Capital Markets and Securities Law

[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he trades; and (ii) this person traded directly or indirectly in the listed securities with respect to which he holds unpublished price-sensitive information (“UPSI”).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 Introduction Indian securities rules ban insider trading, which happens when a person “possesses” unpublished price-sensitive information (“UPSI”) on a publicly listed company’s shares and then trades in those equities.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

[By Modit Mendiratta and Mahak Agarwal] The authors are students of Gujarat National Law University.   Introduction The Securities and Exchange Board of India (SEBI) has recently proposed extending the trading hours for equity derivatives in India. The proposal has garnered mixed reactions from market participants and experts. Currently, the trading hours for equity derivatives on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) are from 9:00 am to 3:30 pm Indian Standard Time (IST). However, the proposed change would extend the trading hours to 5:00 pm IST, allowing for an additional hour and a half of trading. The proposed extension of trading hours is aimed at aligning India’s trading hours with other global markets and catering to the needs of foreign investors who are active during these extended hours. Additionally, the extension would enable market participants to react to any global events that may have an impact on Indian markets. What does it mean for Investors? Extending trading hours in the equity segment in India could have both positive and negative impacts on investors. Increased liquidity and trading opportunities could make it easier for investors to enter and exit trades, potentially reducing bid-ask spreads and transaction costs. However, increased volatility, higher trading costs, and increased risk of errors could make the market riskier for investors, particularly for retail investors who may not have the same level of resources as institutional investors. The actual impact on investors would depend on factors such as the specific length of the extended trading hours, the reaction of market participants, and the regulatory framework in place to monitor and manage the market.[i] The extension of trading hours could attract more market participants, leading to higher trading volumes, and increased liquidity in the market. Increased liquidity could improve the efficiency of the market and reduce bid-ask spreads, making it easier for investors to enter and exit trades. Longer trading hours could allow for more time for market participants to react to news and events, leading to improved accuracy in price discovery. This could result in better pricing of securities, reducing the likelihood of mispricing’s, and reducing the overall risk of investing.[ii] Longer trading hours could provide traders with more opportunities to enter and exit trades, potentially leading to increased profitability in the market. [iii] Positive Impacts of Extended Trading Hours Extending trading hours in the Indian market could have several potential benefits. Firstly, it could lead to increased liquidity in the market by attracting more market participants, resulting in higher trading volumes. This increase in liquidity could help to improve the efficiency of the market and reduce bid-ask spreads, which could make it easier for investors to enter and exit trades. Secondly, longer trading hours could lead to improved price discovery. This could happen because market participants would have more time to react to news and events, which could lead to a more accurate pricing of securities. As a result, the likelihood of mispricing’s could decrease, reducing the overall risk of investing. Thirdly, longer trading hours could provide traders with more opportunities to enter and exit trades, potentially leading to increased profitability. Traders could also benefit from more time to adjust their positions in response to market news or events, which could reduce their overall risk exposure. Lastly, extending trading hours would align the Indian market with global norms, as many other major stock exchanges around the world already have extended trading hours. This could make the Indian market more attractive to international investors, potentially leading to increased foreign investment. Overall, extending trading hours in the Indian market could have several benefits, including increased liquidity, improved price discovery, increased trading opportunities, and alignment with global markets. Negative Impacts of Extended Trading Hours Extending trading hours in the market could have potential drawbacks. Firstly, it could lead to increased volatility, as traders would have more time to react to news and events, potentially leading to wider price swings. This increased volatility could make the market riskier for investors and create greater uncertainty. Secondly, longer trading hours could lead to higher trading costs for market participants. They would need to dedicate more time and resources to monitoring and participating in the market, which could