Author name: CBCL

[By Dhvani Shah] The author is a student of Gujarat National Law University.   Introduction An estimated USD 15 billion is floating around in India’s crypto-asset sector. Indian IPs accounted for 5% of worldwide crypto asset exchange traffic from January 2018 to December 2020, indicating a large crypto community. Recent research suggests that approximately 6 million people, or roughly 0.5% of India’s total population, are active in the crypto space. India’s crypto asset sector is expanding at an unprecedented rate. It is home to an estimated 15 million Virtual Digital Assets (VDA) investors and 350 crypto-based startups. Over the next 18-27 months, such enterprises plan to invest over USD 6.7 billion. It is estimated that Indians have invested roughly USD 10 billion into VDAs. The Reserve Bank of India (RBI) and the government seem against regulating the crypto market in 2014; the RBI issued a caveat to the public against the risks of trading in virtual assets and its violation of the then-existing foreign exchange laws in the country. The tussle between RBI and regulation of the crypto asset market has been long-standing for over 9 years and has been precisely discussed in the Representation before the Government of India. What constitutes Virtual Digital Assets (VDAs) Virtual Digital Assets (VDA) have been finally defined in the Finance Act, 2022 with the introduction of clause 47A to Section 2 of the Income Tax Act, 1961. The Indian Supreme Court, in the decision of Internet and Mobile Association of India v. RBI[1]relied on the definition of ‘virtual currency (VC)’ as per the FATF Report which described VCs as a digital unit that can be traded and serves as “(1) a medium of exchange, (2) a unit of account, and (3) a store of value in the digital economy, but is not a government-issued legal tender.” The Court also deciphered the definition of VCs by various courts in different jurisdictions to mean property, commodity, or payment method. Interestingly, the Hon’ble Court also deduced that VDAs can be treated as an ‘intangible property’ or ‘good’. (For this blog, VDAs, crypto assets, and crypto-currency are used interchangeably). The VDA market requires regulation as banning its trading could do more harm than good as buying and selling of crypto can be treated as an occupation, and a blanket ban on its trading can invoke the fundamental right to freedom of trade and profession.[2] The government is also on the path to introducing Central Banking Digital Currency (CBDC) which would again make regulation of the crypto market necessary before its introduction into the Indian economy. For instance, the Enforcement Directorate, India’s principal body for investigating money laundering offences and violation of foreign exchange laws, has issued notices to WazirX, a cryptocurrency exchange for suspected breach of the Foreign Exchange Management Act, 1999 (FEMA). It is challenging for crypto asset service providers to navigate regulatory frameworks without guidance from authorities on how FEMA or other laws may affect their industry. Regulatory stability plays a crucial role in fostering consumer confidence in a market and in order to increase people’s confidence in the financial system, strict regulation is required. What constitutes Securities Now that we’ve seen the ‘what’ and ‘why’ let’s dive into the placing of VDAs in the existing legal framework.           (i) VDAs as ‘Security’ Securities are tradeable financial instruments with monetary value issued to raise capital. The Securities Contract Regulation Act, 1956 (SCRA) under Section 2(h) defines “securities” to be inclusive of marketable securities in an incorporated company, government securities, and any such instrument notified by the Central Government as securities.[3] This definition is wide in its ambit as the government can notify and expand ‘securities’ to cover other additional instruments. ‘Marketability is an important characteristic of securities[4] and should mean something that is capable of being bought and sold in the market regardless of the market size and has high liquidity and ease of transferability.[5] While this ease of transferability is a characteristic restricted to securities of a publicly listed company, VDAs also possess this feature of ease of transferability. To dissect the quality of ‘marketability’ in VDAs, these assets are capable of being freely bought and sold in the market through crypto-exchange platforms like Wazir X, CoinDCX, ZebPay, etc. that aid investors in trading in the crypto market. However, these crypto-platforms, due to lack of any guidelines on the regulatory framework, operate cluelessly and often in the fear of violation of any law they might be unaware of to be complied with. While an average VDA transaction could take anywhere between 10 minutes to an hour, start-ups like Polygon in the crypto space are trying to develop platforms to expedite the transfer process. Ease of liquidity indicates the demand for an instrument in the market i.e., a readily available buyer or seller which brings stability to the market. VDAs can be converted to the fiat currency of a nation. Some crypto assets are more liquid than others which depends on their trade-ability. While the VDA market might be less liquid than other instruments right now, it is a rapidly