On 18th November 2024, SEBI sent an interim ex-parte order to 4 entities calling them “Unregistered Online Platforms (UOPs)”
An Ex-Parte Order sounds fancy but what it means is that the order was directly issued to the platforms altGraaf, Tap Invest, Stable Investments without any show-cause notice a.k.a. warning.
If you are interested, you can download the full order here and read it.
Modus Operandi Of The Platforms
Before I explain the violation, let's quickly understand how these platforms operate.
Let's assume ALT Investor wants to raise money through Non-Convertible Debentures (NCDs), also known as bonds. ALT Investor approaches altGraaf and issues bonds worth INR 5 Crores to them at a 16% XIRR in a private placement offer. This bond is neither credit-rated nor listed.
altGraaf then decides to down-sell this bond to retail investors registered on their platform at perhaps 14% XIRR, keeping the 2% difference as profit. Since the bond is unlisted, it is not regulated by SEBI or RBI.
However, the bond issuance or private placement offer is regulated according to the Ministry of Corporate Affairs (MCA) Rules. ALT Investor, as a company, must comply with Section 42 of the Companies Act, 2013.
Since this is a private placement offer, ALT Investor can only sell or present the bond offer to a maximum of 200 people in a financial year. In the example above, it sold the entire tranche of INR 5 Crores to altGraaf, thus not violating the guidelines.
Details Of SEBI Order
Continuing from the example above, altGraaf then offered the bond to all registered users on their platform. According to the SEBI Order, altGraaf has 1.86 lakh registered users.
Since this privately placed bond was offered to more than 200 investors, it should actually be considered a public issue, and all rules for public issues should apply. If it is to be considered a private placement, then they violated the provisions of the Companies Act, 2013, the Securities and Exchange Board of India Act, 1992 (SEBI Act), and the NCS Regulations.
As per SEBI Order:
Section 42(2) of the Companies Act, 2013, read with rule 14(2) of Share Capital Rules, specifies that if securities are issued to more than two hundred investors via private placement in a single financial year, it shall be deemed to be a public issue and all attendant requirements, including compliance with SEBI Regulations would get attracted.
There is also one more issue that SEBI has highlighted:
It is worthwhile to note that section 25(2)(a) of the Companies Act, 2013, specifies 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.
So two problems that SEBI has highlighted:
If a privately placed security is sold on an unregistered online platform, it can only be sold to a maximum of 200 people. Some might wonder why this rule doesn't apply to OBPP platforms. SEBI addressed this in this consultation paper and allowed going beyond the 200-person limit if the issue is listed, rated, and regulated, even if it is privately placed.
If a privately placed security is downsold on the platform within 6 months from the date of allotment, it will be treated as a public issue, and all related compliance must be followed. In this case, platforms can easily comply by holding the securities on their books for 6 months before downselling, avoiding any repercussions.
My Thoughts On The Order
After reading all the types of questions and conversations that have happened in the ALT Investor Community since the order, here are my thoughts:
Listed Vs. Unlisted
The order is not about listed vs. unlisted bonds and which is right or wrong. The order is about unlisted bonds being “Unregulated” securities being offered on Unregulated Online Platforms (UOPs).
It is very very important to note that Unlisted Bonds ARE Unregulated. If you lose money in Unlisted Bonds or if a fraud happens with you, SEBI or RBI can’t help you!
Limit On Number Of People
Privately Placed Unlisted Bonds have a limit of max 200 people subscribing to it in the primary issuance. This is done for a good reason. It’s very very simple for any private limited company to issue a privately placed unlisted bond and offer it to public at large. There are not standardized terms on how this bond needs to be structured.
Given the extra specialized knowledge needed, MCA put in the guardrails suggesting that the security can only be offered to max 200 people. 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.
I don’t know for sure if that is absolutely wrong given 99% of the wealth managers in the country also function this way. A large wealth manager may purchase 100 Crores INR worth of bonds and then ask their Relationship Manager team to downsell it to their clients. In many cases, they will breach the 200 limit but there’s no tracking, no transparency.
SEBI should also investigate large wealth managers who are downselling securities, it’s wrong to just penalize platforms which are showing data transparently.
SEBI & RBI Are Against Unregulated Products
It's no surprise that SEBI and RBI have been very active in cracking down on unregulated products by either shutting them down or bringing them under regulation.
Here are some notable actions taken:
RBI regulated P2P platforms in 2017.
SEBI invited existing UOPs to apply for the OBPP framework in November 2022.
SEBI clamped down on Growpital in January 2024.
SEBI introduced the SM-REIT regulation to oversee the fractional real estate industry.
RBI clarified existing P2P guidelines to prevent any creative interpretation.
SEBI issued an ex-parte interim order to UOPs in November 2024.
This should be a wake-up call for investors still putting money into unregulated products. Who knows, the favorite of the alternative investment industry, invoice discounting, might be next in line?
Even Unlisted Equities Maybe At Risk
Even though yesterday’s SEBI order only talked about bond platforms and unlisted bonds, given unlisted equities offered by platforms like Precize, Altius Investech, Incred Money are also technically downselling privately placed equities, they can also be next in line for receiving such an order by SEBI.
I am very conscious, I am not a lawyer to tell you the above affirmatively, but I have had the liberty to chat with a couple of industry folks today to get this view. You can choose to do your own assessment.
But by all means, any “security”, whether its equity, bond or anything else, if it’s privately placed, it should only be offered to 200 people. And if downselling is a problem, SEBI may put an end to all these platforms and even the business of several large wealth managers in the country.
Platforms Need To Listen To The Regulator
Last but not the least, I am sure SEBI must have notified all the impacted platforms informally at least on multiple occasions to stop doing the unregulated products. If platforms don’t take proactive action and err towards the side of regulation, it’s very unlikely investors will trust them or should trust them.
For you investors, you need to be smart and conscious on where you are investing because at the end of the day it’s your hard earned money. And to be fair, even I have invested in some unregulated alternative investments including unlisted bonds, but yesterday’s order for me is crystal clear that SEBI is not messing around. They will sooner or later put a stop to all unregulated instruments or regulate them.
Conclusion
First of all, any existing investor who has invested in unlisted bonds or any other unlisted security need not panic. Your investments are safe from any regulatory risk. This order is stopping the three named platforms from selling more unlisted securities. But there are other platforms which are not named in the order but have the same modus operandi. If possible, you should avoid the below platforms given yesterday’s order.
All Unlisted Shares Platforms (List in this article)
There maybe many more that we are not aware of at this stage, we will update this article when we know more. I am sure all three impacted platforms will want a hearing with SEBI or go to SAT (Securities Appellate Tribunal) to appeal about this order because technically even the bigger wealth managers who are not operating so openly are also in violation.
It is safer to stay away from these products till further clarification. Rest is always upto you because you know best on what works for you!
As always, if you have any doubts about this, or want to get more information, join the ALT Investor community here.
Please note that this is an opinion blog and not an official research or investment advice. This blog aims to help retail investors make an informed decision if they are interested in real estate debt as an asset class, and neither encourages nor discourages you from investing in any particular asset class or platform.