Author name: CBCL

[By Sayali Dodal] The author is a student of Maharashtra National Law University Aurangabad.   Introduction Over the past few years, the Indian markets have witnessed a remarkable growth fuelled by ever evolving desire of General Partner (“GP”) and Limited Partners (“LP”) to take part in secondary transaction structures with an aim to deliver solutions to the challenge faced by investors which is lack of liquidity. These GP led Secondary Transaction such as Strip Sale or Continuation Funds are utilized when, in the opinion of the GP, the investments would not yield the expected returns at the originally expected due time of making exits for closed-end funds. In recent years, continuation funds which involves setting up a new fund to simply transfer unrealized investments out of an existing fund, have emerged as an innovative investing method. Continuation funds provide a solution by extending the investment life cycle of venture capital and private equity funds thereby providing liquidity to early investors while also supporting business growth. Presently, at the end of tenure of a scheme of an Alternative Investment Funds (“AIF”), the manager can seek extension of the tenure of the scheme by two years upon approval of two third of the investors which is decided on the basis of their investment in the scheme. Furthermore, after acquiring approval of at least 75% of the investors by value of their investment, the managers also have the option to distribute the assets of the AIF in-specie. In case neither of the aforementioned investors’ consent is received, or if the two-year extension  of  the AIF  is  complete without  investor  approval  for  in-specie distribution of  residual  assets, the AIF is left with no other option than to liquidate the scheme within one year in accordance with AIF Regulations of 2012. The Fund is expected to exit its investments during the harvesting period, and in any case, upon the completion of its tenure. However, sometimes it may be more conducive from a value generation perspective to have a longer holding period for some of these investments. This necessitates a fine balance of expectations, since not all LPs may be on board with extending the holding period and may seek liquidity by the end of the originally communicated tenure of the Fund. Over the past few years, the branding of GP led secondaries has improved particularly in the light of COVID-19, and GP-led secondaries are being used more frequently to continue investments in assets which can potentially provide higher returns in future commonly referred to as the “trophy assets”. One way to structure secondary transaction is by Continuation Funds. Mechanism Of Continuation Funds Continuation Funds are a form of restructuring, partaking transfer of assets by an existing fund to a new fund. These new funds often invest in existing portfolios of successful early-stage firms, allowing initial investors to earn partial returns while reinvesting in fresh prospects. LPs in the existing fund can quit their investments (“Dissenting Investors”) while still being exposed to potential future gains since continuation funds provide liquidity or roll into the new, longer life fund. The purchase of interests from cashing-out LPs is funded by subscription funds from new LPs or current LPs increasing their stakes. Additionally, these new funds are typically managed by the same GP thus mirroring the old fund. Continuation Funds provides General Partners two options: first, they can retain those assets that have given satisfactory returns and may generate additional value in future, and second, they can let the weaker performing assets to stabilise by giving it more time. A continuation vehicle can also be used strategically to create additional funds to be used in expansion prospects by investing in newer buildings or equipment. SEBI’s Take On Continuation Funds Keeping in view the growing popularity of Continuation Funds, Securities and Exchange Board of India (“SEBI”) issued a Consultation Paper in February, 2023 with the proposal to allow AIFs and the managers to carry forward unliquidated investment of a scheme upon completion of its tenure to a new scheme of the same AIF. As per the Consultation Paper, this step came as a response to the sample data collected by SEBI which highlighted the expiration of 24 AIF schemes with a total valuation of Rs. 3,037 crores in FY 2023-24. Another 43 schemes with a valuation of Rs. 13,450 would also expire in the subsequent FY 2024-25. With closure of an existing fund, the introduction of Continuation funds would benefit the investors by providing them the required liquidity while also ensuring disclosure, recognising its asset value  and tracing fund performance. Accordingly, AIFs/managers can transfer unliquidated assets to a new scheme at the end of its tenure with the consent of 75% of investors by value. One condition to be imposed on such AIFs/managers is to arrange bids for atleast 25% of the