Sebi crackdown against bond platforms may have revealed a regulatory gap

The Securities and Exchange Board of India restrained three unregistered online platforms—altGraaf, Tap Invest and Stable Investments — from offering privately placed unlisted non-convertible debentures for public subscription, according to the regulator’s interim order on 18 November. Sebi cited the violation of norms that treat any issue with over 200 investors as a public issue. Current regulations for private placement of securities are less stringent than public offers.

“Instances where securities were sold shortly after allotment, and to more than 200 investors, bring these transactions under Sebi’s regulatory purview, requiring compliance with public issue norms, such as disclosure requirements and approvals,” said Venkatkrishnan Srinivasan, bond market expert and founder, Rockfort Fincap LLP.

According to the Section 42(2) of the Companies Act, along with rule 14(2) of the Share Capital Rules, if securities are issued to more than 200 investors via private placement in a single financial year, the issue is considered a public issue and needs to comply with Sebi regulations.

Section 25(2)(a) of the Companies Act states that securities issued via private placement, which are offered to the public within six months of issuance, will be treated as a public issue.

Sebi’s concerns stem from the fact that very high yield products offering 15-16% returns are generally not advisable for retail investors as they are niche debt products and carry high credit risk, according to experts. As of the date of the order, altGraaf had over 186,000 investors and Tap Invest had 25,000 investors. While over ₹4,400 crore was raised through altGraaf, over ₹400 crore was raised through Tap Invest, according to Sebi.

Online platforms exploit regulatory gaps, blurring the lines between private and public offerings, and their rapid scaling has complicated enforcement, said Ketan Mukhija, senior partner at Burgeon Law. “The decentralized nature of digital transactions and cross-border operations further adds to Sebi’s difficulties in gathering evidence and ensuring compliance”, Mukhija said, adding that wealth managers and financial institutions must ensure compliance as they were bound by regulatory norms.

Some believe wealth managers have been able to escape Sebi’s scrutiny so far.

“What altGraaf, Tap Invest and Stable Investments did was to buy the whole tranche and then show it as an investment option to their thousands of registered users,” said Yash Roongta, founder of AltInvestor, a digital platform for alternate investing.

However, 99% of wealth managers in the country also operate in a similar manner, and also possibly breach the 200-investor limit but are not tracked due to lack of transparency, said Roongta. “Sebi should also investigate large wealth managers who are downselling securities; it’s wrong to just penalize platforms which are showing data transparently.”

Queries emailed to Sebi’s spokesperson remained unanswered.

Sebi had, in 2022, issued a framework allowing registered online bond platform providers (OBPPs) to offer listed debt securities and other regulated financial products to retail investors. These regulations include KYC mandates, listing bond details, risk disclaimers and a specified list of securities that can be sold on these platforms. OBPPs can only sell public issue bonds and listed private bonds and not unlisted private bonds.

All the three platforms pulled up by Sebi are unregistered under the OBPP framework. The capital markets regulator, in its ex-parte order, said that it found altGraaf was offering unlisted NCDs. Here, the bonds were first subscribed to by the holding companies of these platforms through private placement and then sold to the public in the secondary market through the platform.

Sebi also expressed concerns regarding possible collaboration between the platforms and bond issuers for the sale of privately placed securities to the public, given that these platforms were found to be misleading investors by falsely claiming compliance with regulatory standards.

“The lack of guardrails for unregistered platforms, such as KYC processes or mechanisms to track holdings in case of default, poses significant risks to retail investors,” said ockfort Fincap’s Srinivasan. “While these platforms often engage regulated intermediaries to complete their unlisted issuance process, Sebi’s concern about the rise in unlisted, higher-risk issuances being sold to retail investors within a short period is valid.”

AltGraaf and Stable Investments didn’t respond to Mint‘s emailed queries.

A spokesperson for Tap Investment said that it is examining Sebi’s notice to ensure its operations comply with the regulatory framework. “As the matter is sub-judice before the regulatory authorities, we are not in a position to make any comments at this stage,” the spokesperson said.

However, Sebi’s actions seems to have made other such online platforms take notice. An official at another such online bond platform that has not been named in the order said that its legal team is reviewing the order and evaluating its potential impact. The official, who spoke on the condition of anonymity, said that given that the order targeted unregulated entities, it is reasonable to expect that one of them may approach the Securities Appellate Tribunal.

Listed bond platforms said they are strictly following regulations around bond sales.

“As an online bond platform (OBPP) we are very clear that we cannot sell private unlisted bonds,” said Vijay Kuppa, director at Bidd—the registered online bond platform of wealth platform InCred Money. “For such type of bonds, even for offline and unregistered players, what Sebi’s order seems to be saying is that—you have sold it more than 200 investors.”

A senior executive at a wealth management firm said, “How can somebody run a capital markets business without being Sebi registered? That’s the cost of compliance of doing business.”

“People have to follow the law in spirit and writing. Some of these platforms have flouted even the writing, forget the spirit,” he said. “That’s why the clampdown has happened. Have wealth managers done this as well? The answer is yes, but I don’t think the regulator would be as worried about them doing that because they sell to a very specific client list,” he said, suggesting that the clients could be beyond retail investors.