Capital Markets and Securities Law

[By Ayush Hoonka and Akarsh Singh] The authors are students at the School of Law, Christ (Deemed to be University). Introduction Over the years, the Indian capital market has undergone significant changes and has evolved over a period of time. This is especially true in regards to the equity segment of the capital market, where just the total market capitalization of the Indian equity market stood at 3.21 trillion dollars which makes it the fifth-largest equity market in the world. This has been correlated with the rise of the Indian manufacturing sector, which contributed up to 17.4% to the Indian gross domestic product in the year 2020. This has also been correlated with the massive rise of the Indian technology sector, which has been the engine driver of growth of the Indian economy, contributing 8% to the total gross domestic product in 2021 while reaching a peak of 9.5% in 2015. As a result, there has been a rise of early-stage start-up companies being incorporated in the country and ultimately going public through the traditional initial public offering or the IPO route. As a result,  81 IPOs were offered in the time frame between 2020 and 2022, raising almost 1.52 lakh crore, according to a KMPG study. The performance of most of the new-age start-ups has been less than ideal as shares of stocks such as Paytm, Zomato, Policy Bazar, and Nykaa have plunged 61%,49%,49%, and 46%, respectively, compared to their all-time highs at the time of listing according to data compiled by Bloomberg. Further, this has also correlated with the fact that these companies were primarily “growth stocks” which are yet to achieve maturity in the market regarding their cash flows and business models. This has also led to the Indian capital market regulator, i.e., the Securities and Exchange Board of India (SEBI), floating a consultation paper that proposed that the companies justify their valuation at the time of going public through an IPO, and subsequently, the auditor advising the company to verify the valuation being proposed by the company’s management through key performance indicators. Analysing the Consultation Paper The new proposed rules by the SEBI’s Primary Market Advisory Committee (PMAC) not only want start-ups to reveal their price to earnings multiples (PE ratio) and earning per share (EPS ratio). They also want disclosures and revelations in regards to key performance indicators (KPIs) which venture capital firms use, angel investors as well as private equity firms as a means and a measure to decide whether the newly found start-up is worth investing in. The KPIs are not just supposed to be traditional financial yardsticks to judge a company according to its competitors but also include metrics such as subscriber growth, market penetration since inception, and future expected growth rate. These metrics are further proposed to justify their valuation, which would further be audited by an accountant or an auditor with which the firm registers. Furthermore, SEBI also wants the companies to declare the correspondence between the venture capital firms, angel investors, and private equity firms during their fundraising in regards to these key performance indicators prior to them being listed through an IPO route. The proposal aims to disclose the key performance indicators (KPI) of the preceding three years prior to the company being listed and also wants the listed entity to compare the KPI with other new-age start-up firms across the globe in an effort to get a sense of whether the company’s valuation is justified or not. The objective of the proposed disclosure is that newly formed technological start-ups or growth stocks normally are not profiting in terms of their cash flows, especially when going public. As seen recently in the case of Delhivery being listed, these growth stocks usually prioritize gaining economies of scale, economies of scope, and competitive dominance in the marketplace as a means to achieve growth. This has been true historically for the past 20 years. One prominent example is Amazon, whose founder Jeff Bezos has always prioritized future long-term growth over short-term financial returns. This also requires good capital budgeting and investment decisions, which vary among companies in terms of their business model. Response from the Industry After the SEBI, in its recent consultation paper, has proposed that all the upcoming new-age technology companies have to justify the pricing of their shares at the IPO, the industry has not welcomed this move. The proposal aims to bring transparency so that the investors do not suffer. This idea was proposed due to the meltdown in the four recently listed stocks. However, these proposed rules will make it challenging for the new-age firms to list themselves. Another important thing that the new-age technology companies have to take care of is that the company’s auditors should have audited all the information they are providing to SEBI. The SEBI has also asked the companies to inform about the price-to-earnings ratio, how the valuation of shares is done, and how the price per share is decided. The reason behind this is that SEBI wants to understand how the price of a share is fixed. SEBI, at the moment, asks the companies to disclose their earnings per share, price-to-earnings ratio, return on capital, and return on net worth. However, the new-age technology loss-making companies do not earn any profits; therefore, it would not be possible for them to disclose these as these cannot be applied to the loss-making companies. Therefore, these companies would have to disclose KPIs additionally. These KPIs are valuation based and dependent on the past transactions done by the companies. They are not validated by the companies and are mostly tracked internally. However, if these indicators have to be submitted to SEBI, the act would not be welcomed by the industry as the valuation of these indicators is a lengthy process. If these stringent norms are applied, it will hamper the growth of the companies. Analysis and suggestions: Although the disclosures that the SEBI is discussing are being done in good faith and taking into

