SEBI’s regulations for online bonds platforms will increase retail investors’ trust and market participation
The new rules will catapult the participation of retail investors in the market and provide them with more opportunities to diversify their wealth
Over the last 3-4 years, fintech platforms have empowered retail investors to learn about financial markets and actively participate in various segments. At the same time, the Securities and Exchanges Board of India (SEBI) has been proactively working to safeguard the interests of this investor cohort. In July 2022, the regulator brought out a consultation paper that noted the growth in online bond platform providers (OBPPs), which enable retail investors to access the corporate bonds markets. The paper emphasized creating a regulatory framework for OBPPs to build standard practices and investor grievance redressal mechanisms. Based on the consultation paper, in November 2022, the regulator amended the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 to make it mandatory for online bond platforms (OBPPs) to register as stock brokers under the debt segment with the SEBI.
I believe the regulation of OBPPs is a move in the right direction. It will catapult the participation of retail investors in the market and provide them with more opportunities to diversify their wealth. Here are the three significant long-term benefits for retail investors: –
No miss-selling through catchy advertisements and exotic products: In 2022, the Reserve Bank of India (RBI) conducted a pan-India survey to gauge the country’s financial literacy level. The participants were gauzed on three key parameters, i.e., financial knowledge, attitude, and behaviour. On a scale of 1-21, the average urban and rural scores were 11.7. The score means that an average Indian is highly susceptible to misselling of financial products through catchy advertisements and irrational sales pitches. Prior to SEBI’s regulations, we witnessed several incidents where retail investors were being sold invoice discounting, AT1 bonds, subordinate bonds, and many other exotic debt products, without clearly stating the high degree of risks which come along. Now, SEBI has specified that any entity acting as an OBPP before the new rules came into force cannot offer any products or services on its platform except listed debt securities and debt securities proposed to be listed through a public offering. Thus, the investors are safeguarded from the risk of buying such disguised securities.
SEBI’s regulatory framework also provides an advertisement code for OBPs that will significantly reduce such misleading advertisements selling corporate bonds. For example, all promotional content should be accurate, true, fair, transparent, complete, unambiguous, and concise. Moreover, OBPPs cannot use celebrities in their advertisements. They must ensure standard disclaimers in their communications, and avoid any statements that are false, presumptive, biased, deceptive, intangible, and directly or indirectly induce or mislead an investor. Going further, SEBI will also create a robust mechanism for monitoring these advertisements to ensure adequate checks and balances.
Minimum disclosure requirements: Earlier, the information shown by OBPPs to potential investors varied significantly in form factors and details. However, now all the OBPPs must follow the minimum disclosure requirements prescribed by the SEBI. These include the name of the issuer and the international securities identification (ISIN) number, the nature and seniority of the instrument, the mode of issue and credit rating, the face value and pricing of the security, the coupon, tenure, and maturity date, details of the debenture trustee, and the offer documents, along with reference links, and other prescribed documents. These disclosures help investors to take more informed decisions.
Grievance Redressal mechanism: Just like any other business, it is usual for OBPPs to come across investor grievances over the ordinary course of business. SEBI’s regulation requires OBPPs to obtain a Complaints Redress System (‘SCORES’) authentication by the regulator. The entities must also put together a well-defined internal mechanism to address investor grievances. The mechanism will deepen the sense of trust among current and potential investors of OBPPs and encourage them to explore more opportunities in the bonds space.
The list of benefits for retail investors is much longer. However, given the brevity requirements, it is a win-win situation for everyone. As investors feel more confident about corporate bonds, we can expect them to be the true advocate of this asset class. Simultaneously, there will be a positive ripple effect where new issuers dive into the bonds market for their funding requirements.
The author is co-founder and CEO, Wint Wealth. Views expressed are personal.
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