On November 18, 2024, the Whole-Time Member of the Securities and Exchange Board of India (“SEBI”) passed an Interim Ex Parte Order in the matter of Unregistered Online Bond Platforms (“Order”).
SEBI noted the offering of unlisted bonds on three platforms namely, altGraaf owned by AI Growth Private Limited and operated by Texterity Private Limited, Tap Invest owned and operated by Purple Petal Invest Private Limited and Stable Investments owned and operated by Berkelium Technologies Private Limited. None of these platforms had obtained registration as Online Bond Provider Platforms(“OBPPs”), nevertheless they were engaged in solicitation and sale of unlisted non convertible debentures (“NCDs”) to retail investors.
It was found that Texterity Private Limited had acquired unlisted NCDs through private placement and was selling them to the public on the altGraaf platform. Further, the unlisted NCDs offered on Tap Invest and Stable Investments had also been privately placed first.
SEBI referred to Section 42 of the Companies Act, 2013 and Rule 14(2) of Companies (Share Capital and Debentures) Rules, 2014 which provide that, under a private placement, securities can be allotted only to pre-identified investors, and there is a cap on allotting securities via private placement to more than 200 investors in a financial year. SEBI noted that all of the platforms in consideration had been offering securities to the public rather than pre-identified investors, and to more than 200 investors in a financial year. Further, Section 42(7) of the Companies Act, 2013 prohibits issuers from utilising distribution platforms in aid of making their private placements. SEBI found that this had been violated in the case of altGraaf but would require further investigation in the case of the other two platforms.
SEBI referred to Section 25 of the Companies Act, 2013 which specified that securities issued via private placement, if offered to the public within six months of the issue are treated as a public issue. The onus is on the issuer to prove that the sale to the public by the initial allottee/s or transferees was not with the connivance of the issuer, else issuers can be held liable. In this regard, SEBI noted that all the NCDs offered on altGraaf and Tap Investment, and three out of seven NCDs offered on Stable Investment, were within the six-month period, even counting the time period up to the Order. However, SEBI noted that the time period would have to be computed from the private placement up to the offering of securities to the public, which would require further investigation. Moreover, the question of the connivance of the issuer was left to further investigation.
SEBI further noted that all three platforms structured their offerings ostensibly to appear compliant with regulatory mandates, which was viewed as a scheme or artifice intended to defraud investors and therefore covered within the ambit of fraud under Section 12A of the SEBI Act, 1992 and Regulations 3 and 4(1) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Related to the Securities Market)Regulations, 2003 (“PFUTP Regulations”). The connivance of issuers was left to be investigated. Further, SEBI noted that altGraaf and Stable Investments had made disclosures to the effect that transactions facilitated on the respective platforms or that the products offered thereon were incompliance with the applicable provisions of the Companies Act and SEBI Regulations. SEBI found that these disclosures were misleading and the transactions on the platform therefore were tantamount to mis-selling of securities, attracting Regulation 4(2)(s) of the PFUTP Regulations.
SEBI noted that the platforms were facilitating large values of transactions by large numbers of investors, in ways that deliberately blurred the distinction between public issues and private placements. SEBI therefore found that issuance of interim ex-parte directions was warranted since such a distinction is not merely procedural but a fundamental safeguard to ensure that public investments are protected through rigorous oversight. Accordingly, SEBI directed the owners and operators of the platforms to cease and desist from offering securities for public subscription or from being offered for sale on their platforms. Further, they were directed to preserve all records and communications regarding the offerings made available on their platforms from their inception as well as any investments made by them or their associated companies in securities until the date of the Order and make the same available for inspection and investigation as needed.
We view the Order as a positive step that is necessary to preserve the integrity of the markets and the interests of the investors in NCDs. Further, it contributes to ensuring that duly regulated OBPPs remain the appropriate venue for public offering of NCDs.
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