Author name: CBCL

Hedging in Currency Derivatives Market: Is This End of Currency Derivatives?

Capital Markets and Securities Law /

[By Pranshu Agarwal] The author is a student of Institute of Law, Nirma University.   Introduction  The Exchange-Traded Currency Derivatives (“ETCD”) was introduced with the primary aim to enable traders and members to hedge their forex risk exposure, but they were using the ETCD platform for speculative trading without having any underlying contracted exposure. Although, the Reserve Bank of India (“RBI”) had stated that the Authorised Dealers (“AD”) do not need to establish the existence of any underlying contracted exposure up to $100 million yet, this led to speculative trading by the traders without having any underlying contracted exposure at all.  The RBI on 5th January, 2024, issued a circular titled “Risk Management and Inter-Bank Dealings – Hedging of foreign exchange risk” (“RBI Circular”) and thereafter, the National Stock Exchange (“NSE”) issued circular to the brokers to comply with the RBI Circular by April 5th. Because of these circulars, Market experts are expecting a slump of 80-85% in the volume in the ETCD overnight that is comprised of proprietary traders, retailers and arbitragers. This article seeks to analyses the principle-based regime and RBI’s direction to establish an underlying contracted exposure for ETCD. The article explores the requirement of valid underlying contracted exposure and its implications. It also discusses the effect of the RBI Circular on the derivatives market.  Underlying Exposure for ETCD: The Current Position  ETCDs are financial contracts traded and regulated by the stock exchanges. These contracts are akin to the volatility in international trade and exchange rates, making such contracts exposed to transactional exposure. To ensure stability and exposure against sudden market movements, RBI required the users to have underlying exposure for taking a position in the market. Whereas, for the convenience of the users, RBI allowed them to take up a position of up to $ 10 Million in the market without having to establish the existence of any underlying exposure. Later the limit was increased to $ 100 Million combined across all exchanges.  The RBI Circular, followed by the 1st April NSE’s circular specified that the users are allowed to take a position in the ETCD upto $100 Million without having to establish the underlying exposure, however they have to ensure a valid underlying contracted exposure for the same. What this entails is that before the RBI Circular, the users could trade on the ETCD up to $ 100 Million without having to show any underlying exposure and RBI did not have any authority to ask for the existence of the same. The RBI Circular has granted the RBI the power to inquire the user whether the ETCD units purchased by them have been hedged by a valid underlying contracted exposure. If the users fail to comply with the Circular by 5th April, 2024, they will be held liable for non-compliance under the Foreign Exchange Management Act, 1999 (“FEMA”). The deadline for the compliance has been extended to May 3rd, 2024 in light of numerous requests from members and traders.  Analysis of the RBI’s Circular  A prima facie reading this circular implies that an exemption provided to the users from having an underlying exposure in the ETCD unit upto $ 100 Million. This exemption has been curbed by the RBI Circular, prescribing the users to ensure valid underlying contracted exposure. Due to this, the traders are squaring off their current position in the ETCD market as the circular aim to eliminate speculative trading and various scams in the derivatives market. As per the SEBI report 90% of the traders make loss in the market, the circular will also ensure protection to the traders.  The derivatives market is very volatile for trading purposes, which can multiply your investment or shrink it down to zero in few minutes. Using this speculative and volatile nature of the derivatives market, many traders trade without any underlying exposure. For example, one of the trader keeps on buying derivative units and another trader keeps on selling the same derivative units thereby artificially inflating the price of the derivative unit, and the situation results in significant loss or profit to either of the trader. Such a scenario is not possible in case the users establish an underlying exposure. That is why hedging is prescribed by the RBI under FEMA as it reduces risk and profitability by creating a negative position in the particular unit.  On the close reading of the RBI Circular in line with the RBI’s policy for currency derivatives, it can be said that the RBI Circular does not make any real changes in the hedging requirement for the currency derivatives. The RBI’s policy has always been consistent over the years regarding the hedging requirement. Earlier, the RBI provided exemption from producing evidence of an underlying exposure, but it never intended to allow trading without any exposure. The exposure requirement was always mandatory. The users understood this exemption from producing evidence of exposure tantamounting to no exposure at all. The RBI Circular merely reiterate what was said in the earlier directions and nothing new has been introduced in the RBI Circular.  End of Speculation: Would this serve the RBI’s Purpose?  Speculative trading is often perceived as inherently risky, posing significant risk to traders. However, it is also necessary as it contributes to market volume. Eliminating speculative trading in the market may lead to reduction in market liquidity, issues in finding getting accurate pricing.  The RBI Circular will not affect the hedgers, as they already hedge their investment, but the proprietary traders and retailers were the biggest contributors to the currency derivatives market, liable for more than 80% liquidity in the market. This circular will require these traders and investors to square off their existing positions without having underlying exposure. With all the traders and investors gone, hedgers will not find any liquidity or any counterparty to execute a contract or hedge their securities in the currency derivatives market. However, hedgers have the option to hedge their securities with future contracts through the Over-The-Counter (“OTC”) market with the banks. Still, there

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From Consultation to Stagnation: Decoding India’s Crowdfunding Conundrum

