Regulating Online Bond Platforms: One Step Forward or Two Steps Back?
The authors are Sangita Sharma and Prachya J. Bhattacharya, fourth and second year students, respectively, at Gujarat National Law University, Gandhinagar.
The Securities and Exchange Board of India (‘SEBI’), noticing the significant rise in unregulated Online Bond Platforms (‘OBPs’) has taken cognizance of regulating it. On 21 July 2022, it released a consultation paper proposing a regulatory framework for Online Bond Trading Platforms. Subsequently, SEBI published a Circular on Registration and Regulatory Framework for Online Bond Platform Providers (‘OBPPs’) on November 14, 2022 (‘Circular’). The Circular after incorporating a few public comments modified the regulatory framework from what was suggested in the consultation paper.
The regulatory framework was released to ensure a secure and fair market for trading bonds. The framework also seeks to provide investors with greater access to the bond market by enhancing investor protection and minimizing potential risks associated with online trading. This article highlights several irregularities in the framework to argue that SEBI’s efforts to achieve the stated objectives by enacting this framework have not been successful.
Ambiguity in the Definition
Regulation 51A of the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (‘NCS Regulations’) was amended in November 09, 2022 to provide for registration of OBPPs. ‘Online Bond Platform’ is defined under the explanation to Regulation 51A. It means “any electronic system, other than a recognised stock exchange or an electronic book provider platform, on which the debt securities which are listed or proposed to be listed, are offered and transacted.” In relation to OBPs, an ‘Online Bond Platform Provider’ is a person operating or providing an online bond platform.
The definition states that any platform (other than what is specified) which offers or transacts in debt securities, either listed or to-be-listed, is an OBP. According to the definition, once the securities are listed or proposed to-be-listed, they can be traded on the platform regardless of whether they were originally issued through a private placement or public offering. This clearly indicates that OBPs are those platforms that are recognized by SEBI to deal in listed or to-be listed debt securities. SEBI’s circular primarily aimed to regulate the debt securities traded by Online Bond Platforms. However, it appears that SEBI has adopted a very narrow definition of OBPs. Rather than regulating OBPPs that provides all kinds of securities, ended up merely recognizing platforms that transact in listed or to-be-listed debt securities in the secondary market.
The current existing platforms offer listed, to-be-listed, or/and unlisted debt securities. Now, an entity acting as an OBPP will not be allowed to offer listed or to-be-listed securities for trading on their platform unless they obtain registration within three months and additional time of fifteen days from the date of the amended NCS Regulations coming into force. The Circular states that an OBPP cannot offer any other product or services or securities other than listed, to-be-listed debt securities. The language of the definition and the circular reflects that the regulators have excluded platforms facilitating transactions involving only unlisted debt securities from the purview of the regulatory framework developed by SEBI. This is creating some ambiguity regarding whether the OBPPs while managing an OBP, can also provide unlisted securities on any other platform. The legal consequence of offering unlisted debt securities on OBPs is that OBPPs will be subjected to a penalty, however, the settlement of unlisted debt securities through any other route by OBPPs still remains in a quandary. Thus, it is confounding to the existing OBPPs on whether they are allowed to deal with unlisted debt securities (which could be a valuable source of business) via any other trade route than OBP.
Curtailing Opportunities and Paving the way for an Unregulated Debt Securities Market
The framework allows only listed debt securities or to-be-listed debt securities to be offered on these platforms because there are mandatory requirements to be followed by listed debt securities or to-be-listed debt securities which will help the investors to make informed decisions. Also, SEBI does not want investors to be confused with the notion that unlisted debt securities are also regulated by the board as this confusion might arise because listed or to-be-listed and unlisted debt securities will be offered on the same platform.
SEBI as a regulator should not rely on this reason for absolutely prohibiting unlisted debt securities to be offered on these platforms, when an alternative approach is available. OBPPs could be mandated to disclose and highlight the difference between listed and unlisted debt securities.
