Capital Markets and Securities Law

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

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

[By Praveen Sharma & Sakshi Nalawade] The authors are students of Maharashtra National Law University, Mumbai. On 8th July 2022, the Securities Exchange Board of India (SEBI) released a consultation paper seeking the opinion & comments of the public on its desire to extend the scope of SEBI Prohibition of Insider Trading (PIT Regulations), 2015 to include the dealings in the units of mutual funds. It is vital to take note of the fact that this move has come after the  Axis Mutual Fund Front Running Controversy and  Franklin Templeton case. In this blog, the authors argue that this move by SEBI might be too hard on mutual funds. While the issue needs immediate attention, simply putting mutual funds under the umbrella of PIT Regulations could be onerous for the mutual fund industry Background Currently, the PIT Regulations regulate dealings in securities of listed companies or proposed to be listed, when in possession of Unpublished Price Sensitive Information (UPSI) and it explicitly excludes the transactions in mutual funds. The objective sought to be fulfilled is to harmonize the regulations governing trading in securities and mutual funds, while one is in possession of UPSI. There have been instances wherein officials from the mutual funds’ investment regulating the industry, for instance, employees of Asset Management Companies (AMC(s)) and Trustees of mutual funds have redeemed their holdings in mutual funds schemes being privy to Price Sensitive Information not made public i.e., information not known to the unit holders. Thus, by taking undue advantage of their position they either saved themselves from loss or incurred huge profits. In the Axis Bank Front Running controversy, two of the executives were sacked by Axis Mutual Fund on the accusation of front-running. This resulted in a huge blow to the market as the fund was 7th largest mutual fund in India and such instances at a large fund definitely bought out the lacuna in the mutual fund industry. The case of  Franklin Templeton primarily further might have triggered this harmonization by the SEBI. Vivek Kudva, head of Franklin Templeton’s Asia Pacific, an International Asset Management Company, and his wife Roopa Kudva withdrew an investment of Rs. 30.70 crores from six debt funds of the company before they were shut for redemption. This withdrawal was after it was decided to wind up these six debt schemes as they were not performing well and before the actual date of winding up. Kudva also redeemed his mother’s investment from these schemes. Accordingly, he saved himself and his family members from loss in MF by using UPSI. The Proposal by SEBI The paper has defined the terms ‘Insider’, ‘Connected Person’, and ‘Designated Persons’ concerning mutual fund transactions and has laid down conditions to which these people will be subjected while dealing in mutual fund schemes. Essentially, the person coming under the purview of ‘Designated Persons’, their ‘immediate relative’, and ‘any person from whom such designated person takes trading decisions’ must report their trading of mutual fund units to the Compliance Officer. Further, AMC will disclose their details of holdings in the units of mutual funds on an independent platform as specified by SEBI quarterly. In addition, during the ‘Closure Period,’ a period during which the above-mentioned people can reasonably be expected to have possession of UPSI will be entirely restricted from dealing in the mutual fund units. And when such a closure period is not applicable, they are to take a pre-clearance from the compliance officer to make transactions. It defines UPSI as any information about a scheme of a mutual fund that is not yet generally available and which could materially impact the Net Asset Value or materially affect the interest of unit holders, certain instances of the same have been particularly mentioned. Analysing the move While it is certain that SEBI is strengthening itself when it comes to market regulation and is being as precise as possible. With the SEBI circular already covering insider trading provisions, this move is an extra attempt by SEBI to curb insider trading. SEBI has previously imposed limitations on fund managers and staff members of AMCs for dealing in the securities market through several circulars. At first, there were only restrictions on trading listed securities, but in 2021, through a circular dated October 28, 2021, employees, AMC directors, trustee board members, and access persons (as defined in the said Circular) were also forbidden from engaging in any scheme while in possession of certain sensitive information. It is possible to argue that SEBI’s recent decision to include mutual funds under the ambit of the Insider Trading Regulations is nothing more than an effort to greatly consolidate the previously existing regulation. But this action is unprecedented and unethical (disproportionate). As correctly pointed out by Mr. Sandeep Parekh (Securities Lawyer and Ex-ED at SEBI), in ET blog, SEBI in its paper seeks to add ‘two new classes of people under the ‘connected persons’ category namely, the people working with the mutual fund executives like lawyers and research analysts and unconnected people trying to avoid insider trading allegations by