Capital Markets and Securities Law /

[By Shruti Srivastava] The author is a student of National Law University and Judicial Academy, Assam.   Introduction Currently, India has more than 1,12,718 registered start-ups, making it the third largest start-up ecosystem globally after the USA and China. However, despite these burgeoning numbers, India has only 111 profitable unicorns. Among the many concerns that India’s startup ecosystem is facing, funding emerges as paramount. Though there are multiple avenues for startups to raise funds such as private equity, venture capital etc., a new route of crowdfunding has started making its place in the market.  Crowdfunding is simply the collection of small funds from multiple investors for some social cause, business venture or specific project, typically facilitated through web-based platforms or social networking sites. There are different types of crowdfunding, but not all of them need debates and discussions. Social lending or donation-based crowdfunding, for instance, is a type of crowdfunding in which donations are made without any expectation of investment. They carry minimal risk, but still, SEBI has issued Framework on Social Stock Exchange under which donation-based crowdfunding can be regulated. The second type of crowdfunding is peer-to-peer lending, wherein the platforms connect the lenders with the investors for loans of an unsecured nature. RBI came up with the Master Directions- Non-Banking Financial Company- Peer to Peer Lending Platform (Reserve Bank of India) Directions, 2017, which laid down the rules for peer-to-peer lending. Lastly, equity-based crowdfunding in which equity shares of a company are given to investors in exchange of funds, but it currently lacks legal recognition. This issue is discussed in detail later in the article.    This article commences by examining the contemporary discourse surrounding equity crowdfunding, elucidating its relevance and evolving dynamics. It subsequently conducts a comparative analysis between SEBI’s consultation paper on crowdfunding and the UK’s crowdfunding regulation. Lastly, the article offers a few suggestions and recommendations to enhance SEBI’s approach to crowdfunding.  Equity Crowdfunding in Contemporary Discourse Recently, the Registrar of Companies (NCT of Delhi and Haryana) issued an order stating that two companies, Anbronica Technologies Limited and Septanove Technologies Private Limited, are liable for raising funds through the online equity crowdfunding platform, Tyke, as the fundraising was in violation of Section 42 of the Companies Act 2013. This order underscored the growing influence of crowdfunding platforms as pseudo- stock exchanges.  In 2017, SEBI raised concerns with LinkedIn, inquiring whether they provided a platform for start-ups to raise funds in contravention of the Companies Act 2013.   Furthermore, in the Sahara India Real Estate Corporation Limited & others v Securities and Exchange Board of India & another1, two companies of the Sahara groups, not listed on the stock exchange issued their securities to approximately 3 crore people in the name of private placement. This action violated the Companies Act of 1956 which allowed private companies to issue its securities to only 50 people. Subsequently, SEBI and later the Supreme Court of India held this act to be violative of the provisions of private placement. They clarified that if an issue is made to such a large number of people, it should be treated as a public issue.   It is important to note that at present, equity crowdfunding in India is not explicitly regulated and therefore this regulatory vacuum requires attention. However, in 2014, SEBI came up with a consultation paper acknowledging the usefulness of crowdfunding and proposed a viable regulatory framework. Furthermore, in 2016, SEBI issued a press release cautioning investors. The press release highlighted the increase in the number of digital platforms for raising funds, none of which are recognized or approved by securities market laws.   At this juncture, it is imperative to analyze whether the proposed framework is beneficial for India’s context. Additionally, a comparative analysis is important to understand what lessons India could learn from other jurisdictions.  SEBI’s Consultation Paper vis-a-vis UK’s Crowdfunding Regulation  The framework proposed by SEBI is similar to many functional models in other jurisdictions. However, the UK’s model is flexible, with its primary focus remaining proportional to the risk posed, making it more suitable for India.  The SEBI consultation paper proposes to allow only accredited investors to participate in equity crowdfunding, which includes Qualified Institutional Buyers (QIBs), Companies with a minimum net worth of Rs. 20 crore, Eligible Retail Investors (ERIs) and high-net-worth Individuals (HNIs). Though accredited creditors comprise ERIs, there are a series of restrictions imposed on them. For instance, they must be seeking investment advice from an investment advisor or have a minimum annual gross income of Rs. 10 Lacs. These restrictions create high entry-level barriers, keeping out many retail investors who might be interested in funding Indian startups.   While SEBI has proposed a minimum investment limit for all accredited investors, the UK’s model does not, however, have any restrictions on investments for investors who receive professional advice, are associated with venture capital or corporate finance businesses, or recognized as having a high net worth. Here, SEBI could benefit from the UK model by considering the removal of the minimum investment limit for QIBs and HNIs. They have multiple investment options available, and a minimum limit might act as a barrier to them. These accredited creditors possess a pool of resources, expertise, and experience. Therefore, even if they invest a relatively small percentage in startups, it can still be beneficial. They are likely to invest in startups with a higher probability of success; aiding small retail investors in their decision-making and protecting them from investing in startups with poor outlooks.   Secondly, disclosure requirements are crucial for crowdfunding, but they must differ from IPO disclosures. In the UK, crowdfunding regulations emphasize providing investors with fair, clear, and non-misleading information to support their investment decisions. However, while the UK regulation talks about disclosure requirements, it does not specify compulsory disclosures. Not specifying the disclosure requirements can leave a grey area, and because of this, SEBI has suggested a list of disclosure requirements that have to be made by a company.   Lastly in  the UK, if a project fails to

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SEBI’s Announcement: Short- Selling A Double-Edged Sword?

