Regulation Of Online Bond Platform

Key takeaways

• On November 11, SEBI unveiled the rules governing online bond marketplaces that sell listed debt instruments.
• The Securities and Exchange Board of India (SEBI)'s regulation on the online bond platform may aid in the growth of the fixed-income market and boost investor trust.
• The regulations are crucial in establishing trust among individual investors when it comes to buying bonds through internet platforms.

The Indian equity markets have been attracting more retail investors than ever before. Retail investors poured money into everything from blue-chip to penny stocks during the pandemic as Nifty and Sensex soared to reach new highs. However, another area of the capital markets, corporate bonds, has also experienced extraordinary growth over this time.

The corporate bond market in India has been comparatively undeveloped. Bonds may be privately issued through the Electronic Book Provider Platform or may be openly issued through stock exchanges. In India, institutional investors and private placements account for nearly all bond issuances. Retail investor involvement in the primary and secondary bond markets was minimal until recently. The tide is changing, though, with the introduction of online bond trading platforms. Since 2020, these platforms have seen a 24x rise in users and a 6x increase in the value of retail trades.

SEBI role

After carefully observing this pattern, SEBI has made the decision to take action before the genie exits the bottle. Four important changes are suggested in SEBI's most recent consultation document on the regulation of online bond trading platforms. These platforms must first register as debt-related stockbrokers. Second, stock exchanges must be used as a conduit for bond trading. Third, public offers of bonds issued by unlisted corporations are prohibited. Fourth, in the event of privately placed listed bonds, a lock-in period of 6 months must be observed from the date of allocation. Because reselling these bonds to more than 200 buyers in a short period of time may qualify as a considered public offering.

For ordinary investors seeking larger returns than fixed deposits but lower risk than stocks, bonds offer a medium ground. They might be the ideal place for investors to park their money as the world fights stagflation. To ensure both investor protection and a liquid bond market, SEBI will need to strike a delicate balance.

Regulations

On November 11, SEBI unveiled the rules governing online bond marketplaces that sell listed debt instruments. The Securities and Exchange Board of India (Stock Brokers) Regulations, 1992 state that no person shall provide an online bond platform without a certificate of registration as a stock broker. Such individuals must abide by the registration criteria and any additional rules that the Board may from time to time impose.

Any person that runs or offers an online bond platform is referred to as a platform provider. According to a SEBI notification, an online bond platform is any electronic system other than a recognised stock exchange or an electronic book provider platform where debt securities that are listed or intended to be listed are offered and traded.

On September 30, SEBI made the decision to establish a regulatory framework to assist companies that operate online bond marketplaces and offer listed debt instruments.

A framework has been prescribed for entities operating/ desirous of operating as OBPPs under regulation 51A of the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (‘NCS Regulations’):

• Such entity shall be a company incorporated in India and register itself as a stock broker in the debt segment of the Stock Exchange (s);
• An entity acting as an OBPP on or prior to this circular coming into force, shall cease to offer products or services or securities on its OBP other than Listed Debt Securities and Debt securities proposed to be listed through a public offer.
• Such OBPP shall divest itself of offerings of other products or services or securities.
• Such entities shall comply with Regulation 51A of NCS Regulation i.e., compulsory

What happens to unregistered platforms?

According to the capital market regulator, an online bond platform provider who did not have a certificate of registration on or before the date that the regulations went into effect may continue to do so for a period of three months after that date or for any other time period that the Board may specify, or if it has submitted an application for a certificate of registration within that time period, until the Board decides on that application.

We anticipate the most of them will be registered and continue their operations because the retail sector is still in its infancy and the younger generation of investors is increasingly making investments on their own rather than relying on pooled assets.

Dealers stated that it may be challenging going forward and take some time for organisations dealing with unlisted papers and off-market settlements to realign themselves to the new regulations.

Additionally, this will lead to greater democratization between institutional and non-institutional fixed income market. The rules were crucial in establishing trust among individual investors when it comes to buying bonds through internet platforms.

Implications of regulations

According to bond traders, the Securities and Exchange Board of India (SEBI)'s rules on the online bond platform may aid in the growth of the fixed-income market and boost investor trust. Investors' questions about how their investments are managed via online bond platforms will be answered thanks to these restrictions.

Retail investors will become more confident as a result, and the growth of the fixed-income market will be accelerated. Since there are no entrance requirements in an unregulated market, investors are left in the dark regarding the legitimacy of the counterparty they are dealing with, which causes pandemonium.

The new regulations make it possible for these entities to be regulated and assuage investors' concerns about how their investments are managed.

Conclusion

Industry stakeholders have praised SEBI's efforts to encourage the bond market's steady expansion. Some of the plans, meanwhile, have sparked questions. First off, only a tiny fraction of bonds will be accessible to ordinary investors due to the ban on unlisted bonds and the 6-month lock-in period for privately placed listed bonds. Second, the ban on providing unlisted bonds can give rise to yet another underground market where ineligible bonds can be traded. Allowing unlisted bonds to be sold through regulated channels with proper risk disclosures may be a preferable alternative. Third, to make trades possible, several bond trading platforms collaborate with clearing companies and depositories.

The bonds are sent to the investors' demat accounts when the investors' payments have been deposited in the clearing corporation's bank account. The payment and settlement method in this scenario, where the platform doesn't handle investor cash, might not need to be adjusted. Fourth, the large lot size for privately offered bonds is set by SEBI regulations at Rs. 10 lakh. But it's not clear if this rule applies to bonds that aren't mentioned. Additionally, certain platforms enable small-lot purchases of unlisted bonds by ordinary investors. However, the consultation paper doesn't offer any clarification on this matter.