SEBI’s directions for ‘online bond platforms’

Context

Recently, the Securities and Exchange Board of India (SEBI) has directed online bond platforms (OBPs) to desist from offering debt securities that are not listed or are not proposed to be listed, in contravention of their regulatory framework. What are Online Bond Platforms (OBPs)?

• Online Bond Platform Providers (OBPPs) would be companies incorporated in India and they should register themselves as stock brokers in the debt segment of the stock exchange, as per the framework that would be effective immediately.

Background

• During the past few years, there has been an increase in the number of OBPPs offering debt securities to non-institutional investors.
• Most of them are fintech companies or are backed by stock brokers.
• There has been a significant increase in the number of registered users who have transacted through them.
• Operations of OBPs were outside SEBI’s regulatory purview.
• With the recent amendment, the new rules mandate a registration certificate as a stock broker from SEBI to act as an online bond platform provider.

About the move:

• Revised clause:
  • SEBI has revised Clause 5.2 of the OBP circular to include a few new product categories such as government securities and listed sovereign gold bonds.
  • Under the revised clause 5.2, OBPPs can offer listed debt securities, listed municipal debt securities, and listed securitized debt instruments; debt securities, municipal debt securities, and securitized debt instruments proposed to be listed through a public offering; listed government securities, state development loans, and treasury bills; and listed sovereign gold bonds.
• Need of the initiative:

Sovereign gold bonds (SGBs): As per the Reserve Bank of India SGBs are government securities denominated in grams of gold. These are the substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity.

• • According to SEBI, certain OBP are offering unlisted bonds/other products on a separate platform/website and has not divested of such offerings, and certain OBPs “have a link on the online bond platform/website to another platform/website for transacting in unlisted bonds/other products.”
• Significance:
  • For any vibrant fixed-income market to develop, government securities are at the core of investment in a credit continuum.
  • By allowing government securities and sovereign gold bonds (SGBs) to be offered on OBPPs, investors now have a choice of bond investments as per their own risk appetite.

Bond Market:

• The bond market broadly describes a marketplace where investors buy debt securities that are brought to the market by either governmental entities or corporations.
• National governments generally use the proceeds from bonds to finance infrastructural improvements and pay down debts.
• Companies issue bonds to raise the capital needed to maintain operations, grow their product lines, or open new locations.
• Bonds are either issued on the primary market, which rolls out new debt, or traded on the secondary market, in which investors may purchase existing debt via brokers or other third parties.

Role of Securities and Exchange Board of India (SEBI): A statutory body: SEBI is a statutory body established on April 12, 1992 in accordance with the provisions of the Securities and Exchange Board of India Act, 1992. Function: The basic functions of the Securities and Exchange Board of India is to protect the interests of investors in securities and to promote and regulate the securities market.