Company Law /

[By Zoya Farah Hussain & Vasundhara Mukherjee] The authors are students of National Law University Odisha.   INTRODUCTION  The volatile nature of the Indian securities market has effected various changes in the regulations overseeing the sector but despite the existence of this structured mechanism, there are numerous trading methods undertaken by investors for profit maximisation. In light of the recent announcement by SEBI, we aim to analyse the phenomenon of one such method, called, short-selling.  In a scenario where an investor borrows shares from  someone else, sells them at the current market price, and then buys them back later at a lower price,  he can pocket the difference as profit. It’s like betting against a stock’s performance, and it can help bring balance to the market by reflecting both positive and negative sentiments. This is called short-selling. But  there is a riskier version called   naked short-selling whereinstead of borrowing shares, investors sell stocks they don’t even own. It’s like promising to deliver something you do not have — a practice that can introduce chaos and uncertainty into the market. This creates a potential for abuse and market manipulation, as it generates counterfeit shares that don’t exist.  Short-selling, when done responsibly, can improve market efficiency by reflecting true market sentiment. It adds liquidity and helps in price discovery, but when things get out of hand — especially with naked short-selling — it can wreak havoc. Excessive short-selling can lead to wild swings in stock prices, erode investor confidence, and even destabilize the entire financial system. Here, we understand the possible implications of the recent announcement by SEBI regarding short-selling.  UNDERSTANDING SEBI’s GUIDELINES  SEBI initiated discussions on short-selling in 1996 through a committee chaired by Shri B.D. Shah who defined short-sale as the sale of shares without physical control until settling prior purchases or countering ongoing deliveries. The ban on short-selling was short-lived, as SEBI introduced a Securities Lending and Borrowing (SLB) framework later in December 2007, following recommendations from the Secondary Market Advisory Committee, permitting both retail and institutional investors to engage in short-selling again, with certain conditions.  The Adani-Hindenburg saga unfolded against the backdrop of, Hindenburg, a US-based financial research agency, who short-sold some shares of Adani Group accusing them of engaging in deceptive practices and inflating the value of its companies. Consequently, the ED carried out an investigation directed by the apex court of India which observed that no substantive losses were faced by the investors, implying that SEBI regulations were well in place, but keeping in view the current rise in the stock market trend of price manipulation, SEBI being an independent regulatory authority was directed to formulate further guidelines to ensure a proper framework for short-selling activities so that no investor is at a risk of being victim to violation of market practices.  Making Room for Everyone  This new framework opens the door for a wide spectrum of investors.  but with the doors wide open, we also need to be more careful. Novice retail traders entering this complex arena face the risk of exacerbating market volatility and becoming susceptible to manipulative tactics. To ensure a fair playing field for all, SEBI must prioritize comprehensive investor education and diligent monitoring.  This step could include understanding the investing capacity and the trading intention of new investors and equipping them with the requisite knowledge of the operations of the market and official financial information of the listed companies, by registered securities educators or mentors, enabling them to make an informed decision.  Cracking Down on Risky Business  SEBI has put in place an important rule: if you’re selling shares you borrowed, you’ve got to deliver those shares. This is meant to stop naked short-selling  which is a risky move that can mess with stock prices, just like when Porsche tried to short-sell Volkswagen in 2008. When Volkswagen’s price shot up, Porsche could not deliver the shares it owed, causing a lot of problems for hedge funds and making the market go crazy. SEBI’s mandatory delivery requirement aims to prevent similar scenarios by promoting responsible short-selling and curbing predatory behaviours.  Being Transparent About Trades  SEBI has also mandated transparency through disclosure requirements. Institutional investors have to disclose upfront if they’re making a short sale, while regular retail investors like us have to make a similar disclosure by the end of the trading day. Additionally, brokers have to keep track of all the short-selling positions for each stock and upload this data to the stock exchanges before the next trading day commences.  IMPACT OF THE ANNOUNCEMENT  It’s undeniable that the most recent SEBI short-selling rules have two sides. One may argue that naked short-selling is a good thing for the financial markets. Additionally, they opine that it may enhance the way the securities markets for borrowing and lending operate. The primary contention is that the issue of who serves as the lender is the sole distinction between covered and naked short sales. In contrast to naked shorting, when the lender is the new buyer, covered shorting involves the lender as the present owner of the stocks. It’s possible that this will not have a big impact on determining the fair price, but they also present the counter-argument that the new buyer might not be aware of it and will not voluntarily enter into the lending relationship he/she will not even get paid for it. Nonetheless, the new buyer is in a secure position and may even profit from the interest on the money that is held until the assets are delivered, thanks to the clearing houses’ centre-counterparty arrangement and the option to start the buy-in process.  The suddenness of the share price drop invites investors involved in naked short selling to sell even the unborrowed shares to benefit from it at least in the short-run. This creates competition in the market for security lending by allowing a new buyer to provide the service of being owed the share rather than allowing only the current owner to do so.  Naked short-selling may be good for the financial markets

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Imposition of Moratorium: Analysing the Need for A Broader Interpretation

