A fortnight ago, the Securities and Exchange Board of India (Sebi) constituted a market advisory group, comprising senior members in the bond market and officials of securities exchanges, clearing houses, depositories to explore ways to sort out the operational problems for electronic bond platforms, and review regulations on categorisation and net worth of bond brokers, two persons familiar with the development told ET.
There are about 40 online bond platform providers (OBPP), some operating for five years or more, but non-institutional trade volumes have not picked up significantly.
India’s market regulator is launching a new initiative to boost online bond trading and attract retail and non-institutional investors. A newly formed advisory group will address operational challenges and review regulations for bond brokers to facilitate easier participation in the listed debt market, similar to equities.
Market old-timers believe that one of the hurdles in the story is the way the bond market is viewed by the authorities who are reluctant to treat it differently from equities. While New Delhi wants retail and other investors to buy and sell bonds as seamlessly as they trade equities, what is often not recognised is that the two asset classes are very different, and bond brokers operate in a world that is different from stock brokers, they say. And, as retail and non-institutional investors are encouraged to trade, Sebi has to bring in checks and balances to curb mis-selling. The new panel would probably take up these issues, said an industry person.
In the electronic bond trading architecture, the two key sets of facilities aimed at attracting non-institutional traders are ‘Online Bond Platforms’ (OBPs) and ‘Request for Quote’ (RFQ). The electronic debt-bidding platform (EBP), on the other hand, is meant for issuance of debt securities on a private placement basis.
OBPs were brought under Sebi regulations in end-2022. They offer debt securities obtained through subscriptions to public issues or private placements and through the secondary market, to non-institutional investors. Many are fintech companies or entities backed by stock brokers. These OBPs providers (OBPPs) are market places for listed debt securities and debt securities which are proposed to be listed through public offerings. ‘Request for Quote’ (RFQ) is a trade execution platform launched by an exchange, where all participants can trade either directly or through brokers. The platform aimed to enable price discovery by allowing participants (or their brokers) to request price quotes from multiple potential buyers or sellers. When an investor places an order on an OBPP, the OBPP routes that order through the exchange’s RFQ platform for transparent and secure execution and settlement.
AgenciesSEBI sets up advisory group To attract retail, non-institutional investors, look into broker classification, net worth
However, since payment and settlement in bonds happen differently, the broker may have to borrow funds pledging his securities. “Unlike equities, bond brokers don’t have client’s money. It may happen that it has to leverage its portfolio to procure the securities and deliver them. However, according to regulations, the pledged security value is deducted from its net worth. This puts bond brokers at a disadvantage and it’s time the regulation is reviewed. Or the settlement mechanism for bond bonds is made similar to that of stocks,” said a bond house official.
Also, the regulator prefers that a broker displays all the quotes of clients so that it’s easier for counterparties to buy or sell. “But, clients, particularly large ones, don’t want to show this to the market as prices could deviate. Even in equities block deals are not visible in real-time trading screens,” said another person.
Besides the high taxation where the post-tax yield on a 10% bond would be 6.5 to 7%, investors on OBPs were taken aback by a few cases where the companies (which issued the bonds) went bust. “Now, low-rated papers offering 13/14% return may not have the best credit quality. Retail and some of the non-institutional Investors, not familiar with credit rating and yield calculation, do not grasp this,” said a broker. However, this issue could occasionally crop up when the bond market expands beyond the conventional investors.