be particularly challenging for retail investors who may not have the same level of resources as institutional investors. Thirdly, longer trading hours could increase the risk of errors, as traders and market participants may become fatigued or less attentive during extended sessions. This could lead to mistakes that could have significant consequences for both the individual and the market as a whole. Lastly, extending trading hours could have an impact on the work-life balance of employees in the financial sector. They may need to work longer hours to keep up with the extended trading schedule, which could have negative consequences for employee morale, productivity, and overall well-being. Overall, extending trading hours in the market could have potential drawbacks, including increased volatility, higher trading costs, increased risk of errors, and potential impact on employees. Comparison of Indian Trading Hours with the global markets The Indian stock market currently operates for six and a half hours, from 9:00 am to 3:30 pm Indian Standard Time. In comparison, many other major stock exchanges around the world have longer trading hours. For example, the New York Stock Exchange (NYSE) and the NASDAQ operate for 6.5 hours from 9:30 am to 4:00 pm Eastern Standard Time. The London Stock Exchange operates for 8.5 hours from 8:00 am to 4:30 pm Greenwich Mean Time. It is worth noting that while some exchanges have longer trading hours, others have shorter trading hours than the Indian market. For example, the Australian Securities Exchange operates for 6 hours from 10:00 am to 4:00 pm Australian Eastern Daylight Time. Overall, the trading hours of stock exchanges around the world vary widely, and there is no one-size-fits-all approach. The decision to extend trading hours in the equity segment in India will require careful consideration of the potential benefits and drawbacks,

[By Nirukta Krishnan and Aditi Kotecha] The authors are students of Hidayatullah National Law University.   OVERVIEW: In light of the Public Interest Litigations filed by four social activists after the recent shorting of the Adani Group Stocks, questions are being raised once again concerning the ban on short selling and whether the regulatory authority is adequately equipped to deal with the potential negative consequences of short selling on the market. Short selling has for a long time been the subject of polarising opinions. On one hand, supporters consider it a fundamental practice of the market which keeps the market alive while critics believe that it is a highly volatile practice.  This article thus presents a critical analysis of the short selling laws in India operating at present and also attempts to provide certain recommendations with respect to changes that can be made to the existing regime keeping in view the recent Hindenburg report and the short selling of Adani stocks. MEANING- In simple terms, short selling is a practice where the short seller borrows the stock in terms of derivatives from a broker at a certain price and sells it in the market. When the price of the stock goes down, they proceed to buy it back at the lowered price and keep the difference. SEBI thus defines it as “a sale of a security that the seller does not own”. On a purely technical ground, there is nothing wrong with the practice. Buying and selling stocks in this manner through derivatives like futures and options is not wrong per se but the issue arises when this shorting is done to manipulate stock prices. In this case speculations are being made by experts that Anderson purposely partook in short selling because he knew the instability that would be caused by his report, which would jeopardize investor confidence and cause mass panic thus also leading to a sharp decline in price. This, according to them, is a clear attempt at manipulation. This is precisely the matter surrounding the Adani-Hindenburg debacle. NATHAN ANDERSON- MANIPULATION OR COINCIDENCE? The biggest reason why short selling came into question again is because of the report published by the Hindenburg Research group which caused complete mayhem amongst investors of the Adani Group amid allegations of fraud and manipulation among other things. After the dust settled with regard to the contents of the report itself, eyes turned to the person at the very center of it all – Nathan Anderson– who founded the organization and had previously conducted similar crusades against many large entities. While the report refused to publish the specifics of how they pulled it all off, they mentioned that they had obtained a “short position through US-traded bonds and non-Indian traded derivative instruments”. In direct terms, Anderson purchased and shorted US bonds of Adani after which he proceeded to release his report. With the magnitude of allegations contained in the report, the credit went down which then adversely affected the value of the bonds and securities of Adani. During this time when the market was distressed, he then purchased the bonds again at a lower price thus making a profit from the difference in the purchase and sale. The other method is mainly speculative, but many critics