dealing in mutual funds like judges and accounting firms. He correctly brings out the lacuna in this process as it further complicates the enforcement process for SEBI. For the former, just doing their jobs would make them a connected person, further, if they invest in that company’s shares having no access to any UPSI and it happens to make good quarterly numbers, this will open them to criminal charges. Accordingly, years after their association with any mutual fund deal, they might face allegations associated with it and might be put in a position where they must rebut the ‘presumption of guilt’ so formed. Additionally, the definition of UPSI includes many instances of routine changes which would make any piece of information affecting daily transactions in mutual fund sensitive information. Following this, every person who has some knowledge about the routine changes such as ‘change in accounting policy’, which are not even material and has relations with an MF

[By Dhairya Jain] The author is a student of Hidayatullah National Law University. Introduction In light of India’s projected 3,000 GW Renewable Energy (RE) potential, the nation plans to increase its RE capacity augmentation goal to 175 GW by 2022. Higher capital investments, projected at roughly USD 200 billion over the next years, would be necessary to achieve the much higher capacity objective, which will increase energy security and access while also creating more jobs. The present project finance sources in the Indian market are exhaustive enough to satisfy the expected capital and investment needs. In order to attract a larger pool of potential investors, such as pension funds, sovereign wealth funds, insurance firms, and the like, new financial instruments and financing methods must be developed. Another pushing reason for the need to introduce new funding sources and mechanisms in India is the high cost and short duration of project finance presently available for RE projects. The need for alternative instruments of finance India must diversify its capital sources in order to accomplish its capacity addition objectives despite the fact that the sector’s demand for capital has been low in the previous two to three years owing to policy changes and the economic recession. In India, the following are the main challenges that are preventing the funding of RE projects: The Environment of high interest rate: It is believed that the unattractive terms of debt and exponentially high interest rates discourage the growth of RE projects. It leads to increasing the upfront cost by a margin of 24-32%, as compared to projects financed in The United States and The Europe. Non-Availability of debts of longer tenure: Due to the short-term nature of the capital that these banks generate, Scheduled Commercial Banks in India are typically comfortable with loan tenures of five to seven years. Nearly 79 percent of bank deposits in 2009-10 had an average maturity of less than three years, according to RBI figures. However, there are a few examples of infrastructure projects, including RE projects, that have been able to get ten-year terms. Due to the banks’ short-term lending, loans in India tend to have variable interest rates rather than fixed ones. An expanding economy means that long-term hedging products are often unavailable. Variable Interestsmake cash flows to equity investors less reliable when borrowing at a variable interest rate. As a result, banks are limited in their ability to invest in a single area or technology. The RE sector falls within the overall power sector restriction, which generally lacks the depth necessary for large-scale finance of RE projects. More banks will approach and breach their sector exposure restrictions for the power industry, leaving RE projects without enough bank funding as a result of a growth in RE. As a result, the financial market will need to provide tools and procedures that fit the special needs of the sector, such as lengthy duration, significant pumping of funds, and active engagement by a range of investors, in order to meet the massive deployment of RE in the nation. What are green bonds? In the world of finance, a green bond is a fixed-income vehicle created expressly to fund environmental and climate change initiatives. Most of the time, these bonds are linked to the issuer’s assets and backed by its balance sheet. This means that they usually have the same creditworthiness as the issuer’s numerous different debt liabilities. The same rules apply to green bonds as they do to any other kind of business or government debt. lenders issue these securities in order to obtain funding for initiatives that have a good effect on the environment, such as ecological reconstruction or emission reduction..  