SEBI’s regulatory framework for Online Bond platforms
Pradeep Ramakrishnan
General Manager, Department of Debt and Hybrid Securities, SEBI | Contact: pradeepr@sebi.gov.in, eboard@icai.in
“In the recent years, the interest rate scenario, more so due to the COVID pandemic, has been one that has been fluctuating with low rates resulting in lower returns on investment avenues like fixed deposits. The other options of big ticket investments are real estate and gold. In this setting, corporate bonds seem to be a reasonable fit as they are instruments which can generate higher returns with a reasonably lower risk compared to equities. Additionally, fixed income brokers who have been engaging with retail investors for quite some time with respect to corporate bonds fairly acknowledge this requirement.”
Technology as a Disruptive Force
To fill a gap, there is generally a disruptive force, particularly a technological one. Similarly, the last two/three years have seen the emergence of many online platforms, generally stock broker driven. These platforms were not using the stock exchange platforms for price discovery but some prefer using stock exchange platforms for reporting and settlement, while creating a parallel infrastructure for rest of the processes viz. investor registration, Know Your Client (KYC) verification, availability of bonds, deal execution, etc. Thus, the opportunity for overall bond market development for retail investors using infrastructure of stock exchanges, which is governed by SEBI’s regulatory framework arose.
Modus Operandi & Business Models
- Fintech Promoters & Backing: Most of these platforms are managed by Fintech companies with promoters who are group of individuals. Some of these companies mention about having backing of top investors of India and some of the companies also mention about having partnerships with leading brokers and financial institutions including large bond institutions as suppliers.
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Two Primary Operating Models: Broadly, there are two types of business models which are being used by these platform providers:
- Fee-Based Platform Provider: In one model, they only play the role of platform provider where they empanel brokers who provide inventory on the platform and platform provider charges fee for offering platform and any other services.
- Principal Proprietary Model: In the other model, platform provider himself procures bonds either from primary or secondary market and then further sell to participants by adding spread/ margin on the price of the bond. This spread/ margin on the price of the bond may provide additional incentivization to the firm.
- Aggregators: Some platforms are aggregators, allowing various sellers with some conditions to sell bonds on their platform. They earn through charging fee to sellers for using their platform and services. Some others act as aggregators showing the inventory of other sellers which can be viewed/ selected by buyers.
- Spread / Margin Earnings: Some of them had their own inventory and were earning through spread/ margin on the price of the bonds.
- Surge in Demat Accounts: The pandemic resulted in a number of people opening demat accounts. Presently there are 10 crore plus demat accounts in the country (nearly 108 million demat accounts recorded by December 2022).
📜 Type of Bonds Offered Pre-Regulation
- Most of the platforms offered both listed and unlisted public/ privately placed bonds across ratings.
- Some of the platforms also offered Sovereign Gold Bonds (SGBs) and Debt ETFs. Some offered mutual funds and Unit Linked Insurance Plans (ULIPs) also to go with bonds.
🌐 Internet Penetration & Digitalization
With the rise of digitalization and increasing penetration of the internet, there has been a consequential growth in the technological temper of investors, making them more tech-savvy. Offering of debt securities by online bond platforms provides an attractive and alternative investment option to non-institutional investors. Bond platforms enable easy access to non-institutional investors as they provide an interface similar to that of online shopping websites.
Issues Concerning Unregulated Bond Platforms
Prior to SEBI’s intervention, the rapid rise of unmonitored online bond portals posed several severe systemic and investor-protection risks:
1. Absence of Regulatory Framework
The platforms were not governed by any regulatory framework. Thus, investors stood to lose in case of any infirmity in any transaction on the platforms.
2. Listed vs. Unlisted Opacity
Both listed and unlisted securities were offered and an investor had to be really discerning to distinguish between the two risk profiles.
3. Non-Compliant KYC Norms
Each platform had its own KYC norms, some not aligning with the Prevention of Money Laundering Act, 2002 (PMLA) guidelines or SEBI KYC requirements.
4. Grievance Redressal Gaps
There were serious concerns as to how investor complaints and grievances were being handled without regulatory escalation paths.
5. Conflict of Interest & Mis-Selling
Issues related to conflict of interest, product bundling, asymmetric information availability, and possible aggressive mis-selling.
