Capital Markets and Securities Law

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

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

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

[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

[By Ojas Singh & Tanuj Goyal] The authors are students of Symbiosis Law School, Pune.   INTRODUCTION On 27 June 2024, SEBI in its board meeting, paved the way for public companies to be delisted through the Fixed Price Offer (FPO), as an alternative mechanism to Reverse Book Building (RBB). The move comes following the release of the consultation paper on 14th August 2023, which included crucial modifications to the SEBI (Delisting of Equity Shares) Regulations 2021 ( Delisting Regulations).   While the RBB model was detected with some irregularities, such as inflated share prices driven by speculative trading and manipulation by some shareholders, a new mechanism is being proposed. The market regulator intends to protect the interests of promoters as well as the shareholders by bringing in a fixed premium and adjusted book value calculations that would reduce market volatility and increase efficiency. However, notwithstanding these intentions, the new framework is not without its share of criticisms and possible pitfalls. This article would consist of a primer on the RBB and the new FPO process, and would then proceed to analyse the benefits and pitfalls of the proposed mechanism.   BACKGROUND The RBB mechanism was introduced in 2003 through the SEBI (Delisting of Securities) Guidelines 2003. In the RBB process, a delisting company is required to ascertain a minimum floor price for the shares of the company. The calculation of the floor price is very similar to the floor price for an open offer under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 (Takeover Code). The price was determined based on many aspects including book value, average market price, and future growth potential. Investors would discover the price through bidding, stating the minimum price at which they were willing to sell their shares. A minimum of 90% of the shareholding had to be acquired by the acquirer through this method to ensure successful delisting.   The delisting, when accepted, leads to the purchase of all shares at a price at or below the Delisting Price, at the Delisting Price. This Delisting Price can be further negotiated by the acquirer through the process of ‘counter-offer’.   Because promoters have to agree for the price discovered through RBB to delist, getting enough public shareholders interested in a delisting proposal and the price at which most shares are offered by public shareholders heavily affects the success of a delisting.  A successful delisting can be elusive, as the discovered price through RBB would find itself having an inordinate premium, maybe even above 100% of the Floor Price. For instance as seen in delisting’s such as Brady and Morris Engineering Company Ltd (1128.70%), Universus Photo Imagings Ltd. (164.34%), Shreyas Shipping & Logistics Ltd. (138.35%) and Linde India (517%).  In all these cases, delisting attempts were found unsuccessful as the acquirers were not ready to pay the excessively high discovered prices. For example, in the delisting of Universus Photo Imagings Ltd., it could be noted that the discovered price of ₹ 1,500 (Rupees One Thousand Five Hundred) per share was not consented upon by the acquirers, as it was way above the price offered by them (₹ 568 or Rupees five hundred sixty eight per share). Additionally, in some delisting cases, even having an excessive premium over the indicative price offered by the acquirers may not result it in being successful. As seen in the delisting of Elcid Investments Limited, whose market price per share was ₹ 15 (Rupees Fifteen), but the floor price per share was computed to ₹1,61,023 (Rupees One Lakh Sixty-One Thousand Twenty Three) per share. Despite the premium of around 9,50,000%, the delisting price was rejected initially by the shareholders. This delisting underscores the flaws in the RBB process, where even a huge premium over the market price can fail to secure an approval from the shareholders. This trend of inflated pricing under the RBB process, not only thwarted several delisting attempts but also led to a misalignment between the acquirers and shareholders. Additionally, shareholders who would often hold out to higher prices, would further stall the delisting process. SEBI found that most firms that voluntarily delisted through the RBB process paid premiums with a median value of 125% from 2015 to 2018. This shows the unsustainable financial burden faced by the companies, meanwhile the speculative shareholders were allowed to manipulate the process. This manipulation was further aggravated by the rule that promoters could submit counter-offers only if their post-offer shareholding exceeded 90% of the company’s total issued shares. These concerns were reiterated by the SEBI chairperson, who stated that the companies looking to acquire more than 90%, would find the prices heavily inflated due to certain shareholders who would acquire shares to cross the 10%. Subsequently, counter-offers under the RBB could only be made, if the acquirers post-offer shareholding turned out to be above 90% of the company’s total issued shares. These rules give the shareholders the ability to manipulate and exert control over the discovered price.  SEBI acknowledged these concerns in its consultation paper released on August 14, 2023. Accordingly, the regulatory authority introduced the FPO with an aim to reduce speculative trading and provide a balance between the interests of the investors and the acquirers.   DECODING THE CHANGES Delisting through fixed price offer: As per the modifications under the Delisting Regulations, the delisting price must be at least 15% over the market price of a share. Public shareholders now only need to decide if they want to tender their shares at a fixed price. A delisting is successful, only when an acquirer’s post-offer shareholding exceeds 90% of a company’s total share capital.  Insertion of Adjusted Book Value for the computation of Floor price: Before, the ‘floor price’ was computed based on several factors such as Volume Weighted Average Price (VWAP) of acquired shares during 52 weeks prior to the reference date, VWAP of 60 days preceding the reference date etc. as per Regulation 8 of the Takeover Code. Now, adjusted book value will be used as an additional parameter to