who have been trying to analyze how Anderson achieved this result, have suggested that he probably approached entities like global banks that trade in India and entered into a stock futures contract with them, who then entered the Indian market and shorted the stocks. WHAT DO INDIAN LAWS SAY ABOUT SHORT-SELLING? The discussion on short-selling first took place in 1996 when SEBI constituted a committee under Shri BD Shah. The committee suggested rules and regulations be put in place to regulate the trading practice in India. It was temporarily banned in 1998 and 2001. However, it was finally reviewed in 2003 by the Secondary Market Advisory Committee (SMAC) which took into consideration the practices followed in other states and permitted it on certain conditions. Short-selling poses a potential risk to the market and may lead to a rampant decline, if not regulated. SEBI and the stock exchanges in India have collectively released specific rules and guidelines to be followed while short-selling a stock. India and several other developed countries have not banned short-selling, and the International Organization of Securities Commissions (IOSCO) has also suggested that the practice be regulated rather than prohibited. Currently, in India, retail investors and institutional investors (such as mutual funds, FIIs, banks, insurance companies, etc.) are free to short-sell, provided derivative products are available of that stock. They (institutional investors) are required to disclose at the time of placement itself whether the stock is a short sale and their ability to borrow those stocks to the satisfaction of the broker, the same is not the case with retail investors. They can disclose this at the end of the trading hours on the day of the transaction. In addition to this, naked short-selling and day trading is prohibited. The present lending and borrowing scheme in India operates on clearing corporations/houses (CC/CH) of the stock exchanges, leaving very little scope for the investors to capitalize on the demand for securities. A  lending and borrowing system with CC/CH acting as Approved Intermediaries can be brought in. . However, appointing AIs must be done carefully, starting with appointing Banks as custodians in the first stage and so on. FPIs and Foreign Institutional Investors are explicitly prohibited from short selling as per the guidelines. However, foreign entities still trade in India through some other corporations or organizations which are still allowed to trade. The regulations do not go up to the source and limit themselves to regulating the direct intermediaries which do not solve the problem. Internationally, it is mostly seen that the securities market does not directly regulate the lending and borrowing processes because they are essentially held over the counter. The custodians and depositors run these lending and borrowing institutions. So, if India goes for

[By Jay Shah and Aditya Sharma] The authors are students of Gujarat National Law University   Introduction Algorithmic trading refers to a method of trading wherein an algorithm is used to execute trade setups on basis of information as input by the trader in terms of, time, price, quantity and other other mathematical models. Essentially, algorithms scan the markets for appropriate trade setups, and when they find the proper ones, trades are executed and managed as per the instructions specified in the codes. Algo trading is incorporated as they generate profits faster than humans can and allow the user to take advantage of small directional movement of any stock. Stance of the Regulator: Evolution Securities and Exchange Board of India (‘SEBI’) is devising dedicated guidelines or regulations to govern how algo trading is to work and how say, in the event of an unlawful act, the remedy is to be exercised by the aggrieved when algo-trading takes centre stage. SEBI has released multiple circulars in attempt to regulate to algo trading. These standalone guidelines released in 2012, 2013 and 2015 deal with redressal mechanism, monitoring process, measures to put in place to disincentivize high daily order-to-trade ratio and procedure for auditing algo trading systems.  Further, the Discussion Paper of 2016 attempted to clarify the various technical concepts relating to algo trading. In this paper, algo trading was touted to be the broader concept, which provides greater speed to stock trading and also offers anonymity.  