The blanket ban on the transaction of unlisted debt securities is limiting the OBPPs business and public access to such opportunities of investment. The amount raised by companies through publicly issued listed bonds is a meagre 2 per cent of the total ₹6 lakh crore issued corporate bonds. The private placement covers more than 98% of the market, which is now being made inaccessible to the public at a time when there has been a huge increase in the number of retail investors on these platforms.
SEBI’s concern that many non-institutional investors investing through unregulated platforms raise questions of market integrity and investor protection is valid. However, major investors are non-institutional investors investing predominantly in unlisted debt securities. Therefore, SEBI’s action of limiting the kinds of securities to be offered in OBPs defeats the purpose of regulating this market.
SEBI, rather than limiting the platform to trading in listed securities should have recognized platforms that are trading in all kinds of debt securities, including unlisted debt securities as well. As unlisted debt securities are more commonly offered in such platforms, by allowing offerings in unlisted debt securities, these platforms will encourage retail participation. SEBI rather than prohibiting should focus on regulating trading in unlisted debt securities through regulated channels with adequate risk disclosures to include them under the purview of the regulation and safeguard the retail investors. SEBI might introduce more securities in a gradual manner as the framework matures, therefore the welcome step could be to allow these platforms to provide access to Accredited Investors for unlisted debt securities. This is suggested in view of the fact that there is an existing regulation for Accredited Investors in India, so the apprehension concerning investment without due diligence stands resolved.
Further, SEBI by not including the offering of unlisted debt securities is paving the way for an unregulated market. This might create a grey market for trading this kind of security, which may be antithetical to the purpose of regulating this market.
Misjudgment of the Functionality of the OBPs
The primary function of the OBPPs is to provide a platform for investors to discover, compare, and invest in debt securities whereas a stock broker acts as an agent of the investor, who holds, executes and sells their funds on their behalf. The functions of the OBPPs are similar to that of the stock exchanges whereas they are to be registered as a stock broker. It is not only the function of OBPPs that differ from stock brokers but also their revenue model and compliance formalities. SEBI in its board meeting for the introduction of a regulatory framework for Online Bond Platforms has acknowledged this striking difference.
The requirement for OBPs to be registered as stock brokers creates confusion about whether other legislations will be applicable to them or not and sometimes imposes onerous compliances on them. An illustrative instance of this matter pertains to asking for SCORES (SEBI Complaints Redress System) authentication by OBPs which in fact is exempted for stock brokers.
SCORES is an online platform that helps investors to lodge their complaints, pertaining to the securities market with SEBI against listed companies or/and SEBI registered intermediaries. All registered intermediaries and listed companies except stock brokers, sub-brokers, and depository participants are mandated to take SCORES authentication. The creation of a SCORES User ID and password has been automated for all new SEBI-registered intermediaries. Under the NCS Regulation, an OBPP has to register as a stock broker and has to obtain SCORES authentication. This is creating some obscurity as to how an OBPP should obtain the automatic ID and password for generating SCORES when they are being registered as an entity exempt from such authentication.
All in all, OBPPs are the basis for the development of efficient and robust bond markets. Therefore, to enhance OBPs functionality and long-term sustainability, SEBI ought to provide a long-term solution and must release a framework for registering OBPPs as a separate class of intermediaries.
SEBI’s action of regulating the OBPs represents a progressive step towards fostering greater inclusivity in the bond market by expanding investment opportunities to small investors who may not have had access to such investment opportunities in the past. However, the framework has several irregularities that make it unsuccessful in achieving its objectives. SEBI is responsible for regulating and developing the securities market in India while also protecting the interests of investors in the market; therefore, it should bring regulatory changes that strengthen the market’s ecosystem. The existing framework does not correspond to the increasing affinity of the investors in the bond market, instead goes in the direction of divesting the interest of the investors.Therefore, SEBI must revisit the regulation and create a comprehensive framework that strikes a balance between investor protection and innovation brought by OBPs in the online trading market to broaden access and deepen the corporate bond market.