SEBI’s Proposed Regulatory Framework For Online Bond Platforms – Commodities/Derivatives/Stock Exchanges

INTRODUCTION

Issuance of listed debt securities in India is currently by way
of: (a) public issuance through the Stock Exchanges and
Depositories; and (b) private placements to an identified set of
mostly institutional investors. Over the last 3 financial years,
the Securities Exchange Board of India (SEBI) has observed that the
volume of private placements has far exceeded that of public
issuances. It has also noted that, within private placements, the
investor class has largely been restricted to institutional
investors. This has resulted in an increase in the number of online
bond platforms which facilitate investments in both listed and
unlisted debt securities by non-institutional investors. So far
these bond platforms were not under any regulatory purview.

On 21 July 2022, SEBI released a consultation paper on
‘Online Bond Trading Platforms – Proposed Regulatory
Framework’ (Consultation Paper), making the case for
the regulation of online bond trading platforms. In its assessment,
SEBI has also evaluated the market share of the current players in
online bond trading, some of which operate in a manner akin to
organized avenues for trading; bringing together buyers and sellers
to trade in debt securities.

SEBI’S RATIONALE FOR REGULATING ONLINE BOND
PLATFORMS

SEBI is looking to bring online bond platforms within the
regulatory fold to address issues arising out of: (a) lack of
regulatory oversight and accountability for the bond platform; (b)
absence of standards for know your client Know Your Customer (KYC)
norms; (c) ambiguity in redressing investor grievances; (d)
possibility of misrepresentation; (e) conflict of interest, product
offerings, information availability and possible mis-selling; (f)
concerns regarding deemed public issuances; (h) reporting of
trades; and (i) inconsistencies in clearing and settlement.

PROPOSED FRAMEWORK

An overview of proposed regulatory framework is set out
below:

• SEBI stock-broker registration: Online bond
  platforms play the role of facilitators, where they facilitate
  transactions by the registered investors on their platforms.
  Accordingly, SEBI has proposed that all online bond platforms must
  mandatorily register themselves as stockbrokers (in the debt
  segment) with SEBI or be run by SEBI registered brokers.




• Eligible securities: To mitigate a risk of a
  deemed public issue, where debt securities issued on private
  placement basis are down sold by the bond platforms to a large
  number of investors (i.e., more than 200 persons), SEBI has
  proposed that online bond platforms must offer only listed debt
  securities for purchase / sale to their registered investors.




• Lock-in period: A lock-in period of 6 months
  from the allotment date of the debt securities is
  proposed to address the issue of a deemed public
  issue.




• Channelizing transactions through specified
  platforms: SEBI has proposed that the transactions
  executed on the online bond platforms can either be routed through
  the trading platform of the debt segment of the
  exchanges, or through the Request for Quote Platform (RFQ) of the
  stock exchanges where the transactions will be cleared and settled
  on a Delivery Versus Payment (DVP-1) basis (in terms of the
  settlement requirements therein). It has also been clarified that
  the bond platforms can continue to maintain their front-end or
  their present web interface (displaying the available list of debt
  securities, ratings, associated risks, among others).

Comment:

The proposed regulatory framework is an anticipated outcome of
recent meetings of SEBI’s Corporate Bonds &
Securitization Advisory Committee (CoBoSAC) around the issues
regarding bond platforms. CoBoSAC had observed that there is a need
to govern the operations of online bond platforms
to ensure enhanced regulatory oversight and governance. The
committee had concluded that there will be multiple benefits of
regulation of bond platforms as stockbrokers under SEBI
regulations, such as:

• applicability of standard KYC requirements at the time of
  onboarding clients on bond platforms;




• eligibility norms on net worth and deposit requirements akin to
  those prescribed for stockbrokers will ensure stable financial
  health of bond platforms;




• the applicability of code of conduct mandated for stockbrokers
  will ensure fairness in their dealings with clients;




• regulatory inspection and oversight would ensure appropriate
  checks and balances towards creating safe and transparent
  investment platforms for investors.

Further, routing of transactions through trading platform of
exchanges will ensure: (a) robust risk management framework and
surveillance mechanism; (b) fair and transparent pricing; (c)
guaranteed settlement; (d) exit opportunity to the investors; and
(e) augment market making.

This framework will be instrumental in the development of the
secondary market for debt securities, where the market participants
would adopt investor-centric business models and would be under
much-needed regulatory oversight. That said, excluding unlisted
debt securities from the purview of online bond trading platforms
could potentially impact the secondary market for sale of
bonds.

The content of this document do not necessarily reflect the
views/position of Khaitan & Co but remain solely those of the
author(s). For any further queries or follow up please contact
Khaitan & Co at legalalerts@khaitanco.com

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