When these bonds reach maturity, investors will be able to cash in on their investment and profit. Investing in green bonds might also result in tax advantages for investors. ​ Investors are increasingly considering green infrastructure investments as part of their social and corporate responsibility efforts in light of the growing emphasis on ecologically friendly practises. As a result, Green Bonds may be used to free up previously locked-up private funds for use in environmentally friendly initiatives. It’s still unclear what counts as “green,” although sectors such as RE, reusing and reusing garbage, water conservation, and afforestation all fall under the umbrella of “green.” If the profits of the bond offering are utilised for green initiatives, investors may make an informed decision about the project’s viability. These instruments are also being defined and governed by standards such as the Green Bond Principles. Benefits of Green Bond to various stake holders The advantages of green bonds have to be viewed from the perspective of its four stake holders which include: Investors, Issuers, Lenders and the state. Benefits to the Investors To guard against the dangers of climate change, some institutional investors promote environment-friendly corporate practises, while others diversify their investment portfolios..Green assets’ long-term competitiveness, the bond market’s better liquidity, and the minimal operational risk they carry make them an appealing investment option for institutional investors. Benefits to the Issuers or project developers For the time being, project developers in India have few alternatives when it comes to contacting financial institutions (FIs)Is that provide short-term loans with high interest rates. Developers will be able to get foreign funding at competitive conditions thanks to Green Bonds. Increasing capacity without corresponding equity injection is possible via the use of longer-term bonds with bullet payment schedules. Increased annual growth rates of 30-50 percent for the same equity base may be achieved by redeploying surplus cash flow. Benefits to the lenders or financial institutions There are self-imposed constraints on FIs in India’s financial industry. By issuing RE portfolios of Green Bonds, FIs may unload holding assets while still using the revenues to fund new projects and stay within the sector restrictions. With short-term deposits, the asset-liability mismatch is a major problem for Indian banks. The absence of long-term liquidity in the system prevents banks from obtaining long-term loans for the industry. Green Bonds are a solution

[By Muhammed Ijaz] The author is a student of Faculty of Law, University of Delhi. Introduction Bearing with success stories of thriving Asset Management Industries across countries like Singapore, Hong Kong, UK and Luxembourg and their role as engines of growth at their respective entrepreneurial promoting economies, the Government of India(“Government”) has keenly emphasized in bringing slew of measures over the time to catalyze and attract the global players into the Indian asset management/Investment fund industry. The ongoing developments and deliberations among the Government stakeholders to possibly permit the Variable Capital Companies(“VCC”), as a new vehicle for pooling of funds, in the India’s first and only International Financial Services Centre (“IFSC”), Gujarat International Finance Tec-city (‘GIFT city’), evidences the above. Pooling Vehicles for Fund formation in India       For the purpose of fund formation and its management, the legal regime emanating from the mandates of Securities and Exchange Board of India (‘SEBI’) applicable to  the Indian mainland and to IFSC through International Financial Services Centers Authority (‘IFSCA’), contemplates three types of corporate structures as permissible fund pooling vehicles. Namely, Trusts governed under the Indian Trusts Act, 1882, Companies governed under the Companies Act, 2013, and Limited Liability Partnerships (LLPs) under the Limited Liability Partnership Act. Of these, trusts are found to be predominantly used to pool funds for a variety of reasons, ranging from historical factors to pragmatic considerations such as lower compliance costs and more confidentiality. Given the benefits of the trust structure, an established legal and commercial practice has developed around its formation and operation of Investment fund industry over the years in India. However, despite being the most sought-after pooling vehicle, Trust route suffers from certain limitations including: The trustee(s), being the legal owner(s) of the trust, has/have unlimited liability; The eligibility of a trust to claim tax treaty benefits in case of overseas investments is always a contentious issue. Variable Capital Companies (“VCC”) To address above discussed limitations which has been similarly prevalent in other jurisdictions across the globe, some jurisdictions like Singapore, Hong Kong, Ireland and UK have set up a legal regime for a fourth type of corporate structure for the Investment Fund formations. A hybrid vehicle which combines the advantages across these three structures of Trust, Company and LLP. These entities are called “Variable Capital Companies” in Singapore, “Investment Company of Variable Capital” (‘ICVC’) and “Open-ended Investment Companies” (‘OEIC’) in the UK , “Open-ended Fund Company” (‘OEFC’)in Hong Kong, and “Irish Collective Asset-management Vehicle” (‘ICAV’) in Ireland. It combines the advantages of limited liability of a company with the flexibility available in a trust structure of exit and entry without alteration to the capital structure. Essentially, VCC is a collective investment scheme or pooling vehicle.  