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Registration & Regulatory Framework on Online Bond Platform Providers

Nikhil Mogha

| Updated: Nov 24, 2022 | Category: SEBI

Registration & Regulatory Framework on Online Bond Platform Providers

The online Bond Platform Providers or OBPPs are the person or companies that provide debt securities to non-institutional investors on an online bond platform. Most of the Online Bond Providers are fintech companies that are supported by Stockbrokers and SEBI registered Intermediaries. Looking at the increase in the number of users in the OBPs and access of non-institutional investors to the bond markets, there is a need to keep check and balance on the operations of the OBPPs by bringing transparency in the disclosure process. Henceforth to regulate the operation of the OBPs, the SEBI has issued a framework for entities desirous of operating OBPPs under Regulation 51A of SEBI (Issue & Listing of Non-convertible Securities) Regulation 2021, which requires:

  • The entity is a company incorporated in India and is registered as a stockbroker in the debt segment of the Stock Exchange.
  • Any entity operating as OBPP before the circular shall cease to offer products & services or securities on the platform, excluding listed debt securities and Debt securities proposed to list through a public offering.

Therefore, the Online Bond Platform Providers, in addition to complying with the requirements under Regulation 51A, are required to comply with the additional requirements mentioned under “Registration and regulatory framework for Online Bond Platform Providers (OBPPs)” issued on 14th November 2022.

Rules and obligations

The entity shall have to abide by the rules and obligations enumerated below:

  • The entity shall appoint Company Secretary as the Compliance officer.
  • The entity shall appoint 2 qualified key managerial person having experience of at least 3 years and possessing qualifications in finance, law, accountancy, engineering, company secretaryship or management from a university recognised by the Central Government or State government, foreign university or post-graduation (of 2 yrs.) in securities market from National Institute of Securities Market[1].
  • The entity has SEBI complaints Redress System (SCORES) authentication and put in place a system or mechanism to address grievances that may arise while carrying out OBP operations.  

Technological Requirements

The entity shall undertake and confirm the following in terms of technological requirements:

  • The entity owns, maintains & operates robust technology with a high degree of availability, reliability, & security in respect of its data, system, & network.
  • The technology is appropriate to support its operations & manage the associated risks.
  • The entity has suitable technology to disseminate information on transactions on a real-time basis.
  • The entity possesses the organisational capabilities, systems and technology for maintaining the confidentiality of data and preventing the unauthorised sharing of data.
  • The entity must provide an open architecture to all potential investors or sellers on a uniform and non-discriminatory basis.

Operational Framework

A. Access and Participation

The requirements for access and participation are:

1. The Online Bond Platform Providers shall have fair & transparent criteria for registering sellers or investors on its online bond platform.

2. The entity shall undertake due diligence while registering any investor, seller, or user on its online bond platform.

3. The entity shall establish the required system & frame written policies in regard to the following:

  • Registration of investors or sellers or users on its OBP
  • Execution of Transactions & Orders
  • Roles & Responsibilities of Investors & Sellers
  • Risk Management & Control
  • Liability Framework for Online Bond Platform
  • Liability framework for investors & sellers in case of breach of policies
  • Restrictions & requirements needed to access the online bond platform.

4. The entity shall ensure data governance by making information available to investors & sellers on a non-discriminatory and fair basis, including:

  • Price, face value, yield, coupon, date of maturity and put or call option
  • Copies of offer documents or prospectus or any other literature
  • Any other information

5. The entity shall ensure data privacy and data integrity at all levels.

B. Agreement with sellers of Debt Securities

The online bond platform providers may allow third-party sellers to use their OBP to sell securities. It is required that before providing any platform to third-party sellers, the entity shall enter into an agreement with such seller that clearly defines the relationship and determines the mutual rights, liabilities & obligations.

C. KYC for On-boarding Investors and Sellers

The Online Bond platform providers shall take necessary steps in complying with the Know Your Customer or KYC requirements and verify the identity and submitted documents of the investors & sellers.

D. Execution of Orders

The online bond platform providers shall ensure that:

  • Listed debt securities orders placed on an online bond platform shall be routed through the Request for quote platform of the recognised Stock Exchange & are settled through a clearing corporation.
  • Debt Securities proposed to be listed through public offering placed on an online bond platform shall be routed and settled through a recognised stock exchange.

E. Risk Profiling

The online bond platform provider shall undertake risk profiling by evaluating through a set of questionnaires containing appropriate risk factors & disclaimers. The entity shall also evaluate the level of risk an investor or seller is willing to undertake based on their risk, appetite, age, investment, horizon etc.

F. Issue of Order receipt, Deal Sheet and Quote Receipt

1. Receipt of order to investor on placement of order: The Online Bond Platform provider shall issue a receipt of order to an investor without any delay, at the time of placing the order. It shall be issued in the electronic format containing the date & time of the order, details of involved parties, quantity & amount proposed to be transacted etc.

2. Deal Sheet to investor after execution of order: The Online Bond Platform provider shall, after execution, issue a deal sheet to the investor. The deal sheet shall contain all the information regarding the transactions, including the date & time of order, details of involved parties, quantity & amount proposed to be transacted etc.

3. Quote receipt to seller after execution of the order: In a third-party sale of debt securities on the online bond platform, the entity shall issue a quote receipt containing the date & time of order, details of involved parties, quantity & amount proposed to be transacted etc.

