Abstract
Online Bond platforms have made it easier for everyday investors to buy bonds like NCDs. But a shady practice called “down-selling” has crept in. Companies issue these NCDs privately to just a handful of big investors, skipping all the public checks and balances. Then, OBPP platforms such as the online bond marketplaces run by registered brokers snap them up and push them to retail folks hyping high returns while burying the risks. This turns a private deal into a public one overnight, dodging SEBI rules on disclosures, ratings, and safety nets. There has been massive fallout, like the 2024 altGraaf case where over Rs. 4,800 crore in risky NCDs got peddled to thousands, leading to huge losses when issuers defaulted. SEBI slammed the brakes with shutdown orders, but the gaps remain. This paper digs into how this happens, the legal pitfalls like deemed public issues under the Companies Act and why retail investors keep getting burned. It calls for tighter rules to protect the market without killing innovation.
Introduction
India’s corporate debt market has undergone a quiet but significant transformation. What was once the preserve of institutional investors and high-net-worth individuals has now been opened up to retail participants, largely due to the rise of Online Bond Platform Providers (OBPPs). These platforms have democratised access to fixed-income instruments such as Non-Convertible Debentures (NCDs), presenting them as attractive alternatives to traditional savings avenues in a low-interest environment. With a few clicks, everyday investors can now participate in debt markets that were previously distant and opaque.[1]
However, this newfound accessibility has not come without risks. Beneath the veneer of convenience and high returns lies a growing and deeply concerning practice commonly referred to as “down-selling”. Down-selling involves the private placement of NCDs to a limited group of sophisticated investors followed by their redistribution to retail investors through OBPPs. [2]This practice effectively transforms what is legally a private issuance into a quasi-public offering without adhering to the rigorous disclosure, compliance, and investor protection norms mandated for public issues.
The implications of this regulatory arbitrage are profound bypassing intermediaries are able to market high-risk debt instruments to unsuspecting retail investors. These instruments are often portrayed as “secured” or offering “assured returns,” while critical information of deteriorating financial health of the issuer or rating downgrades remains obscured or underemphasised[3]. This asymmetry of information with aggressive marketing creates a fertile ground for mis-selling.
The fallout from such practices is no longer theoretical, the 2024 altGraaf episode stands as a stark reminder of the systemic vulnerabilities in this space, where over ₹4,800 crore worth of high-risk NCDs were channelled to thousands of retail investors, many of whom suffered significant losses following issuer defaults. While the Securities and Exchange Board of India (SEBI) responded with enforcement actions, these measures have largely been reactive symptoms rather than the structural gaps that enable such conduct[4].
At the heart of the issue lies a complex interplay between company law and securities regulation. The concept of “deemed public issue” under the Companies Act, 2013 raises important questions about whether such widespread redistribution of privately placed securities should trigger public issue compliances. [5]Similarly, the regulatory framework governing OBPPs despite the recent developments of mandating their registration as stock brokers, continues to lack clearly defined fiduciary obligations and oversight mechanisms.
Legal Framework
The regulatory regime governing the issuance and distribution of Non-Convertible Debentures (NCDs) in India is anchored in a combination of company law and securities regulation. While this framework is complete, the practice of “down-selling” through Online Bond Platform Providers (OBPPs) reveals how these provisions can be structurally circumvented often in ways that strain the law indirectly.
The Companies Act, 2013 draws a strict line between private placements and public issues. Section 42[6] mandates that a private placement offer can only be made to a select group of identified persons and expressly prohibits any advertisement or utilisation of media, marketing, or distribution channels to inform the public at large about such offers. In a typical down-selling structure, the initial issuance complies with Section 42 by being privately placed, the subsequent listing and aggressive marketing of these NCDs to retail investors via OBPPs arguably defeats the spirit of Section 42 to constitute an indirect violation. Further it also provides that any offer or allotment made in contravention of this section shall be treated as a public offer, thereby triggering compliance with public issue norms. This is critical in the context of down-selling, as the wide redistribution of privately placed NCDs to retail investors may amount to a “deemed public issue.”
Section 25 [7]of the Act penalises companies that make public offers without complying with the prescribed requirements, stating that regulatory safeguards cannot be bypassed through clever structuring. Complementing this, Section 71[8]govern the issuance of debentures, requiring, the creation of a debenture redemption reserve and adequate security for secured debentures, while Rule 18 [9]of the Companies (Share Capital and Debentures) Rules, 2014 prescribes conditions such as security cover and appointment of debenture trustees. However, these provisions focus primarily on issuance not on post-issuance distribution and marketing therefore leaving a regulatory blind spot.