booming sector with great potential for liquidity in the future. The VDAs can thus be deemed to be marketable security. The other roadblock in the existing definition of ‘securities’ to include VDA is that it is issued by an incorporated company ruling out a major chunk of the crypto assets. This is because crypto assets are created via minting anonymously and hence, even if a company mints crypto, the original issuer of the minted crypto-asset would be unidentified leaving it out of the ambit of the company. Crypto-currency exchanges like ZebPay have been incorporated with the Registrar of Companies (ROC) as private companies offering IT and Software services. Attempts to have a new company incorporated in India for the express purpose of operating as a cryptocurrency exchange have been denied by the ROC. Before rejecting an incorporation application, in a few cases, the ROC has provided notice to the applicant

[By Rajdeep Bhattacharjee and Aayush Ambasht] The authors are students of Symbiosis Law School, Pune.   Introduction By way of Circular dated April 5, 2023, the Securities Exchange Board of India (“SEBI”) devised a regulatory cobweb in order to regulate the code of conduct with regards to advertisements; which are to be strictly complied by the Investment Advisers (“IAs”) and Research Analysts (“RAs”) or who are popularly paralleled as social media handles which offer “financial and investment advice.” The Circular aims to clear pertinent conundrums pertaining to the behavioural aspect of both RAs and IAs in the aforementioned regard as well as aims to impose a degree of affirmative correspondence to conduct fair trade of securities in the Indian capital markets. In due furtherance of such interest, this research piece aims to dissect this Circular’s binding rationales and address its larger applicable discourse in the securities exchange regime. Further, the authors also highlight the following conundrums namely: Third party liability considerations, One-on-one communication concerns Limited material purview of registrations; of the SEBI’s Circular in conjunction with the U.S. Securities Exchange Commission’s amendment in this regard. Third Party Liability Considerations: A Double Edged Sword? The U.S. Securities Exchange Commission (“SEC”) vide amendment to Rule 206(4)-1, makes an explicit reference to ‘Marketing Rules” and “Third Party Statements” holding that any form of such advisers indulging in advertising financial insights (which may fuel market irregularities) shall also be liable to costs, as under the “Marketing Rules” concerning such communications with third parties. Pursuant to the same, it also outlines a requisite requirement for such advisers to comply with such marketing rules, independent of any third-party disseminations in this regard. As far as materiality thresholds are concerned pertaining to such third-party ratings, there is a definitive minimal imposition of $1,000 per calendar year backed by the adviser’s written statement as a blanket agreement to the same. Thus, the SEC not only clears the murkier waters of third-party liability, but also seems to hold a rational ground for ring fencing coherence on behalf of both: advisers and third-parties in the strictest regard. In the present instance, the SEBI fails to outline a parallel gordian knot of regulatory clarity as far as third-party liability in instances of falling under the verbiage of “advertisement” according to such IAs and RAs. Inadequacy along such lines leads to creating further arbitrary bottlenecks in identifying lapses and tracking grounds for holding the employees and/or subsidiaries who may also be liable in this regard. Further, the present Circular does not posit any clear regulatory dialogue as to whether third party statements such as disclaimer(s), endorsement(s) and testimonial(s) are to be incorporated under the definition of “advertisement” as an implied concern; including the treatment of proceeds arising out of such forms of advertisements. Lastly, affixing vicarious liability in cases revolving around a principal agent and/or master-servant contractual arrangements is another smokescreen, the aspect of which is absent in the present Circular. Therefore, the SEBI must furnish an informed interpretational autonomy in light of these pertinent discrepancies and address the growing salience of such lacunae at the earliest. One on One Communication Concerns: Are Physical Interactions Unguarded? One of the major lacunas of this Circular in question is that nothing is explicitly mentioned regarding one-on-one communication. The ambit of the definition of advertisement as is given is an umbrella one and mostly incorporates every form except the aforementioned form. This may amount to be problematic and defeat the entire purpose of the Circular as there are a plethora of finfluencer , IAs and RAs who conduct physical meet-ups wherein they extensively discuss stock trading. Furthermore, this could amount to prospective influencers accepting any solicited information and, as a result, this strengthens a veiled affirmation of inflating and/or deflating a stock without any accountability whatsoever, underlying such verbally communicated opinions. This loophole has proven to be exploited in other jurisdictions as well, especially the United States post which the SEC had to