VCC corporate entity structure allows multiple collective investment schemes to be managed under a single corporate entity and allowing each of these to be ring-fenced. This structure is similar to multi-class fund structures such as the Protected Cell Company (‘PCC’) and Segregated Portfolio Company (‘SPC’) prevalent in other offshore fund jurisdictions such as Cayman Islands, the British Virgin Islands and Mauritius. The participants, who are the shareholders of the VCC, invest money [or any other asset / contribution] with the objective of making a return or profit from the investment. They invest in the capital of the VCC, but do not have control over the day-to-day management of the VCC. The constitution documents of a VCC should include a Memorandum of Association setting out the main objective of the VCC and other objectives ancillary to the main objective, and an Article of Association, setting out the rules for the internal management of the VCC. Krishnan Committee – Recommendations In September 2020, The IFSCA, the regulator at the India’s IFSC which contemplates the need for VCCs as a fund formation vehicle set up an Expert Committee under the chairpersonship of Dr. K. P. Krishnan (“Krishnan Committee”) to examine the feasibility of the VCC in India. In its report in May 2021, the Krishnan Committee assessed the features of a VCC or its equivalent, in other jurisdictions such as the UK, Singapore, Ireland and Luxembourg. In the background of Committee’s assessment of various jurisdictions and derived principles, The Committee recommended the introduction of VCCs in the IFSC by way of a separate law containing the substantive provisions governing the VCC structure in IFSCs for this purpose. It delineated the benefits of this structure over the traditional ones. The Committee noted that as a hybrid structure, a VCC carries the benefits of a company, limited liability partnership and trust, while avoiding their limitations. It allows access to various treaty benefits that do not typically extend to unincorporated entities. These would make a VCC a preferred entity to house funds in IFSCs. Additional recommendations of the Committee as follows: The share capital of the VCC should be variable in nature to allow for easy entry, redemption and buy-back of its shares by investors. A VCC can have multiple sub-funds, which are like schemes of a mutual fund. Sub-funds should not be separately incorporated. The VCC should issue a separate class of shares for each sub-fund. The assets and liabilities should be segregated at the sub-fund level. The assets of any one sub-fund should not be used to discharge the liabilities of the VCC or any of its other sub-funds.  VCCs should be allowed to issue, redeem or buy back the securities issued by them, or undertake capital reduction exercises, without restrictions. VCCs should be allowed to pay dividends out of their capital as well as profits. From a tax perspective, each sub-fund should be deemed to be a separate ‘person’ and all the provisions of Indian tax laws should apply to the sub-funds treating it as a separate person. Proposed Legal Framework for VCCs at IFSC    On consideration of the suggestions and recommendation to introduce VCC as an investment fund vehicle in the IFSC by way of a separate law, laid down through the Krishnan Committee report, the IFSCA in May 2022,

[By Anirudh Vats]   The author is a student at the Rajiv Gandhi National University of Law, Patiala. I. Introduction The Securities and Exchange Board of India (“SEBI”), in a pertinent towards the development of the Alternative Investment Fund (“AIF”) regime in India, relaxed the stringent restrictions pertaining to overseas investments made by Indian AIFs, vide SEBI Circular dated 17 August 2022[1] (“SEBI 2022 Circular”). This development comes as a partial relief to investors in the AIF industry who have been long demanding a more flexible and transparent route to overseas investments without tedious regulation and red-tapism. However, the circular does not go far enough in transforming the regulatory framework so as to accommodate the rapidly growing AIF industry. This circular comes as a welcome but sluggish step forward in the right direction, with much scope for further relaxations. II. The Evolved Regime         i.) ‘Indian Connection’ Requirement In accordance with SEBI Circular dated August 09, 2007[2] read with SEBI Circular dated October 01, 2015[3] regulating overseas investments, Indian AIFs investing in foreign portfolio entities were required to ensure that such entities have an Indian connection; they may operate a front office overseas but must have functioning back office operations in India. With the introduction of the SEBI 2022 circular, this requirement has been done away with. While the erstwhile requirement was introduced to expand the local market, it placed an unjust obligation on investors by forcing them to limit the ambit of their overseas portfolio and discourage diversification. This caused the investment managers to have limited choices in the available avenues within his/her area of expertise which could potentially fetch lucrative returns for investors. Moreover, the requirement seemed redundant in light of the restriction requiring AIFs to invest 25% of their investible fund in overseas entities, while the overwhelming majority of the fund is mandatorily allocated for Indian companies. Therefore, such an arbitrary requirement merely functioned as an embargo on the agility of the investment manager to procure sufficient returns for investors and diversify into more dynamic and flexible overseas investment strategies.         