SEBI rolls out Consultation Paper on Online Bond Trading Platforms – Proposed Regulatory Framework; invites public comments by 12th August, 2022

The Securities and Exchange Board of India has issued the Consultation Paper on Online Bond Trading Platforms – Proposed Regulatory Framework (“Consultation Paper”) inviting comments and suggestions from the public by 12th August, 2022.

Comments are invited in the prescribed format through the following modes:

1. By email to: pradeepr@sebi.gov.in; nikhilc@sebi.gov.in; and kirand@sebi.gov.in or
2. By post to the following address: 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

Background:

Debt securities can be issued either through a public issuance or on private placement basis. A Public issue of debt securities is made through the on-line system of the Stock Exchanges and Depositories. For privately placed debt securities, the following issues of debt securities has to be mandatorily made through Electronic Book Provider Platform (EBP Platform):

• In case of issuers who are in existence for three years and more, where the issue size is of Rs.100 crore or more;
• If the issuers are in existence for less than three years, irrespective of the issue size. Presently, the following participants are eligible to bid on the EBP platforms:
• Qualified Institutional Buyers (QIBs);
• Non-QIBs including arrangers who/which has been authorized by the issuer.

Issues concerning bond platforms:

Bond platforms largely tap into the non-institutional segment, hitherto unexplored as far as bond market investment is concerned. While it is a welcome sign that more investors are investing in the bond market, these platforms also give rise to certain concerns. The following are the possible regulatory concerns as regards to the functioning of bond platforms:

1. Lack of regulatory oversight
2. Listed and unlisted securities
3. Absence of standards for Know Your Client (KYC) norms
4. Ambiguity in redressing Investor Grievances
5. Possibility of mis-representation
6. Conflict of interest, product offerings, information availability and possible misselling
7. Concerns regarding Deemed Public Issue
8. Reporting of trades
9. Clearing and settlement

Key points of the proposed regulatory framework emanating from such discussions are given below:

1. Mandatory SEBI Stock-Broker registration:
   1. Bond platforms play the role of facilitators, thereby facilitating transactions by investors registered on their websites. Therefore, it is proposed that these bond platforms should register as stock-brokers (debt segment) with SEBI or be run by SEBI registered brokers. This will also enhance the confidence among investors, particularly non-institutional investors, as the platforms would be provided by SEBI regulated intermediaries
   2. Additionally, the stock-broker regulations will be applicable to these entities, which would govern their code of conduct and other aspects related to their operations and risk management.
2. Eligible securities:
   1. The debt securities offered for buy/ sale by the online bond platforms shall be only listed debt securities.
3. Proposed Lock-in period for the eligible securities:
   1. To address the issue of DPI it is proposed 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.
4. Channelizing transactions through either of the following two options:
   1. Exchange Platform – Debt segment: The transactions executed on the online bond platforms are to be routed through the trading platform of the debt segment of Exchanges. Routing their trades through the trading platform of Exchanges, will help in mitigating settlement risk associated with these online bond platforms as the settlement is guaranteed on T+2 basis.
   2. Request for Quote Platform (RFQ): Alternatively, the transactions executed on the online bond platforms can be routed through RFQ platform of the Stock Exchanges where the transactions will be cleared and settled on a Delivery Versus Payment (DVP-1) basis.

Please refer to the hyperlink below for a detailed read of the Consultation Paper:

Source: Securities and Exchange Board of India