[By Neha Koppu] The author is a student at the Symbiosis Law School, Hyderabad.  The COVID-19 pandemic has cast a shadow upon the Indian economy.  The financial sector was in turmoil after the imposition of the first lockdown back in March 2020. The mutual fund industry was no exception to this crisis. There was a negative return on equity-oriented mutual funds of around 25% to the investors in March 2020. The outbreak of COVID-19 led to a decrease in the net asset value of several mutual fund schemes resulting in a decline in income levels of the investors. One of the biggest AMCs, Franklin Templeton Mutual Fund (‘FTMF’) announced the winding up of six mutual funds due to the hit of the COVID-19 pandemic as the debt markets turned volatile and illiquid. This move surprised and disappointed the investors. The Indian mutual fund industry is now recovering from the horrors of the second wave of COVID-19. The present article aims to critically analyse the curious case of FTMF in light of the Supreme Court ruling and the corollary measures undertaken by the Securities Exchange Board of India (‘SEBI’). BACKGROUND In April 2020, the trustee of FTMF decided to wind up six of their debt schemes viz. (i) Franklin India Ultra Short Bond Fund; (ii) Franklin India Low Duration Fund; (iii) Franklin India Short Term Income Plan; (iv) Franklin India Income Opportunities Fund; (v) Franklin India Credit Risk Fund; and (vi) Franklin India Dynamic Accrual Fund. The decision to wind up came due to the illiquid market because of the COVID-19 pandemic. Due to the reduced liquidity in the market, most of the investors were looking to redeem their mutual funds, thereby reducing the value of the funds. Moreover, all credit risk funds earn high interest as the borrowers also pay high-interest charges in order to compensate for their low credit rating, making these schemes riskier than other debt schemes. A forensic audit carried out by Choksi and Choksi revealed that around 2 billion dollars were withdrawn from the six debt schemes of FTMF just a few weeks before the winding-up announcement, terming these activities “unusual”. Several petitions were filed in the High Courts of India by the aggrieved unitholders. The Supreme Court directed the Karnataka High Court to provide a decision in the instant case regarding the requirement of consent of the unitholders for closure of the mutual fund schemes. After a careful analysis of the SEBI (Mutual Fund) Regulations, 1996 (‘Mutual Fund Regulations’) the Karnataka High Court,[i] held that the consent of the unitholders is required to be obtained before winding up the mutual fund schemes. At the outset, the Court adopted a purposive interpretation of all the regulations akin to the winding up of mutual funds and held that the consent of the unitholders is sine qua non to the winding-up procedure. Thus, the Court stayed the process of winding up until the vote of the unitholders is taken. RULING OF THE SUPREME COURT Franklin Templeton approached the Supreme Court of India[ii] against the judgment passed by the Karnataka High Court. One of the main issues dealt with by the Supreme Court was whether the consent of the unitholders is a prerequisite for winding up mutual funds. The challenge before the Court was that the unitholders do not fall under the purview of Regulation 39(2) (a) and 39(2)(c) of the Mutual Fund Regulations, when SEBI and the trustees decide to shut a scheme. The trustee’s contention was as per Regulation 39(2(b), only when the unitholders want to wind up a scheme, a resolution of 75% majority is mandated. While interpreting these Regulations, the Court adopted a harmonious interpretation. In most cases, the courts adopt a three-pronged approach while interpreting statutes, (i) the words are interpreted as per its grammatical meaning in the literal sense, (ii) the context of the words are understood as to whether it is logical and workable, or (iii) applying interpretative tools to understand the provision. Firstly, the Court interpreted the term “consent” under Regulation 18(15)(c) to mean ‘consent of a majority of the unitholders.’ The term ‘consent’ as per the Black’s Law Dictionary means “a voluntary yielding to what another proposes or desires; agreement, approval, or permission regarding some act or purpose, esp. given voluntarily by a competent person; legally effective assent.”[iii] The Court observed that the underlying principle of Regulation 18(15)(c) was to provide the unitholders with information, cause and reason of winding up schemes by giving them an opportunity to accept/reject the proposal. Secondly, the Court analysed Regulation 39 to 42 read with Regulation 18(15)(c) at length, in terms of the responsibility of trustees to seek the consent of the unitholders. In general, the term ‘shall’ must be understood as a command. The expression ‘when the majority of the trustees decide to wind up’ under Regulation 18(15)(c) explicitly refers to Regulation 39(2)(a) as it is the only Regulation, that vests the trustees with the right to close a scheme. Thus, the consent of the unitholders is required to be sought before the trustees decide for a scheme to be wound up as per the interpretation of Regulation 39(2) read with Regulation 18(15)(c) of the Mutual Fund Regulations. This consent shall be sought only after the publication of the notice which discloses the reasons for winding up of the schemes. AFTERMATH The Franklin Templeton Trustees Services Pvt. Ltd. & Anr. v. Amruta Garg & Ors. has set a precedent in the mutual fund industry by emphasising the importance of seeking consent from the unitholders before winding up the schemes for any reason whatsoever. The Supreme Court of India made it abundantly clear that a combined reading of the regulations under the Mutual Fund Regulations is needed which promulgates that the consent of the unitholders is, therefore, necessary before winding up of mutual fund schemes. Pursuant to the FTMF debacle, to protect the interests of the unitholders of the mutual funds’ schemes, SEBI rolled out a circular which mandates all the Key Employees to invest