ii.) Jurisdiction Specific Requirements In addition to the ‘Indian Connection’ requirement being removed, the SEBI 2022 Circular also prescribes jurisdiction specific guidelines prescribing the permitted jurisdictions which could attract investments from Indian AIFs. AIFs are restricted to investing only in portfolio entities overseas which are incorporated in countries where the securities market regulator is either: a signatory under Appendix A of the International Organization of Securities Commission’s (IOSCO) Multilateral Memorandum of Understanding (such as Luxembourg, Malaysia, and Netherlands); or a signatory to the bilateral Memorandum of Understanding (MOU) with SEBI (such as USA, Mauritius, Singapore, and Indonesia). Moreover, the SEBI 2022 Circular also prohibits investments into the overseas companies in countries which have been identified in the public statement of Financial Action Task Force (FATF) as either having strategic anti-money laundering or lack of effort in combating terror financing. However, certain jurisdictions fall in both the permitted and prohibited categories mentioned above (such as the UAE) and, hence, it is unclear whether overseas investments into these countries would be permitted under the new regime or not.         iii.) Permission for Reinvestment of Principal Amount from Liquidation or Disinvestment The SEBI 2022 Circular has permitted AIFs to reinvest the principal amount of the proceeds procured from the liquidation of overseas investments, without the requirement of a prior approval from SEBI for allocation of investing limits. However, this would be subject to the fund documents providing for such a flexible model of investment. This is a welcome change as it relaxes the tedious process for AIFs which employ a dynamic mode of overseas investment wherein investments can be repurposed to new portfolio entities according to the strategy of the investment manager. This is a significant step forward by SEBI to liberalize the overseas investment regime and provide the AIF industry the support it needs to continue its trajectory of rapid growth in India.         iv.,) Additional Compliances The SEBI 2022 Circular also prescribes certain additional compliances for AIFs. These are, inter alia: – AIFs are mandated to furnish an application to SEBI for allocation of limit for overseas investments in the prescribed format. AIFs are required by SEBI to provide the modalities of sale or disinvestment of the overseas investments to SEBI in accordance with the prescribed format within a period of 3 working days of the disinvestment or sale. Such compliances will ensure that SEBI can effectively monitor and update the allocated limits for overseas investments and ensure the overall limit is not exceeded. Moreover, these compliances will provide SEBI with valuable data that will assist in analysing market trends and updating the law in the future. III. Unaddressed Issues pertaining to Overseas Investments         i.) No enhancement of the USD 1.5 billion overseas investment cap Despite the AIF market size expanding exponentially in the past few years, this circular maintains the status quo regarding the USD 1.5 Billion overall limit for overseas investments by AIFs, despite calls for increasing the limit by investors. However, SEBI 2022 Circular falls short of increasing the aforesaid limit despite purporting to be an exhaustive overhaul of the overseas investments regime under AIFs. The possible rationale behind not increasing the overall limit is possibly to protect the foreign exchange reserves of India in the face of a resurgent US dollar and the fall in the value of the INR. While this concern is valid, periodic review of the overall limit is crucial to ensure that the regulatory regime is in line with the rapidly growing industry, and incremental increase will not have any drastic effects on the foreign exchange reserves. Moreover, if this limit is viewed as a function of the overall industry size of AIFs, it is clear that the 1.5 billion cap is a miniscule percentage of the total industry size. In the status quo, there exists a huge lag between the expanding

[By Aditya Maheshwari and Kaushlendra Pratap Singh] The authors are students at the Gujarat National Law University, Gandhinagar. Introduction The securities market (“market”) is a gravitating concept modulated by various controllable and uncontrollable factors. One of the significant aspects of the flourishment and progression of the market is the role of investors’ confidence in the market and the regulatory body. On various occasions, an accentuation is being made on the part of transparency in economic and regulatory policies for perpetuating the Investors’ Confidence in the market. The term investors’ confidence in its generic sense can be understood as investors’ readiness to capitalize on the investment possibilities and intermediation channels that are accessible to them based on their assessment of risk and reward. To make it possible for investors to access information related to various securities and regulations, the role of the Security Exchange Board of India (“Board”) has become prominent. This article intends to crack wide open the efforts being made by Board to protect investors’ interests, the comparison being made to other foreign legal regimes, and the aperture in the present legal regime related to it. The mutuality between investors’ confidence and transparency in