B. Securities Regulations
The Securities and Exchange Board of India has framed the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (NCS Regulations)[10], which impose stringent requirements for public issues of debt securities. Regulation 19 [11]mandates detailed disclosures in the offer document, while Regulation 44 [12]requires continuous disclosures post-listing.
However, in down-selling arrangements, issuers often rely on the private placement route under Chapter II of the NCS Regulations, thereby avoiding the more rigorous disclosure regime applicable to public issues. When these privately placed securities are later sold to retail investors, the protections envisaged under Regulations 19 and 44 are effectively diluted, exposing investors to heightened risk without corresponding safeguards.[13]
The practice also raises serious concerns under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 (PFUTP Regulations)[14]. Regulation 3(a)-(d)[15] prohibits the use of any manipulative, deceptive, or fraudulent device in connection with securities transactions, while Regulation 4(2)(k) specifically targets misleading advertisements and misrepresentations that induce investors to trade. The portrayal of high-risk NCDs as “secured” or offering “guaranteed returns,” without adequately disclosing credit risks or rating downgrades, may constitute a direct violation of these provisions.
Further, SEBI’s regulatory framework for OBPPs introduced through circulars mandating their registration as stock brokers imposes certain operational requirements. OBPPs are required to comply with the SEBI (Stock Brokers) Regulations, 1992,[16] including Code of Conduct obligations under Schedule II, which require brokers to act with due skill, care, and diligence and not engage in misleading conduct. Down-selling practices that prioritise volume over suitability may therefore breach these obligations, particularly where platforms fail to conduct adequate due diligence on the instruments they list.
Additionally, the role of debenture trustees, governed under Regulation 8[17] of the NCS Regulations and Rule 18(1)(c), [18]is intended to safeguard investor interests. However, in fragmented distribution models, trustees often have limited visibility into secondary market sales through OBPPs, weakening their ability to enforce security and monitor issuer compliance.
Mechanism For Down Selling
The practice of down-selling operates through a carefully structured, yet deceptively simple, two-step process that blurs the line between private placement and public distribution. At its core, it leverages regulatory asymmetry using the flexibility of private placements at the issuance stage, and the reach of digital platforms at the distribution stage.
The first stage begins with the private placement of Non-Convertible Debentures (NCDs) by the issuing company. Under the Companies Act, 2013, Section 42, companies are permitted to raise funds from a limited pool of identified investors like institutional players, high-net-worth individuals (HNIs), or investment intermediaries. These investors are presumed to possess the financial sophistication and risk appetite necessary to evaluate complex debt instruments. [19]Subsequently, the regulatory burden at this stage is relatively lighter there is no requirement for a detailed public offer document, extensive marketing disclosures, or broad-based investor outreach.[20]
However, the process does not end with this initial placement. In the second stage, these privately placed NCDs are subsequently listed on stock exchanges, often to facilitate liquidity. It is at this juncture that Online Bond Platform Providers (OBPPs) operating as registered intermediaries under the Securities and Exchange Board of India framework enter the picture.[21]
OBPPs acquire or aggregate these NCDs, either directly or through market arrangements, and repackage them for retail consumption. Through user-friendly interfaces
and persuasive marketing narratives, these platforms present the instruments as attractive investment opportunities. Terms such as “secured,” “high-yield,” or “fixed returns” are prominently highlighted and often without commensurate emphasis on the underlying credit risks or recent rating downgrades.[22]
This is where the essence of down-selling becomes evident. What was originally a private placement intended for a select group is effectively transformed into a widely distributed retail product without undergoing the regulatory scrutiny that a public issue would demand. The transition from institutional to retail hands occurs seamlessly on the platform, giving the appearance of legitimacy through exchange listing, while masking the absence of robust disclosure at the point of issuance.
Alt Gaff Case Study
The altGraaf episode of 2024 [23]is not just another regulatory incident it is a telling story of how innovation in financial markets when left loosely supervised can quietly turn into a source of widespread investor harm. It brings to life the very real risks of down-selling, showing how gaps in India’s regulatory framework can be used sometimes subtly and sometimes aggressively to push complex and risky debt products into the hands of everyday investors.
Facts and Transaction Structure
At its core, altGraaf functioned as a digital bond marketplace promising to make debt investments simple and accessible. The idea was appealing, bring bonds closer to retail investors who had long been excluded from such opportunities. However, what unfolded beneath this promise was far more complex.
