What Sebi crackdown on 3 unregulated bond platforms means

The Securities and Exchange Board of India (Sebi) has taken action this week by prohibiting three unregistered online bond platforms — altGraaf, Tap Invest and Stable Investments — from engaging in the sale of securities. The interim order, issued on November 18, was enacted swiftly to safeguard public investors from "significant risk."

The Sebi's order revealed that a routine investigation uncovered that these unregulated online platforms were promoting and selling unlisted non-convertible debentures (NCDs) to retail investors, prompting the regulator to initiate a comprehensive inquiry.

What activities does the Sebi say these platforms were involved in?

In essence, as per the market regulator, they were acquiring debt instruments issued by companies or unlisted NCDs in the private market and subsequently offering them to the public market.

What are the concerns associated with this?

The private market, where a borrowing company secures funds from a limited number of investors, has less stringent compliance and disclosure requirements. In private placements, securities can only be allocated to a select group of pre-identified investors, limited to no more than 200 in a financial year.

Conversely, public offerings, which target a broader investor audience, are subject to more rigorous compliance and disclosure standards. For instance, they must produce a prospectus detailing aspects such as the establishment of a dedicated bank account for the raised funds, obtaining credit ratings, and engaging registered intermediaries like merchant bankers and debenture trustees.

According to the order of the market regulator, altGraaf reports having over 186,000 investors/users, while Tap Invest claims to have more than 25,000 investors/users. Given their substantial user bases, these unregistered platforms appeared to be circumventing the regulations governing public offerings.

How were they accomplishing this?

The company issuing the debt would allocate the non-convertible debentures (NCDs) to the platform operator, who would then offer them for sale to the public. It appears that these platforms primarily held onto these debt securities until they were sold. In certain cases, as highlighted in the Sebi order, the NCDs were obtained by the platform through private placement.

The platforms lacked a system to ensure compliance with the regulations governing public issues as stipulated in the Companies Act, 2013, along with the Share Capital and Debentures Companies (Prospectus and Allotment of Securities) Rules, 2014, which include restrictions on the number of investors to fewer than 200.

The Sebi order indicated: "It prima facie appears that the Noticees (the operators and owners of these unregistered online platforms) were offering for subscription NCDs that were privately placed, in violation of section 42 of the Companies Act in conjunction with rule 14 of the Share Capital Rules."

Could the issuing companies face penalties?

According to the Sebi order, under section 25 (2) (a) of the Companies Act 2013, if any privately placed security is made available to the public within six months of its issuance, it can be classified as a public issue.

In the event of a violation, the issuing company must demonstrate that the public sale was not conducted in collusion with the company; otherwise, the issuers may be held accountable.

The market regulator's order noted that a conservative estimate, based on data from the centralised database managed by the National Securities Database Limited (NSDL), indicated that all NCDs offered on altGraaf and Tap Invest fell within the six-month timeframe. Additionally, three out of the seven NCDs on Stable Investment were also within this period.

Nonetheless, according to the Sebi order, this matter requires further investigation, stating, "Whether these platforms were making these securities available in collusion with the issuers needs further examination."

The directive issued by Sebi's Whole-Time Member Ashwani Bhatia stated, "Given the current evidence at my disposal, I cannot establish a prima facie finding regarding the unlisted NCDs presented on Stable Investments and Tap Invest."

Were there additional infractions by the platforms?

The Companies Act of 2013 "clearly forbids issuers from using distribution platforms to facilitate their private placements."

The order by the regulator indicated that this provision appears relevant in the case of altGraaf and noted that the applicability of this section to the other two cases "necessitates further examination."

Furthermore, the order observed that all three platforms designed their offerings in a way that suggested compliance with regulatory standards. It stated that "prima facie," the structuring of these offerings by all three platforms could be interpreted as fraudulent under the Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) Regulations.

What implications does this have for other bond platforms?

Bond platforms regulated by Sebi are permitted to sell only specific types of securities—those that are listed or intended to be listed.

They are authorised to offer the following securities:

1. Listed debt securities, listed municipal debt securities, and listed securitised debt instruments;

2. Debt securities, municipal debt securities, and securitised debt instruments intended for listing through a public offering;

3. Listed Government Securities, State Development Loans, and Treasury Bills; and

4. Listed Sovereign Gold Bonds.

In a circular issued in July 2023, the regulator instructed them to divest from all other offerings/securities.

Numerous unregulated platforms provide debt securities that fall outside these categories. Market experts believe that this order signals the regulator's intent to take action against such platforms if there is a "significant risk" to public investors.