SEBI’s outlook towards algo-trading becomes clearer from the discussions that took place in April, 2018. These showed SEBI’s intent to restrict unfair use of algo trading. In this April 2018 discussion, SEBI proposed to discourage algo traders from placing huge orders and then subsequently cancelling them within a short span of time by prescribing a ‘minimum resting time’. This step was intended to lower down the instances of frequent cancellation of orders by the traders that intends to create phantom liquidity in the market. Post this, the Consultation Paper shifted the focus to retail investors. It proposed a potential framework that may be followed to engage in algo trading, which includes application programming interface (‘API’) access and automation of trades. In this backdrop , came a press release in June, 2022. The Consultation Paper seeks to classify all orders emanating from an API as an algo order and be subject to control by the stock broker. The APIs shall be tagged with the unique algo ID provided by the exchange. Thus, the stock broker shall have a  mandate to obtain approval of all the algorithms from the concerned exchange irrespective of whether the same is used for actual trading or not.. As per  the authors,    we propose a scenario  wherein  the stock brokers shoulder the responsibility of procuring requisite approvals in the cases of deployment of algorithmic trading by third-party algo providers, in line with the Consultation Paper. The stock brokers however, argue that it would be a tedious task for them to obtain approvals of algorithms enabled through APIs, since there can be numerous customized algo strategies that could be deployed by third-party vendors. Another circular, issued in September, 2022 also points to the cautious stance SEBI has long taken about algo trading. Vide this circular, SEBI issued strict guidelines for Stock Brokers providing algorithmic trading services. In brief, the same states that Stock Brokers who provide algorithmic trading services shall not – Make any reference to the past or expected future return/ performance of the algorithm. Associate with any platform providing any reference to the past or expected future return/ performance of the algorithm. In addition, Stock Brokers were required to monitor the compliance of this circular and submit a compliance report before SEBI before 01.11.2022. Outlook of the SEC Securities Exchange Commission (‘SEC’) actions in the U.S. have been on various occasions replicated by SEBI after appropriate customisations in the Indian securities market. It is no surprise that SEBI sought guidance from the SEC on the matter. In August 2020, the SEC released a staff report, which dealt with algorithmic trading in the U.S. capital markets. The report acknowledged the rapid growth of algo trading and the object of the report was to ensure that the interest of investors is not compromised. The report states that SEC undertook various measures, and is constantly attempting to increase transparency, mitigate volatility, enhance stability and otherwise improve market integrity. Apart from this SEC does not have a dedicated set of provisions that govern algo trading. Further, the SEC’s outlook is a little more relaxed in comparison to that of SEBI, as SEC in the report mentioned above discusses at great length the benefits brought on the table by algo trading. The SEC also opines that the efficacy of such mechanisms was greatly highlighted by the Covid-19 pandemic as well. Penalty Mechanism The parameters governing the imposition of penalty are unclear under the limited SEBI jurisprudence. The same is generally left at the behest of the stock exchanges. The NSE and the BSE have their threshold for levying penal charges when algorithms are used to manipulate the market. The guidelines governing such imposition have been laid down by the SEBI via its circular, as discussed above. The onus put on the stock exchanges in this respect is grave. SEBI, in this regard, has ensured that the stock exchanges are doing the needful to monitor algorithmic trading in isolation and its overall impact on market operations. SEBI’s strict imposition of penalty on the NSE in the matter of NSE Dark Fibre signifies the regulator’s stance in this respect. There is an inherent urge to regulate algo trading; however, with standalone circulars and notifications, only so much can be done. Even in terms of penalty imposition, which could very well become the bone of contention in matters dealing with algo trading, there is little clarity. For this particular instance, the violation was traced in a Circular from March 2012. Regarding penalty imposition, the regime in the EU must

[By Kumar Shubham] The author is a student of the National Law University, Odisha.   INTRODUCTION Early-stage firms or startups today have a variety of fundraising options. Over the years, hybrid investment vehicles such as Convertible Compulsory Debentures (“CCD”) and Compulsory Convertible Preference Shares (“CCPS”) have grown in popularity for raising funds. However, these firms have also ventured into new investing options, which have so far proved viable for both the companies and the investors. Simple Agreement for Future Equity (“SAFE”) & India Simple Agreement for Future Equity (“iSAFE”) are two such methods that have been prevalent in the investment paradigm. This article analyses the legal landscape surrounding investments through SAFE & iSAFE in India, and draws comparisons between the two. Further, the article provides how iSAFE transactions are beneficial and outlines suggestions for proper implementation of the same. SAFE & iSAFE INVESTMENTS SAFE was first proposed by American startup incubator Y Combinator. It was introduced as a better alternative to Convertible debt. It is a financing contract between a startup and an investor that grants the investor the right to acquire equity in the