Author name: CBCL

[By Owais S. Khan] The author is a student of Government Law College, Mumbai. Introduction: On 11 October, 2024 the Securities & Exchange Board of India (SEBI) in the matter of Royal Orchid Hotels Ltd. (ROHL), imposed a monetary penalty upon ROHL, its Directors/ Promoters and the Chief Financial Officer (CFO) of the Ksheer Sagar Developers Pvt. Ltd. (KSDPL) under Section 11 of the SEBI Act, 1992 for violating multiple provisions of SEBI Act, the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations) and SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (PFUTP Regulations). The order held that ROHL has misrepresented its consolidated financial statement, by classifying KSDPL as an associate company, despite being its subsidiary. This inflated the consolidated profit of ROHL, thereby enabling the directors/ promoters of ROHL, to offload their holdings and making a considerable gain on the basis of the profit, which was calculated on the basis of a misrepresentation. The scrip price of ROHL, also recorded a jump due to the wrong classification.    The present article inter alia deliberates on firstly, the evolution of control and significant influence in determining the relationship of a company with the holding company, secondly, the relevance and application of the Indian Accounting Standards (IndAS) in determining this relationship and finally attempts to examine the impact of this order in broadening the scope of control and matters concomitant thereto.     Control vs Significant Influence: Section 2(87) of the Companies Act, 2013 (Act) defines that a company shall be deemed to be a subsidiary of the holding company if the holding company exercises or controls over more than one-half of the total voting power of subsidiary OR controls over the composition of the Board of the Directors (BoD). This establishes a holding – subsidiary relationship. Similarly, according to Section 2(6) of the Act, an associate company is the one in which another company has a significant influence, but is not a subsidiary of the company having influence.   In the ROHL matter, as per the Articles of Association (AoA) of KSDPL, the BoD of KSDPL would consist of 5 members, 3 of which would be appointed by ROHL. This dominance over the BOD was construed as a control, and KSDPL was initially declared as a subsidiary of ROHL. However, being a subsidiary of a listed company, KSDPL was under an obligation to appoint independent directors as per Sec. 149 of the Act. Thus, 2 independent directors were appointed on the board of KSDPL, taking the strength to 7. This resulted in ROHL having 3 members on the board out of 7. This change was interpreted to be a loss of its control over the composition of the BoD of KSDPL, classifying it as an associate company in the consolidated financial statement of ROHL.  The term Control has been defined in the Act under Section 2(27) which shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner. Also, in the Subhkam Ventures, it has been held that to determine control, the person must be on the driver’s seat, wherein he owes a proactive and not a reactive role. It is power by which one can command the company to do, what he desires it to do. Control is a positive power and not a negative power. Similarly, it has been an explicit legal position that the power to control the composition of the BoD is a necessary element of holding-subsidiary relationship in Vodafone International Holdings B.V vs. Union of India.  Despite this limitation of control over the composition, SEBI held KSDPL to be a subsidiary of ROHL, owing to special rights which were conferred in favour of ROHL under the AoA of KSDPL. These were the rights to appoint the chairman of the BoD of KSDPL, and the right of the chairman to exercise a casting vote in case of a tie. SEBI held that this provides a virtual control to ROHL, to influence the decision-making power of the BoD, with the chairman, as a nominee of ROHL, exercising its power in favour of ROHL.   Associate vs Subsidiary in light of Ind AS SEBI held that holding-subsidiary relationship is determined not only by virtue of the definitions in the Act, but also by the accounting standard under Ind AS 110 and shall not be dependent on the number of independent directors.   SEBI, in its order relied on Ind AS 110, in determining the control of ROHL over KSDP, taking the following factors into consideration for determining the control of the investor over the investee.   Relevant activities and ability to direct the relevant activities: As per the Memorandum of Understanding (MoU), ROHL was conferred with the operational authority of KSDPL and all the key personnels managing the operations of KSDPL, including its CFO, were employees of ROHL, satisfying the criteria to control the relevant activities and decision making. Exposure or right to variable returns: ROHL had rights over management fees of KSDPL as a percent of its turnover and also as percent of earning over the gross profit. Thus, it was held that ROHL had exposure to variable returns, thus recognizing its control.  