Author name: CBCL

[By Hemang Arora & Ayush Pratap Singh] The authors are students of Gujarat National Law University. Abstract  On 21 July, 2022, SEBI issued a consultation paper proposing to bring online bond trading platforms under its regulatory purview. The SEBI raised concerns in the paper regarding the lack of regulation surrounding these online bond trading platforms and therefore provided recommendations to address the same. SEBI thus recommended manda­tory registration requirements, eligibility requirements etc., in order to address these concerns. This has come at a time when India is going through an evolution in its technological advancement, if we specifically talk about the securities market. This is evidenced by an approximate increase of six million retail investors within the Indian economy. The need for this regulation has arisen due to the sharp rise in retail investors in the country and the increasing knowledge of the common man in the field of securities. Online bond trading platforms usually provide an electronic interface to users on which buying and selling transactions are routed through a recognised exchange. Even though these bond platforms attract a variety of investors, especially non-institutional investors, the problem is that they are not subject to any regulatory oversight, meaning that the platform providers are not registered with any regulatory agency. Analysis of SEBI’s Proposed Framework                               Increase in the Number of Online Bond Trading Platforms In the consultation paper, SEBI has noted an increase in the number of online bond trading platforms in India due to low-interest rates on Fixed Deposits and the appeal of such platforms to non-institutional investors                                  Issues Surrounding Online Bond Trading Platforms SEBI has noted the increase in the number of investors on online bond trading platforms to be a positive sign but has also raised concerns that need to be addressed. The SEBI has provided a list of issues to be discussed. Lack of regulatory framework: SEBI has raised concerns about the lack of a regulatory framework governing online bond trading platforms and the lack of recourse for investors in the event of issues with transactions. No discernibility factor between listed and unlisted securities: Listed and unlisted securities are currently offered together on the same webpage, making it difficult for new investors to distinguish between them. No definite standard of KYC norms: SEBI observed that most of these platforms do not align and comply with the Prevention of Money Laundering Act, 2002 guidelines or SEBI KYC requirements. Improper and ambiguous redressal mechanisms: SEBI has emphasised the need for a framework for addressing investor grievances and providing an arbitration mechanism for dispute resolution on online bond trading platforms, similar to the Investor Services Cell on regulated platforms. Issues relating to conflict of interest, and mis-selling: SEBI has raised concerns about the potential for mis-selling of lower-rated securities as high-yield securities on online bond trading platforms, and the need for increased regulation if the platform has cross-holdings or management linkages with issuers. Deemed Public Issue (“DPI”): SEBI has raised concerns about the potential for the down selling of debt securities on private placement by online bond trading platforms to constitute a DPI. In some cases, the entire issue was reportedly down sold to over 200 investors within 15 days of allotment, according to SEBI data. SEBI has noted that the sale of securities on a private placement basis by online bond platforms to over 200 investors will violate Section 25(2)(a) of the Companies Act, 2013. Reporting of Trades: The current regulatory framework requires debt securities trading to be reported and settled through clearing corporations of exchanges. It is essential that online bond platforms be brought under this regulatory framework to ensure compliance with these provisions Issues relating to clearing and settlement: SEBI has observed procedural inconsistencies, including the bypassing of the role of stock exchanges and clearing corporations, in the processes followed by online bond platforms. In some cases, the platforms directly accepted funds from clients and processed security settlements through off-market mode, especially for unlisted bonds or transactions below Rs. 2 Lakhs.                                                 Recommendations by SEBI Mandatory registration requirements: SEBI has proposed mandatory registration of online bond platforms as stock brokers with SEBI or by SEBI registered brokers to give investors confidence and ensure the application of stock broker regulations for investor protection. Eligibility requirements: According to the proposal by SEBI, the debt securities to be offered on the platform shall only be listed in nature. Addressing the concerns relating to DPI: To address the issue of DPI, SEBI has proposed that listed securities offered on online bond platforms be locked in for six months from the date of allotment by the issuer. Channelising transactions: Exchange Platform-Debt Segment- SEBI has recommended routing transactions on online bond platforms through the trading platform of the debt segment of exchanges to reduce settlement risks and guarantee settlement on a T+2 basis. Request for quote platform (RFQ)- SEBI has also recommended using the RFQ platform of the Stock Exchange, where transactions will be settled and cleared on a Delivery Versus Payment (DVP-1) basis, as an alternative to the previously mentioned option SEBI has proposed that online bond platforms use Exchange platforms’ APIs to quickly integrate with Exchange systems. This proposal is similar to the trading mechanism used for equities transactions, in which stock brokers create their own front-end for clients to place orders, and the transactions are carried out on the trading platforms of the Exchange. This would allow the platforms to preserve their current web interface and display a list of available debt securities, ratings, risk information, and other details on their website.                                Opinion of the authors on the Regulatory Framework According to the authors, the benefits of the regulatory framework would be manyfold. For instance, the implementation of standard KYC norms and the applicability of a code of conduct applicable to stock brokers will ensure fairness. Further, the overall regulatory inspection and oversight shall bring investor confidence in the process. If we talk about the routing of transactions, it would also bring about