firm subject to specific activating events, such as a future equity fundraising (known as a Next Equity Financing, often led by an institutional venture capital (VC) fund). No maturity date or interest is accrued for SAFEs prior to a conversion event. The Indian venture capital firm “100X.VC” introduced a significantly modified version of the SAFE concept, i.e., the iSAFE. iSAFE is recognized as Compulsorily Convertible Preference Shares (“CCPS”) in order to maintain the transaction’s legality under Indian law. It is therefore regarded as a commitment to provide investors with CCPS. When the maturity period expires or if another event specified in the terms and circumstances occurs, CCPS, which are preference shares, are converted into equity. Legality of iSAFE & SAFE in India Since SAFEs are neither equity/preference shares, debt, convertible notes, nor any other type of instrument, they are not legally recognized in India. SAFE agreements can’t be categorized as “debt” because they don’t accrue interest or have a maturity date. Likewise, it cannot be referred to as “equity” because there are no dividends or other shareholder rights. This greatly reduces the instrument’s reliability and security, which is the primary cause of its failure in India. However, iSAFE is legally recognised as Compulsorily Convertible Preference Shares since there is no particular statute for such convertibles in India. Sections 42, 55, and 62 of the Companies Act of 2013 as well as the 2014 Rules for Companies (Share Capital and Debentures) and Companies (Prospectus and Allotment of Securities) regulate CCPS in India. Moreover, given that only registered companies may issue shares, the Companies Act of 2013 requires that the start-up be formed as a company before it may issue an iSAFE. As a result, an LLP or partnership firm cannot issue iSAFE notes. For accounting iSAFE notes in India, neither the accounting standards nor the Institute of Chartered Accountants of India have provided any precise guidelines. The iSAFE notes in India must be listed under the Preference Share Capital heading nonetheless, as they bear the legal designation of CCPS. These will eventually be listed on the balance sheet under the “Shareholder Funds” heading. Moreover, there is no explicit guidance on the taxation of iSAFE Notes in India because the concept of iSAFE is still relatively new here. However, Section 47(xb) of the Income Tax, 1961 can be examined because iSAFE notes are regarded as CCPS. This provision states that any conversion of a company’s preference shares into equity is not recognized as a transfer. As a result, there is no tax due when iSAFE notes are converted to equity. Comarative Aanalysis & Suggestions A SAFE note with a valuation cap can serve as a cap for the upcoming financing round and, in essence, functions as an anti-dilution clause. Additionally, it increases risk for the business. The holders of the SAFE notes will be entitled to assume a far bigger percentage ownership of the firm upon conversion, for example, if the company is valued substantially lower in a subsequent fundraising round than when the SAFE notes were issued. Furthermore, investors find it challenging to declare a default when there is no maturity date. There may be specific circumstances in which the triggers are not activated and the SAFE is not converted, leaving the investor with nothing, depending on its terms, and notwithstanding the identified triggering events. However, given that iSAFE notes essentially take the shape of CCPS, the likelihood of this happening is extremely remote in cases of iSAFE. The iSAFE notes issued in India are classed as preference shares under the Companies Act, 2013, which categorizes all share capital as either equity or preference and entitles the holders to a minimal dividend. Unlike the SAFE notes proposed by the Y Combinator, which do not guarantee or confer preference if a liquidity event occurs prior to the conversion date, the iSAFE notes will be entitled to a portion of the proceeds, due and payable to the iSAFE noteholders immediately in preference over the equity shareholders and secured creditors. Moreover, SAFE cannot be used for inviting foreign investments since the Capital instruments permitted for receiving foreign investment in an Indian company means equity shares, debentures, preference shares and share warrants issued by the Indian company, however, SAFE being a future equity, does not suffice the criteria of capital instruments as required under RBI regulations. Therefore, since iSAFE takes the form of CCPS in India, it will help the companies in easily accruing international funding through Foreign Direct Investment routes. The company needs to fill the FCGPR form while issuing CCPS/CCD to an individual/body corporate residing out of India. The Reserve Bank of India (RBI) issues Form FC-GPR when the Company receives a foreign investment and allots shares to a foreign investor in exchange for that investment. The Company is then required to file information regarding that share allotment using Form FC-GPR. iSAFE is actually just CCPS with a different

[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