step in and extensively address this issue. Finally, failing to hold accountable such verbal tips and one on one communications, the SEC was compelled to exclude such communications from the advertisement regulatory regime. The backing behind such exclusion was cited to be the inability of tracking and garnering of material evidence. In the SEC’s amendments to Rule 206(4)-1 of the Investment Advisers Act of 1940 which went on to implement the regulator’s new Marketing Rule, it was firmly held that the exclusion shall be applicable to both – a single person with an account as well as multiple persons bearing the representation of a single account. However, such exclusion is not applicable in the case of electronic communication that is being disseminated in bulk. Duplicated advise herein inserts into otherwise tailored one-on-one communications to individual investors, for example, constitute advertisements, while the tailored portions are exempted. Therefore, this lacuna could have been addressed by SEBI in a more tacit manner, taking in cognizance the wide mode of personal methods of dissemination, barring the forms of publications. Enforceability of Registrations: Demystifying its Materiality Purview At the very outset of the Circular, it can be found that the people addressed are registered IAs and RAs. However, keeping in mind the problem that SEBI has sought to solve vide this Circular has somewhat remained un-addressed due to the principal blanket of registration that the regulator has propounded at the very inception of this document. The principal predicament in the current epoch with the rise of social media influencing, which has given rise to unregulated financial advisory related to investing in securities, was sought to be addressed by the regulator and the fundamental essence of the Circular puts forward the same as the definition of advertisement has been made somewhat exhaustive. However, despite such endeavour, the major conflicting issue of being able to regulate such unregulated and unaccountable financial advisory is defeated due to the incorporation of registration criteria, which in turn jeopardises the entire stratagem envisaged by the regulator; to deal with such unsolicited

[By Aditya Mehrotra] The author is a student of Symbiosis Law School, Pune.   Abstract Insider trading is essentially the unlawful trading of stocks having access to non-public information that, if published, would alter the market price of shares. In light of prior rulings on insider trading, the Supreme Court and SAT have rejected the use of circumstantial evidence in identifying insider trading offences, however they have given due weight to circumstantial evidence when exonerating corporations. In their own way, these instances constitute the establishment of a “new standard of proof” to be upheld by SEBI in insider trading cases, but they also cause doubt over the application of the law. To identify insider trading violations, it is necessary to do further assessments of the stated UPSI’s relevance, its application, and the trading behaviour of the companies. Curiously, the SEBI Rules, 2015 do not define the term “insider trading,” but a person is found guilty of insider trading if all of the following conditions are met: (i) this person is an insider of a firm whose listed securities he trades; and (ii) this person traded directly or indirectly in the listed securities with respect to which he holds unpublished price-sensitive information (“UPSI”). If these two conditions have been satisfied, the duty of establishing innocence shifts to the insider, who may use any of the permitted defences. In this study, the author will thus give a basic criticism of the current Insider Trading Regulation in India while assessing its legitimacy. In addition, the author will investigate the basis of Judicial Dictums on Insider Trading and provide proposals and recommendations for their proper implementation. Introduction Indian securities rules ban insider trading, which happens when a person “possesses” unpublished price-sensitive information (“UPSI”) on a publicly listed company’s shares and then trades in those equities. The restriction is triggered by “possession,” which does not require “use,” of the information. This regulation is meant to maintain “even playing fields” in securities trading. In other words, it aims to prevent an insider from gaining an unfair advantage over public investors by just holding UPSI, which is referred to as “information asymmetry” in the context of insider trading. Insider trading is defined as “the use of material non-public knowledge to trade business shares by a corporate insider or any other person having a fiduciary duty to the firm.” Hence, the 2015 SEBI (Prohibition of Insider Trading) Regulation has superseded the 1992 SEBI (Prohibition of Insider Trading) Regulation. SEBI enacted these limits upon the proposal of a high-level committee. Former head of the Securities Appellate Tribunal, Justice Shri N.K. Sodhi presided over the committee (SAT) which elaborated that, “the obvious need and understandable concern about the damage to public confidence that insider dealing is likely to cause, as well as the clear intention to prevent, to the greatest extent possible, what amounts to cheating when those with inside information use that information