Ability to use the power to affect return: With the control over the BoD and the terms of MoU and AoA, ROHL was held to be a decision maker having the ability to use its power to affect the returns of KSDPL.  The author advocates that the Act providing for control of at least 20% shareholding to exercise significant influence in another entity needs to corroborated with other grounds laid down in  Ind AS 28 relating to investment in associate companies like representation in BoD, participation in policy making, material transactions, etc. to resolve this Associate/ Subsidiary relationship enigma.  Implications for

[By Gauravi Talwar] The author is a student of Gujarat National Law University.   INTRODUCTION The Securities and Exchange Board of India (SEBI), in its Consultation Paper dated July 29, 2024, has initiated a pivotal reform in its regulatory approach to insider trading. This proposed amendment to the SEBI (Prohibition of Insider Trading) Regulations, 2015, signals a decisive effort to strengthen the regulatory landscape in response to the growing sophistication of financial markets and insider trading practices. By focusing on closing historical loopholes and enhancing market integrity, SEBI aims to create a more comprehensive framework by revising key definitions, such as “connected persons” and “relatives.”   By aligning the definition of “connected persons” with the “related party” concept in the Companies Act, 2013, and expanding the definition of “relative” under Section 56(2) of the Income Tax Act, 1961, these amendments are designed to capture a broader spectrum of individuals and entities with access to Unpublished Price Sensitive Information (UPSI). This article conducts a comparative analysis of the proposed amendments and evaluates their potential impact on insider trading regulations in India.  EXPANDING THE DEFINITION OF “CONNECTED PERSON” The SEBI (Prohibition of Insider Trading) Regulations, 2015, define an “insider” as any individual who either is a connected person or has access to Unpublished Price Sensitive Information (UPSI). However, the current definition of “connected person” is insufficient in covering individuals with indirect access to UPSI through their associations with such persons. SEBI’s proposed amendments seek to remedy this by aligning the term “connected person” with the “related party” concept under Section 2(76) of the Companies Act, 2013. This alignment expands accountability, casting a wider regulatory net to capture those with indirect ties to companies and recognising the complex relationships that can facilitate insider trading. Additionally, amendments to Regulation 2(1)(d)(ii) broaden the scope of “deemed connected persons,” acknowledging that insider trading networks often extend beyond formal company roles.  A pivotal change is the expanded definition of “relatives,” now modelled on Section 56(2) of the Income Tax Act, of 1961. This revision includes a broader array of familial connections—spouses, siblings, and lineal ascendants—closing loopholes that previously enabled insiders to exploit indirect access to UPSI through family members. These amendments reinforce SEBI’s efforts to ensure comprehensive regulatory scrutiny and prevent circumvention of insider trading laws through intermediaries.  COMPARATIVE MODELS: UNITED STATES AND UNITED KINGDOM United States In the United States, insider trading is regulated under a broad legal framework, anchored in the Securities Exchange Act of 1934, the Insider Trading Sanctions Act of 1984, and the Insider Trading and Securities Fraud Enforcement Act of 1988. The U.S. Securities and Exchange Commission (SEC) treats insider trading as securities fraud, focusing on the improper use of non-public, material information rather than the individual’s formal association with the company.  This ideology has been reinforced by the landmark U.S. v. O’Hagan case  which introduced the “misappropriation theory”. The idea behind the theory is to extend liability beyond corporate insiders to include any individual who improperly uses confidential information for personal gain. U.S. regulations also emphasize flexible enforcement through civil penalties, disgorgement of profits, and criminal charges, allowing the SEC to adapt to evolving market practices, such as high-frequency trading.   