unliquidated investment in order to provide liquidity to the investors who do not wish to continue. When the bid is obtained from related parties of the AIF/manager/sponsor or existing investors, it has to be disclosed to the investor for transperancy and according to SEBI “such bids can only be used to provide pro-rata exit to other remaining investors”. It is assumed therefore, that to provide liquidity to the dissenting investor who do not wish to transfer to the new scheme, bids obtained from related parties or existing investors can only be utilised. But this pose the question that wouldn’t bids from parties who do not fall in this purview be used to provide liquidity? Another interesting point is that this obligation to obtain bids for 25% of the unliquidated investment is not mandatory since the proposal itself provides an alternative.  In case such bids cannot be arranged, the closing valuation of the scheme will be based on the liquidation value as determined under IBBI Regulation, 2016 or other IBC norms. The ambiguity concerning whether Dissenting investors have to be paid or not poses another issue. In the scenario when 25%  bids are obtained for the unliquidated assets,

[By Siddharth Sharma] The author is a student of Institute of Law (Nirma University).   Introduction In the world of the securities market, insider trading is one of the most heard and frowned upon terms. The term insider trading in its simplest connotation implies the advantage churned out of some confidential information, where the information lies with the person due to the position or privilege he holds in an entity and the information is of such nature which has the potential to either soar the value of the securities or plunge it. The indulgence in selling and purchasing of securities on the basis of such information that is generally not available to the public consequently results in insider trading Across jurisdictions, the practice of insider trading has been considered to be both immoral as well as illegal in nature. This article analyses the judgment of the Supreme Court of India in the case of SEBI v. Abhijit Ranjan. The Apex Court through its judgement in the aforesaid case has changed the yardstick for holding a person guilty of insider trading to some extent. The article further delves into the question of whether this decision of the apex court is an overreach. The Factual Matrix of the Case The respondent in the present case, Mr. Abhijit Ranjan was the chairman and managing Director of Gammon Infrastructure Projects Limited (GIPL) till 20th September 2013 and thereafter he continued only as director of the company. In the year 2012, a special purpose vehicle (SPV), Vijayawada Gundugolanu Road Project Pvt. Ltd. (VGRPPL), was created for the execution of the project worth Rs 1648 Crores which was awarded to GIPL by the National Highway Authority of India (NHAI).  Simplex Infrastructure Limited (SIL) was similarly awarded a contract worth Rs. 940 Crores by NHAI for a project in Jharkhand and West Bengal. For the execution of this project, SIL set up an SPV called Maa Durga Expressway Private Ltd. (MDEPL). Thereafter two shareholders agreement was signed between SIL and GIPL, pursuant to these agreements SIL had to invest in VGRPPL and similarly GIPL had to make an investment in MDEPL. The structure of this investment effectively meant that each of the parties would have 49% stakes in each other’s project. However, on 09.08.2013, the abovementioned agreements between the parties were terminated by the GIPL Board. Later, the respondent on 22.08.2013 sold a total of 114 lakhs of his shares of GIPL worth Rs. 10.28 crore. The disclosure regarding the termination of the shareholder’s agreement was made to the National Stock Exchange of India (NSE) and the Bombay Stock Exchange (BSE) was made on 30/08/ 2013. The Securities and Exchange Board of India (SEBI), based on the input of the NSE regarding the transaction and the possibility of the trade being concluded based on unpublished price sensitive information (UPSI), conducted a preliminary enquiry, wherein it prima facie held that the respondent violated the provisions of Section 12A(d) and (e) of the SEBI Act, 1992. This was later confirmed, upon hearing the respondent, by its order dated 23.03.2015. Further, notices were served upon to the respondent and another company named, Consolidated Infrastructure Company Pvt Ltd (CICPL) along with its two directors. Upon receiving the replies and hearing the notices, an order holding the respondent guilty of insider trading was passed and he was made liable to disgorge Rs. 1.09 crores, which is the said amount of unlawful gain from the trade. However, the other noticee i.e., CICPL. Subsequently, a statutory appeal was filed by the respondent which was ruled in its favour and thus the SEBI went to appeal against it before the apex court, which is the present case. The Bone of Contention The apex court in this appeal by the SEBI formulated primarily a