[By Mainak Mukherjee] The author is a student of National Law University and Judicial Academy, Assam. Introduction Delegated legislation acts as a tool for the legislature to reduce the burden from its shoulder. However, considering the thin line that separates delegated legislation from excessive delegation of power, it is pertinent for the legislature to exercise more control over the executive even when legislative powers have been delegated. Moreover, delegated legislation can often lead to a lack of transparency and accountability as the administrative bodies are not subjected to a similar level of scrutiny and debate as laws made by the legislature. One such example of excessive delegation of power is the Securities and Exchange Board of India’s (SEBI) power to issue Supplementary Show Cause Notices at any given point of a proceeding. SEBI undertakes quasi-judicial proceedings based on the principle of natural justice, and notices serve an essential function to heed natural justice as it allows the other side to know the charges that are being labeled against them. That being said, the question still beckons: if there should be a regulatory framework for SEBI to issue Supplementary Show Cause Notices—after a show cause notice has already been issued—especially when the statute remains silent about the same. In this article, the author will first discuss SEBI’s power to arbitrarily issue Supplementary Show Cause Notices at any given point of a proceeding. In the latter half of the article, he will analyze how the Parliament has not conferred SEBI with the power to issue Supplementary Show Cause Notices and why a properly laid-down framework for the same is the need of the hour. The curious case of Supplementary Show Cause Notices issued by SEBI Nemo judex causa sua and Audi alteram partem are essentially two essential principles of any quasi-judicial proceeding. As mentioned earlier, issuing a notice—in this case: Supplementary Show Cause Notices—to the concerned person, informing them about the charges framed, and the actions to be taken is sine qua non of a fair hearing. Nevertheless, not having a proper regulatory framework on Supplementary Show Cause Notices—as in, when it can be served—can go against the very principle of natural justice. For example, when a matter has already gone before adjudication based on the Show Cause Notice, and the noticee has prepared their defense, and suddenly they get hit by a Supplementary Show Cause Notice adding new facts to the case. Power can often transform into misusage. In this scenario, the power to issue Supplementary Show Cause Notices, without a just regulatory framework, can be used as a tool by SEBI to post facto improve its case. Further, a Supplementary Show Cause Notice can also defeat the explanations put forth by the noticee in their reply to the Show Cause Notice. The same arguments were raised by the noticees in Adjudication Order in respect of NSE in the matter of Karvy Stock Broking Limited. The noticees argued that SEBI uses the Supplementary Show Cause Notice at a later stage of a proceeding to improve its case, which defeats the purpose of the show cause notice. SEBI, in its order, stated that additional facts were found and went on to justify the issuance of the Supplementary Show Cause Notice under the garb of natural justice in a quasi-judicial proceeding. SEBI has, on multiple occasions, taken the defense of natural justice whenever noticees have raised an issue on SEBI’s power to issue Supplementary Show Cause Notices. For example, in both, Adjudication Order in the matter of Fixed Maturity Plans Series 127, 183, 187, 189, 193, and 194 of Kotak Mahindra Mutual Fund and Order in the matter of GDR issue of Morepen Laboratories Ltd, SEBI passed an order stating: “supplementary show cause notice is an inbuilt requirement in any quasi-judicial proceedings as a part and parcel of principles of provided for in the legislation.” Further, the order against Morepen Laboratories Ltd. was later appealed to the Hon’ble Securities Appellate Tribunal (SAT). SAT’s order—in the appeal—throws out of the window SEBI’s power of issuing notices at any time as “the SEBI Act, 1992 (SEBI Act) is not time-barred”. SAT, in its order, stated that although there is no period of limitation prescribed in the SEBI Act and other regulations, the issuance of notices for the completion of adjudication proceedings must be done within a reasonable period of time to avoid inordinate delay. Reliance was placed on the Hon’ble Supreme Court’s judgment in Adjudicating Officer, Securities, and Exchange Board of India vs. Bhavesh Pabari[1]. Not only did this SAT order impose restrictions on SEBI’s boundless power of issuing notices, but it also acted as an antithesis to SEBI’s notion: that if something is not covered under its laws, then it is not bound by those laws—in the present case, the concept of time-barred limitation. Further, this SAT order also becomes relevant in the context of Supplementary Show Cause Notices. It poses two big questions: does SEBI have the power to issue Supplementary Show Cause Notices in a proceeding just because anything contrary to this has not been mentioned in any of its laws? If yes, then is this power absolute without any restrictions? In arguendo: Parliament has conferred other agencies with the power of issuing Supplementary Show Cause Notices In the context of the argument raised against the nature of SEBI’s power to issue Supplementary Show Cause Notices, it becomes relevant to mention that whenever the Parliament has thought of conferring any agency with the power of issuing Supplementary Show Cause Notices, the legislature has explicitly so provided. For example, the Finance Act 2018 amended the Customs Act 1962 to include Supplementary Show Cause Notices under the legislation; however, nothing was done for the SEBI Act. Further, Sections 28(7A) and 124 of the Customs Act, 1962 outline the circumstances under which “a proper officer” can issue a supplementary notice. Additionally, the erstwhile Income Tax Act 1869 also contained Section 23, which gave power to the Collector to issue a fresh notice when he “has reason to believe that, in assessing any person under the Act, any

