New Rules May Pull Rug Out From India’s Bid to Boost Market

(Bloomberg) -- India’s plan to expand its corporate bond market faces an unexpected impediment because the regulator is considering tightening control of trading platforms that allow investments in company debt in just a few clicks. 

While the proposed framework is designed to protect investors and is therefore being welcomed by some, a few of the proposals by the Securities and Exchange Board of India could actually prove counterproductive and hurt liquidity, according to experts who spoke to Bloomberg. That’s because the sale of unlisted debt would be banned, platforms would be forbidden to sell privately placed corporate notes on to non-institutional investors soon after acquiring them, and trades would need to be settled via routes that today are not commonly used. 

Market participants have until Aug. 12. to give officials their input on the matter.

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

Opening up India’s corporate bond market is an important part of Prime Minister Narendra Modi’s pledge to almost double the size of the economy to $5 trillion by 2025. As it stands, the local-currency bond market offers easier access only for the top-rated issuers, with big local banks and brokers doing deals based on long-standing relationships.

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Bond platforms, either start-ups or businesses backed by banks or brokers, have boomed in India with more than a dozen financial technology platforms emerging in the last three years, competing for a share of the $1.9 trillion market for time deposits. They mainly target individual investors with a promise of much higher interest rates by putting money into company debt, and allow for minimum investments that can be as low as 10,000 rupees ($126). 

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

Here’s how the regulation might impact the market: 

Six-Month Lock-in

• Sebi proposes to bar platforms from selling privately placed corporate bonds to non-institutional investors within six months of allotment
  • The proposal comes after the regulator found that in some cases the entire privately placed issue was sold to more than 200 investors within 15 days of allotment, making it more akin to a public issue
• “The regulator is concerned about private placements becoming shadow public offerings via distribution on online platforms given that the rules, compliance and disclosure requirements for a public offering are much more stringent and detailed,” said Shardul Amarchand’s Ahluwalia
• But Ankit Gupta, who founded BondsIndia.com, said institutions would be required to maintain a huge balance sheet to buy and hold notes for six months
• Because of this, Gupta said there’s a risk of platforms’ ability to participate in primary issuance will be limited, thereby affecting liquidity. He will reach out to the regulator for more clarity

Trade Settlement

• Sebi has proposed transactions on these platforms be settled either through the debt segments of exchanges or through request for quote platforms
  • The regulator found that in some cases these platforms accepted funds directly from the client, bypassing procedural norms
• But market participants argue the two routes suggested by Sebi aren’t regularly used by bigger participants to settle over-the-counter trades
• “In cases where platforms are settling trades through clearing corporation, the party that buys bonds credits money in clearing corporation’s account directly and the seller supplies the debt securities,” said Aditi Mittal, co-founder at IndiaBonds.com and director at one of India’s leading broker A.K. Capital Services Ltd., adding only if the deal matches, respective accounts are debited and credited
• “This system is working beautifully as nothing is paid into the platforms’ account. Hence, the concern regarding tweaking the settlement structure needs to be discussed and deliberated,” she said

Unlisted Debt

• The authority also proposes to prohibit platforms selling bonds that will not be listed on exchanges
  • The move comes as the regulator wants to protect the non-professional buyer. That’s because unlisted bond offerings don’t require companies to provide detailed information on the issuance and can be sold in smaller denominations than standard 1 million rupees
• “This move will reduce the variety of bonds available on bond platforms for investors,” said IndiaBonds’ Mittal, adding there are other ways to educate the investors such as highlighting the difference between listed and unlisted notes

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