to profit in dealings with others”. The Insider Trading Regulations establish two offenses: first, the communication offense, wherein an insider is liable for communicating price-sensitive information to a third party, and second, the trading offense, wherein an insider is liable for trading while in possession of price-sensitive information. The communication violation not only creates an insider trading barrier for the person who communicates the information, but also penalizes anybody who attempts to induce or compel an insider into revealing the information. There are, though, exceptions that must be considered. Although evidence of malicious intent is not required, the trade crime has a high threshold and stringent standard. It presume that a person with the knowledge has traded on it, rather than needing evidence that price-sensitive non-public information was used to trade. Evidentiary Burden vis a vis Insider Trading Jurisprudence SEBI as a regulator is unable to garner sufficient support from the language of the Insider Trading Regulations, particularly in terms of evidence presentation, for establishing the insider trading offense. In the case of Mr. V.K. Kaul v. The Adjudicating Officer, SEBI, the Supreme Court of India ruled that relying on circumstantial evidence to establish an insider trading offense is not in conflict with the regulatory framework prescribed by SEBI, and that SEBI/SAT may consider circumstantial evidence when deciding an insider trading case. While attempting to show the previously enumerated aspects of the breach, the quantity of evidence necessary for a conviction for insider trading is the most important factor to consider. In Samir C. Arora v. SEBI, for instance, the Supreme Court of India ruled that in cases involving securities market breaches, SEBI is not needed to prove its case beyond a reasonable doubt; nonetheless, “legally sustainable evidence” must be present in order to convict an individual of such accusations. In contrast, in Dilip S. Pendse v. SEBI (‘Pendse’), SAT said that “the charge of insider trading is one of the most serious infractions relating to the securities market, and given the gravity of this breach, the preponderance of likelihood required to prove the same must be larger.” But, the Supreme Court’s judgement in SEBI v. Kishore R. Ajmera (Ajmera) has ruled in favor of the lower criterion. In this case, while addressing a violation of the SEBI (Prohibition of Fraudulent and Unfair Trading Practices Relating to Securities Market) Regulations, 2003, the Supreme Court said that “the test would always be what inferential approach a reasonable/prudent man would use to reach a conclusion.” In a related case, the Supreme Court determined, based on its own decision in Ajmera, that the appropriate standard of proof would be the preponderance of responsibility rather than proof beyond a reasonable doubt, despite the fact that the relevant violations would result in criminal penalties for the defaulters. The Supreme Court’s announced opinion is incontestable. In circumstances where only a monetary penalty is imposed under the SEBI Act, submitting SEBI to the criminal standard of proof would make the Insider Trading Rules essentially ineffective due to the difficulties of gathering evidence to support an insider trading accusation. Analysing the Underpinnings of

[By Muskan Madhogaria, Lavanya Bhattacharya and Srishti Gupta] The authors are students of Jindal Global Law School.   Introduction  The Securities and Exchange Board of India (“SEBI”) recently by way of a Consultation Paper dated 21st February 2023, proposed mandatory disclosure requirements for listed entities by amending Regulation 30 of the LODR along with certain other shareholder approval mechanisms. This has prompted several suggestions for consideration, some of which are discussed in this paper. What amounts to ‘impact’? Listed entities are required to disclose agreements that have an ‘impact on the management and control’ of their businesses, but the use of the word “impact” lacks a threshold value to avoid imposing unnecessary compliance burdens on companies. Under such a broad scope, investors are prone to receiving information that is irrelevant and distracting to their investment and voting decisions. Additionally, listed entities must ensure that the information they disclose is not misleading, false, or deceptive and does not omit anything that may affect the interpretation of such information. Discrepancies with the Pre-Existing Framework Under Regulation 30 of the LODR, any disclosure requirements must meet the standard of materiality laid down in Clause 2(e) of Chapter II. This requires the listed entity to provide accurate and timely disclosure on all significant matters, including the financial situation, performance, ownership, and governance of the listed entity. However, it’s uncertain whether agreements that ‘impact management or control’ or impose any restrictions or liabilities would always be deemed material to the company. In cases where such agreements don’t meet the materiality standard, the listed entity won’t be liable for informing its shareholders about them. SEBI should also clarify the distinction between transactions covered under this regime and the Related Party Transactions (RPT) regime and adopt a more nuanced approach