[By Renuka Nevgi]  The author is a student at Maharashtra National Law University, Mumbai.  Introduction: Meaning and Nature Front running is an illegal act of buying or selling securities based on non-public information regarding a substantial future transaction likely to influence the price. It includes entering into options or futures contracts before an imminent transaction while anticipating the fluctuation in the price after the information will become public. This term has been defined in the SEBI Circular dated 25th May 2012. Regulation 4(2)(q) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 classifies front running as a manipulative, fraudulent and unfair trade practice. Furthermore, Sec. 12A(e) of the SEBI Act also lays down that a person shall not deal in securities directly or indirectly while possessing non-public information. Front running may take place in several ways through intermediaries as well as non-intermediaries. Orders can be placed in tranches and all such tranches placed before the last tranche of the Big Client will classify as front running transactions. This practice involves illegal usage of confidential information given to an intermediary resultantly amounting to unfair leverage. This article critically analyses the extant legal provisions as well as judicial decisions dealing with front running by non-intermediaries and juxtaposes it with those in the other jurisdictions. The author also attempts to provide constructive suggestions in order to impose effective strictures on this manipulative practice. Kinds of Front running According to the decision in case of SEBI v. Shri Kanaiyalal Baldevbhai Patel and Ors, front running consists of three forms of conduct: (1) ‘tippee trading’ which means trading by third parties who are given information or tipped on an impending block trade, (2) ‘self- front running’ implying the transactions wherein the purchasers or owners of block themselves involve in offsetting options or futures transaction by indulging in ‘hedging’, and (3) ‘trading ahead’ refers to a transaction in which an intermediary trades for own profit ahead of an impending customer block order. When confidential information is passed on to a third party, it results in the breach of duty prescribed by law. Specifically, if the tippee is cognizant of the breach and thereby induces the person to share such information, it is considered to be a ‘fraud’ by the recipient tippee. Front running behaviour can be classified into two categories as confirmed by a SEBI Order in the matter of Reliance Securities Ltd.: (i) ‘BBS’ or Buy-Buy-Sell: This is when the front-runner places own buy order preceding the last tranche of Big Client’s buy order. Subsequently, the front runner keeps selling the securities bought earlier at an escalated price. And (ii) ‘SSB’ or Sell-Sell-Buy: This happens when the front-runner places own sell orders preceding the last tranche of Big Client’s sell order. Consequently, the front-runner buys securities at a reduced price as and when the Big Client’s sell order gets executed. Indian judicial pronouncements w.r.t. non-intermediaries If only intermediaries are held responsible for front running, then the manipulators will get the leeway to engage in iniquitous activities through name lending or by masking their identity. However, as decided in the matter of Manish Chaturvedi & Ors., name lending is a serious offence and one cannot be absolved of the liability simply by claiming obliviousness. If these activities remain uncontrolled, then those who aid and abet such unfair practices will also detrimentally affect the interest of investors. When the accounts are rented out to third parties, they become the custodians of those securities or funds. Although the account holder still remains as the technical owner, the non-intermediary or third party employs its own resources which may be utilised for illegal purposes. The account holder may also receive direct or indirect gratification in return for the same. This deceitful practise helps the third parties to carry out fraudulent activities while concealing their identity. Under Indian law, the standard of proof required to establish front-running by third parties is a preponderance of probability, whereas any clinching evidence is not needed. The modus operandi is determined by collective analysis which leads to inference in relation to the conduct of the manipulators in the securities market. Circumstantial evidence including the pattern of trading could suffice to prove a fact. Different participants in the front running are broadly categorised as (1) ‘information carriers’ which have access to the content of non-public information (2) ‘front runner holder accounts’ that are registered owners of the trading accounts. (3) ‘mule account holders’ are the entities employed by the information carrier which operates the account set comprising of the trading account, Demat account and bank account. In case of defiance of PFUTP regulations, SEBI had also imposed penalties that that act as a deterrent to all those who indulged in serious violations. A maximum penalty of INR 25 crores or three times of profits generated from such practice can be imposed under the SEBI Act. Along with this, SEBI is also vested with the power to institute other civil suits under the SEBI (Intermediaries) Regulations, 2008 and criminal proceedings under Sec. 24 of the SEBI Act. Regulations in foreign countries In the jurisdiction of U.S., front running has been classified as a separate offence by the Financial Industry Regulatory Authority. The brokers or firms are not allowed to place their interests after gaining knowledge of an imminent trade. However, if such a trade is necessary to facilitate the execution of the client’s order, they can do it with the client’s free consent. Rule 5270 includes mule account holders because it has a wide scope since it includes members as well as the persons associated with members. Thus, the third-party traders are also impliedly included within the purview of frontrunning under the FINRA Rules. Likewise, under the EU Market Abuse Regulations, Rules 23 and 24 categorically include third parties whose account is used by the trader to obtain unfair gains indirectly. It also contains a presumption of the traders themselves placing the orders if such confidential information is used to

