforms, which operate on aggregator model like e-commerce sites. Heightened payment and settlement risks, when dealing with third-party sellers, are real and so clarity on such issues is key especially when retail investors are on the buyer’s side.       

The SEBI has also asked OBPPs to do risk profiling, comply to norms relating to issue of order receipt, deal sheet and quote receipt. Besides, OBPPs must issue alerts to investors and sellers, adhere to minimum disclosure requirements, conform with advertisement guidelines, set up comprehensive risk management, be prepared to manage exigencies and disclose any conflict of interest.

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