United Kingdom The United Kingdom’s regulatory framework, governed by the Criminal Justice Act of 2003 and the Financial Services and Markets Act (FSMA), adopts a broad and inclusive definition of insider trading. It focuses on the misuse of non-public information, regardless of the insider’s relationship with the company, and places significant emphasis on the intent behind trading activities. The UK regulators impose both criminal and civil penalties, providing flexibility in enforcement. Notably, the UK’s approach is less focused on fraud and instead prioritizes preventing the unfair exploitation of confidential information. This is exemplified by the R v. McQuoid and Melbourne case, which emphasized possession and misuse of inside information over intent to commit fraud.  This concept of evaluating insider trading has not yet been explored by the Indian regime which only looks at the use of Unpublished price sensitive information from a unidimensional lens that does not evaluate the improper use of UPSI extensively, thereby increasing bureaucracy in the segment as most of the cases get overturned by SAT due to incorrect evaluation of an insider in possession of UPSI in general or lack of conclusive proof of improper use.   IMPACT OF SEBI’S PROPOSED INSIDER TRADING AMENDMENTS SEBI’s proposed amendments to the SEBI (Prohibition of Insider Trading) Regulations, 2015, mark a pivotal shift toward aligning India’s insider trading laws with global standards. By broadening the definition of “connected person,” these changes aim to enhance market fairness and investor protection, by encompassing a broader range of individuals with potential access to unpublished price-sensitive information (UPSI).  This will increase accountability, subject more individuals and businesses to regulatory oversight, and reduce opportunities for gaining unfair advantages. Drawing inspiration from U.S. and UK regulatory models, SEBI’s approach strikes a balance by expanding coverage while maintaining a focus on preventing unfair practices. These changes are expected to significantly bolster market integrity, foster greater compliance, and enhance investor trust, ultimately promoting a fairer, more transparent financial market.  LIMITATIONS OF THE PROPOSED AMENDMENTS: SEBI’s proposed amendments to the definition of “relatives” in insider trading regulations may have significant implications, particularly in high-profile cases akin to the Adani-Hindenburg affair. By expanding the scope to include a wider array of familial ties, SEBI acknowledges that insider trading frequently involves not just immediate associates but also extended family members. However, this expanded definition risks regulatory overreach, as seen in the SEBI ruling against Deep Industries. In that case, social media interactions were deemed sufficient to establish insider trading connections, a decision later overturned by the Securities Appellate Tribunal (SAT), highlighting the risk of overreach in interpreting personal relationships. The proposed amendments could significantly increase the number of insider-trading cases, potentially deterring legitimate market activities. Investors, fearful of being wrongfully accused, may curtail their trading activities, thereby dampening market liquidity and impeding growth. Additionally, the inclusion of extended familial relationships could pose

[By Aashi Goyal] The author is a student of National Law School of India (NLSIU), Bengaluru.   Introduction On 27 June 2024, SEBI published a press release regarding its 206th Board Meeting. As per the press release, SEBI has approved the recommendations regarding restricting the association of SEBI-regulated entities with persons who directly or indirectly provide advice or recommendations without being registered with SEBI or make any implicit or explicit claim of return or performance in respect of or related to security. Moreover, the ASCI, on 17 August 2023, published “Guidelines for influencer advertising in Digital Media” wherein it has directed that any influencer providing information and advice on BFSI must be registered with SEBI.   In this context, this paper argues that the current regulatory framework is inadequate to deal with the unique challenges finfluencers pose and therefore there is a need for the development of a distinct regulatory framework tailored to these unique challenges. Firstly, the paper establishes the current regulatory framework seeking to regulate finfluencers. Secondly, it argues that the current ex-ante approach limits finfluencers to existing regulatory categories that do not fully encompass their activities. Thirdly, it argues that the ex-post approach requires proving intention and knowledge of dissemination of misleading or false information, which is a difficult standard to meet.   Current Regulatory Framework The Advertising Standards Council of India (“ASCI”) defines influencer as a person who has access to an audience and the power to affect their audience’s purchasing decisions or opinions because of the influencer’s knowledge and relationship with their audience. Therefore, a finfluencer refers to an influencer that provides advice or comments on merits/demerits on aspects related to commercial goods and services, in the field of banking, financial services and insurance (“BFSI”).  