that is able to harmonize the pre-existing regulatory framework to better compliance. It is also important to note that SHAs typically include change in control clauses as they can provide important protections and mechanisms for shareholders in the event of a change in ownership or control of the company. However, the specific terms of these clauses can vary widely depending on the preferences of the shareholders involved and the nature of the company’s business and ownership structure. Whether a particular SHA requires disclosure of change in control should be pertinent to decide whether such disclosures are to be made to the shareholder. Additional Compliance and Regulatory Burden The board or audit committee members will be held responsible for determining whether a detailed opinion on the proposed agreements requiring disclosure is necessary for seeking shareholder approval. This expanded role of evaluating these agreements would primarily be assigned to the audit committee, independent directors, and the Board, as executive directors are usually representatives of the promoter group, which would inevitably increase the regulatory burden on them. Insufficient Time Period for Disclosure Compared to the US and UK frameworks, which allow for up to 4 business days and 21 calendar days, respectively, the 24-hour time period is very short and puts a burden on both the listed entity and the shareholders to ensure timely disclosure. Industry standards suggest that the time period for such disclosures should be reasonably extended to allow for more thoughtful and informed decision-making by shareholders. Obtaining Shareholder Approval for Agreements That Impose a Restriction or Liability Agreements of such nature are typically subject to incorporation into the company’s AoA, which itself requires shareholder approval. Creating a double requirement for shareholder approval in all those situations will only add to the compliance burden. Without reference to the nature, magnitude or materiality of these restrictions/ liability, any and all agreements at the shareholder level having any impact on a listed entity, will trigger the specified disclosure and approvals. Consequently, this renewed shift of power shall be susceptible to challenges such as the risk of decision-making errors and shifting of agency costs by retail shareholders upon institutional shareholders. For any agreement that might really inflict restrictions or obligations, regardless of whether the listed entity is directly engaged, the proposed update also demands shareholder approval. While this is a good corporate governance measure, applying it retrospectively to existing agreements could create compliance issues. Shareholders may have vested interests in past agreements and revisiting them now could cause complications for the company, especially if significant business decisions have already been made based on these agreements. However, for agreements that provide protective rights or board seats to the listed entity and are not already included in the company’s articles of association, disclosure and approval will be required at the first AGM or EGM meeting after April 01, 2023. Future obligations arising from such agreements will depend on shareholder ratification. Status of Special Rights issue to Directors in the United States and key takeaways for SEBI Stock markets work on the basic principle that all shareholders are created equal. Therefore, any special rights that are negotiated at the PE stage usually fall away post listing. However, it is usual for some governance rights to be negotiated to remain in effect after a company goes public. Private equity investors may request a position on the board or observer rights, and sometimes they retain veto power in specific situations after the IPO. In the United States, there existsa proper difference between dual class and single class IPOs since the former is subjected to more scrutiny. A dataset created by searching the IPO documents of around 1,870 companies in the United States that went public from 2000 to 2020 suggested that companies often grant disproportionate rights to shareholders through a combination of agreements. These control rights typically exist in tandem with other control rights relating to the board of directors, which allows insider shareholders to have the power not only to choose who sits on the board, but also to control their decision-making process. However, these shares are treated as single class in form and therefore subject to a lower threshold. Empirical literature suggests that the option of issuing dual class shares has pushed a