G. Issuance of alerts to investors & sellers

The entity shall regularly inform the investors & sellers through SMS, E-mail etc., in regard to the status of transactions.

Minimum disclosure Requirements

The online bond platform providers must comply with the following disclosure requirements for every debt security offered for sale on the Online Bond Platform:

  • Issuer’s name, security number & ISIN
  • Instruments’ name, i.e. Listed Security or Unlisted unsecured
  • Seniority, i.e. Senior or Non-Senior
  • Mode of issuance, i.e. Public Issue or Private Placement
  • Date of issue
  • Instrument’s rating- Outstanding rating, date of the rating, Rating Agency and Rating Rationale
  • Dirty price, clean price and face value
  • Type of Coupon, i.e. fixed or floating
  • Rate or Value of Coupon, Frequency of Coupon
  • Maturity date
  • Debenture Trustee’s Name
  • Calculation of current yield & yield to maturity.
  • Prospectus and Private Placement Memorandum
  • Any other document specified by SEBI

Advertisements Codes

The online Bond Platform Providers must ensure that their advertisement shall conform to the following requirements:

  • The advertisements shall be true, fair, clear, unambiguous, complete and concise.
  • The advertisements shall not contain any statements that are misleading, false, biased & deceptive.
  • The advertisements shall not contain any statements based on presumptions or assumptions.
  • The advertisements shall not contain any ranking or testimonials.
  • The advertisements shall not be designed in such a way that it may likely be understood or disguised as the significance of any statement.
  • The advertisement shall not contain statements which may indirectly or directly induce or mislead the investors.
  • The advertisements shall not have any slogan that is inconsistent or unwarranted or exaggerated, or unrelated to the nature & risk or profile of the advertised product.
  • The advertisements shall not contain any celebrities.
  • The advertisement shall not be framed as such to exploit the lack of experience and knowledge of the investors.
  • The language of the advertisements shall be simple and does not contain any technical or complex language or legal terminology that may confuse the investor.
  • The advertisements shall not in any way discredit the other advertisements, whether directly or indirectly or make any unfair comparisons.
  • The advertisements shall contain the following: “Investments in debt securities are subject to risks. Read all the offer-related documents carefully”.
  • The advertisements in the regional language shall contain a warning in the regional language.
  • The advertisement in audio-visual mode shall contain the warning visually which shall be accompanied by audio in that regard.

Investor’s Grievance redress mechanism

The online bond platform provider shall undertake measures or steps to redress the investor’s grievances within 30 days of receiving the complaint. Further, the entity shall also make certain disclosures in the form as specified by the stock exchange, including the number, name & date of the complaint.

Risk Management Framework

The online Bond Platform Providers shall ensure that they have a risk management framework that will cover all the aspects of their operations and ensure that the risk is properly identified and managed prudently. The entity must establish a framework to reduce the probability of any erroneous transactions, such as fat-finger errors and unintended/uncontrolled trading activity by investors & sellers.

Further, the entity shall have a mechanism to:

  • Ensure access & control for its investors and prevent unauthorised access to the Online Bond Platform.
  • Prevent unfair access and avoid potential, actual and perceived conflicts of interest.
  • Ensure that all the transactions on the online bind platform are dealt with in a fair, orderly and non-discriminatory manner.
  • Prevents transactions that are not compliant with the existing legal and regulatory requirements.

Handling Exigencies

The online bond platform shall put in place appropriate safeguards to deal with exigencies like:

  • Suspension/Cessation of trading in debt securities
  • Cancellation of transactions or orders by the investor & seller
  • Malfunction/erroneous use of the system by investor & seller.
  • Any other unforeseen situations.

Disclosure of Conflict of interest

The online bond platform providers must identify and disclose on its online bond platform all possibilities of conflict of interest that may arise due to any transactions or dealings with any related parties.

Data Integrity- Preservation, Access and use of data

The online bond platform providers must ensure that:

  • They maintain all the data of their activities in an easily retrievable manner.
  • They maintain the secrecy and confidentiality of their data and strictly control access to such data.

Reporting and disclosure requirements

In addition to submitting the information required under various SEBI regulations, the online bond platform providers shall submit such information as required by the stock exchanges in relation to their operations. Further, the stock exchange shall require the online bond platform providers to submit information or reports, including:

  1. Details of transactions executed on Online bond Platform.
  2. Details of debt securities offered on the online bond platform.
  3. Any change in the information previously furnished.

Moreover, the OBPP shall inform the stock exchange without delay if any event disrupts the activities or abuses the market. The stock exchange is further required to periodically monitor the activities of OBPPs in relation to the compliance requirements under the guidelines and also notify SEBI in case of non-compliance.

Conclusion

The current guidelines are issued to put the online bond platform providers under the regulatory scrutiny of SEBI. Henceforth, to keep the operations under the purview of the SEBI, it is made mandatory by the OBPs to get themselves registered with a stockbroker in the stock exchange. Therefore, in addition to getting registered, the entity must comply with the requirements discussed above. The guidelines not only protect the rights of the investor but also bring the operations of the OBPs under the purview of SEBI.

Read Our Article: SEBI Request for Quote Platforms for Execution and Settlement of Trade

Nikhil Mogha

An Advocate by profession, Nikhil Mogha holds experience in the field of Business and Securities law. He has done his Masters of Law in Corporate Law from Guru Gobind Singh Indraprastha University, New Delhi. He is also versed with the drafting and research work in the field of Company Law, Banking Laws and Contract Laws.

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