[By Tejas Venkatesh] The author is a student of Jindal Global Law School.   Introduction On 16th August 2024, the Securities and Exchange Board of India (“SEBI”) released a consultation paper on Expanding the Scope of Sustainable Finance Framework in the Indian Securities Market. The purpose of the paper is to solicit public comments on the appropriateness and adequacy of the proposed new framework for ESG debt securities and sustainable securitized debt instruments. The new framework incentivizes sustainable debt financing and also provides much-needed flexibility to issuers who aim to pursue projects that align with their ESG objectives. Yet, the proposal raises certain vital concerns.  SEBI’s Existing regime on Sustainable financing in India SEBI’s approach to encouraging sustainable finance has mainly focused on the Indian debt markets. The focus on the debt market seems to stem from the need for a large pool of potential investments in various sustainable projects. An estimate by the Reserve Bank of India (“RBI”), indicates that a green finance pool of up to 2.5% of the GDP is necessary to meet the infrastructure gaps resulting from disastrous climate events in India.   In 2023, in an effort to boost investments in the sustainable debt financing market, SEBI introduced the Securities and Exchange Board of India (Issue and Listing of Non-Convertible Securities) (Amendment) Regulations, 2023, wherein it allowed for the issuance of “Green Debt Securities” as a debt security instrument to raise funds for sustainable projects like renewable energy plants, clean transportation, pollution prevention and biodiversity conservation projects. Although the issuance of “Green Debt Securities” was allowed under the SEBI (Non-Convertible Securities) Regulation, 2021, the scope and ambit of activities that could be financed through the instrument remained vague and ambiguous until an illustrative list of activities was provided in the amended regulations in 2023. Further, the board continuously revised and expanded the scope of activities to include blue, yellow, and transition bonds as other sub-forms of green debt securities under the regulations.  In order to align the framework for the issuance of green debt securities with globally accepted standards like the Green Bond Principles (GBP), issued by the International Capital Markets Association (ICMA), SEBI introduced additional disclosures for green debt securities. The focus of the revised disclosure requirements was on ex-ante disclosures regarding the utilization of proceeds, the process for evaluation and selection of a project, management of proceeds, and improved reporting mechanisms. Impact reporting and involvement of third-party reviewers or certifiers were sought to be strengthened to ensure transparency and reliability in the utilization of bond monies by issuers.  However, the growing need to adopt an intersectional approach for tackling economic, social, and environmental aspects of sustainable development has been felt. Further, the tremendous lag in funding for the attainment of Sustainable Development Goals (SDG) has prompted SEBI to propose the introduction of Social Bonds, Sustainable Bonds, and Sustainability Linked Bonds (which together with Green Debt Securities would be termed ESG debt securities). Additionally, to leverage the underlying sustainable finance credit facilities for the benefit of potential investors, SEBI also seeks to introduce ‘Sustainable Securitised Debt Instruments’ as a form of finance that has the backing of the underlying sustainable credit.  Proposed framework for ESG debt securities The introduction of Social Bonds and Sustainable Bonds marks an addition to the theme of Use of Proceeds (UoP) Bonds, wherein the proceeds are earmarked for specific projects designed to achieve the intended impact. Whereas, Sustainability-Linked Bonds (SLB) are categorized as Key Performance Indicator (KPI) bonds wherein the proceeds are not tied to a specific project but are intended for the issuer to achieve self-imposed sustainability targets in the course of their operation.   Although SEBI has not specified the scope of projects falling within the ambit of Social Bonds, the Social Bond Principles (SBP) given by the ICMA provide valuable direction. The SBP includes a wide ambit of activities including projects that aim to provide affordable basic infrastructure like water, sanitation, health, housing, and food security. However, Sustainable Bonds are an effort to acknowledge the intersectional co-benefits that a combination of Green and Social projects present.   The extant framework for the regulation of Use of Proceeds Bonds (i.e. Green, social, and Sustainable Bonds) remains uniform with a special focus on core components such as the mechanism for categorization of projects, criteria for project evaluation and selection, managing proceeds, and reporting. However, the focus on transparency and accountability is diluted due to the voluntary nature of the guidelines given by the ICMA. The framework provides no liability mechanism in instances of greenwashing or failure to meet intended targets.   Unlike UoP Bonds, Sustainability-linked bonds are debt instruments that are catered to finance the incorporation and achievement of forward-looking ESG outcomes by the issuer. The core components of the bonds include the selection of Key Performance Indicators (KPIs) and calibration of Sustainability Performance Targets (SPTs) by the issuers. The focus is on the declaration of bond characteristics, reporting on the attainment of targets, and third-party verification of bond targets achieved.   Critical Analysis The new debt instruments raise several concerns as regards their ambit and effectiveness. First, the qualifying factor for the utilization of bond proceeds of a Social Bond is that the monies have to be committed to generating a ‘social impact.’ Although the ICMA Social Bond Principles (SBP) provide guidance on projects that can be pursued by the issuance of Social Bonds, pertinent questions regarding the quantification of the term “impact” arise. For instance, it is unclear whether a social project can avoid generating a negative environmental impact. Therefore, in instances such as affordable housing projects wherein the social impact contrasts with the environmental impact, there is no direction on what interest will prevail.  Further, the Social Bonds framework fails to differentiate between challenges posed by varied timelines for achieving the desired impact For instance, a loan-based social bond will achieve its social impact merely by financing the beneficiary using the proceeds received whereas other forms of social bonds require active collaboration between the beneficiary and the issuer. The