Explained: Why SEBI cracked down on three unregulated bond platforms; what it means for other players

The SEBI order said, "whether these platforms were making available these securities in connivance with the issuers needs further investigation".

The market regulator this week banned three unregistered online bond platforms — altGraaf, Tap Invest and Stable Investments, from selling securities.
The November 18 order was passed with some urgency—it was an interim order—because the regulator wanted to protect the public investors from "significant risk".
The order issued by the Securities and Exchange Board of India (SEBI) said that during a routine investigation it was found that certain unregulated online platforms were advertising and selling unlisted non-convertible debentures (NCDs) to retail investors. Therefore, the regulator launched a detailed investigation.

Also read: SEBI asks altGraaf, Tap Invest and Stable Investments to cease and desist from selling bonds

Here is what the regulator found, why it was considered a significant risk and what it means for other unregulated platforms.

What were these platforms doing?

Simply put, they were buying debt issued by companies or unlisted non-convertible debentures (NCDs) in the private market. Then they were making it available in the public market.

What's the problem with that?

In the private market, which is when a debt-issuing/borrower company borrows from a limited set of investors, the compliance and disclosure norms are more relaxed.

In a private placement, securities can be allotted only to pre-identified investors and to not more than 200 investors in a financial year.

In a public issue, with a much larger investor base, there are stricter compliance and disclosure norms. For example, they have to bring out a prospectus that will record details such as the opening of a separate bank account that will hold the money raised, obtaining credit ratings, and appointing registered intermediaries such as merchant bankers and debenture trustees.

According to the SEBI order, altGraaf claims to have over 1.86 lakh investors/users and Tap Invest claims to have over 25,000 investors/users.

With such a large user base, these unregistered platforms were seemingly used to "get around" the public issue norms.

How were they doing that?

The debt-issuing (borrower) company would allot the NCDs to the platform operator. Then the platform operator would make it available for sale to the public. Largely these platforms seem to be warehousing these debt securities till they were sold to the public. In some instances, as the SEBI order noted, the NCDs were acquired by the platform in the private placement.

The platforms had no mechanism to ensure that the rules laid out for public issue, under the Companies Act, 2013, read with Share Capital and Debentures Companies (Prospectus and Allotment of Securities) Rules, 2014, were being followed, such as limiting the number of investors to under 200.

The SEBI order noted: "It prima facies appears that the Noticees (the operators and owners of these unregistered online platforms) were making available for subscription NCDs that were privately placed in violation of the provisions of section 42 of the Companies Act read with rule 14 of the Share Capital Rules".

Can the issuer companies face any penal action?

The SEBI order said that 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 issue, then this issue can be treated as a public issue.

If there is a violation, the issuing company will need to prove that the sale to the public was not done in connivance with the company or else issuers can be held liable.

The SEBI order noted that a conservative estimate, based on data available on the centralised database operated by the National Securities Database Limited (NSDL), showed that all the NCDs offered on altGraaf and Tap Invest were within the six-month period. Three out of the seven NCDs on Stable Investment also were within this period.

Despite this, the SEBI order noted that this aspect will need further investigation. It said that "whether these platforms were making available these securities in connivance with the issuers needs further investigation".

The order issued by SEBI's Whole-Time Member Ashwani Bhatia said, "Based on the evidence available before me at present, it is not possible to arrive at a prima facie finding in this regard in respect of the unlisted NCDs offered on Stable Investments and Tap Invest."

Were there other violations by the platforms?

The Companies Act 2013 "expressly prohibits issuers from utilising distribution platforms in aid of making their private placements".

The SEBI order said that this section seems applicable in altGraaf's instance and added that the section's applicability in the other two instances "requires further investigation”.

Also, the order noted that all three platforms structured their offerings in a manner that conveyed that the offerings were in compliance with regulatory norms. The order said that "prima facie" the structuring of these offerings by all three platforms can be considered fraud under the Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) Regulations.

Also read: Explainer: Why a recent SEBI order on Piramal Pharma was highly unusual and what it means for other listed entities

What does it mean for other bond platforms?

SEBI-regulated bond platforms are allowed to sell only certain kinds of securities—which are listed or to-be-listed.

They are allowed 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 proposed to be listed through a public offering;

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

4. Listed Sovereign Gold Bonds.

In a July 2023 circular, the regulator had asked them to divest themselves of all other offerings/securities.

Several unregulated platforms offer debt securities that are outside of this. Market insiders believe that this order indicates that the regulator will crack down on such platforms if there is a "significant risk" to public investors.