three-pronged issue for consideration. Two of the main issues were: (i) Whether the decision of the board to terminate the aforesaid agreements can be characterized as ‘Price Sensitive Information’ within the meaning of section 2h(a) of the SEBI (Prohibition of Insider Trading) Regulations, 1992. (ii) Whether the said sale of the shares by the Respondent would amount to insider trading under Regulation 3(i) and Regulation 4. A. Unpublished Prince Sensitive Information The expression Price Sensitive Information has been defined under Regulation 2(ha) of the SEBI (Prohibition of Insider Trading) Regulations, 1992. It is defined as ‘any information which relates directly or indirectly to a company and which if published is likely to materially affect the price of securities of company.’ The explanation to regulation 2(ha) provides 6 specific pieces of information which are to be characterized as price sensitive, whereas the seventh sub-point of explanation mentions a relatively broad entry i.e., significant changes in policies, plans or operations of the country. The term ‘unpublished’ has been defined under regulation 2k as ‘information which is not published by the company or its agents and is not specific in nature. Further, regulation 3 prohibits dealing, communicating or counselling on matters related to insider trading. Any person who enters into a transaction of securities in contravention of the provisions mentioned under regulation 3/3A was made to be held guilty of the mischief of insider trading. Therefore, for rendering a person guilty of insider trading two essentials are to be fulfilled in accordance with Regulation 4, they are a) the person happens to be an insider b) the transaction in securities should be in violation of regulation 3/3A. The apex court held in its judgement that the information which resided with the respondent would definitely fall within the category of Unpublished Price Sensitive Information as it found the information regarding the termination of the said agreements capable enough to materially affect the price of the security in the market where the effect of such information could either be beneficial or have an adverse effect. B. Guilt of Insider Trading: Introduction of a New Element While the apex court affirmatively answered the essentials with regard to the said information being rendered to be a UPSI and

[By Shivesh Didwania] The author is a student of Maharashtra National Law University, Mumbai.   Introduction Corporate Transparency Act (hereinafter ‘CTA’) was brought forth by the Congress of the USA on 1 January, 2021. CTA is a part of the Anti-Money Laundering Act of 2020. Financial Crimes Enforcement Network of the Department of the Treasury (hereinafter ‘FinCEN’) finalized the guidelines for implementation of the CTA on 30 September, 2022. The CTA will come into force from 1 January, 2024 for new companies and from 1 January, 2025 for the already existing companies. The objective of the enactment is to is to fight money laundering, tax evasions, etc. by the way of mandatory corporate reporting which will enhance corporate transparency. However, the CTA has been hailed as a ‘seismic shift’ towards achieving a better version of corporate transparency in the USA. It will help in curtailing the illegality that is carried on by the activities of shell companies.[i] In India, such corporate reporting which is mandatory for the companies is governed and regulated by the Securities and Exchange Board of India’s Listing Obligations and Disclosure Requirements (hereinafter ‘LODR’) 2015. The objective of these regulations is to make transparency an intrinsic part of the Indian corporate regime. The objective of this article is to make the reader aware of the new legislation – the CTA of the USA and the loopholes that it suffers from. It will be followed by a comparison of the CTA with the existing regime of LODR in India. Corporate Transparency Act: What does it entail? The USA had a weak legal regime to tackle the transparency with regard to the beneficial ownership information. The CTA creates a federal framework for the information relating to the beneficial ownership in the USA.[ii] The CTA creates a rule for a ‘reporting company’ to disclose beneficial owners of the company.[iii] The company is required to disclose this information to the FinCEN, which will maintain a central registry.[iv] The information is to be provided on an annual basis. If there is a change in the ownership structure which needs to be reported, then the company must intimate the change to the FinCEN within period of thirty days.[v] FinCEN, in turn, shares the information with investigation authorities as and when the need arises. These authorities may very well include any federal enforcement agency or may also include any overseas law enforcement bodies who have made request to a federal enforcement agency. However, there are stringent safeguards to ensure the data protection and privacy concerns.