Go with regulated entity: Listed bonds subject to ratings, oversight

The Securities and Exchange Board of India (Sebi), through a circular dated December 5, 2024, warned investors against transacting on unregulated online bond platforms that promote unlisted securities. The circular highlighted that these platforms are not subject to any regulatory or supervisory oversight, and lack basic investor protection or grievance redress mechanisms.

 

“Unlisted securities, issued by smaller companies, often promise high interest rates of 15-18 per cent to attract investors. They may be complex, structured credit products that investors may not fully understand as they come with inadequate information,” says Vishal Goenka, co-founder, IndiaBonds.com.

 

Unregulated platforms: A risky proposition

 

Unregulated platforms expose investors to counterparty risk. “An investor transfers money to the platform’s account. The latter in turn transfers securities to the investor’s account. There is a counterparty risk that the platform may abscond with the money without transferring the securities,” says Anshul Gupta, co-founder and chief investment officer (CIO), Wint Wealth.

 

If such a platform shuts down, investors have no fallback options. In contrast, Sebi-registered platforms provide access to a robust grievance redress process. Also, disputes with unregulated platforms must be settled bilaterally, as there is no independent and regulated mediation process.

 

Unlisted debt: Higher on the risk scale

 

Unlisted debt securities, often issued by smaller entities, carry higher default risk. “These issuers are not subject to rigorous scrutiny, making it harder to evaluate their creditworthiness,” says Vijay Kuppa, director, Bidd.

 

Unlisted securities are also not subject to mandatory disclosures. “Listed securities must follow Sebi’s rules, including quarterly financial updates and monitoring by debenture trustees. Unlisted securities lack such safeguards,” says Goenka.

 

Such securities also carry higher credit, liquidity, and interest rate risk.

 

“Issuers may default, investors may struggle to sell and exit these bonds, and interest rate changes may affect valuations,” says Ankit Gupta, founder director, BondsIndia.

 

According to Gupta of Wint Wealth, the absence of mandatory credit ratings for unlisted debentures means they could turn out to be junk bonds.

 

Take the regulated option

 

Sebi-regulated platforms sell only listed bonds, which have to adhere to higher governance standards and undergo credit rating.

 

“Rating is mandatory and is a prerequisite for listing,” says Gupta of Wint Wealth.

 

These platforms register as stockbrokers in the debt segment and as online bond platform providers (OBPP). “Their registration number and other details are available on their websites,” says Kuppa.

 

Investments are processed through Sebi’s request for quote (RFQ) platform.

 

“Funds are routed directly to the national clearing corporations and securities are credited directly to investors, bypassing the bond platform and thereby ensuring safety,” says Goenka.

 

Sebi-regulated platforms also provide grievance redress through Sebi’s SCORES platform. “The scope for mis-selling is limited as platforms must follow an advertising code,” says Goenka.

 

Verify platform compliance

 

Investors should verify a platform’s registration on Sebi’s website (where all regulated platforms are listed). “This adds an extra layer of assurance,” says Goenka. In addition, check the platform’s registration number, licence number, and address on its website.

 

Choosing the right platform

 

Strong equity backing is essential. “This ensures the platform’s longevity and focus on doing the right things,” says Gupta of Wint Wealth. He also suggests choosing a platform with no history of defaults. Goenka favours selecting one with a wide range of offerings, including government and corporate bonds.

 

Several segments of the bond market lack depth. “Check whether the platform provides liquidity support for exit before maturity,” says Kuppa.

  Beginner’s roadmap to bond investing

 

• Invest in bonds listed on Sebi-regulated online bond platforms
• Start with a small investment: NCDs now have a face value as low as Rs 10,000, reduced from Rs 1 lakh
• Increase exposure gradually as you gain knowledge
• Bonds are categorised into senior secured, senior unsecured, subordinate, and perpetual; senior secured bonds, backed by collateral, are suitable for new investors
• Ensure the bond is rated as investment grade by a major rating agency
• Check if the issuer earns net profits and has strong financial ratios (return on assets and return on equity)
• Be aware of details like maturity date, yield to maturity (YTM), and rating