6. Unstreamlined Trade Reporting
There was an incentive in including bond platforms under the regulatory ambit to ensure centralized and streamlined trade reporting.
7. Settlement & Counterparty Risk
There was a critical need to ensure clearing and settlement of trades through official clearing corporations for investor protection.
SEBI Consultation Paper & Regulatory Formulation
After preliminary discussions with the industry and market participants, SEBI decided to take public comments on the concept and modus operandi of the bond platforms through a Consultation Paper in July 2022. An alternative was proposed to register the platforms with SEBI as stock brokers for the purpose of bringing them under the regulatory ambit. The consultation paper stated that only listed debt securities would be allowed on the platforms and that the stock exchange mechanism would be used for transactions on the online bond platforms.
After considering public comments and approval by the Board of the proposals to:
- Register Online Bond Platform Providers with SEBI as Stock Brokers under the debt segment of the Stock Exchanges; and
- Issue a procedural circular detailing the specifics and mechanics of the operations of the online bond platform provider.
SEBI came out with a detailed framework in November 2022, introducing the new Regulation 51A in the SEBI (Issue and Listing of Non-convertible Securities) Regulations, 2021. This regulation provided a period of three months for existing online bond platform providers to apply for registration as stockbrokers.
“…..with the bond market offering tremendous scope for development, particularly in the non-institutional space, there is a need to provide checks and balances in the form of transparency and disclosures to the investors dealing with such OBPs, measures for mitigation of payment and settlement risk, availability of redress mechanism in case of complaints, etc. Thus, in order to streamline the operations of these OBPs and to facilitate the participation of investors in the corporate bond market, there is a need to provide a regulatory framework for the working of such OBPs…”
Salient Features of the Regulatory Framework
1. Applicability & Mandatory Stock Broker Registration
The regulatory framework is applicable to entities desirous of operating online bond platforms, designated as Online Bond Platform Providers (OBPPs). An OBPP has to be mandatorily registered as a stock broker with SEBI under the debt segment of recognized stock exchanges.
2. Permissible Products on OBP
An entity acting as an OBPP cannot offer products, services, or securities on its OBP other than the following:
- 1.1.1. Listed debt securities; and
- 1.1.2. Debt securities proposed to be listed through a public offering.
3. Compliance Officer & Key Managerial Personnel (KMP)
- The entity must appoint a qualified Company Secretary (CS) as a Compliance Officer.
- The entity must appoint at least two qualified Key Managerial Personnel with experience of at least three years in the securities market.
4. SCORES Authentication & Grievance Redressal
The OBPP should obtain SEBI Complaints Redress System (SCORES) authentication and shall put in place a well-defined mechanism to address grievances that may arise or are likely to arise while carrying out OBP operations.
5. Robust Technology Infrastructure & Data Security
- (a) Reliability & Scalability: Ensure robust technology infrastructure with high degree of reliability, availability, scalability and security in respect of systems, data, and network.
- (b) Real-Time Dissemination: Adequate systems in place to disseminate transaction information on a real-time or near real-time basis.
- (c) Privacy Safeguards: Organizational capabilities, technology, systems and safeguards for maintaining data privacy and preventing unauthorized sharing of data.
- (d) Data Integrity: Absolute commitment to ensuring data integrity and confidentiality.
6. Know Your Client (KYC) Requirements & Inter-se Agreements
The entity shall, before taking up an assignment of offering eligible securities on its OBP, enter into an agreement in writing with sellers clearly defining inter-se relationships, rights, liabilities, and obligations.
The entity shall strictly comply with KYC requirements and verify the identity of investors and sellers by requiring requisite documentation under PMLA and SEBI standards.
7. Mandatory Routing via Stock Exchange RFQ Platform
The core objective of an online bond platform is transparency. The OBPP shall ensure that all orders with respect to listed debt securities placed on OBP shall be mandatorily routed through the Request for Quote platform (RFQ) of the recognised Stock Exchange(s) and settled through the respective Clearing Corporations. The official Stock Exchange mechanism shall be used to execute all orders.
8. Comprehensive Client Risk Profiling
OBPPs must evaluate, through a structured set of questionnaires accompanied by appropriate risk factors and disclaimers, the optimum level of investment risk an investor or seller is willing to take, factoring in age, risk appetite, and investment horizon.