[By Sanchit Singh]  The author is a student at Vivekananda School of Law and Legal Studies, GGSIPU, Delhi.  The Dodd-Frank Wall Street Reforms and Consumer Protection Act, which came in response to the 2008 financial crisis, removed a historic exemption enabling the Securities and Exchange Commission (SEC) to regulate hedge funds and private fund, advisors. However, this included a new provision that required the SEC to define family offices in order to exclude them under Section 202(a)(11)(G) of the Investment Advisers Act, 1940. Among other aspects, family offices were not required to disclose their size or leverage as a result of this exemption. The family office, Archegos Capital Management’s extreme leverage led to a reported $10 Billion loss to some of the biggest banks globally in March 2021. This has attracted a great deal of discourse regarding the lack of transparency of family offices, especially the ability of these invisible whales to hurt the U.S. economy. The March 2021 Meltdown The losses resulted from the family office’s inability to meet margin calls relating to total return swap agreements and such positions that were financed by prime brokers. The U.S. Federal Reserve had raised attention to such practices in its May 2020 Financial Stability Report, noting that the concentration for hedge fund leverage had “increased markedly”where the top 25 hedge funds accounted for 50 per cent of industry borrowing. The reason for this concentration the report mentions “dealers have reportedly given preferential terms to their most-favoured hedge fund clients” and that “hedge funds with disproportionately high leverage can have outsized effects”. Despite this, the price decline in Archegos’ concentrated positions led to margin calls which prompted the sale of positions which further led to the decline of affected stocks, finally leading to the losses for the banks to bear. Japan’s largest investment bank, Nomura and Credit Suisse have been hit the hardest with them collectively facing losses close to $6 Billion alone. Other banks like JP Morgan, Goldman Sachs and Deutsche Bank were prompt to avert significant financial impact by de-risking their exposure to Archegos Capital. Were Disclosure Standards the Real Problem? As previously discussed, family offices are exempted from any registration with the SEC due to its exclusion under the Investment Advisors Act. Consequently, hedge funds like Archegos Capital do not need to file quarterly financial reports on their performance or the size of equity holdings including the types of assets. This hampers the ability for prime brokers of banks to evaluate risk and oversight by market regulators including the Federal Reserve and SEC. Despite this, many believe that adequate disclosure standards were not the main problem resulting to collapse. There has indeed been an evolution in the relationship between family offices and these banks. Deutsche Bank v. Sebastian Holdings Inc. (2013) was consequential for banks to realise that family offices were not significant institutional players, where the Deutsche was sued for $8 Billion in 2008 over margin calls arising from trades with the prime brokerage division. The court dismissed the entire claim and ordered the payment of $240 Million in dues. Thereafter, family offices were treated more like private clients which meant less leverage and higher trading costs. The preferential relationship with Archegos depicts a major change in attitude ever since. Clearly, banks with prime brokerages had loosened up restrictions in search of lucrative clients by providing high leverage, especially considering the staggering increase in the number of family offices where assets under management stood at $5.9 Trillion as of 2019, significantly larger than all U.S. private equity firms put together. In an independent review conducted by a law firm at the behest of Credit Suisse, there was enough evidence to suggest that the bank slept on multiple warning signals that could have prevented their burden of losses. Archegos Capital had begun frequently breaching its PE limit and by April 2020 it was ten times more than its $200 million limits. This evidently indicates highly volatile and under-margined swap positions of significant risk to the Bank. There does not seem to be any sign of fraudulent activities or corruption but rather rises questions on the Bank’s competence to identify and appreciate the scale and urgency of Archegos’ risk. While typically most family offices are risk-averse and their main objective is to preserve wealth but a different breed of such offices have come out that demonstrate speculative aggression much similar to some of the most competitive hedge funds. It becomes difficult to truly categorise Archegos Capital as a family office or a hedge fund outrightly, considering the scale of leveraging. The industry has come to refer to them as “invisible whales” equipped with great capabilities to move and influence the markets. With Credit Suisse’s specific example, one can imagine the systemic problem in the manner in which these large banks conduct business and manage risk. Potential Legislative Correction and the Exclusive Grandfather Clause HR 4620, the Family Office Regulation Act of 2021 was introduced in the House Financial Services Committee on 22 July 2021. The Bill has sought to reflect on the Archegos Capital meltdown and address the exemptive and exclusive clauses. As amended, HR 4620 would limit family office exclusion from “investment adviser” to a more comprehensively defined “covered family office” which includes family offices with less than $750 Million in assets under management. Offices with more than $750 Million under management would be exempted from registration with the SEC under the new legislation but will be required to submit reports in accordance with the Commission as exempted reporting advisors (ERA). Further, Section 409 of the Dodd-Frank Wall Street Reform and Consumer Protection Act that allowed clients who were not members of the family to be eligible for the family office exclusion would be repealed. Lastly, the Bill would authorize the Commission to exclude a family office from the “covered family office” definition when the family office is highly leveraged and/or engages in high-risk activities in the interest to protect investors. While the legislative expectation for HR 4620

