Online Bond Platforms Should be Registered as Securities Dealers with SEBI: Consultation Paper

A consultation paper has been posted on the SEBI website to regulate online bond platforms, which sell debt securities to investors, in particular retail/non-institutional investors. This is to provide regulatory oversight, common standard practices, an investor redress mechanism, etc. to many online bond platforms which have proliferated over the past two to three years. Some of the existing online bond platforms are GoldenPi, BondsKart, Wint Wealth and Indiabonds.

The consultation paper proposed that these bond platforms be registered as securities dealers (debt segment) with SEBI or be managed by brokers registered with SEBI.

“This proposal will boost investor confidence, especially non-institutional investors, as the platforms would be provided by SEBI-regulated intermediaries. In addition, the regulation of securities dealers will be applicable to these entities, which will govern their code of conduct and other aspects related to their operations and risk management,” according to the document.

If implemented, standard KYC (Know Your Customer) requirements will apply when users register on bond platforms. This also ensures the financial stability of these platforms as net worth and deposit requirements will be as prescribed for stockbrokers. The applicability of the code of conduct imposed on securities brokers will further ensure fairness in their dealings with clients. The platforms will periodically be subject to regulatory inspection and oversight.

Second, the document also recommended that the debt securities offered for purchase/sale should only be debt securities listed on these platforms. Currently, both listed and unlisted debt securities are offered.

In addition, the document also suggests that trades executed on these online bond platforms are routed either through the exchange’s debt segment or through the exchange’s request for quotation (RFQ) platform. This is to ensure guaranteed settlement of transactions to users.

“Routing trades through the exchanges trading platform will help mitigate the settlement risk associated with these online bond platforms, as exchange settlement is guaranteed on a T+2 basis. In the event of transactions through the RFQ platform of exchanges, transactions will be cleared and settled on a delivery versus payment basis, which involves the transfer of securities only after payment has been made,” according to the newspaper.

It was also proposed that listed debt securities issued under a private placement be blocked for a period of six months from the date of allocation of these securities by the issuer, so that the debt is not not immediately transferred to investors.

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Dolores W. Simon