The NCDs offered on the platform were not originally meant for the general public. They were issued through the private placement route under the Companies Act, 2013, typically subscribed to by institutional investors or financially sophisticated players who are expected to understand and bear higher risks.[24]
But the story did not end there. These very instruments were later brought onto the altGraaf platform, broken down into smaller investment sizes, and presented to retail investors. The platform highlighted phrases like “secured returns” and “attractive yields” terms that naturally appeal to individuals looking for stable income. What was often less visible however were with the underlying risks. Over time, this model scaled rapidly. Nearly ₹4,800 crore worth of such NCDs found their way into the portfolios of thousands of retail investors and then the cracks began to show. Defaults started occurring, and what was once marketed as a safe, high-return opportunity turned into a source of significant financial loss.[25]
SEBI’s Findings
When the Securities and Exchange Board of India stepped in, its concerns went beyond isolated defaults. The regulator looked at the bigger picture the structure itself. SEBI observed that while the initial issuance technically complied with Section 42 of the Companies Act, the subsequent mass distribution to retail investors changed the very nature of the transaction. What was meant to be a private placement began to resemble a public issue in substance, raising the possibility of it being treated as a “deemed public issue[26].”
There were also serious concerns about how these products were presented. Marketing high-risk instruments as “secured” or “safe,” without clearly communicating the associated risks, was seen as potentially misleading. This brought the conduct within the scope of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003, particularly in relation to misrepresentation and inadequate disclosure. In response, SEBI acted promptly by imposing interim restrictions on the platform’s operations. These measures were necessary to prevent further harm, but they also highlighted that regulatory intervention had come after the damage had already begun.
Regulatory Gaps Exposed
Perhaps the most important takeaway from the altGraaf case is not just what went wrong, but why it was able to happen in the first place.
The case exposed a clear gap between issuance and distribution. While the law carefully regulates how securities are issued, it pays far less attention to how they are later marketed and sold especially on digital platforms. This creates a space where privately placed instruments can quietly make their way into retail markets without triggering the safeguards of a public issue. It also brought into focus the uncertain role of OBPPs. These platforms position themselves as facilitators, yet they actively curate and promote investment options. [27] Despite this, they are not bound by strong fiduciary duties, leaving investors to rely heavily on how products are portrayed rather than on fully informed decision-making.
The case highlighted the limitations of debenture trustees, who, despite being tasked with protecting investor interests, often lack the practical ability to monitor and respond effectively in such dispersed, platform-driven ecosystems. In the end, the altGraaf episode is less about one platform and more about a broader systemic issue
Recommendations
The altGraaf episode highlights that the problem of down-selling is not merely transactional but structural. It reflects a deeper misalignment between regulatory intent and market practice, where innovation has outpaced oversight. The following recommendations aim to bridge this gap by strengthening investor protection while preserving market efficiency.
a. Reclassification of Down-Selling as a Deemed Public Issue
A critical reform lies in recognising that when privately placed NCDs are widely redistributed to retail investors through OBPPs, the transaction resembles a public issue. Such instances should be explicitly classified as “deemed public issues” under the Companies Act, 2013. This would trigger the full spectrum of disclosure and compliance requirements under the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021, ensures that issuers cannot bypass regulatory safeguards through layered structuring. [28]
b. Strengthening Rating Transparency and Continuous Disclosures
Retail investors often rely heavily on credit ratings, yet these are frequently presented in isolation or without adequate context. It is essential to mandate continuous and real-time disclosure of rating changes including outlook revisions and historical rating trajectories. Platforms should be required to prominently display such information and provide immediate alerts in case of downgrades or defaults. This would ensure that investors are not relying on outdated or selectively presented data, but are instead making decisions based on a dynamic and transparent risk profile.
c. Introduction of Lock-in Periods for Initial Allottees
To prevent the rapid migration of privately placed securities into retail markets, a mandatory lock-in period for initial subscribers should be introduced. This would discourage the use of institutional investors as mere conduits for redistribution and reinforce the fundamental distinction between private and public markets. By ensuring that initial investors retain exposure for a minimum period, the system preserves the original intent of private placement as a channel for informed and long-term capital.[29]
d. Imposition of Suitability and Appropriateness Norms on OBPPs
OBPPs play a far more influential role than mere intermediaries they curate, present, and often implicitly endorse investment products. As such they should be subject to suitability and appropriateness requirements including basic investor risk profiling and product categorisation. High-risk NCDs should not be indiscriminately accessible to all investors but should be restricted to those with the financial capacity and understanding to bear such risks. This ensures that accessibility does not come at the cost of informed decision-making.
e. Recognition of Fiduciary Duties for OBPPs
There is a pressing need to impose clear fiduciary obligations on OBPPs. Given their role in shaping investor perception, these platforms must act in the best interests of investors, rather than merely facilitating transactions. This includes obligations to conduct reasonable due diligence on listed instruments avoid misleading representations and ensure balanced disclosure of both risks and returns.
