[Yajush is a student at Gujarat National Law University.]
The latest proposal by the Securities and Exchange Board of India (SEBI) to establish a regulatory framework for the regulation of online bond trading platforms (OBTPs) was a needed measure. Implementation of this regulatory framework, in all probability, will rule out the majority of concerns highlighted by the consultation paper dated 21 July 2022 passed by SEBI, which also enlists the regulatory measures regarding the OBTPs in a detailed manner.
SEBI came up with these regulations to protect the investor’s interests, specifically to ensure that the confidence of non-institutional or retail investors remains intact. Moreover, to alleviate the fear of the investors that the OBTPs, i.e., fintech companies such as Goldenpi, might misappropriate their investment.
Retail investors’ investment in debt securities or bonds is scanty through the electronic bond platforms. Therefore, OBTPs were brought about, which connect the buyers and sellers, i.e., act as intermediaries for trading purposes. So, to ensure that the investment from such non-institutional investors persists and to crank it up a notch higher efficiently and correctly and for other related aspects, a kind of regulatory mechanism was needed for the smooth functioning of OBTPs. SEBI proposed a regulatory framework to suffice this purpose through this consultation order.
Analysis of the Regulations
These regulatory steps seem stringent prima facie, and rightfully so, as, to effectively ensure the above objectives, these regulatory measures need to be stern and nuanced. The step of registering these bond platforms as stock brokers with SEBI and an alternative to it, i.e. authorising SEBI-registered brokers to run the OBTPs, seems the most pragmatic regulatory step. It is so, as this step ensures transparency as to in which debt securities the retail investors invest and in what manner. Furthermore, this would also ensure that the functioning of the OBTPs is free of encumbrances and hardships. The effectuation of this step would be plausible, all the even more, attributable to SEBI's code of conduct for such stockbrokers, within which these OBTPs would now deem to fall. Adherence to the code of conduct would ensure the smooth functioning of OBTPs.
Another step of locking in for six months the debt securities issued on a private-placement basis and offered for sale on OBTPs, was also necessary since it attempted to address the issue of non-compliance with Section 25(2) of the Companies Act 2013. SEBI essentially brought about this regulatory step to ensure that there is no buying/selling of debt securities interminably. Moreover, if the current regime continues to persist, then as per the existing framework, the purpose of OTBPs of selling the debt securities to investors on a private placement basis would lose its significance. Eventually, the whole current mechanism of OTBPs would deem to be a public issue.
In addition, the mandate of SEBI to make all transactions go through the route of the Debt segment's trading platform or the exchanges' RFQ platform is a step which can mitigate the possibility of wrongful transactions. The route of trading them through the trading platform of the debt segment of stock exchanges seems reasonable as it would diminish the settlement risk in accordance with the functioning of stock exchanges. Further, it would give settlements on a ‘T+2’ basis (‘trade date plus two days’ basis) which indicates that the monetary transactions regarding selling and buying of a security shall be settled within two days after the completion of the trade. The ‘T+2’ basis is a standard practice in India for settling trades in stock exchanges. As an alternative to the above route method, SEBI also proposed the route ‘request for quote’ (RFQ) platform of the stock exchanges on a delivery versus payment basis for the transactions done through the OBTPs, which works on the principle of payment for shares by the investors only after the deliverance of it. This step also seems to improve the existing framework as this step, like the above, would not mandate the OBTPs to do away with their current interface and, at the same time, will, in all probability, settle the transactions in a manner conducive to investors. This clears the air on whether the transactions shall be effectuated through cash on a delivery or delivery versus payment basis.
Apart from these regulatory steps, the consultation paper also states that only listed debt securities shall be offered by the OBTPs to be bought/sold. SEBI essentially did this to decrease the confusion investors bore regarding the nature of the debt securities whilst purchasing the same. Though per the current regime, the bond platforms themselves mention the listing status of the debt security. Still, for the sake of clarity and brevity for the investors, it was deemed necessary that the selling/buying of both listed and unlisted debt securities be done separately to avoid any iota of confusion. The same has been stated through this clarification by the SEBI.
A Needed Step or a Premature Step by SEBI?
A proposed regulatory framework by SEBI on OBTPs through a consultation paper dated 21 July 2022 can be termed as a ‘needed step’ and not a premature step attributable to all the reasons enlisted by SEBI in the consultation paper itself and owing to the growth trajectory of the OBTPs since its inception.
In observance of the functioning and growth of OBTPs, i.e., Goldenpi, BondsIndia, and Bondskart, it is palpable that the number of investors buying the debt securities through these platforms has increased exponentially and is continuing to increase because herein, the investors get increased interest returns compared to fixed deposits’ dwindling returns. Owing to these developments, the investors are deemed more susceptible to misappropriation at the hands of the fintech companies as mentioned above. Thus, to prevent any harm to investors and maintain the sanctity of the securities market, a regulatory framework was needed immediately owing to investors’ flourished usage of OBTPs.
So, it cannot be termed a premature step, as the basis of the proposed regulatory framework is solid and astute. This also can be said based on the reasoning that the size, stature, flow and significance of the OBTPs for non-institutional buyers or retail investors have become equivalent to the online system of stock exchanges and depositories, and as this system has a regulatory framework, the same shall be the case for OBTPs on an immediate basis (else, there can be dire consequences, especially for investors).
Thus, the reasonable conclusion of the foregoing discussion is that the consultation paper on OBTPs- Proposed regulatory framework dated 21 July 2022 was a much-needed step. SEBI carrying this out seemingly would resolve many concerns that are there in the functioning of OBTPs and also could, in turn, spruce up the possibility of augmentation of market making.
Implementing these steps is subject to public comments that the SEBI has sought through the release of the consultation paper. It seems that the investors or the potential investors would not oppose these regulatory steps, and the only friction it will face would come from the OBTPs, i.e., fintech companies, as they would have to comply with the new regulations. Now, it is on SEBI, based on public comments, to firmly adjudge how this regulatory framework pans out for investors and the fintech companies.