Why Sebi has sounded alarm over online bond platforms
Summary
- Online platforms are splitting these bonds into smaller units and selling to retail investors
Ease of investing. That is what has been primarily driving investors to online bond or debt investment platforms. Falling interest rates on fixed deposits and the availability of a wide range of bonds are among other reasons why they are immensely popular. Several such platforms have cropped up in recent years, apparently cashing in on this popularity. And, then it caught the attention of Sebi.
Not everything that is sold on these platforms may be suitable for retail investors, bond market experts told Mint. What’s worrisome is also that the bonds bought in private placements are being split into smaller units and offered to investors, they said. And, in many instances, this was being done within a few days of the bond allotment by the issuer in violation of the Companies Act. A recent consultation paper by market regulator Sebi on online bond platforms has now raised this concern.
Bonds issued via private placement involve an entity raising money from a relatively smaller number of institutional investors. Such bonds are supposed to have a face value of ₹ 10 lakh. While entities subscribing to the issue can sell these bonds to retail investors, there are rules for such sales. One, such bonds are not to be sold within six months of the allotment. Two, the bonds cannot be split into smaller denominations. But the rules are being flouted, especially in the case of unlisted bonds which do not attract the same extent of stringent disclosures as listed bonds do.
According to Ankit Gupta, founder, BondsIndia, an online bond platform selling only listed bonds, the concern around selling unlisted bonds to retail investors is the lack of adequate information regarding the issuer and the issue. While public bond issues provide adequate information in public domain for investors to make an informed decision, the same may not be true for a private placement. Apart from this, the credentials of the issuer and the corporate governance thereof is also unknown to investors.
There are other concerns. Online platforms do not provide information memorandum for some unlisted bonds and in some cases only a credit ratings report is made available for the issue.
Sometimes, certain bond arrangers may encourage the fund-raising entity going for a private placement to opt for unlisted bonds when the yields are attractive, said a person familiar with the matter but did not wish to be identified. This can provide the bond arranger (can be an online bond platform) the opportunity to subscribe to the entire issue, which is later offloaded to retail investors at a premium. While the yields may be attractive, retail investors must keep away from such issues for lack of adequate public information, be it listed or unlisted bonds.
Investors should also note that Sebi regulations require bonds issued via private placement to have face value of ₹ 10 lakh. But there are divergent views on whether this limit applies only to listed bonds or extends to unlisted bonds as well. One view is that regulations don’t specify the face value for privately placed unlisted bonds and therefore, the sale of smaller units of unlisted bonds by debt platforms is not violative of rules. But an alternative view is that the specified face value applies to unlisted bonds, too. So, any further sale of unlisted bonds to retail investors in smaller units is in violation of rules.
According to Arvind Chari, chief investment officer, Quantum Advisors India, some of these bond platforms are only disintermediation agents and do not have the networth for holding bonds on their balance sheet, unlike a bond house or a larger broker, and the six-month lock in period may put an end to violations. So, Sebi seems to be saying you can either be a platform for buying or selling, or be an aggregator or issuer of bonds, but not both. The role needs to be defined and regulated. He also said some entities are selling bonds to retail investors on behalf of their institutional clients, who want to offload their troubled debt through these pooled high-yielding privately placed bonds.
The person quoted earlier in this story said that while the Sebi consultation paper makes reference to deemed public issues (where bonds issued via private placement are sold to the public within six months of the date of allotment) in the context of online bond platforms, practices like this have been rampant even in bond transactions outside of these platforms. It would therefore make sense to extend the scope of any regulatory action to transactions that happen beyond online bond platforms.
“If you are a serious player, then you will welcome any regulations made in the wake of this consultation paper because then you will not be operating in a grey area," says Chari.
From Sebi’s point of view, these platforms are helping deepen the retail market for debt issuance and so need to be encouraged with appropriate regulation, he adds.