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, Bloomberg reported.
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 from selling privately placed corporate notes 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 August 12 to give officials their input on the matter, the report said.
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 to the top-rated issuers, with big local banks and brokers doing deals based on long-standing relationships.
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.
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.
Under trade settlement, SEBI has proposed transactions on these platforms be settled either through the debt segments of exchanges or through requests 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.
SEBI also proposes to prohibit platforms from selling bonds that will not be listed on exchanges.
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