Currently, a specific legal regime does not exist that regulates finfluencers. However, a finfluencer may be implicated under section 12A of the Securities and Exchange Board of India Act (“SEBI Act”) and Rule 4(2)(k) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (“PFUTP Regulations”). This is the existing ex-post approach in the regulation of finfluencers. In an effort to take an ex-ante approach, the SEBI Board in its 206th meeting approved the recommendations in the Consultation Paper titled “Association of SEBI Registered Intermediaries/Regulated Entities with Unregistered Entities (including Finfluencers)”. As per the consultation paper, a SEBI registered intermediary shall not have any association or relationship in any form, for promotion or advertisement of their products and services with any unregistered entities including finfluencers. Echoing similar sentiment, ASCI published “Guidelines for influencer advertising in Digital Media” wherein it has directed that any influencer providing information and advice on BFSI must be registered with SEBI.  It is pertinent to note that the requirement of registration of finfluencers with SEBI has essentially restricted them to the category of Research Analysts (“RA”) and Investment Advisers (“IA”). The class of finfluencers has not been notified as a separate category of intermediaries as per Rule 1(2) of SEBI (Intermediaries) Regulations, 2008. Therefore, the only category they may be registered under is that of an RA or an IA. This is further indicated by the Consultation Paper’s conflation of the issue of unauthorised and unregistered IAs and RAs and the issue of regulation of finfluencers.  Gaps in the Ex Ante Approach SEBI and ASCI have erred in confining the finfluencers to the category of RAs and IAs. In the current framework, SEBI and ASCI are essentially regulating RAs and IAs that are utilising social media platforms and not the category of finfluencers as a whole. The SEBI (Investment Advisers) Regulations, 2013 (“IA Regulations”) excludes from its scope, the investment advice that is disseminated through any electronic or broadcasting medium, which is widely available to the public.i Therefore, by definition, a finfluencer providing investment advice on social media platforms such as YouTube, Instagram, Facebook, etc. does not come under the purview of IA regulations.    Although the SEBI (Research Analysts) Regulations, 2014 (“RA Regulations”) do not bar from its purview, communication through public media, it does exclude comments on general market trends, economic and political conditions, technical analysis, etc.ii This implies that a finfluencer that does not provide advice on which particular shares to sell, buy, hold or makes claims as to the future performance of specific sharesiii is not regulated by RA regulations. A finfluencer may create hype around a particular industry such as the psychedelics industry by analysing  the general market trends surrounding the industry. As a result, the followers of the finfluencer may start buying shares of psychedelic companies leading to an increase in the price of the shares. At this stage, the finfluencer might sell his or her shares at a significant profit. Further, there is a possibility of the creation of price bubbles in this scenario. However, the same cannot be regulated under RA regulations as mere speculation as to general market trends and market conditions are not within its purview.   Gaps in the Ex-Post Approach Rule 4(2)(k) of PFUTP Regulations states “Disseminating  information  or  advice  through  any  media,  whether  physical  or  digital,  which  the  disseminator  knows  to  be  false  or  misleading  in  a  reckless  or careless  manner  and  which  is  designed  to,  or  likely  to  influence  the  decision  of  investors dealing in securities.” From the bare reading of the provision it is evident that for one to be liable, there has to be knowledge as to the falsity or the misleading nature of the information. This belief is further backed by the Report of the Committee on Fair Market Conduct (“Report”), on the basis of which amendment to the PFUTP regulations was passed in 2019.  Prior to the 2019 amendment, Rule 4(2)(k) considered the publication of misleading advertisements or advertisements containing distorted information as manipulative, fraudulent and/or an unfair trade practice. The action of publication of misleading advertisement was not qualified by any requirement of intention or knowledge. This meant inadvertent mistakes could be penalised. Subsequently, the Report recommended that the action of “knowingly” influencing the decision to invest in