[By Raj Shekhar & Krati Gupta]  Raj Shekhar is a student at NUSRL, Ranchi and Krati Gupta is a student at NLU, Jodhpur.  The Securities and Exchange Board of India (SEBI, hereinafter) has recently released the SEBI (Alternative Investment Funds) (Third Amendment) Regulations, 2021 on August 03, 2021. The amendment seeks to introduce a new category of investors in an Alternative Investment Fund (AIF, hereinafter) called Accredited Investors (AIs, hereinafter). This move can be seen as a successor to the initial SEBI consultation paper on AIs, released in February 2021. The aim of the consultation paper was to seek comments from industry experts that were largely positive. The experts considered the introduction of AIs as a powerful tool to distinguish sophisticated investors who are capable of independently managing risk without the need to adhere to strict regulatory prescriptions, thereby making Indian regulations more aligned with capital market regulations in more mature markets.  In one of its recent board meetings, SEBI which has been deliberating on the concept of AIs for quite a while now has accepted the proposal. In furtherance of the same, it has released an amendment regulation that tries to introduce AIs as a completely new category of investors. In light of this recent notification, the article seeks to elucidate upon the concept of AIs in the Indian securities market, its advantages and disadvantages through a global comparative study. Accredited Investors: The “Experienced” Players AIs are based on the concept of a class of investors who, due to their prior experiences and other allied factors, have an understanding of various financial products and the risks- returns associated with investments that they make in the market. Thus, they are able to make an informed choice regarding their investments, unlike other investors in the market. This concept of ‘experienced’ or ‘professional’ investors is recognized by many securities and financial market regulators around the globe who have their own names for such categories of investors like Qualified Investors, Accredited Investors or Professional Investors. This class of investors is seen as one that has the capacity to deal in relatively riskier investment products due to their stable financial status and ability to bear financial losses which may be incurred. The majority of the time, investments made by such players are closely monitored by fund managers who have financial acumen or are directly overseen by the AI who is well aware of the risks involved, owing to his experience of the market. Thus, AIs are those investors who are presumed capable of making risky investments with minimal regulatory protection. The Accredited Investor Tag: Why it Matters? When we look at the functioning of SEBI or any international market regulator, we find that their function is not just limited to the smooth functioning of the market. Their other prime duty is to provide necessary protection by introducing regulatory requirements that help investors in making a more informed choice. While the idea behind disclosure requirements, filing of offer document/ prospectus, flexibility in respect of investor reporting, etc. is to ensure a safe and conducive investing environment, these are time-consuming at the same time. Further, the main aim of such stringent requirements is generally to ensure that the investors are making an informed choice. So, for experienced investors, such requirements are redundant for they are already well acquainted with the risks/prospects of their investments. The concept of AI, as per SEBI, envisages that such accreditation can lead to identifying a class of sophisticated investors who have the ability and willingness to invest in the securities market, particularly in investment products that are relatively riskier and have minimal regulatory oversight. What adds to the benefit is that the redundant restrictive practices are relaxed for this class of investors. However, the advantage that the AI tag offers is exactly the same element that forms the core of its disadvantage. The minimal intervention by the regulator means that the chances of financial losses are much higher in spite of the fact that AIs have a better understanding of investments. Thus, we can rightfully assert that the tag of AI enables the holder to enter into a trade-off between investment security and ease of investing. Accredited Investors Around the World: A Global Comparative Analysis As discussed above, the idea of AI is not new and has been operational in various global jurisdictions. The following discussion provides a brief understanding of how the concept of AIs differs in these jurisdictions from that in India. United States of America An AI in US is an investor who satisfies one or more of the conditions that the US Securities Commission has laid down. Some of them include the condition that a potential AI should have an annual income that exceeds $200,000 in each of the two most recent years (or $300,000 in joint income with a person’s spouse) and who reasonably expects to reach the same income level in the current year. Further, his net worth should exceed $1 million and other allied requirements. Singapore  In Singapore, an individual whose net personal assets exceed Singaporean $2 million; an individual whose income in the preceding 12 months exceeds Singaporean $300,000; or corporations with assets exceeding S$10 million can apply for accreditation and become an AI. The problem till 2018 in Singapore was that anyone with above-stated requirements was made an AI without the need for an explicit request. This led to a lot of controversies where investors complained that they were unaware of the risks involved as an AI in the market. This led to the introduction of the opt-in requirements where an investor can only become an AI once he has explicitly made an application in writing. European Union EU similar to the USA has tried to include the essence of experience, but unlike the USA which has kept such a requirement as an alternative path, EU has made it mandatory. For an individual to get accredited as a ‘Profession Investor’, he needs to have carried out transactions of significant size on the