[vi] Beneficial owners according to the CTA Beneficial owners are persons/ entities that directly or indirectly have a substantial control over the reporting company; or which hold at least 25% in the reporting company. Substantial control essentially means that the entity/person has an intrinsic role to play in decision making in the affairs of the reporting company. This means that the person/entity holds a substantial control over the main company. It is important to note that ‘substantial control’ is not defined adequately in the CTA. A senior officer of a reporting company will also be said to have a substantial control over the affairs of the reporting company. Moreover, a person having control over the appointment or removal of the senior officer or the majority of the board of directors will also be said to have a substantial control over the reporting company.[vii] However, this interpretation of substantial control is not exhaustive in nature.[viii] Moreover, persons/ entities are beneficial owners irrespective of their citizenship or residency.[ix] However, serious data privacy and confidentiality aspects may arise when the requesting party is a foreign agency. It may be justified when it is under a treaty between USA and the requesting country. However, it will be a matter of concern when the request is not made in furtherance of a treaty.[x] Beneficial owner may also include a person/ entity that receive substantial economic benefits from the assets of the reporting company. This wide definition or, as some people argue, lack of a proper definition opens the gate for the FinCEN to include numerous actors within the ambit of the CTA.[xi] CTA is not free from loopholes The CTA has been lauded as a land and mark step towards tackling corporate shell crimes. However, this legislation is also not without flaws. One of the problems that this mechanism may face is the time period of reporting the information. This mechanism may require the companies to report the required data on an annual basis which may, in turn, lead to untimely and non-updated information.[xii] Another problem is that this mechanism does not lay down rules for entities like trusts.[xiii] These bodies may take advantage if they are kept outside the regime of the CTA. The information demanded is to be kept confidential and only the prescribed government agencies can access the same. However, there are arguments that whether the CTA really promotes transparency if the beneficial ownership information is highly confidential and secretive.[xiv] The scope of financial institutions to which information may be shared is also a restricted one and includes only a certain class of institutions as governed by the CTA.[xv] Access to the information can only be acquired so as to ensure requirements relating to the customer due diligence (CDD).[xvi] This might pacify the concerns of the companies that may be worried about the horizon of the disclosure of the beneficial ownership information. There can be serious privacy concerns about the data that is reported by the reporting company. The question posed may be that whether the right of a reporting company to keep its data confidential is greater than the importance of tracking the illegality pursued by shell companies.[xvii] Another major problem is that companies may have reservations in declaring the information which might be available in the public domain.[xviii] They may be concerned about the extent of information that the CTA might effectively demand. This criticism will be present for a very long time because the USA might very well

[By Palash Varyani] The author is a student of Institute of Law, Nirma University.   Introduction Recently, the Securities and Exchange Board of India (SEBI) has made a significant breakthrough by explicitly addressing and defining the practice of “spoofing” in its recent order. Spoofing, a method employed by traders worldwide to extract illegitimate profit from the stock market, has been a longstanding concern. This article focuses on the SEBI’s order concerning Nimi Enterprises, highlighting the concept of spoofing and recent developments in its regulation within India’s financial landscape. By examining the implications of the SEBI’s action and the measures taken to combat spoofing, this article sheds light on the evolving dynamics of market integrity and investor protection. The Practice of Spoofing Spoofing entails a manipulative strategy employed in financial markets, wherein a trader deliberately places deceptive buy or sell orders, without genuine intent for their execution within the market. This deceptive practice frequently relies on the deployment of algorithms and automated bots, with the objective of distorting market dynamics and asset prices by fabricating a false impression of supply or demand. In simple terms, spoofing refers to the act of a trader initiating orders to purchase or sell a specific security, only to subsequently alter or cancel those orders with the aim of extracting