Insolvency Law /

[By Aditya Vaid & Anvita Sharma] The authors are students of Jindal Global Law School.   Introduction  In a significant ruling in the case of Ansal Crown Heights Flat Buyers Association (Regd.) v. Ansal Crown Infrabuild Private Limited and Others (“the case”), the Supreme Court of India recently delineated that the implementation of a moratorium as stipulated in Section 14 of the Insolvency and Bankruptcy Code (“IBC”) does not hinder the enforcement of a decree against directors or officers of entitles undergoing Corporate Insolvency Resolution Process (“CIRP”) under the IBC.   A complaint was filed by the Homebuyers Association (“Appellant Association”) against the developers of the project, Ansal Crown Infrabuild Pvt Ltd. (“Developer Company”) before the National Consumer Disputes Redressal Commission (“NCDRC’). Subsequently, a petition under Section 9 of the IBC was filed before the National Company Law Tribunal (“NCLT”) seeking the initiation of CIRP against the Developer Company. Thereby, the NCLT commenced CIRP proceedings against the Developer Company and implemented a moratorium as per section 14 of the IBC. Thereafter, the Appellant Association filed an executive application before the NCDRC seeking the implementation of an order against the CD, i.e., the Developer Company and the Directors and Officers of the Company. The NCDRC refused to execute the said order due to the moratorium enforced under section 14 of the IBC. This order of the NCDRC was challenged before the SC, to which the Apex Court opined that the moratorium under the IBC is only available to the CD and not to the promoters, directors or other officers of the company.   Through this post, the author contends that the moratorium as outlined in section 14 of the IBC which prohibits the initiation of new proceedings or the continuation of existing ones, only applies to the Corporate Debtor (“CD”) and does not offer protection to the promoters of a financially distressed company. The author contends that the provision outlined in section 14, which constitutes the essence of IBC, should be interpreted expansively to ensure that the intended purpose and objective of the provision, as well as the code as a whole, are fully realized.  Legal Evolution: Analysing Past Precedents  In Anjali Rathi and others vs Today Homes and Infrastructure Pvt. Ltd and Ors, the agreement entered into by the parties was not duly complied with by the developer company. Consequently, the creditors raised a claim against the promoters and directors which was allowed by the SC as the moratorium imposed by the NCLT did not extend to the promoters and directors and was only limited to the CD. Through this judgment, the SC clarified that a party through a separate petition may choose to move against the promoters/directors or other officers of the CD, even though a moratorium was imposed under section 14 of the IBC. The Apex Court placed reliance on a judgement passed by a three-judge Bench of the SC in the case of P. Mohanraj V. Shah Bros. Ispat (P) Ltd.  Through the aforementioned ruling, the SC laid down the precedent regarding legal actions under sections 138 and 139 of the Negotiable Instruments Act, 1881. The same delineated that such actions would be covered under the ambit of the moratorium provision outlined in section 14 of the IBC.  However, the ruling emphasized that the moratorium applied solely to the CD and not to its management, Therefore, any ongoing proceedings against the management could proceed, and new proceedings could be initiated against them.  The decision of the SC in the present case allows the creditors of the CD to initiate proceedings against the management of the company, thus going against the underlying objective of section 14(1) of the IBC. The authors suggest that exempting key managerial roles such as promoters and directors from the moratorium not only endangers the creditors’ interests but also compromises the operations of the CD’s company.  The primary reason behind the same is that promoters or directors of a company handle all major decisions relating to the functioning of a company, and further litigation rounds could result in the loss of assets or properties, essentially rendering the objective of CIRP futile and making the moratorium under section 14 irrelevant.  Analysing the Provisions under the IBC  The provisions under section 13 (1) (a) of the IBC enable the Adjudicating Authority (‘AA’) to enact and enforce a moratorium on the CD. The moratorium period would be effective from the date of admission until the completition of the CIRP. Section 14(1) of the IBC prohibits the imposition of a moratorium on specific actions, including the recovery of property by an owner or lessor, as long as the CD possesses the said property. The primary objective of these provisions is to prevent Directors of a corporate entity from withdrawing or accessing available funds.  Furthermore, the IBC safeguards the assets and properties of the CD and guarantees the prompt conclusion of insolvency resolution proceedings by preserving the continuity of the corporate entity.    At first, it may seem like the legislature’s main goal was to restrict the extent of the moratorium delineated in section 14(1) of the IBC, which would be advantageous to the CD, its assets, and creditors. The underlying objective of section 14, which imposes a moratorium on the CD, is primarily to prevent the depletion of the CD’s assets during the CIRP. Simultaneously, it aims to keep the company operational as a going concern throughout the CIRP as doing so optimises the value for all stakeholders involved.   However, the continuation of this approach may have some gross defects that might work to the detriment of the interests of the CD. First, the underlying purpose of CIRP is to help the CD recover from financial difficulties and subsequently resume normal proceedings. Further proceedings against the CD may exacerbate their financial situation due to increased litigation expenses. Second, if the courts are faced with the conundrum of whether a proceeding benefits or harms the CD, then it may result in the judiciary making a decision based on a preliminary understanding of

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Wrong Move? How the Proposed Digital Competition Bill will Lead to False Convictions and Crush Innovation

Competition Law /

[By Anmol Aggarwal] The author is a student of Rajiv Gandhi National University of Law, Patiala.   Introduction  The Ministry of Corporate Affairs (“MCA”) on 12 March 2024 released the draft report of the Committee on Digital Competition Law (“CDCL”) and a Draft Digital Competition Bill (“the draft bill”). The CDCL report seeks to lower the threshold of proof required to determine anti-competitive practices by certain large undertakings to the lowest threshold of “ex-ante measure” or determining the abusive practices on a “by object” basis. This essentially means that the anti-competitive practices by such undertakings would be determined without examining any effects or potential effects of the conduct. The report proposed several quantitative and qualitative benchmarks to determine the entities that would fall under the ambit of the new bill, designating these entities as Systematically Significant Digital Enterprises (“SSDE”). In this piece, the author analyses how this shift from ex-post to ex-ante framework for SSDEs is harmful. It poses a huge risk of false convictions and will disincentivize such enterprises to indulge in innovations. The report mentions that the current move is in line with the Digital Markets Act, 2022 (“DMA”) enacted in the European Union (“EU”). Although not viable, under the EU Competition Law, the low threshold of the ex-ante framework can still work as it imposes only monetary fines for infringements. However, such a low threshold is dangerous in the Indian Competition regime as it consists of monetary fines and imprisonment of a term extending up to 3 years in case of an infringement. The author argues that such a low threshold is not viable in a framework in which the punishment consists of imprisonment in addition to monetary fines.  Risk of false convictions  The new ex-ante framework or “by object” approach in identifying abuse of dominance by SSDEs poses a huge risk of false convictions, which goes against the principle of presumption of innocence. This principle is an undebated principle that works to favour the undertaking alleged of the abusive conduct. The determination of the abuse by object, i.e. before even looking at the facts, will result in innocent actions of the firms to come under the ambit of anti-competitive conduct.   For instance, let us assume a dominant software company provides an office suite with several tools like Word processing software, presentation software and spreadsheets, among others. This company has introduced a new email management system integrated into the suite. Now, the company has done the same with an intent to improve the consumer experience and provide seamless productivity and streamlined workflows to the consumers. The dominant firm, while not intending to foreclose competition, would face liability for tying under the ex-ante framework, leading to the imposition of a huge fine.  Under the EU jurisprudence, the antitrust fines qualify as “criminal sanctions” as they meet the “Engel criteria” developed by the European Court of Human Rights (“ECHR”). This criterion considers several factors, such as the nature of the penalty and domestic context, among others. Given that the Indian Competition regime has largely evolved by examining the EU Competition regime, one can infer that antitrust fines in India also qualify as “criminal sanctions”. Looking at the severity of punishments for finding abusive conduct, avoiding false convictions at any cost is imperative. As stated by a famous English Jurist that “It is better that ten guilty persons escape than that one innocent suffer”. The new bill seeks to prevent anti-competitive conduct before it even materialises, which, looking at the high risk of false convictions, will prove to be a blunder in the Indian Competition regime.  To avoid such risks, the EU Competition regime has consistently shifted towards an effects-based approach or ex-post framework when analysing anti-competitive conduct.  As can be observed in the recent competition policy brief (“policy brief”) regarding 2023 amendment to the 2008 Guidance on the Commission’s Enforcement Priorities in Applying Article 82 (“Guidelines”), wherein the policy brief departs from the object-based approach of the 2008 Guidelines, stating that “the Commission is committed to an effects based enforcement of Article 102 TFEU, which fully takes into account the dynamic nature of competition and constitutes a workable basis for vigorous enforcement”. As the EU competition regime progressively adopts an effect-based approach, it is incongruous for the Indian Competition regime to regress towards an object-based approach in assessing anti-competitive conduct.  The Justification Of It Being In Line With EU’s DMA Is Erroneous  One line of reasoning we can observe while looking at the report is that the proposed bill is in line with the EU’s DMA, 2022. This reasoning is highly erroneous, as discrepancies exist in the punishments prescribed in the proposed bill and DMA. The punishment under the DMA is a monetary penalty of up to 10% of the undertaking’s worldwide annual turnover, which extends to a maximum of 20% considering the repetitive infringements. Contrary to this, the punishment for repetitive infringements and not following the orders of the Competition Commission of India (“CCI”) embarks an imprisonment of up to 3 years in addition to huge monetary fines. Thus, the threshold of determining anti-competitive conduct cannot be compared to the DMA, as the punishments under the proposed Bill and DMA are inconsistent.  Further, the criteria to determine the firms that would fall under the ambit of SSDE is highly arbitrary as it vests a disproportionately large discretion with the CCI. This arbitrariness exists because the report gives discretionary power to CCI to designate an undertaking as SSDE, even if it does not meet the quantitative and qualitative criteria laid down in the report. An ex-ante approach coupled with such arbitrariness and punishments, including imprisonment in addition to the monetary fines, will be a disastrous measure for the Indian Competition Regime.  The Proposed Rules will Disincentivise Firms To Indulge in Innovatation  The proposed bill puts the SSDEs under large scrutiny and restrictions, which will, in turn, lead to a strike at the innovation. The dominant firms are the largest contributors to present-day innovations around the globe, consider the

