Under the Indian Companies Act, 2013, a public company can issue debt instruments either through a public issue or private placement. While public issues are done on the stock exchanges, private placements are done on electronic book provider platforms ("EBP"). Over recent years, the issue of debt securities through private platforms on the EBP have grown in leaps and bounds. To put it in perspective, in the financial year 2021-2022, 1,405 issue of listed debt securities were done through private placement on EBP out of the total 1,433 i.e. more than 98%.
The primary reason for such growth in issuance of debt securities through private placement on EBP seems to be minimal regulation as compared to a public issue of debt securities.
During the last couple of years, particularly after the onset of Covid-19 pandemic, there has been a surge in issuance of debt securities through private placement by companies and demand for such securities by investors as they provide attractive return compared to traditional investment alternatives. The debt securities issued by companies through private placement and held by non-QIBs do not have restrictions as provided under /s 24 of the Companies Act, 2013 as such there are freely marketable. However, there was lack of trading platforms for such trades.
With recent advent of technology and growth opportunity, online platforms for trading of debt securities issued by companies through private placement have been primarily developed by fintech companies or are backed by brokers/ SEBI registered intermediaries not being governed by any regulator until the present 2022 amendment. These platforms are typically called as online bond platforms ("OBP"). Some of the popular OBP names include BondsIndia, GoldenPi, BondsKart (owned and run by JM Financial Products Ltd).
As at 31st March 2021, the number of registered users on OBP stood around 46,895 and grew to 3,37,765 as at 31st March 2022. As at July 2022, the number of registered users of OBP is around 5,68,308. Such drastic increase in the number of registered users on OBP drew the attention of government regulatory bodies and a need was felt to regulate the OBPs in order to safeguard investor's interest.
Recent Amendment By SEBI & Its Impact
SEBI has brought out a recent amendment with the motive to regulate the operation of OBPs and safeguard the interest of investors trading therein. Securities market regulator SEBI has recently inserted Chapter VIA in the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 ('NCS Regulations') bringing the much awaited provisions for 'Registration of Online Bond Platform Providers'.
As per the explanation attached to Regulation 51AOBP has defined as:
"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."
Chapter VIA brings forth the newly brought Regulation 51A which mandates OBP to obtain registration under Section 12(1) with the Board as 'Stock Broker'. This would imply that the OBP will now also have to comply with Securities and Exchange Board of India (Stock Brokers) Regulations, 1992. Board has also provided an onboarding relaxation for a period of three months to OBP i.e. from the date of this regulation coming into force.
That Board further vide Circular No. SEBI/HO/DDHS/DDHS-RACPOD1/P/CIR/2022/154 has clarified that:
Only company incorporated in India can make an application for registration as OBPs; and
Under the new regime only Listed Debt Securities and Debt Securities proposed to be listed through a public offering can be dealt with by OBP
Subsequent to registration with SEBI, OBP will now be required to make an application to recognized stock exchange to act as an Online Bond Platform Provider (OBPP). Such an application needs to made in the manner specified in Annex-A of the Circular.
The new regulatory regime is investor centric which will provide for a robust mechanism in safeguarding the entire transaction process i.e. from (a) placing of orders; (b) execution of order. Further, OBP will have to comply with KYC requirements before onboarding investors and sellers.
Further any investor grievance will be addressed appropriately as OBPP will have to obtain a SEBI Complaints Redress System (SCORES) authentication. The most crucial aspect from a legal perspectives is that the grievances of the investors will be redressed within 30 days from the date of the receipt of the complaint.
The OBP will also have to ensure that all the orders will now routed through the Request for Quote platform (RFQ) of the recognised Stock Exchange. They also have to comply with the Clearing Corporations who will be monitoring the entire process in settling such transactions where the facility to match the orders on one-to-one basis is available.