Co-authored with Lipika Vinjamuri and Navneeta Shankar, Associates at Finsec Law Advisors
The last few years have been marked by rapid digitalization and a significant increase in the usage of the internet, resulting in investors becoming more tech-savvy. Coupled with long periods of modest returns on traditional investment methods, this has led to a substantial increase in investors trading on online bond platforms. Presently, these platforms are not under the purview of any sectoral regulator. Owing to this, there exists ambiguity over several aspects of their functioning ranging from grievance redressal mechanism and KYC norms to recourse for investors in case of misrepresentation or infirmity in transactions.
In this regard, a consultation paper was floated by SEBI in July setting forth the salient features of such bond platforms and a proposed framework to regulate them. As evidenced from the empirical data provided in the consultation paper,debt securities offered on online bond platforms have become increasingly popular amongst non-institutional investors. Consequently, there is a need to regulate these platforms so as to ensure fair play and efficient functioning.
The paper proposes to restrict these bond platforms to only listed bonds. In India, listed securities can be either publicly issued or privately placed for a face value of INR 10 Lakhs or more. By virtue of this, a retail investor has limited options as they cannot practically access privately placed listed securities.This leaves retail investors with only two options of securities, viz. publicly placed listed securities and unlisted securities. From the data reflected in the paper, it can be inferred that public issues amount to around 2% of the debt market and so is tiny. Even within this, it is only the apex quality companies which would go for a public offer. Naturally, retail investors will not be able to access a bulk of the segment, amounting to nearly 98% of the debt market. In addition to the persistent problem of the ambit of ‘eligible securities’ being narrow, the high ticket size prescribed for privately placed bonds poses a concern that it will lead to inaccessibility of the market. In order to mitigate these issues, a plausible solution would be to expand the definition of ‘eligible securities’ to include unlisted securities as well.Furthermore, the minimum ticket size prescribed for privately placed bonds should be removed, or alternatively it could be reduced to INR 1,000, the same as public issue.
The proposed rules further suggest that bond platforms should register as stock-brokers with SEBI and be governed by the stock-broker regulations since they facilitate the purchase of debt securities. SEBI seeks to achieve investor confidence by treating online bond trading platforms as registered intermediaries. However, while some aspects of these platforms might be similar to that of stock-brokers, their activities are closer to that of a stock exchange, whereby they bring together buyers and sellers of securities. Since the broking regulations were never drafted with the intention to regulate online bond platforms, a more prudent solution would be to regulate these platforms under a separate framework by detailing their permitted manner of operations. Alternatively, if SEBI chooses to regulate these platforms under the broking framework, the best way to do so would be by putting in place relevant adjustments and exemptions catering to the characteristic features of these platforms to ensure efficient trading.
The paper also proposes a lock-in period of 6 months starting from the date of allotment, wherein a privately placed bond cannot be brought onto the platform.The underlying intention behind this was to ensure that these platforms do not violate the ‘deemed public issue’ norms under Companies Act, 2013. However, the paper further states that bond platforms are required to take license as astock broker and use the mechanism of stock exchange for their transactions. Itis contended that this restriction is not applicable on exchanges and hence should not be extended to bond platforms. With regard to the concern that the offer might be construed as a ‘deemed public issue’, it can be argued that once securities are issued, they are freely transferrable and only if the issuer itself is making offers can it be construed as a ‘deemed public issue’.Typically, the aim of the regulator is to provide a framework to regulate the transactions through bond trading platforms, however, in doing so, the regulations should not pose a risk of being rigid. Thus, in order to facilitate unreserved transactions on the bond platform, it is suggested that the 6 months lock-in period requirement be removed, or alternatively the same can be reduced to a period of 1 month in order to ensure that the said requirement is fair to the platforms.
The proposed rules, if implemented, would not only facilitate efficient trading,but also, at the same time, ensure that there are robust investor protection norms in place. Enhanced investor protection can be achieved by putting in place a diligence protection framework to verify that the right products are being made available to the retail investors. Defined measures such as a mandatory risk-o-meter that provides a graphical representation of the risks carried by a bond, along with an insurance cover providing some coverage in case of defaults on the platform can go a long way in significantly reducing the risks involved.Moreover, mandating disclosures, disclaimers, and awareness programs on the platforms will ensure that investors are informed about the risks and returns expected from the investments.
Presently,there is no certainty or uniformity in the way these platforms address investor grievances. In this regard, the consultation paper seeks to put in place a grievance redressal framework that will cater to the needs of investors by addressing their queries, resolving complaints and providing the Arbitration Mechanism for settlement of disputes. However, in doing so, SEBI must ensure that there are adequate mechanisms to address grievances arising from unlisted securities as well. While, these may or may not fall outside SEBI’s jurisdiction, creating a best practices framework would create a baseline of expectations from everyone as to minimum rules of conduct.
The proposed framework becomes increasingly relevant at a time when the Indian securities market has witnessed a surge in the number of online bond platforms.Given that these platforms are currently unregulated, the suggestions proposed in the consultation paper are welcome. That being said, regulations made in this respect should typically aim at easing transactions for both – the platforms and the investors. In a hypermetropic view, the market will function efficiently and will flourish only when comfortably regulated, in a way that all parties are able to access it easily and equally.
(This article was first published in Financial Express)