Author name: CBCL

[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

[By Anushka Aggarwal] The author is a student of National Law School of India University (NLSIU).   Introduction Recently, the Securities and Exchange Board of India (SEBI) sent a 31-point advisory to investment bankers via the Association of Investment Bankers of India, the investment banking industry’s representative to SEBI (IPO advisories), which increases the Initial Public Offering (IPO) disclosure requirements and due diligence requirements. This was a part of regulatory advisories that SEBI frequently issues to intermediaries like the AIBI. These advisories operate along with the existing legal framework including the Companies Act, 2013 and Part A of Schedule VI of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018. I argue that SEBI’s authority to issue such advisories without a well-defined legal framework opens the door to potential regulatory substitution, i.e., using advisories to perform functions that would typically require a more formal legal framework, such as an amendment. This is concerning given the judiciary’s usual deferential stance toward SEBI which can fail to keep a check on SEBI’s advisory powers, and the implications of this on the securities market: First, the article describes the absence of a clear legal framework governing advisories, and second, addresses the broader implications of this, including how it fails to keep a check on regulatory substitution and contributes to increased transaction costs and inefficiencies within the securities’ market.  The Issue: (Lack of) Legal Framework The Securities and Exchange Board of India Act, 1992 (SEBI Act) which establishes SEBI and lays down its powers and functions does not use the term ‘advisory.’ Under S. 11A and 11B, SEBI has the power to issue ‘regulations,’ ‘orders’ and ‘directions’ to the securities market. I argue that none of these can encompass advisories. All rules and regulations made by the SEBI have to be tabled before the Parliament under S. 31. The Parliament can modify such regulations or invalidate these. However, none of the advisories issued have been tabled before the Parliament, or their validity subject to such tabling. Under S. 11B, a direction by a statutory authority is like an order requiring positive compliance. However, advisories are typically supposed to be clarificatory, offering guidance to help interpret existing law and align market practices. Whether advisories require positive compliance is unclear. Additionally, ‘directions’ is synonymous with ‘orders.’ Since ‘advisories’ cannot be considered ‘directions,’ they cannot be considered ‘orders’ either.    Thus, the SEBI Act not only lacks a clear framework authorizing the issuance of ‘advisories,’ but also the aforementioned ways of regulation cannot encompass ‘advisories.’ Arguendo, the SEBI Act gives SEBI overarching powers to protect the interests of investors and regulate the securities market, and advisories fall under this general regulatory function. However, the lack of a structured legal framework governing advisories leads to concerns about potential regulatory substitution: The content of the IPO advisories is not limited to guidance but effectively amends a regulation as elaborated upon subsequently, but due to its status as an ‘advisory,’ the SEBI circumvented the need for parliamentary tabling. Further, these advisories may blur the line between informal guidance and enforceable regulation, creating uncertainty. For example, the IPO advisories necessitate that the offer document not in conformity with the advisories shall be returned to the company.  The Relevance: Why is This An Issue? This section first examines how issuing advisories bypasses the formal processes required for making regulatory changes, such as passing amendments or issuing new regulations, thereby amounting to regulatory substitution. Instead of following the more rigorous procedures that ensure accountability and transparency, advisories are used to introduce changes informally. This may remain unchecked due to the judiciary’s deferential. Second, it analyzes how the advisories increase transaction costs and lead to inefficiencies in the securities market.  1. Regulatory Substitution Under the IPO advisories, SEBI notified that “any entity or person having any special right under articles of association or shareholders’ agreement should be cancelled before filing the updated draft red herring prospectus.” Before these advisories, such rights were cancelled after the listing of a company as per Regulation 31B of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. These special rights, like veto powers, Right of First Offer/Right of First Refusal, etc., are important for private equity (PE) investors. Retention of special rights, during the critical phase of the company’s transition to a public entity, provides them with a safety net and the ability to influence major decision that could impact their rights vis-à-vis the company. PE investors usually have limited day-to-day control over the company. Their special rights compensate for this by providing mechanisms to protect their investment.  Thus, the SEBI effectively amended a Regulation that secures important rights for PE investors through the use of advisories, which are part of an informal framework. This constitutes regulatory substitution because by issuing advisories, SEBI was able to introduce a significant change without going through the formal process that would normally require parliamentary approval. This not only undermines the transparency and accountability checks required for rule-making but also impacts the regulatory landscape. Although SEBI later withdrew the advisory, this action did not fully resolve the issues created by the initial substitution. The next section will explore how these negative impacts cannot be undone by the withdrawal.  The potential for SEBI to engage in regulatory substitution through advisories could remain insufficiently addressed due to the judiciary’s deferential stance towards SEBI. In Prakash Gupta, the court defers to SEBI remarking that SEBI’s actions are guided by public interest and its role in maintaining market integrity and investor protection. The courts have avoided substituting their judgment for that of SEBI, acknowledging the latter’s extensive regulatory and adjudicatory powers, and specialized knowledge. A stronger form of deference is displayed here since the statute was clear that the offences could be compounded (only) by the SAT or a court. The court concludes that SEBI’s consent cannot be made mandatory owing to the language of the statute, but held that the views of SEBI must necessarily be considered by the SAT and the court, and