[By Saima Khan] The author is a student of Dr. Ram Manohar Lohiya National Law University, Lucknow. Introduction: During the Covid-19 pandemic, the Indian Stock Market witnessed a massive rise in the number of retail investors with remarkable participation from millennials and Gen-Z. According to the National Stock Exchange, retail shareholding in Indian companies reached a 15-year high in June 2022. This is indeed good news for our country’s economy. However, retail investor participation in India still has a long way to go.  The legal and regulatory framework of the Indian Capital markets is such that it disincentivizes investors from participating in the market. For instance, the Companies Act, 2013 (hereinafter referred to as “CA-13”) does not permit investors to purchase or hold fractional shares. A fractional share refers to a unit of stock that is less than one full share. Fractional shares make the world of investment more accessible to retail investors. For instance, one MRF share is currently priced at around Rs. 90,000. Now, let’s say a college student with limited savings wants to purchase this share. Since the existing regime does not allow shareholders to hold less than a whole share, it would be impossible for them to buy even one share of MRF. On the contrary, if fractional share investing were allowed in India, such investors could easily buy a fraction of the share, for example, 1/30th part of the share amounting to Rs. 3,000. Thus, Indian market participants are pitching for changes in the current framework, enabling them to buy fractional shares of the companies of their choice.  Pursuant to their demands, the Company Law Committee (hereinafter referred to as “CLC”), in its report dated March 21, 2022, has recommended certain amendments to the CA-13 to pave the way for fractional share investing in India. Through this article, the author attempts to examine the impact of these recommendations on the present regime while discussing the future course of fractional share investing in India by providing a detailed comparison between the operation of stock trading in the USA and India. Recommendations Of The Committee: The CLC has, inter alia, proposed the amendment of  Section 4(1)(e)(i) and paragraph 4 of Table F – Schedule 1 of the CA-13 which restrict the issuance and holding of fractional shares in India. Section 4(1)(e)(i) creates a bar on the holding of fractional shares by stating that the amount of share capital to which the subscribers to the Memorandum of Association agree to subscribe shall not be less than one share. Notwithstanding the above restrictions, corporate actions such as stock splits, mergers and acquisitions may give rise to fractional shares in India. However, in practice, fractional shares resulting from such actions are not allotted to the shareholders. In stock splits, a company divides its shares into smaller units to lower the price per share and make the company’s stock more attainable for investors. Similarly, in the case of mergers, the share value is redefined and the shares held by the investor are converted into shares of the new entity formed by the merger, in a specific ratio, say 1:4. So, if an investor holds 17 shares of the company, 16 of his shares will be converted into 4 shares of the new entity. The remaining one share will result in 4 ¼  shares. In such cases, the resultant fractional shares are either converted into a whole number of shares or a trustee is appointed by the Board of the company, who buys back the fractional shares and credits the proceeds to the linked bank account. The Report of the CLC has not only recommended the holding of fractional shares, but also their issuance and transfer. Once these recommendations are implemented, shareholders would be entitled to hold fractional shares resulting from such corporate actions. Furthermore, the buying and selling of fractional shares would also become possible. Fractional Share Investing: A Boon For Investors?  The introduction of fractional shares would open the floodgates for retail investing in India owing to their inherent advantages. In the above example, we have seen how fractional shares enable small investors to buy shares of the companies which offer their shares at high prices. Further, owning fractional shares when one has a low capital to invest can help one maintain a diversified portfolio. As the saying goes, “Don’t put all your eggs in one basket”. Hence, it would be prudent for an investor with Rs.10,000 to invest Rs.1,000 by purchasing fractional units of ten different companies rather than buying a single share of one company for Rs. 10,000. Fractional shares also enable investors to receive dividends which are proportionate to the shares held by them. However, the other side of the coin is that fractional shares do not confer voting rights to investors. To tackle this problem, several brokers offering fractional shares have come up with proxy voting rights wherein the broker votes on behalf of the shareholders by aggregating the votes and reporting the results to the shareholders. Another drawback of fractional shares is the excessive fees charged by the brokers which makes it unfeasible to invest in them. Fractional Share Trading In The USA: A Comparative Analysis In the USA, Interactive Brokers set the ball rolling for fractional trade investing by offering investors the option to sell or purchase fractional shares. In response, other prominent brokers such as Schwab, Robinhood and Fidelity jumped on the bandwagon by announcing fractional share trading on their platforms. Similarly, brokers in Canada and Japan have also introduced fractional share trading. The popularity of fractional shares in these countries has inspired the CLC to recommend fractional share investing in India. However, in its report, the CLC has overlooked the fundamental differences between the working of the Indian and the US Stock markets. In India, brokers act as agents of investors. They collect the orders from investors and send them to the exchanges for execution. Thus, in the present system, shares are not held by brokers but by depositories such as Central Depository