The Securities and Exchange Board of India (SEBI) has always kept a watchful eye on the proliferation of fintech entities everywhere in the consumer-facing side of the financial sector. In July 2022, the SEBI issued a consultation paper that noted the growth in online bond platforms offering access to bonds and trading to non-institutional investors but which were themselves unregulated. The consultation paper pointed out the “need to guide and regulate these platforms in order to bring about, inter alia, regulatory oversight, common standard practices, investor redress mechanism”. The consultation paper brought about market rumblings but did not result in any concrete action until the amendment on 9 November 2022 to the Securities and Exchange Board of India (Issue and Listing of Non-Convertible Securities) Regulations, 2021.
This amendment defined online bond platforms as “any electronic system, other than a recognised stock exchange or an electronic book provider platform, on which the debt securities which are listed or proposed to be listed, are offered and transacted”. It also introduced the requirement that online bond platforms have to register as stock brokers with the SEBI. The amendment will permit an existing online bond platform (OBP) to continue operating for a period of three months from the date of the amendment or for the period specified by the SEBI if the OBP has already applied for registration.
On 14 November, the SEBI followed the amendment by issuing a regulatory framework for OBPs and the providers of OBPs (OBPP). The framework makes it clear that an OBP will have to seek registration as a stock broker under the debt segment. The framework also prescribes that, other than listed debt securities and debt securities proposed to be listed through a public offering, no other products or services can be offered on an OBP. All other offerings of other products or services and securities will have to be divested. The framework prescribes qualitative criteria for the registration of OBPPs. An OBPP will have to appoint a company secretary and at least two key managerial personnel with at least three years of experience in the securities market.
Possibly taking into account the adverse impact that catchy, new-age advertisements may have on retail investors, the framework prescribes a code for advertisements put out by OBPPs. The advertisement code is a mixture of clear, tangible criteria and broad brush-stroke requirements. For instance, the code prescribes that celebrities cannot be featured in such advertisements, imposes standard disclaimers that cannot be amended, sets out the requirement that advertisements cannot contain statements that directly or indirectly induce or mislead an investor, and prohibits “statements which are false, misleading, biased or deceptive, or any statements based on assumption or projections”. The amendment requires advertisements to be “accurate, true, fair, clear, complete, unambiguous and concise” and not to be “so framed as to exploit the lack of experience or knowledge of the investors”. The framework does not set out how advertisements will be monitored.
Securities offered on an OBP will have to comply with minimum disclosure requirements. These include the name of the issuer and the international securities identification number; the nature of the instrument; its seniority, mode of issue and rating; the face value and pricing of the instrument; the coupon, tenor and maturity of the instrument; details of the debenture trustee; details of the offer documents together with links, and other documents to be specified by the SEBI.
The framework could have considered the approach, where, as in other sectors, a self-regulatory body of market participants is established to formulate and disseminate industry-wide standard practices. For instance, the framework is silent on marketing through social media, which is the most pervasive route that platforms use to reach out to retail investors. Similarly, while mis-selling will broadly be governed and dealt with under an OBPP’s obligations as a stock-broker, existing regulations under which stock-brokers operate are not sufficiently nuanced to deal with selling over a bond platform to retail investors entering the market for the first time.
Sawant Singh and Aditya Bhargava are partners at Phoenix Legal
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