[By Debangana Nag] The author is a student of the West Bengal National University of Juridical Sciences.   Introduction In its recent board meeting on 30th September, SEBI outlined maintaining pari-passu rights of the investors in Alternate Investment funds to maintain a level playing field among them. The Board approved proposals to amend the AIF Regulations to state that, in all other respects (barring specified exemptions), investors’ rights in an AIF scheme shall be pro-rata and pari-passu, meaning investors must have equal rights (pari passu) in all investments within the scheme, thereby stating that no investor will be prioritised over another. Additionally, any returns or distributions from the scheme will be allocated proportionally (pro rata) based on the amount each investor had contributed, ensuring that their share of returns is directly in line with their investment. However, to prevent existing investments from being disrupted, the SEBI has allowed them to continue.  In May 2023, a consultation paper was released by SEBI seeking comments from the public. This paper emphasised that the pro-rata principle should be regarded as of utmost importance in AIFs, highlighting it as crucial for maintaining fairness. In contrast, the pari-passu principle was highlighted as a means to guarantee equality in economic rights among all investors. SEBI identified key issues concerning the use of the Priority Distribution Model by AIFs, which classifies investors into distinct groups, raising concerns about its implications for equitable treatment.  By examining this decision in light of SEBI’s consultation paper on pro-rata and pari-passu rights, this article shall critically analyse how the decision fails to balance investor protection and flexibility required by managers for creating innovative investment products along with emphasising the need to prevent regulatory arbitrage.  Understanding SEBI’s Decision on Pro-Rata and Pari-Passu Rights Although the pro-rata is not explicitly stated in the AIF Regulations, ensuring proportional rights for investors particularly in the distribution of investment proceeds is a fundamental feature of the AIF framework. However in a PD Model in the event of a loss, money from the residual capital of junior-class investors could be utilised to reimburse the senior-class investors. A hurdle rate is a performance-based benchmark for a fund that guarantees minimum returns. Senior class investors have lower hurdle rates which are prioritised during the payment. In the event of a profit, the senior class investors receive distributions until their hurdle rate is satisfied, after which the junior class investors get any residual funds.   As discussed in the Introduction, this decision by SEBI aims to uphold equitable distribution of profit and loss to ensure fairness and investor protection while emphasising that the principle of fairness that must be secured in a pooled investment like AIF.  Furthermore, SEBI granted exemptions from these regulations to certain entities like those owned by the Government, multilateral development financial institutions, State Industrial Development Corporations and other specified entities as designated by SEBI. Importantly, only these entities will be allowed to give less than pro-rata rights to persons who subscribe to junior-class units of the AIF scheme. This exemption has also been granted to Large Value Funds (LVF) but only if each investor explicitly agrees to waive off their Pari-passu rights. According to SEBI regulations, Section 2(1)pa, an LVF is an AIF where each investor commits a minimum of ₹70 crore.  It is pertinent to mention here that the SEBI Board has authorised that only in the above-mentioned AIFs, certain differential rights can be granted to some investors while the rights of other investors remain unaffected. The permitted terms for offering differentiated rights will be determined by the Standard Setting Forum for AIFs in collaboration with and certain principles outlined by SEBI.  Critical analysis of SEBI’s stance on the Priority Distribution modelSEBI has categorically banned AIFs following the Priority Distribution model (PD Model) from raising fresh commitments or making investments in a new investee company. In its consultation paper, SEBI identified that in a PD Model, investors are categorised into senior and junior groups. Senior investors are accorded priority in the distribution of returns, typically enjoying reduced risk and assured repayment before any allocation is made to junior investors. Junior investors, by contrast, assume a higher level of risk as they are compensated only after the senior class has been fully satisfied. This often results in the junior class disproportionately bearing losses in adverse scenarios. However, in exchange for this elevated risk, junior investors may realise greater returns contingent upon the overall performance of the fund. This hierarchical structure prioritises the protection of senior investors while exposing junior investors to greater risk for potentially higher rewards.  In addition, SEBI noted that this model led to a regulatory arbitrage which is prone to misuse for unethical financing like evergreening of loans.  A Working Group had recommended allowing the PD Model in limited scenarios; however, SEBI decided against this, stressing that the model’s risks outweigh its benefits.  Balancing flexibility and investor protection: Differential Rights and Operational Flexibility for AIFs To balance investor protection with operational flexibility, SEBI has allowed AIFs to offer certain differential rights to certain investors provided that they do not affect the rights of other investors to prevent conflict of interests. The rationale for this decision, highlighted earlier, was to prevent scenarios similar to those that led to the 2008 financial crisis, where investors were disproportionately impacted by differential tranches in collateralized debt obligations (CDOs), causing widespread financial instability. In such cases, investors, particularly those holding junior tranches often did not fully understand the associated risks. Junior tranche holders were typically the last to receive payments and the first to absorb any losses, making these tranches riskier.   However, it is important to underscore the trade-off between providing investors with choice and regulating AIFs, especially for those seeking opportunities through differential tranches that offer higher risk and potentially greater rewards. AIFs are investment products specifically designed for people who are considered experienced enough to negotiate their own terms. The move to prohibit fresh investments into AIFs following these structures signals SEBI’s low tolerance for financial innovation in a move towards strict regulations over risk-laden flexibility. Units with