Exchanges caution investors against dealing with unregistered online bond platform providers

New Delhi, Jul 11 (PTI) Leading stock exchanges BSE and NSE on Friday cautioned investors against dealing with unregistered Online Bond Platform Providers (OBPPs), amid the rising popularity of such platforms that offer easier access to various fixed-income instruments.
     In a joint statement, the exchanges asked investors to consider various key factors before investing through any online bond platform. These include checking the bond's credit rating, the issuer's repayment track record, the instrument's liquidity, settlement timelines, and tax implications.
     Moreover, investors must ensure the platform is registered with Sebi as an Online Bond Platform Provider.
     The exchanges also advised investors to thoroughly read platform disclaimers, understand the terms and conditions, and ensure that transactions are conducted through regulated and secure systems.
     Given the growing use of these platforms, the exchanges stressed the importance of understanding the underlying features, risks, and associated costs to make informed investment decisions.
     The bourses noted that the risk and return on corporate bond investments vary based on the instrument's credit rating. A rating-wise risk scale, similar to the mutual funds risk-o-meter, could be considered to help investors assess risk more effectively.
     Further, the exchanges explained key concepts affecting bond yields. One such concept is Yield to Maturity (YTM), which indicates the total annualised return an investor can expect if the bond is held until maturity. YTM factors in the bond's market price, periodic coupon payments, and the remaining time to maturity.
     However, YTM is not a guaranteed return-- it can fluctuate based on market interest rate movements, liquidity conditions, time to maturity, and the creditworthiness of the issuer. If a bond is sold before maturity, the actual return may differ from the indicated YTM. Typically, when a bond trades below its face value, its YTM is higher than the coupon rate, and vice versa.
     The coupon rate refers to the fixed annual interest paid by the issuer, calculated as a percentage of the bond's face value. This provides investors with regular income --usually semi-annual or annual. However, these payments are not without risk and depend on the issuer's financial health. Any delays or defaults in payment can negatively impact returns.
     Another essential aspect is the inverse relationship between bond prices and yields. When market interest rates rise, bond prices fall, resulting in higher yields. On the other hand, when interest rates fall, bond prices rise, lowering the yield. Understanding this dynamic is key to assessing interest rate risk and anticipating price movements in the secondary market.
     Lastly, the exchanges highlighted that brokerage reversal or zero brokerage can impact YTM by lowering the investment's overall cost, thereby slightly improving the effective return. Investors should always evaluate final returns after factoring in all costs, fees, and applicable taxes.
     In December 2024, Sebi cautioned investors against using unregistered online platforms offering unlisted debt securities as these platforms operate without regulatory oversight, lack investor protection mechanisms, and do not provide grievance redress systems.

(This story has not been edited by THE WEEK and is auto-generated from PTI)