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Analyzing the Classification of I-REIT Units as Securities under the Securities Contract Regulation Act, 1956

Capital Markets and Securities Law /

[By Siddhant Shinde] The author is a student of MNLU Mumbai.   Introduction Real Estate Investment Trusts (‘REIT’) are instruments that allow investors to pool their collective resources and invest in publicly-traded securities, in the form of real estate, without having to make substantial capital commitments. Thus, they provide an avenue for consumers to invest in commercial real estate with regular returns to investors along with long-term capital growth, and an alternate source of funding to developers. Introduced initially in the USA as a way to counter inadequacy of public capital for the real estate industry, it was introduced in India through SEBI (Real Estate Investment Trusts) Regulations, 2014 (‘REIT Regulations’).  In the first part, the author discusses the basic framework of REITs in India, and juxtaposes the same with the The Securities Contracts (Regulation) Act, 1956 (SCRA), highlighting the ambiguity related to the classification and positioning of REIT units within the SCRA Framework. Following this, the article argues for the inclusion of REIT units within the meaning of ‘securities’.   I-REIT Framework and SCRA – Locating the Problem  REITs in India are registered as a Trust with SEBI,1under the Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993, and regulated by the REIT Regulations, which are amended regularly. Every REIT has various stakeholder; namely, Managers, Trustees, Sponsors, and Unitholders. While managers provide investment management services to the Trust, the Trustee holds the assets, for the benefit of the unit holders (beneficiaries).2 Much like the Board of Directors of a company, even the Trustees have a fiduciary responsibility towards the unitholders, which the managers don’t. Another important stakeholder is the Sponsor/Sponsor Group, who inject their assets into the initial portfolio of the trust and appoint the trustee, and thus play a crucial role in the initial stages of setting up an REIT.  The main purpose of the REIT however is to invest in commercial real estate assets, which are divided into units and traded on stock exchanges. These trusts are established for the benefit of unitholders, who receive rental distributions.  The Securities Contracts (Regulation) Act, 1956 (SCRA) defines the scope of securities within the Indian regulatory framework. It defines ‘securities’, and intriguingly includes the term ‘units’. However, the SCRA refrains from offering a precise and comprehensive explanation of what these ‘units’ encompass. SCRA’s definition of securities, however, is not exhaustive, and Courts have maintained that the term must be interpreted widely. The lack of a specific statutory definition under SCRA makes it difficult to ascertain if REIT units fall under SCRA’s ambit.   Making a Case for Inclusion of REIT Units within the Ambit of ‘Securities’  The SCRA limits the scope of securities to marketable securities of a ‘company’ or a ‘body corporate’3. The question of classification of REIT is dealt with by two statues. While SEBI Regulations classify REITs as trusts, the Foreign Exchange Management (Non-Debt Instruments) Rules,2019 define REITs as an ‘investment vehicle’4. The SCRA makes no explicit mention of either of these terms, raising the question if trusts or investment vehicles can fall under ‘other marketable securities.   The marketability criteria purports that an instrument must be freely bought and sold in a market regardless of whether it is listed in a stock exchange. It is argued that the absence of any explicit terms restricting or barring transfer of REITs implies that they are transferrable, and hence marketable. A similar line of argument was accepted by the Court, when it held that OFCDs are marketable. Marketability in this context is closely linked with transferability, and thus the test of marketability implies that an instrument must not only be capable of being sold in the market, but also freely transferrable. REITs can raise capital from investors through issuance of units via initial offer, which is collectively used to invest in real estate assets. Post the initial offer, Regulation 16 mandates REITs to be listed on a recognized stock exchange, where the trade of individual REIT units is governed by the bye-laws of the respective stock exchange. Further, Regulation 19 clearly states that REIT units are fully transferrable. Thus, the absence of explicit restrictions on transfer affirms the marketability and transferability of REIT units.  In the past, the Court has also considered the purpose of the instrument to decisively determine its nature. Thus, an instrument that is marketable and issued for the purpose of investment falls under Section 2(h). This test purports that the instrument must be issued in an investment context. The definition clause itself explicitly refers to “real estate investment trust” as an investment vehicle. Regulation 13 prescribes the investment criteria for REITs. It specifies that a REIT shall invest in income-generating real estate assets, thus highlighting the core investment nature of REITs. Further, from the unitholder’s perspective too, Regulations 18 and 20 talk about Public Issue Allotment and Minimum Public Shareholding respectively, both of which are typical features of investment offerings.   Thus, it is argued that because REIT units are marketable, transferrable and issued for the purpose of investment, they are under the ambit of ‘securities’ und thus the SCRA is applicable to REIT units too.  Further, it is also argued that the SCRA is an essential regulatory framework, which cannot be replaced by the REIT Guidelines. The aim of The Securities Contracts (Regulation) Act, 1956 is to prevent undesirable and unethical securities transactions. Though The Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations, 2014 (REIT Regulations) regulations provide a regulatory framework for REITs in India, and both largely aim at investor protection, they have varied functions. While SCRA regulates stock exchanges, brokers, intermediaries, and various other entities involved in the broader securities market, whereas REIT Regulations focus on the specific structure, governance, and operation of REITs and set criteria for their formation and operation. Thus, given the difference in their purpose and scope, the same is not a case of overlapping legislation or concurrent jurisdiction; it is thus argued that both the SCRA and the REIT Regulations are essential for regulating the REIT framework. 