f. Standardisation of Risk Disclosures and Marketing Practices
The language used in marketing financial products plays a powerful role in influencing investor behaviour. Terms such as “secured” or “high-yield” can create a misleading sense of safety if not properly contextualised. SEBI should mandate standardised, plain-language risk disclosures, along with a uniform risk classification system akin to a risk-o-meter. Additionally, strict controls must be imposed on the use of terms that imply certainty or safety, ensuring that the communication of risk is as prominent as the promise of returns.[30]
Conclusion
Even though SEBI’s interim ex-parte order does not, at this stage, impose any monetary penalties, its significance cannot be understated. Acting under Sections 11(1), 11(4), and 11B of the SEBI Act, the regulator has directed the concerned platforms to immediately cease activities that resemble public offerings and to preserve all records for the ongoing investigation. In effect, the order brings their core operations to a standstill and sends a clear and firm message to the entire OBPP ecosystem innovation in distribution cannot come at the cost of regulatory compliance or investor protection.
The implications of non-compliance are equally serious. Should violations persist, SEBI is empowered to impose substantial penalties up to ₹25 crore or three times the unlawful gains. Beyond financial penalties, entities also face the very real risk of market debarment or a permanent ban which could effectively end their participation in the securities market altogether. The order serves as a much-needed wake-up call for the regulation of OBPPs. As these platforms increasingly become the gateway for retail participation in India’s debt markets, the absence of strong post-issuance oversight is no longer tenable. The practice of down-selling carried out in opaque and loosely regulated environments not only exposes investors to hidden risks but also erodes trust in the capital markets as a whole. What emerges is therefore the need for a more proactive, technology-driven regulatory approach one that keeps pace with evolving market structures and ensures that accessibility does not come at the cost of accountability.
Notes:
[1] Taxmann, ‘SEBI Warns Investors Against Unregistered Online Bond Platforms’ (Taxmann Blog, 21 November 2025) https://www.taxmann.com/post/blog/sebi-warns-investors-against-unregistered-online-bond-platforms
[2] Ibid.
[3] Vinod Kothari Consultants, ‘Deemed Public Issue: Concerns for Privately Placed Debt’ (Vinod Kothari Consultants, 19 November 2025) https://vinodkothari.com/2025/11/deemed-public-issue-concerns-for-privately-placed-debt/
[4] Ashutosh Chandra and Shriyansh Singhal, ‘Down Selling of NCDs through OBPPs: Private Placement to Public Risk’ (IndiaCorpLaw, 10 August 2025) https://indiacorplaw.in/2025/08/10/down-selling-of-ncds-through-obpps-private-placement-to-public-risk/
[5] Ibid.
[6] Companies Act 2013, s 42 (India).
[7] Companies Act 2013, s 25 (India).
[8] Companies Act 2013, s 71 (India).
[9] Companies (Share Capital and Debentures) Rules, 2014, Rule 18.
[10] SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021.
[11] SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021, Regulation 19.
[12] SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021, Regulation 44.
[13] Ibid.
[14] SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003.
[15] SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003, Regulation 3(a)-(d).
[16] SEBI (Stock Brokers) Regulations, 1992,
[17] SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021, Regulation 8.
[18] Companies (Share Capital and Debentures) Rules, 2014, Rule 18.
[19] Supra note 4
[20] Finsec Law Advisors, ‘SEBI Cracks Down on Unregistered Online Bond Platforms’ (21 November 2024) https://www.finseclaw.com/article/sebi-cracks-down-on-unregistered-online-bond-platforms
[21] Ibid.
[22] Ibid.
[23] Securities and Exchange Board of India, Interim Ex Parte Order in the matter of Unregistered Online Bond Platforms(WTM/AB/DDHS/DDHS-SEC-1/30990/2024-25, 18 November 2024)
[24] Ibid.
[25] Supra note 4.
[26] Ibid.
[27] Argus Partners, ‘SEBI’s Consultation Paper on Regulatory Framework for Online Bond Trading Platforms’ (31 October 2022) https://www.argus-p.com/updates/updates/sebis-consultation-paper-on-regulatory-framework-for-online-bond-trading-platforms/
[28] Argus Partners, ‘SEBI’s Consultation Paper on Regulatory Framework for Online Bond Trading Platforms’ (31 October 2022) https://www.argus-p.com/updates/updates/sebis-consultation-paper-on-regulatory-framework-for-online-bond-trading-platforms/
[29] Ibid.
[30] Finsec Law Advisors, ‘SEBI Cracks Down on Unregistered Online Bond Platforms’ (21 November 2024) https://www.finseclaw.com/article/sebi-cracks-down-on-unregistered-online-bond-platforms
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