[By Aman Jha & Anurag Shah]  Aman Jha is a student at the National Law University, Delhi and Anurag Shah is a student at the School of Law, Christ (Deemed to be University).  The Securities and Exchange Board of India (“SEBI“), in its board meeting dated 6th of August 2021, resolved multiple changes in the regulatory framework of the capital market in India. Two of the most notable include the reduction in the minimum lock-in period that has to be observed by a promoter following an initial public offering (“IPO“) and approving the principle of ‘Person in Control’ which would replace the concept of promoters in India. These changes have been resolved in pursuance of a consultation paper rolled out in May 2021, which proposed changes related to the promoter regime in India. This article analyzes these changes and the effect they would have on the capital market of India while also drawing analysis from different jurisdictions. Reduction in mandatory promoter lock-in: At present, Regulation 16 of the SEBI (Issue of Capital and Disclosure Requirements), 2018 (” ICDR“) provides that there should be a minimum promoter’s contribution of 20%, which should be locked in for 3 (three) years. The lock-in period starts from the date of commencement of commercial production or the date of allotment of the IPO, whichever is later. Further, ICDR also prescribes that a promoter holding more than the minimum requirement of 20% should have his excess holding subject to lock-in for one year starting from the date of allotment. The rationale behind such a lock-in system can be attributed to the regulatory regime before the globalization era in India. Setting up companies before the globalization reforms required special permissions. The pre-condition for such permission was a minimum equity contribution by the founder until the money taken from the lender was paid off. This was done to ensure that the founders had their skin in the game during incorporating companies and raising money. This skin-in-the-game concept was retained even in post-globalization India in the form of mandatory promoter lock-in. However, this requirement to have promoter’s skin in the game started becoming a hindrance for the capital markets since it also made going public difficult for the promoters. In the pre-globalization era, funds were raised to finance a project or for a Greenfield project which would be a new start, and thereby there was a lack of surety of the company’s performance. Having the promoter’s skin in the game would provide surety for the lenders in such a scenario. It would act as an incentive for the promoter to ensure the performance of the company. In today’s competitive start-up ecosystem, where companies going public are matured businesses and have gone through several series of funding, the promoters already have had their skin in the game. Therefore, a further lock-in would only make going public burdensome for the promoters. In a bid to solve this issue, the SEBI decided to reduce the mandatory lock-in period for the promoter’s contribution from 3 (three) years to 18 (eighteen) months. Further, the board also resolved to reduce the lock-in for pre-IPO shareholders who were not promoters from 1 (one) year to 6 (six) months. The transition from the concept of promoters to Person in Control: Having understood the rationale behind promoters and mandatory lock-in, it becomes imperative to know why SEBI has resolved an in-principle shift from the concept of a promoter to Person in Control (“PIC“). The primary reason for this shift can be attributed to the change in the investment landscape in India. The Indian start-up market now is one of the most attractive investment markets, with multiple businesses raising huge capital from investors all across the globe. Unlike the pre-globalization era when companies raised money from family, friends, or lenders, the start-ups now focus on institutional investors such as private equity funds. This shift has also changed the dynamics in the board room of companies. Traditionally promoters used to have significant control over businesses even after listing. However, many institutional investors have considerable control over the board in today’s landscape through their representative directors. The latter is not considered promoters as a result of the definition provided under Indian law. As a result of the aforementioned, situations arise wherein persons who do not have any controlling rights or are minority shareholders are still classified as promoters. This would have a two-faceted effect. Firstly, the responsibility and liability would be placed on the wrong party who does not control the decisions. Secondly, by virtue of being considered a promoter, the person may have disproportionate influence over the board. Therefore, the shift from promoter to PIC would ensure that the regulatory regime identifies the correct person and places responsibilities and liabilities on a person who has significant control over the board. The prime benefit of this shift would be the improved and better quality of corporate governance in the Indian regulatory regime. Removing the concept of promoters would ensure that the shareholders can place trust in the board, which would constitute of PICs and independent directors to keep a check on the board. This would change the Indian regulatory regime from a promoter-based system to a professionally managed company system. Keeping up with international standards: The changes resolved by SEBI have been received positively by the stakeholders. These changes showcase how the regulator is trying to undertake progressive steps to ensure that the regulatory system is at par with international practices even in the post-pandemic economy. The concept of promoter has been unique to India as most of the other capital market regulators do not have a system of promoters, and they focus on control. A shift from a system of promoters to PIC would bring the Indian regulatory regime at par with different jurisdictions. However, at present, SEBI has retained the idea of promoter lock-in and just halved the period. International practices concerning post-IPO lock-in have been to allow the market forces to decide the lock-in period. Most of the

