Why has SEBI sounded the alarm on the online bond platform?

Bond market experts told Mint that not everything sold on these platforms may be suitable for retail investors. What is also worrying is that bonds bought in private placements are being split into smaller units and offered to investors, he said. And, in many cases, this was being done within days of the bond allotment by the issuer in contravention of the Companies Act. The recent consultation paper by market regulator SEBI on online bond platforms has now added to this concern.

Bonds issued through private placement involve an institution that raises funds from a relatively small number of institutional investors. The face value of such bonds is assumed to be 10 lakhs. While the entities subscribing to the issue may sell these bonds to retail investors, there are rules for such sales. One, such bonds are not to be sold within six months of allotment. Two, bonds cannot be divided into smaller denominations. But rules are being flouted, especially in the case of unlisted bonds, which do not attract the same stringent disclosure as listed bonds.

According to Ankit Gupta, founder of BondIndia, an online bond platform that sells only listed bonds, the concern about selling unlisted bonds to retail investors is the lack of adequate information about the issuer and the issue. While public bond issuances provide investors with enough information in the public domain to make an informed decision, the same may not be true for private placements. In addition, the credibility of the issuer and its corporate governance is also unknown to investors.

There are other concerns. Online platforms do not provide information memorandums for some unlisted bonds and in some cases only for issuance of a credit rating report.

At times, some bond arrangers may encourage a fund-raising entity to choose unlisted bonds for private placements when the yield is attractive, said a person familiar with the matter, but did not wish to be identified. This may provide an opportunity to the bond arranger (could be an online bond platform) to subscribe to the entire issue, which is then sold at a premium to retail investors. Although the returns may be attractive, retail investors should avoid such issues, whether listed or unlisted bonds, due to the lack of sufficient public information.

Investors should also note that as per SEBI regulations the bonds issued through private placement are required to have a face value 10 lakhs. But there are differing views on whether this limit applies only to listed bonds or to unlisted bonds as well. One view is that the rules do not specify a face value for privately held unlisted bonds and, therefore, the sale of smaller units of unlisted bonds by lending platforms is not a violation of the rules. But an alternative view is that the specified face value applies to unlisted bonds as well. Therefore, sale of unlisted bonds to retail investors in smaller units is a violation of the rules.

According to Arvind Chari, Chief Investment Officer, Quantum Advisors India, some of these bond platforms are mere arbitrage agents and, unlike bond houses or large brokers, do not have the net worth to hold bonds on their balance sheets, and a six-month lock-in period can prevent breaches. can terminate. Hence, SEBI is saying that you can either be a platform to buy or sell, or can be an aggregator or a bond issuer, but not both. The role needs to be defined and regulated. He also noted that some entities are selling bonds on behalf of their institutional clients to retail investors, who want to pay off their troubled debt through these pooled high-yield privately held bonds.

The person cited earlier in this story said that while the SEBI consultation paper refers to the practices of online bond platforms, deemed public issues (where bonds issued through private placement are sold to the public within six months from the date of allotment) gives reference. Bond transactions like this have also happened on a large scale outside these platforms. Therefore, it would be prudent to extend the scope of any regulatory action to transactions that take place beyond online bond platforms.

“If you are a serious player, you would welcome any rules made in the wake of this consultation paper because then you would not be operating in a gray area,” says Chari.

From SEBI’s point of view, these platforms are helping to deepen the retail market for debt issuance and hence need to be encouraged with proper regulation, he added.

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