The Securities and Exchange Board of India (Sebi) has come out with a consultation paper on the bond market ecosystem in India. The market regulator observed certain trends in the bond investment market, and has now come out with a list of proposals that aims to be beneficial to both the market and the market participants.
Here’s what Sebi has proposed in its consultation paper.
Mandatory stockbroker registration: Sebi has observed that bond platforms play the “role of facilitators, thus facilitating transactions by investors registered on their websites.”
Sebi has now proposed that “these bond platforms should register as stockbrokers (debt segment) with Sebi or be run by Sebi-registered brokers. Additionally, the stockbroker regulations will be applicable to these entities, which would govern their code of conduct and other aspects related to their operations and risk management”.
Only listed bonds: Sebi observed that “both listed and unlisted debt securities are being offered on the same webpage and/or under the same tab on the websites of these platforms. The listing status of the debt securities is being mentioned by the bond platforms,” the consultation paper said.
Sebi now wishes to modify the existing process by only allowing debt securities “offered for buy/ sale by the online bond platforms to be only listed debt securities,” as investors should be able “to discern and distinguish between the two,” the paper said.
Mandatory lock-in for six months in privately-placed securities: Sebi had analysed the market data of listed debt securities issued on private placement basis during FY 2021-22 offered for sale by few bond platforms and “observed that in a couple of instances, the entire issue was down sold to more than 200 investors within 15 days from the date of allotment.”
Incidentally, under Section 25 of the Companies Act, 2013, privately placed securities cannot be placed to more than 200 persons.
“Thus, if debt securities issued on a private placement basis are offered for sale by the bond platforms to more than 200 investors, it would violate the provision of the Companies Act, 2013,” Sebi said.
Sebi now wants to bring in a new proposal which says that “listed debt securities issued on private placement basis, offered for sale on bond platforms shall be locked-in for a period of six months from the date of allotment of such debt securities by the issuer.”
New bond transaction channel: Sebi is proposing a new way of transaction route on online bond platforms. Sebi hopes to route them through the trading platform of the debt segment of stock exchanges, since this will help in mitigating settlement risk associated with various online bond platforms, as in the case of stock exchanges, the settlement is guaranteed on a T+2 basis.
Sebi is also proposing another alternative route. Sebi has said that “transactions executed on the online bond platforms can be routed through Request for Quote (RFQ) platform of the stock exchanges, where the transactions will be cleared and settled on a Delivery Versus Payment (DVP-1) basis.”
Using exchange’s application protocol interface (API) as back-end technology: Sebi has said that API bond platforms can be made to integrate with the exchanges in much the same way the stock brokers build “their own front-end interface for facilitating placing of orders by their clients, and the transactions are executed on the Exchange trading platforms,”.
Sebi has said this will help the online bond platforms maintain their current front-end Web interface and also comply with the changes in the backend (stock exchange’s API). But in the front-end user interface, they will have to show the list of all available debt securities, their ratings, the risk associated and any other information as necessary.
Sebi wants the transactions to be routed only through an stock exchange platform, as that will provide a “robust risk management framework and surveillance mechanism; fair and transparent pricing; guaranteed settlement; exit opportunity to the investors; augment market making; and also provide a well-defined framework for redress of investor grievances.”
Sebi has said that the new proposals will be “beneficial to the market and market participants,” for a variety of reasons, including mandatory know-your-customer (KYC) registration, stability and fairness in transaction.
KYC: The standard KYC requirements will be applicable while registering clients on bond platforms.
Stability: The networth and deposit requirements prescribed for stock brokers will ensure that the bond platform has a sound and stable financial health, the paper said.
Fairness: The applicability of code of conduct mandated for stockbrokers will ensure fairness in their dealings with clients. “They will be subjected to regulatory inspection and oversight, providing more confidence to investors and hence, will have the potential to attract more investors,” said Sebi.
Ankit Gupta, founder, BondsIndia.com, a bond-buying platform, welcomed the move in a statement.
He said: “This is a welcome move, and it falls exactly in lines of the regulators’ focus towards developing a transparent, robust and well-developed bond market for retail participation. This comes at a time when there has been a lot of mushrooming in the retail bond platforms, and the investors could fall prey to mis-selling of bonds. There was a need to bring in transparency and ease with risk management protocols in place, and the regulators have ensured just that.”
Incidentally, Sebi has also asked the public to send in their suggestions on the matter till August 12, 2022. Investors can send their suggestions at pradeepr@sebi.gov.in ; nikhilc@sebi.gov.in ; and kirand@sebi.gov.in or by post to Pradeep Ramakrishnan, General Manager, Department of Debt & Hybrid Securities Securities and Exchange Board of India, SEBI Bhavan, C4-A, G-Block, Bandra Kurla Complex, Bandra (East), Mumbai – 400051.