the policies regulating investors The relationship between Investors’ Confidence and Transparency has been impregnable when it comes to the legal or the financial aspect. Investors consider the legal and regulatory environment along with political and economic aspects before making any kind of investment in the market. As per the Global Investment Competitiveness (GIC) survey in the years 2017 and 2019, two-thirds of the investors in the market, study policy uncertainty as a significant factor in their investment decision. When it comes to transparency, systematic publication of the rules and regulations,  clarity and specificity of the legal provisions of the administrative procedure, and the availability of the portals and other mechanisms are some of the criteria to be considered by the regulatory body. There is an inverse relationship between  the regulatory risk and the investment by the foreign investors as the lack of certainty holds the investors back from investing in such market While it has already been discussed the mutuality between the transparency in the regulation and the investors’ confidence, the upcoming sections would discuss the present regulatory framework in India to enhance investors’ confidence and how changes can be made in the present legal regime. For instance, European Union enacted separate legislation to bring transparency to increase investors’ confidence. Investors’ confidence – present legal regime and recent amendments As discussed above, the mutuality between investors’ confidence and transparency in the policies regulating investors in the market, the Board, since its inception in the year 1992, has undertaken specific measures and further made amendments for the protection of the investors’ interest as well as bringing transparency in the process regulating them. Existing legal framework for the protection of investors’ interest in India Since the inception of the Security Exchange Board of India Act, 1992 (“Act”), the legislature’s intention and objective were clear behind enacting this statute which can be determined through the preamble of the statute. The preamble uses the expression “protect the interests of investors in securities” in the preamble which upfront clears the role of the regulatory board. Moreover, to make it an obligation, the same is enshrined under Section 11(1) of the Act. Further, in regarding initiating an investigation as well as passing orders by the Board, one of the significant reasons is to protect the interest of the investors and against transactions that are detrimental to the investors. Initially, the investors’ grievances redressal procedure under this Act was incorporeal, however, with the introduction of the Investor Grievance Redressal Mechanism, the investors’ confidence in the market increased significantly. To add extra cushion to investors’ protection in the market, the penalty is being imposed on the listed company and person acting as an intermediary that fails to address the grievances of the investors. Consolidating the present legal framework for the protection of investors’ interest in India While in the initial legislation, certain statutory remedies were available to the investors in India however, to consolidate the existing legal framework, the Board over the last decade made substantial amendments to the Act as well as issued circulars to further substantiate the position of investors in India. Starting with the introduction of the Investors Protection and Education Fund in the year 2009 which is used to educate the investors about the current market situation as well as provide restitution to eligible and identifiable investors who have suffered losses resulting from a violation of securities laws under regulation 5(1) and 5(3) of the Securities and Exchange Board of India (Investor Protection and Education Fund) Regulations, 2009. As discussed in detail earlier about the role of transparency in policies regulating investors and investors’ confidence, the Board to provide clarity and transparency regarding revealing the shareholding pattern to the investors amended in the initial circular issued in the year 2015. Moreover, the Board to enhance the investors’ grievances mechanism, put forwarded various measures such as – Arbitration Mechanism at Stock Exchanges To vitalize the investors’ grievance mechanism, the Board introduced the arbitration mechanism to resolve investors’ grievances. The measure was taken regarding the speedy disposal of the grievances. Moreover, to further enhance this mechanism, the Board brought transparency to the process of arbitration by providing public dissemination of profiles of arbitrators. SEBI Complaints Redress System The SEBI Complaints Redress System (“SCORES”) is an online mechanism to assist investors’ to lodge compliant and further track the process of such complaints virtually. Moreover, the Board made it a devoir for the recognized stock exchanges to design and implement an online web-based complaints redressal system of their own. Analysis – shortcomings in the present legal regime Now that it has been discussed in detail the regulatory regime concerning investors’ protection in India, this section aims to compare the grievances redressal mechanism prevailing in India and other countries along with the challenges in the present regime. Comparison of investors’ grievances redressal mechanism in India