 [By Aashirwa Baburaj]  The author is a student at NMIMS Kirit P. Mehta School of Law, Mumbai.  With the rise of unicorns, such as PayTM, in the fintech industry and the emergence of a new shareholding pattern comprising of private equity (“PE”) and institutional investors; the controlling powers that were long vested in the hands of promoters in India, have begun to steadily slip through the fading Indian concentrated ownership structure. In light of this shift, and at a time when many new-age companies from the startup world are making their way to the Indian IPO market, the Securities and Exchange Board of India (“SEBI”) has issued a consultation paper proposing a transition from the concept of a “promoter” to that of a “person in control”. The aforementioned proposal merits a thorough examination on account of multiple reasons. To begin with; if this proposal were to come to life, it would result in a substantial reform of the Indian corporate regime as the idea and notion of promoters runs very deep in the Indian regulatory framework. Consequently, this move may have severe repercussions on laws administered by other regulators such as the Ministry of Corporate Affairs, the Competition Commission of India, and the Reserve Bank of India. Furthermore, while the proposal also contemplates reducing and minimizing the lock-in obligations for promoters and shareholders investing in an IPO and SEBI is clearly in favour of these reforms, it is important to assess whether the Indian corporate market is ready to adopt them. Preface: Current Legal Framework & Proposed Changes At the outset, it is pertinent to note that the changes proposed by SEBI presently are restricted to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR”).  Thus, while SEBI has highlighted that some of these recommendations may affect other legislations, it has not explicitly evaluated the implications of the same. As per the current legal framework, promoters play a key role in the listing process since the ICDR regulations impose significant obligations on promoters to ensure their involvement in the company. The consultation paper proposes 4 major changes: Shifting from the concept of ‘promoter’ to the concept of ‘person in control’. A ‘promoter,’ according to Regulation 2(1)(za) of the ICDR, is a person named in the offer document who is instrumental in the formulation of the plan on the basis of which securities are offered,      or promotes or sponsors mutual funds in the case of financial institutions, scheduled banks, and foreign institutional investors. The proposed change from ‘promoters’ to ‘persons in control’ by eliminating references to promoters and promoter groups, whilst adding the terminology of the person in control or controlling shareholders in numerous SEBI Regulations, is the centrepiece of SEBI’s proposal. Reduction in lock-in periods Presently, as per Regulation 16 of the ICDR, a minimum shareholding of 20% in the company’s post-issue share capital is required, as is a three-year lock-in period on such shareholding. Additionally, a lock-in requirement of one year from the IPO has been listed for persons other than promoters under Regulation 17 of the ICDR. If SEBI’s proposal is adopted, then the lock-in period for persons other than promoters will be reduced to six months from the date of allotment in IPO; the current three-year threshold for promoters will be whittled down to one year. Further,  the Promoters’ holding in excess of minimum promoters’ contribution will only be locked in for a period of six months as opposed to the current requirement for one year. Streamlining the disclosures of group companies Currently, a ‘group company’ intending to list its shares must disclose comprehensive details of the previous three years for its five largest listed group companies or five largest unlisted group companies based on the turnover where no listed group companies are involved. This includes information such as date of incorporation,  nature of activities,  equity capital,  reserves,  sales,  profit after tax, earnings per share and diluted earnings per share,  net asset value,  pending litigation involving the group company which has a material impact on the issuer etc. SEBI has proposed that the detailed disclosure requirement be eliminated and the IPO Offer Document merely includes the names and registered office addresses of all Group Companies. However, these disclosures — slated to be eliminated — may continue to be made available on the websites of the listed companies. Rationalization of the definition of ‘Promoter Group’. Regulation 2(1)(pp)(iii)(c) of the ICDR stipulates  ‘promoter group’ to include “[a]ny   body corporate  in  which  a  group  of  individuals  or  companies  or  combinations  thereof acting in concert, which hold twenty per cent or more of the equity share capital in that body corporate and such group of individuals or companies or combinations thereof also holds twenty per cent or more of the equity share capital of the issuer and are also acting in concert.” In order to rationalize the disclosure burdens upon companies, SEBI has suggested eliminating the norm of mentioning the aforementioned corporate bodies as part of the promoter group vide the deletion of the aforementioned regulation, thereby diluting this concept. Addressing This Wave Of Reform Is The Promoter Landscape Changing in India? As stated earlier, this proposed transition from ‘promoters’ to ‘persons-in-control’ lies at the heart of SEBI’s proposal. It is worth noting that the existence of a promoter-driven regulatory mechanism across the Indian legal framework is largely attributable to the prevalence of ‘family’ held companies in the Indian market, formerly. Due to this, promoters or founders ended up retaining a majority of the shares in a company. However, with a large number of institutional investors (both foreign and Indian) penetrating the Indian market, numerous enterprises, particularly new age and tech companies, are now embracing a rather diversified shareholding pattern. These institutional investors are made up of thousands and thousands of investors who amass money from individual investors and invest it in companies with the sole purpose of maximizing returns. As a result, there has been a      paradigm shift in the ownership structure as these companies are not family-owned and/or lack a distinctly identifiable promoter/ promoter group. This suggested change can

