New Sebi rules could pull the rug out from under India’s bid to boost the bond market

India’s plan to expand its corporate bond market is hitting an unexpected hurdle as the regulator plans to tighten control over trading platforms that allow investing in corporate debt with just a few clicks.

While the proposed framework is designed to protect investors and is therefore welcomed by some, a few of the Securities and Exchange Board of India’s proposals could actually prove counterproductive and hurt liquidity, according to experts who spoke to Bloomberg. Indeed, the sale of unlisted debt securities would be prohibited, platforms would not be allowed to sell privately placed corporate bonds to non-institutional investors shortly after their acquisition, and transactions would have to be settled through channels that are not commonly used today.

Market participants have until August 12 to give officials their opinion on the matter.

“The trade-off very often is between creating depth in the market and ensuring investor protection,” said Shilpa Mankar Ahluwalia, partner at law firm Shardul Amarchand Mangaldas & Co. “The regulator ideally needs to strike the right balance between investor protection and innovation, also recognizing that online bond platforms have the potential to broaden access and deepen the corporate bond market.

Opening India’s corporate bond market is an important part of Prime Minister Narendra Modi’s pledge to nearly double the size of the economy to $5 trillion by 2025. As it stands things, the local-currency bond market offers easier access only to higher-rated issuers. , with major local banks and brokers closing deals based on longstanding relationships.

Bond platforms, whether start-ups or bank- or broker-backed ventures, have exploded in India with more than a dozen fintech platforms emerging over the past three years, vying for a share of the $1.9 trillion term deposit market. They mainly target individual investors with the promise of much higher interest rates by putting money into corporate debt, and allow minimum investments which can be as low as 10,000 rupees ($126).

Easy access through an interface similar to online shopping websites and the prospect of higher returns can be appealing to novices. The platforms, though tiny, have grown more than sixfold in two years, with debt mostly sold to non-institutional investors, Sebi said in a consultation paper last month.

Here is how the regulation could impact the market:

Six month block

  • Sebi proposes to ban platforms from selling privately placed corporate bonds to non-institutional investors within six months of allocation
  • The proposal comes after the regulator discovered that, in some cases, the entire privately placed issue had been sold to more than 200 investors within 15 days of allocation, bringing it closer of a public broadcast.
  • “The regulator is concerned that private placements could become parallel public offerings via distribution on online platforms as the rules, compliance and disclosure requirements for a public offering are much stricter and more detailed,” Ahluwalia said. by Shardul Amarchand.
  • But Ankit Gupta, who founded BondsIndia.com, said institutions would be required to maintain a huge balance sheet to buy and hold tickets for six months.
  • For this reason, Gupta said there is a risk that the platforms’ ability to participate in the primary issuance will be limited, thus affecting liquidity. He will contact the regulator for more clarity.

Trade rules

  • Sebi proposed that transactions on these platforms be settled either by the debt segments of the exchanges or by request for quotation platforms.
  • The regulator found that in some cases these platforms were accepting funds directly from the customer, circumventing procedural standards
  • But market participants say the two avenues suggested by Sebi are not regularly used by larger participants to settle OTC trades.
  • “In cases where platforms settle transactions through a clearing house, the party buying bonds directly credits the money to the clearing house’s account and the seller provides the debt securities,” said Aditi Mittal, co-founder of IndiaBonds.com and director of one of the Indian companies. main broker AK Capital Services Ltd., adding only if the agreement matches, the respective accounts are debited and credited
  • “This system works wonderfully because nothing is paid into the account of the platforms. Therefore, the concern about adjusting the settlement structure needs to be discussed and deliberated,” she said.

Unlisted debt

  • The authority also proposes to ban platforms selling bonds that will not be listed on the stock exchange.
  • “This move will reduce the variety of bonds available on bond platforms for investors,” IndiaBonds’ Mittal said, adding that there are other ways to educate investors, such as the difference between listed and unlisted bonds. listed.

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