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Charting New Waters: SEBI’s Revised Approach to Short Selling

Capital Markets and Securities Law /

[By Vikas Saran & Pritha Lahiri] The authors are students of Institute of Law, Nirma University.   Overview:   In the dynamic landscape of securities trading, the contentious practice of short selling has emerged as a focal point of regulatory scrutiny. In response to the Adani Hindenburg fiasco and in alignment with the Supreme Court directive in the matter of Vishal Tiwari v. Union of India,  the Securities and Exchange Board of India (SEBI) has introduced new regulations to address the risks associated with short selling.  The regulatory intervention reflects SEBI’s strategic approach of preventing, detecting and deterring, and underscores the importance of a balanced regulatory framework.   This article presents a detailed analysis of the recent framework introduced by SEBI. It provides insights from both domestic and international perspectives, offering a comprehensive examination of the regulatory landscape. Additionally, the authors offer innovative strategies for future improvements within this framework.  Revisiting SEBI Guidelines:   Regulation of short selling is not new in India; in 2007, SEBI introduced the first set of regulations on short selling, titled, “Circular on Short Selling & Securities Lending and Borrowing” wherein it defined short selling as the “practice of selling a stock which the seller does not own at the time of trade”. All classes of investors were permitted to short-sell with certain disclosure requirements put in place to ensure transparency. Pertinently, naked short selling, involving selling shares that have not been borrowed or even confirmed to exist at the time of the trade was not allowed by SEBI.   Fast forward to 2024, SEBI has overhauled its 2007 circular, integrating it into the “Master Circular on Short Selling and Securities Lending and Borrowing Scheme”. The new framework provides for:   Inclusivity in Market Participation: The framework democratises the short-selling arena, extending the privilege to both retail and institutional investors alike.  Prohibition of Uncovered Short Selling: In a bid to ensure the integrity of market transactions, the framework categorically proscribes the practice of naked short selling.  Restrictions on Day Trading for Institutional Investors: Institutional entities are enjoined from day trading while engaging in short selling, with an imperative to satisfy their delivery commitments.  Transparency as the Bedrock: The framework institutes rigorous disclosure mandates, requiring institutional investors to declare their short selling positions at the juncture of order placement, while retail investors are accorded a grace period extending to the trading day’s end.  Dissemination of Short Interest Data: Brokers are tasked with the daily aggregation of short-sell positions, which are subsequently reported to the stock exchanges. This data is synthesised and released on a weekly basis, enhancing the market’s transparency quotient.  In its recent circular, SEBI has synchronised the framework for short selling, detailed in ‘Annexure 3’ of Chapter 1 of the Master Circular, with provisions from the rescinded SEBI 2007 circular. Notably, this has not yielded any material changes because the recent framework essentially replicates the structure and guidelines established by the earlier framework. Therefore, while the regulatory process was updated and streamlined, the substantive rules governing short selling remained largely unchanged.  However, the Expert Committee established by the Supreme Court, after the Adani Hindenburg episode, had suggested a proactive regulatory intervention. It had emphasised using market events for enhancements, inviting SEBI and the Indian government to engage in proactive improvements aligned with market dynamics.  This suggests that while SEBI’s recent circular revision reflects a commitment to regulatory stability, there is still scope for refinement and enhancement in certain aspects of the framework.  A Global Perspective:   To gain a comprehensive understanding of SEBI’s regulatory approach, it is essential to explore international practices and their potential impact on India’s securities market landscape.   United States  The US has a long history of regulating short selling, overseen by the Securities and Exchange Commission (SEC). Regulation SHO, implemented by the SEC in 2010, includes measures to limit manipulative short selling. Rule 201 mandates trading centres to enforce price limits on short sales during significant price drops.  Furthermore, Regulation SHO Rules 203(b)(1) and (2) establish ‘locate requirements’. These rules require broker-dealers to confirm that a security can be borrowed, guaranteeing its delivery on the settlement date of the short sale.   Recently, Rule 13f-2 was approved under the Securities Exchange Act of 1934, requiring managers with significant short-sale positions to report certain information to the SEC through Form SHO.  United Kingdom  In the UK, short selling is governed by the Short Selling Regulation (SSR) of 2012 which applies to financial instruments and sovereign debt traded in the UK. Key provisions include:  Notification Requirement: Holders of significant net short positions in shares or sovereign debt have to notify the Financial Conduct Authority (FCA) upon reaching specified thresholds.  Public Disclosure: Investors who hold significant net short positions in shares are mandated to publicly disclose these positions once they cross certain predefined thresholds.  Restrictions on Uncovered Short Positions: The SSR outlines restrictions on investors entering into uncovered short positions in shares or sovereign debt.  Exemptions: Stabilisation activities and market makers meeting specific criteria may apply to the FCA for exemptions from uncovered short-selling restrictions and notification requirements.  FCA Powers: The FCA has the authority to restrict short selling in specific situations to prevent disorderly price declines and threats to financial stability.   The SSR exempts sovereign debt and CDS from uncovered short-selling restrictions and notification requirements, aligning with the government’s stance. Once implemented, there will be no such restrictions or notification obligations for these instruments.  Singapore  In Singapore, the Monetary Authority of Singapore (MAS) regulates short selling through its Guidelines on Short Selling Disclosure under Section 321 of the Securities and Futures Act, 2001. The Central Depository (Pte) Limited (CDP) addresses settlement disruptions via buying-in processes, with costs and penalties for sellers failing to deliver securities. The SGX-ST conducts surveillance to prevent market abuse.  The SGX-ST’s rules mandate disclosure for sell orders: Rule 8A.3.1 requires market participants to indicate if an order is a short sell. Rule 8A.5.1 necessitates reporting short sell order volumes before each market day. Additionally, Rule 8A.6.1 allows for the correction of erroneously marked sell