[By Saumya Mittal] The author is a student of Gujarat National Law University.   Introduction The implementation of the Social Stock Exchange (“SSE”) in India exemplifies a point where socialism and capitalism intersect with the appropriate balance, providing a fitting illustration. Although in existence for more than two decades around the globe, SSE was mentioned for the first time in India in the Union Budget of 2019-20. The then-Finance Minister had declared the objective of SSE to be realisation of the social goal by way of our capital markets. Consequently, SEBI constituted a Working and a Technical group, which submitted their reports and recommendations on 1st June 2021 and 6th May 2021, respectively. Finally, on 22nd February 2023, SEBI gave its final approval to NSE for the constitution of SSE. But what exactly is an SSE?; What are the regulations that SEBI has mandated, and how is this whole concept going to be realised in the end? These are some aspects that this article shall try to address. Meaning of Social Stock Exchange Regulation 292A of the SEBI (ICDR) Regulations, 2022 defines SSE as a separate segment of a recognised stock exchange with which a Non-Profit Organisation (“NPO”) can be registered and/or its securities can be listed with SSE. But what is SSE? It is a stock exchange, where NPOs shall be listed rather than commercial entities. Like a company listed on a stock exchange for raising capital, an NPO gets listed on SSE for raising funds for its operations. The amount it receives is a donation which people donate without expecting any monetary return. Definition of NPO NPO stands for- Not-For-Profit Organisation. Their main objective is social welfare, and their primary sources of income are donations, subscriptions, etc. Regulation 292A(e) defines NPO as any entity constituted under the Indian Trust Act, 1882; the Public Trust statute of the relevant state; the Societies Registration Act, 1860; Section 8 of the Companies Act, 2013; or as may be specified by the Board. Definition of For-Profit Social Enterprise (FPE) It is an enterprise whose primary objective is to do social service in a specified way and, at the same time, earn profit through such activities. It aims to maximise both profit and social welfare. An instance of such an organisation can be a business that employs marginalised people to manufacture jute bags (to act as an alternative to plastic bags). Regulation 292A defines it as a company/body corporate operating for profit and within the purview of a social enterprise. FPEs and NPOs are collectively called ‘social enterprises.’ Brief History SSE has been introduced in 7 countries till now, of which only three exchanges are currently active. SSE in Brazil, Portugal, South Africa and the UK failed and thus became non-functional, whereas the same in Canada, Jamaica, and Singapore are still operational. The focus of Canada and Singapore is solely on helping small and mid-cap companies raise capital through SSE. Social organisations, in general, are excluded from getting listed on the exchange. On the other hand, Jamaica is gearing up to introduce NPO under the aegis of SSE. The failure of SSE has been observed to be due to a lack of focus on NPOs and diversion of funding towards FPEs only, major project-based funding and a dearth of social funding culture. India needs to learn from the mistakes of such predecessors. Objectives of SSE SSE intends to reduce the adverse economic impact of COVID-19 by utilising social finance to restore the lives of pandemic-hit people. It aims to address this urgent issue by unlocking vast reserves of social finance and fostering collaboration between social and commercial capital. It emphasises the importance of generating profits for social goals as a critical component of sustainability (this rationale only applies to an FPE). How will the SSE function? SEBI (ICDR) Regulations, 2022 state that SSE regulations apply only to NPOs registered and/or listed with it and to FPEs that want to be recognised as social enterprises. It is important to note here that it neither talks about registering FPEs nor listing their securities on SSE. This is because Regulation 292G (b) states that if an FPE wants to raise funds, it shall do so via the main Board (NSE/BSE), the SME platform, Alternative Investment Fund or by issuing debt securities. So, it can be inferred that, at present, SEBI has no intention of allowing FPEs to raise capital directly from SSE or even be registered with it. The Listing and Registration at present are limited to NPOs only, although the SSE framework provisions apply to FPEs as well. Also, SSE can only be accessed by institutional and non-institutional investors. Along with this, an SSE Governing Council shall also be constituted to monitor its functions. Further, in 292E, areas of social work have been provided from which political or religious organisations, corporate foundations and housing companies have been explicitly excluded. The framework provides for only two securities through which money can be raised by NPO – Zero Coupon Zero Principal Instruments and donations through mutual funds. The former is a financial instrument in which no coupon is provided, and no principal money is paid on maturity. It can be compared to a bond. Generally, when an entity issues a bond (which is a debt security), it has to make interest payments on the same and there’s final payment of principal money on the maturity of bonds. In Zero Coupon Zero Principal instrument, any interested investor can purchase these securities but he shall receive neither the interest nor the principal money. So instead of a debt, it’s a donation in essence. But it’s still similar to a bond due to its structure i.e. it shall be issued for a certain time or a certain project, albeit the monetary returns. Similarly, donations can be made in the form of investment in mutual funds offered by the NPOs. For issuance of any security, NPO is required to file a draft fundraising document with SEBI. Advantages of SSE in