The pandemic of COVID-19 significantly altered investment strategies, leading to a shift of approach that focused on retail investors. Retail investors, at the same time, looked for safer ways to invest their money as traditional investments like fixed deposits, post office savings, mutual funds, and so on, generated lower returns. The Reserve Bank of India ("RBI") had first attempted to increase retail participation by launching Retail Direct, that focused on investment in government securities (primary and secondary) by retail investors. This, however, found limited ground, and the total number of registrations of individual investors stood at 1,35,629 as of April 22nd, 2024, since its inception in 2021, according to RBI data1 The objective announced by RBI in the Statement of Developmental and Regulatory Policies of deepening retail participation and ease of access, was yet to be achieved! After the recession in 2008, banks and financial institutions witnessed regulatory scrutiny, higher cost of capital, liquidity and solvency risks, all of which remained vital factors to identify stability. The larger consequence − retail passiveness. Change takes more than a decade, and every major life event sets us back to a pace that makes change even more difficult to achieve.
The propeller must, however, come from retail participation! This objective of the regulator caught the attention of many, amongst them being fintech companies in the securities market − ones that focussed on offering non-equity investment options. Such fintech companies achieved scale through financial inclusion, investor-centric innovations and technology for outreach, and untapped opportunities in alternate investment options like bonds to capture retail interest through Online Bond Platform Providers ("Bond Platforms").
While Bond Platforms existed since 2020, the Securities and Exchange Board of India ("SEBI") began to regulate them only in November 2022. Rather with, strategy after having in September, 2022 rationalised norms on denomination of issuance and trading of Non-Convertible Debt Securities ("NCDs") from INR 10 lakhs to INR 1 lakh.2 SEBI, in April 2024, further reduced the face value to INR 10,000 from INR 1 lakh for privately placed NCDs and Non-Convertible Redeemable Preference Shares ("NCRPS") to enhance retail participation.3 A significant uptick was observed after SEBI permitted Bond Platforms to offer products other than just bonds. An expansion in the securities revealed a notable surge of 30-40% in retail investor engagement over a financial year.4
Delving into Bond Platforms, they are technology platforms that facilitate the buying and selling of bonds, debt securities, government securities, and other financial instruments. The financial nature of the technology platform originates not merely from product offerings but also from the regulatory licenses they are mandated to obtain: first, as a stockbroker in the debt segment of a stock exchange(s) from SEBI, and thereafter, registration with a stock exchange. Bond Platforms were an unregulated segment until 2022. They have come a long way, and the sheer volume of transactions pushed SEBI to wear its investor protection hat once again. Not only do Bond Platforms require a license to operate, but also upkeep compliance, briefly:5
1. Products and Services
Bond Platform can, from December 2023, offer, in addition to bonds, products / securities / services that are regulated by financial sector regulators such as the Reserve Bank of India (RBI), Insurance Regulatory Development Authority (IRDAI), Pension Fund Regulatory Development Authority (PFRDA) or SEBI.
2. Execution of Orders
SEBI, in recognition of its own mandate to register Bond Platforms as stock brokers (debt Segment),also permitted:
(a) Request for Quote platform (RFQ) of a recognised stock exchange and settlement through respective clearing corporations for listed debt securities, listed municipal debt securities, and listed securitised debt instruments;
(b) Routing and settlement through a stock exchange mechanism for debt securities, municipal debt securities, and securitised debt instruments proposed to be listed through a public offering;
(c) Routing and settlement through a stock exchange mechanism, unless otherwise specified by RBI, for listed government securities, state development loans, and treasury bills;
(d) Routing and settlement through a stock exchange mechanism, unless otherwise specified by RBI for listed sovereign gold bonds.
3. Transparency
Bond Platforms must:
(a) Enlist each product / security / service regulated by various financial regulators under a different tab / section on their platform or on any other website / platform;
(b) Display disclaimers, provide hyperlinks that direct users to offerings regulated by financial sector regulators and follow regulator specific regulations for the distribution, marketing and advertising of products.
Conclusion
Bond Platforms exemplify a scenario where regulatory supervision became essential due to the increasing engagement of retail investors − INR 1.2 billion poured into the bonds market in 2021-22 alone. As per CRISIL Ratings, the bond market is set for a significant upswing, with projections indicating that it will more than double, increasing from approximately INR 430 billion as of the last financial year to INR 1000 -1200 billion by the financial year 2030.6 The much-awaited objective of waking up the retail passive knocked at the regulator's door!
The transformation of Bond Platforms has brought significant changes to the financial sector, particularly in enhancing accessibility and inclusivity. The multi-fold increase in retail participation proved to be a market that was rather, untapped! The treat for corporates lay in the reduction of the face value of bonds, further widening participation and boosting accessibility to funds / capital. The journey of Bond Platforms signifies a transformative shift towards a more inclusive, transparent, and regulated bond market, where investors and corporates can make informed decisions and access a diverse array of investment and debt raising opportunities.
Footnotes
1 https://www.rbiretaildirect.org.in/#/about_statistics
2 SEBI Operational Circular on "Issue and listing of Non -convertible Securities, Securitised Debt Instruments, Security Receipts, Municipal Debt Securities and Commercial Paper" modified vide SEBI/HO/DDHS/P/CIR/2022/00144 dated October 28, 2022 (the provisions of the circular came into effect from January 1, 2023).
3 Amendments to "Issue and Listing of Non-Convertible Securities Regulations, 2021" to modify provisions relating to reduction in face value of debt securities and Non-convertible Redeemable Preference Shares in SEBI's press release of its board meeting PR No.08/2024 held on April 30, 2024.
4"Retail investor participation in online bond platform grow 30-40% in FY24" published on Feb 21, 2024 at https://www.moneycontrol.com/news/business/retail-investor-participation-in-online-bond-platform-grow-30-40-in-fy24-shows-data-12321281.html
5 SEBI circular titled SEBI | Modifications to provisions of Chapter XXI of NCS Master Circular dealing with registration and regulatory framework for Online Bond Platform Providers (OBPPs) dated Dec 28, 2023.
6 "Corporate bond market to more than double by fiscal 2030" published on December 04, 2023 at https://www.crisilratings.com/en/home/newsroom/press-releases/2023/12/corporate-bond-market-to-more-than-double-by-fiscal-2030.html
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