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Unveiling MCA’s Game-Changer Navigating Transparency and Inclusivity Through Unified Regulatory Policies

Contemporary Issues /

[By Ananta Chopra] The author is a student of University School of Law and Legal Studies, Guru Gobind Singh Indraprastha University.   Introduction  With effect from 1 January 2024, Ministry of Corporate Affairs (MCA) and other regulatory bodies under it, such as, the Competition Commission of India(CCI) and the Insolvency and Bankruptcy Board of India are following a uniform policy of seeking public comments before finalising any regulation or legislation. Public consultations are intended to be conducted as a part of the policy during both the original rule-making and review phases.  Need for Uniform Policy  Currently, different regulators (SEBI, IBBI, CCI, etc.) have different procedures when it comes to public engagement before establishing regulations. Therefore, in order to increase openness and stakeholder involvement, it has been observed that a policy for public consultation in rule-making exercises is essential. By adopting a unified approach, this change enhances openness, fosters stakeholder engagement, and ensures a standardised framework for public comments. This not only promotes fairness but also facilitates more inclusive and informed decision-making, aligning regulatory practices and promoting a cohesive and accountable regulatory environment.  Pre-Legislative Consultation for New Rules and Regulations  The policy’s Part A highlights the Ministry’s methodology, which involves drafting primary regulations and revisions, while also emphasizing transparency and public engagement in the regulatory process. An explanation note is required to accompany these regulations and revisions, outlining the problem addressed, current regulations, tactics for implementation, and the procedure for gathering public input. These versions will be made available for public review and feedback for at least thirty days on the Ministry’s website, ensuring that stakeholders have ample opportunity to provide input and suggestions. The Ministry’s divisions may decide to abbreviate this period in urgent situations or skip it altogether. In addition, the policy requires public feedback to follow a systematic framework, which encourages thorough, clause-by-clause responses. The broader public is not the only audience for this inclusive strategy; it provides a thorough consultation process by involving field offices, outside specialists, and certain stakeholder groups.  Additionally, unless the circulars are merely clarifications or informative, the Ministry intends to include the public in discussions about fee relaxations or compliance. Remarkably, the policy suggests disclosing answers to public feedback to guarantee openness in the process by which public opinion influences final regulations.  Including Regulators in the Process of Consultation  Pre-legislative consultations are a requirement for regulators operating under the Ministry’s purview. This entails making major rules and revisions available to the public for at least 30 days, unless there is an urgent need to do otherwise. According to the policy, prospective regulations must be accompanied by an explanatory note that addresses comparable topics to those of rules. Regulators are urged to ask the public for input on any changes they make, no matter how little, or on interim measures like fee reductions. Additionally, they might release their answers to queries from the public, reflecting the Ministry’s dedication to openness.  Comprehensive Review of Existing Rules and Regulations  Part B outlines a policy for thorough review of existing rules and regulations. This is critical for ensuring that laws remain relevant and effective in a rapidly changing economic environment. The Ministry and the regulators are tasked with evaluating each rule and regulation against a set of criteria, including their objectives, implementation experiences, current relevance, and overall regulatory practices. Public consultation, as detailed in Part A, plays a vital role in this review process. Feedback from stakeholders, experts, and field officers will be integral. Even forms attached to the rules and regulations are subject to review, aiming to reduce compliance burdens.  Timeline and Execution  The goal of this thorough review process is, to start on 1 January 2024and finish it in time for the 2024–2025 fiscal year. The effort taken by the Ministry is a positive step in the direction of democratising the rule-making and regulating process. The policy guarantees that the legal framework is fashioned not only by a top-down approach but also by the experiences, needs, and insights of people who will be most affected by it by actively involving the public and other stakeholders. Including a variety of stakeholders guarantees that a wide range of viewpoints are taken into account, including that of subject matter specialists and specialised interest groups. By addressing any blind spots that might not be apparent in a more closed regulatory process, this diversity of opinion can result in more thorough and balanced regulations.  Furthermore, the dedication to re-examining and even revising current laws and guidelines guarantees that the legal system remains  relevant and efficient in the face of changing social, technological, and economic environments. In a world that is changing quickly, this dynamic approach to policy-making is crucial.  Impact of Policy on Stakeholders  Increased Inclusivity and Transparency: By giving stakeholders a uniform framework for participation, a unified approach guarantees transparency. This encourages inclusivity by allowing a range of viewpoints to be taken into account during the decision-making process, which advances a more democratic and equitable regulatory environment.  Streamlined Compliance and Lessened Burdens: Outdated or onerous requirements are found by thoroughly reviewing all current rules and regulations, along with any paperwork that may be attached. Stakeholders gain from this as it streamlines compliance procedures and lessens needless regulatory obligations.  Openness and Accountability: Encouraging public comment and requiring regulators to publish their answers to it improves transparency and accountability. The policy emphasises a dedication to transparency in the regulatory process, making sure interested parties understand how their feedback affects the final regulations. The development of trust between stakeholders and regulators is facilitated by this accountability.  Compliance Difficulties: Despite the thorough examination of current regulations being meant to guarantee their applicability and efficacy, stakeholders could find it difficult to adjust to any modifications. The neutral effect results from the possibility that the review process will require modifications to compliance protocols, resulting in a transitional time for impacted parties.  Time and Resource Allocation: The policy stipulates a 30-day public review process. Although this length of time is meant to allow for in-depth