profits. For example, Mr. A submits a purchase request for 5000 shares of XYZ company, which will lead to an increased demand for the stock. Consequently, the price of the stock will escalate. Later on, he cancels the order and proceeds to sell his existing shares. By doing so, he aims to generate an artificial demand and achieve a higher selling price than originally anticipated. This practice is also known as “Layering” which encompasses the utilization of a disruptive algorithmic trading strategy. This particular approach can potentially instigate either excessive “optimism” or “pessimism” within the market. It constitutes a form of illicit market manipulation that is prohibited in the majority of countries worldwide. Within the USA, engaging in such conduct is deemed unlawful and classified as a criminal offence according to the Dodd-Frank Act of 2010. In the UK, spoofing is governed by Article 15 of the Market Abuse Regulation, and sections 89 and 90 of the Financial Services Act, 2012. SEBI and the Nimi Enterprises case The SEBI has recently passed an order against “Nimi Enterprises” and has ruled that it was involved in spoofing of shares in the Indian securities market. The firm was involved in securities trading and was subject to an investigation regarding its trading operations to determine whether it violated the regulations outlined in the SEBI Act and the Prohibition of Fraudulent and Unfair Trade Practices Regulations, 2003. Throughout the probe, SEBI uncovered evidence indicating that the firm engaged in a trading scheme designed to artificially manipulate the perception of demand or supply for specific stocks. As an illustration, the firm placed substantial buy orders for a security, offering a price significantly distinct from the current market value. Subsequently, the firm would place another order for the same stock, but at a price in line with market rates, although for a lower number of shares. After this order was executed, they would cancel the initial order, which consisted of a higher quantity of shares. As a result of the public disclosure of these activities, the parties concerned received a “Show Cause Notice”. The firm asserted that its approach of placing many large purchase and sell orders, some of which were executed at prices higher or lower than the current market price, was driven by the anticipated price changes caused by a variety of causes. Certain big orders, however, were not fulfilled and were subsequently cancelled in order to free up the “margin” for trading in alternative equities. Furthermore, they claimed ignorance of the word “spoofing” used in the “Show Cause Notice”, emphasising that it was not defined by SEBI. Moreover, they asserted that their actions evidenced a genuine intention to carry out the orders, as they openly disclosed them to participants of the market. According to their argument, a trader who harbours no intention of executing an order would refrain from making such disclosures. Consequently, they contended that there was no substantiated proof indicating any fraudulent motives behind the activities in question. SEBI’s investigation determined that there was a brief time interval, often just seconds, between the fulfilment of “small orders” and the subsequent cancellation of “large orders”. On multiple days, a similar trend was observed for several stocks. This information revealed the firm’s recurrent mode of operation as a usual trade practice. SEBI also emphasised the rules of the stock exchanges, which require traders to reveal to market participants either the complete quantity of their order or at least 10% of the overall quantity. A further amount equal to 10% of the total quantity then becomes publicly viewable in the “Order book” once the revealed quantity has been traded. According to SEBI’s inquiry, the firm purposefully disclosed all of their significant orders in the “Order book”. They chose to report only a portion of shares, however, while making deals involving significantly lower amounts for the same stocks. Based on this factual investigation, SEBI reached the conclusion that the firm had placed “large orders” with no genuine motive of executing them. Instead, they harboured a “malicious intent” to rig the price of the stock. By capitalizing on the non-authentic demand or supply generated within those stocks, the firm was able to purchase or sell shares at the price that was influenced by these artificial market conditions. This unethical practice ultimately affected the interests of sincere investors trading in the stock market. In this order, the SEBI also defined spoofing for the first time as: “The unlawful practice of placing orders containing a large number of shares on one side of the market (buy/sell) and eventually executing orders containing relatively smaller quantities of shares on the opposite side (sell/buy) and cancelling the orders containing large orders.” According to SEBI, the firm was involved in the act of spoofing and its