Mumbai: The Securities and Exchange Board of India (Sebi) has proposed a new network of fixed-income distributors to take online bond investing beyond big cities, alongside tighter advertising rules for online bond platforms to curb mis-selling and misleading claims.
In a consultation paper issued on Friday, the market regulator has proposed a framework for fixed-income channel partners (FICPs), who would help investors access fixed-income securities through online bond platform providers (OBPPs). The move comes as the regulator seeks to widen retail participation in corporate bonds, which remains concentrated relative to institutional participation.
The model draws on the experience of mutual fund distributors, who have helped expand mutual fund penetration beyond major urban centres. FICPs would assist investors with onboarding, documentation, KYC and transactions, but orders would have to be routed directly through the OBPP platform.
Need to enlist
FICPs would need to be enlisted with a recognized stock exchange and meet eligibility requirements. Individual FICPs would have to be Indian citizens, at least 18 years old, have passed Class 12, and hold the relevant NISM certification. Mutual fund distributors registered with the Association of Mutual Funds in India (Amfi) could also apply as FICPs without paying any enlistment fee, subject to the proposed certification requirement.
The framework places significant responsibility on OBPPs. Platforms would have to conduct due diligence on FICPs, verify their enlistment and certification, provide training and undertake risk-based inspections. They would also be responsible for the acts of omission and commission of FICPs relating to distribution. OBPPs would have to maintain client-mapping records, monitor suspicious activity and complaints, and periodically contact investors onboarded through FICPs.
Sebi is also proposing restrictions aimed at preventing sales incentives from driving product recommendations. OBPPs would not be allowed to offer FICPs in-kind incentives, such as gift vouchers or electronic gadgets, to achieve sales targets. FICPs would have to ensure that financial incentives do not determine which securities or platforms they recommend.
Open for feedback
The proposals are open to public feedback until 11 September.
The regulator has simultaneously proposed replacing the existing OBPP advertisement code with a revised framework. The new rules would require advertisements for specific securities to disclose the issuer, tenor, credit rating and relevant rating information, whether the security is secured or unsecured, clean and dirty prices, and yield to maturity. Advertisements would also have to carry a prescribed warning that fixed returns are not guaranteed returns and that debt securities are subject to market, credit and default risks.
Sebi has stopped short of banning terms such as “fixed returns”, “predictable returns” and “passive income”. However, such terms would have to be used in a generic and non-promissory manner, with appropriate risk disclosures
The proposed advertising code also seeks to address behavioural tactics such as artificial scarcity and urgency. Vague promotional descriptions such as “high yield” or “high returns” would be discouraged where they lack an objective basis. Advertisements would have to present disclaimers prominently rather than burying them in small print.