9. Order Receipt, Deal Sheet & Quote Receipt
- (a) Order Receipt: On placement of order by an investor, issued without delay, stating date, time, counter-parties, quantity, and amount proposed.
- (b) Deal Sheet: Forthwith issued upon execution to both investors and sellers, containing date and time of order and settlement, counter-party details, quantity, and amount transacted.
- (c) Quote Receipt: Issued without delay upon quotation by a seller, containing date, time, counter-parties, quantity, and quoted amount.
Mandatory Minimum Disclosures to Investors
SEBI is a disclosure-based regulator and mandates that every OBPP disclose the following ten parameters for every bond on its portal:
| # | Disclosure Parameter | Regulatory Specification |
|---|---|---|
| 1 | Issuer & Security Identification | Name of the Issuer, Security Name, and International Securities Identification Number (ISIN) |
| 2 | Nature of Instrument | Listed Secured / Listed Unsecured status |
| 3 | Seniority | Senior / Non-Senior claim hierarchy |
| 4 | Mode & Date of Issue | Original Mode of Issue (Public Issue / Private Placement) and Date of Issue |
| 5 | Credit Rating | Outstanding Rating, Date of Rating, Rating Agency, and Latest Rating Rationale (PDF download required) |
| 6 | Pricing Metrics | Face Value, Clean Price, and Dirty Price (incorporating accrued interest) |
| 7 | Coupon Terms | Fixed / Floating coupon, Rate/Value, and Payment Frequency |
| 8 | Maturity & Tenor | Date of Maturity and exact Tenor remaining |
| 9 | Fiduciary Oversight | Name of Debenture Trustee |
| 10 | Yield Computations | Yield to Maturity (YTM) and exact mathematical calculation methodology |
Code for Advertisements (10 Regulatory Tenets)
Advertisements represent the primary medium for attracting retail investors across TV, print, digital media, or directly on the OBP. Drawing from established equity and debt issuer frameworks, SEBI has enacted a stringent 10-point Advertisement Code:
- Veracity & Clarity: Advertisements shall be accurate, true, fair, clear, complete, unambiguous and concise.
- Prohibition of Misleading Statements: Advertisements shall not contain statements which are false, misleading, etc.
- Anti-Deception Design: Advertisements shall not be so designed as likely to be misunderstood.
- Slogan Restrictions: Advertisements shall not carry any slogan that is exaggerated or unrelated to the nature and risk-and-return profile of the product being advertised.
- Celebrity Endorsement Ban: No celebrities shall endorse the products.
- Protection Against Exploitation: Advertisements shall not be so framed as to exploit the investors.
- Simplicity of Language: The language used in the advertisements shall be simple.
- Fair Competition: No advertisement shall directly or indirectly discredit other advertisements or make unfair comparisons.
- Mandatory Risk Warning: All advertisements shall be accompanied by a standard warning in legible font stating: “Investments in debt securities are subject to risks. Read all the offer related documents carefully.”
- Vernacular Language Compliance: Advertisements in regional languages shall contain the standard risk warning in such respective languages.
Graphical Depiction of OBPP Operating Architecture
Regulated KYC Registration & Order Placement
Integrated SEBI SCORES Portal
Risk Profiling, Order Receipts & Deal Sheets
Mandatory Screen-Based Order Matching & Execution
Guaranteed Delivery vs. Payment (DvP), Trade Settlement, and Liquidity Oversight
Reporting of Information and Supervisory Monitoring
The Stock Exchange(s) may require OBPPs to disclose information as and when required, including:
- (a) Particulars regarding the transactions executed on the OBP;
- (b) Particulars regarding the securities offered on the OBP; and
- (c) Any change in the information or particulars previously furnished which have a bearing on the certificate of registration granted.
An OBPP shall keep Stock Exchange(s) informed of events resulting in disruption of activities or market abuse without undue delay. Recognized Stock Exchanges are entrusted with the continuous statutory task of monitoring the activities of the OBPPs, including disclosures.
Conclusion: Strategic Regulatory Outcomes
SEBI believes that this calibrated regulatory framework for Online Bond Platform Providers achieves the ideal equilibrium between investor protection and capital market dynamism, ensuring: