⚡SEBI's New Move to Save Investors
SEBI is always on the lookout for investors. And this time it is trying to make online bond investments safer for them. Here's how.
Retail investors have been through a lot lately.
The crypto crash, the NFT bubble burst, the stock market entering bear territory, and whatnot.
And with inflation eroding their wealth more and more every day, many of these investors have begun looking at debt securities and online bonds as investment opportunities as they provide high returns.
But these new investment opportunities have awoken SEBI's mama bear instincts and it wants to make sure that retail investors don't get hurt yet another time.
So, it is attempting to regulate this online debt security space.
🤔 What Are Debt Securities and Online Bonds?
Imagine you lent your friend Rs. 10,000 and they promised to give you back the money after 2 months with interest.
You feel that you can't trust this friend because they've not repaid you in the past. So, you make them sign a piece of paper which guarantees that you will get your money back and get regular interest.
That piece of paper is a debt security.
The most common form of debt security out there is a bond.
Now, these bonds are issued by the government, by corporate companies or even private players to borrow money from investors.
Usually they are listed on the stock exchange where investors can invest in them. But since companies want to raise a lot of money quickly, the ticket size of these bonds is too high (minimum ticket size Rs. 10 lakh).
Only qualified institutional buyers and high net worth individuals (basically those who have a lot of money and can afford to lose it) are allowed to buy these bonds.
This is basically so SEBI doesn't have to regulate this space much.
But with the entry of online bond platforms, SEBI has no choice but to regulate it.
That's because these platforms are offering these bonds to a larger investor base (by going online) and that too at a lower ticket size.
And offering any debt instruments to retail investors opens them up to a lot of risk.
Wondering what risks?
Well, SEBI has a looong list of concerns, so let's take a look at them.
🤨 SEBI's Concerns
Lack of Regulatory Oversight: These platforms don't have to report to the SEBI and as such are unregulated. So, it cannot protect investors or intervene unless it introduces new rules.
No Standard KYC Norms: Each of these platforms have different KYC norms, which the SEBI wants to standardise, in accordance with the Prevention of Money Laundering Act.
Listed and Unlisted Securities: These platforms sell both listed securities (securities that are already listed on a stock exchange and are safe) and unlisted securities, which are risky. SEBI believes that this could be misleading for investors as it would not be easy for them to understand the risk associated with the different bonds on the platform.
No Set Way to Address Investor Grievances: When investors invest via regulated platforms, the Investor Services Cell takes care of all their grievances and problems. But that is not the case with these platforms. While some may have set processes to take care of investors, others may not, leaving investors in a lurch.
Possible Misleading, Misselling and Misrepresentation: These platforms could mislead customers into believing that some risky deals are safe or approved/backed by the SEBI when they are not. This could cause major harm to investors.
Now, these are just concerns and you might feel that SEBI is being an overprotective parent here. But there is an actual legitimate legal problem with the way these platforms are functioning.
Like we said that these platforms are bringing down the ticket size of these debt securities so retail investors can invest money.
But to do so, they are allowing more than 200 people to invest in these securities, which is deemed a public issue which would violate the Companies Act.
So, is this the end of these platforms? Is this another BNPL moment?
Well, no. Like we said SEBI truly cares about retail investors and it wants them to earn high returns from these platforms.
It just wants the process to be a little bit safer.
And to do that, it wants to regulate this space. Here are its suggestions:
All of these platforms should get broker licenses. Why? Stock brokers need to have a net worth of Rs. 2 crores (CDSL) or Rs. 3 crores (NSDL). This will ensure that the platform has enough money at all times to pay back to investors.
All trades should be routed through stock exchanges' platforms to ensure safety.
These platforms should only offer listed debt securities that are safe.
And to get around that issue of 200 people, the securities should be locked in for a period of 6 months from the date they are issued before a sale to the public is made.
Mind you, these are just suggestions written in a consultation paper.
They are still open to suggestions and could change a lot before they are codified into law.
So, these platforms don't need to change how they are working right now.
But this has brought up an important question.
Are companies that offer bonds to more than 200 investors going against the law?
Well, some believe so.
But most others are of the opinion that the law is made only for listed securities. And it doesn't apply to these platforms that are currently offering unlisted securities.
Now, nobody knows which interpretation of the law is right and the only way to find out is if SEBI clarifies this rule.
In the meantime, these platforms can keep operating but they will need to start making changes to make sure they are compliant if and when a law does come out.
⚡ In a line: SEBI is trying to make online bond platforms safer for retail investors by introducing suggestions that would help regulate them.
💡 Quick question: Will these suggestions help investors or make things more complicated for everyone?
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