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Fast Track Evolution: SEBI’s Consultation Paper on the Fast-track Issuance of  Debt  Securities

Capital Markets and Securities Law /

[By Tirth Purani & Ananya Sinha] The authors are students of Institute of Law, Nirma University and KIIT School of Law, Bhubaneswar, Odisha respectively.   Introduction   To make India’s debt securities market robust, the Securities and Exchange Board of India (SEBI) introduced a consultation paper on 9 December 2023, prescribing amendments to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, (LODR Regulations) and the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021, (NCS Regulations). Along with the amendments in the regulations, SEBI has also introduced fast-track public issuance and listing of debt securities. These amendments were driven by the Union Budget (2023-24) which settled its primary focus to ease the existing regulations and simplify and reduce the cost of compliance. To elevate ease of doing of business Over 3,000 law provisions were decriminalized, and more than 39,000 compliances were decreased. To put this into effect, SEBI constituted a specialized Corporate Bonds and Securitization Advisory Committee, to propose strategies for enhancing ease of doing business for debt issuers listed on the stock exchange and assess the LODR and NCS Regulations.   The authors of this post attempt to showcase the consequences of the consultation paper on India’s debt securities market and the facilitation of business operations through its proposals and recommendations. The piece aims to elaborate on the recommendations concerning the reduction of the minimum face value for non-convertible securities, need for an efficient regulatory procedure, and abolishing the requirement of minimum subscription for banks and financial institutions.   Lacunas in the existing framework and Underlying Reasoning   Debt securities such as bonds and debentures are pertinent for a company’s growth and benefit as they are efficient and cost friendly. India’s debt securities market has grown considerably, as the market of corporate bonds took a leap from Rs 16.49 lakh crore in 2014 to Rs 44.16 lakh crore in 2023. Annual issuances of listed bonds increased from Rs 3 lakh crore in 2013 to Rs 6 lakh crore in 2022. With this growth, however, there exist multiple lacunas, which are impeding the sophisticated growth of debt market. The share of retail investors in debt market is very small as bulk of the debt is raised through private placement. It lacks transparency due to potential flaws in the credit rating process such as influencing ratings by borrowers thus making the process highly unreliable. There is also lack of liquidity due to thin market as it makes it difficult to buy and sell debt instruments quickly and efficiently. Additionally, the existing regulatory framework of the debt market is not designed in a manner to accomplish minimum cost and less time in the issuance and listing procedures. Stringent regulations have discouraged investors from investing, and to say the least, market-making has been difficult to implement.  To resolve the above stated lacunas and boost the debt securities market, SEBI has been striving to raise the monetary threshold, which requires large corporations to raise at least 25% of their incremental borrowings through corporate bonds during a consecutive three-year period. Further, it has introduced settlement through delivery versus payment method that guarantees transfer of securities only after payment has been made. To improve transparency, it was mandated that all trades in the securities debt instruments shall be reported on the trade reporting platform of the stock exchanges. To make the process of issuing securities smooth SEBI introduced electronic book platform through which investors can place multiple bids in a private placement on debt basis. A novel idea for fast-track public debt securities issuance has been put out in the consultation paper, allowing regular issuers to issue debt securities publicly in less time, money, and effort.  Proposals of the Consultation paper and its implications   One of the major proposals of the consultation paper is reducing the minimum face value for non-convertible securities (NCS) and non-convertible redeemable preference shares (NCRPS) to Rs 10,000 as opposed to Rs 1 lakh earlier. However, it is mandatory for the issuer to appoint a merchant banker for carrying out due diligence of such securities. Such a step would promote investments by non-institutional investors and make the debt securities market more accessible for them. In pursuant to this, SEBI witnessed an increase in the participation of non-institutional investors.  To make the regulatory procedure more efficient and cost-friendly, the proposal provides that the financial statements should be accessible through a QR code, which will directly lead to the audited financial statements on the stock exchange’s website. As the LODR Regulations requires financial results to be submitted to stock exchanges within 30 minutes of the board meeting and immediate online publication is accessible, discretion has also been given to publish the financial results in the newspaper, which was earlier necessary. The timeline for listing fast-track issue of debt securities has been proposed to be T+3 instead of T+6 for a regular public issue. This step to a larger extent will reduce the time for raising funds. To inculcate more consistency and harmonization, the format of the due diligence certificate has been modified with formats of the certificate for equity issuances.   The consultation paper has also proposed to abolish the requirement of minimum subscription for banks and financial institutions, which will help them to generate more funds for their functioning. In the year 2023, SEBI introduced the concepts of General Information Document (GID) and Key Information Document (KID) for filing only necessary and required information. In the event of a subsequent NCS issuance, KID will take the place of the shelf placement memorandum, whereas GID will replace it during the original NCS issuance. These concepts were, however, first limited to the private placement issuance of NCS. At present, they have also been extended to public issuance of securities. These documents containing disclosures in the NCS regulations, information on key developments, and details of debt securities will aid the fast-track issuance of securities. They will reduce the complexity in disclosure requirements and only material information conveyed to the investors through them.   The above-mentioned changes are likely to reduce the time and

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