[By Simran Lunagariya & Unnati Jain]  The authors are students at the Institute of Law, Nirma University.  Introduction Covid-19 has created unprecedented and irreversible business and regulatory disruptions across the globe. At this juncture, India is in dire need to stabilize its global economic position. The Indian economy has been adversely affected, and the GDP for the year 2020-21 went down by 7.7%. Also, a job loss of 20% was witnessed in Urban India during 2020-21. The loss of jobs has attracted people to generate side income creating a greater spike in crypto trading. Additionally, the institutional investment wave is also increasing at a greater pace; in such a scenario, the Environmental, Social and Governance regime of the crypto industry must be addressed with a comprehensive approach in India. For mitigating the value-driven uncertainty from this emerging asset class. Especially when India is aspiring to become a $5 trillion economy, however, the co-existence of cryptocurrency and the ESG has often been debated globally. In the Indian scenario, this would be a nightmare in the absence of an effective regulatory framework. This blog explores the avenues of potential regulatory requirements that could address the ESG aspect of Cryptocurrency in India. Environment  The mining of cryptocurrency involves proof-of-work methods to transact and verify the transactions. This method requires high-power systems to solve the complex calculations, thereby creating a highly energy inefficient system. The amount of carbon dioxide released by such power-hungry systems is considerably high and affects the environment negatively. Although massive energy consumption of crypto-mining forms to primary environmental issue, the increasing usage of coal for this energy driven process also proves to be analogous to this issue. According to a study the annual carbon footprint of cryptocurrency is almost parallel to the carbon footprint of Mumbai. Moreover, cryptocurrencies account for 0.40% of the world’s total electricity consumption. Hence, these digital assets undoubtedly oppose the principles of Environment sustainability. Various responsible investors are withdrawing from investing in cryptos at the global level due to their catastrophic environmental effects. Recently, Elon Musk, CEO of Tesla, affirmed that the Bitcoin consumes a great amount of fossil fuels, hence making it an environmentally weak crypto. Consequently, he suspended the use of Bitcoin for trading. However, until now, India has not taken any steps to regulate cryptocurrency mining for its harmful effects on environmental sustainability. Although SEBI recently, in March 2021, had issued new guidelines on disclosure norms on sustainability-related reporting for the top 1,000 listed companies by market cap, which includes Environment-related disclosure, the regulation of crypto mining seems not to be affected by the SEBI guidelines. In India, despite the speculation of banning cryptocurrency, the trade is subsequently rising. The matured growth of crypto as an asset class in India needs strong regulation to force market players to create portfolios attracting greater environmental benefits. The regulations must include : Stricter Disclosure Regulations with respect to crypto-mining methods would foster a greater sense of responsibility in the minds of market players. For instance this can be done under the aegis of the SEBI norms on sustainability-related reporting released in March,2021. A guidance mechanism and up to date database displaying the on-going mining operations (for market players and investors respectively) would make crypto-mining a transperant process with respect to environment. Eventually, this would attract responsible investors towards crypto-trading/investing. A comprehensive and stringent compliance mechanism promoting environmental friendly crypto-mining would help in avoiding alarming situation in future. Inclusion of monetary penalties and prohibiting crypto-trading for the entity who performs severe non-compliance would imbibe sense of responsibility in the minds of crypto investors/traders. Promoting more intelligent methodologies like Proof-of-Stake (PoS) method would reduce the ill-effects of Proof-of-Work method. Also, a guide to PoS methodology would make it an approachable and performable method for market players. This shift would help in restricting the entry of crypto-miners and motivate more responsible and well-equipped crypto-miners. Social  On the social front swift transacting ability of the crypto has attracted the masses due to economic disruptions in recent times. The cryptocurrency network provides flawless transactions across the world along with minimal hindrance from the financial regulators. However, the conflict between private and sovereign propriety over crypto is primary to the cryptocurrency struggle in India. The lift of the RBI ban and Supreme Court verdict of 2020 has raised the hopes of Private Crypto start-ups. Almost 300 start-ups in India have created huge job opportunities for youth, boosting tech infrastructure. The Indian government’s stance to centralise the crypto in order to transfer stability to crypto investing/trading in India would make the industry more restricted. Eventually, this would keep India behind other countries and adversely affect Indian economy. The swift transacting capacity and no hinderance from intermediaries is characteristic to crypto. Centralisation of crypto would highly affect this unique feature, juxtaposing it to a car without fuel. Hence, promoting a decentralised crypto is equally important as the centralised crypto to create a balance in the industry and cope up with worldly developments in crypto regime. The wide usage of Etherium Crypto has fostered investment opportunities like Decentralised Finance (DeFi). Consequently, smart contracts have brought in the innovation-driven Non-fungible Tokens, a more secured and un-replicable asset with unique identities. DAO is another trending avenue for investment with great scope to boost the economy and shrink the externalities like inflation and depreciation. Amongst all these innovations, fintech and DeFi regimes of crypto have certain associated risks of their own. For the Indian scenario, an intact mechanism addressing investor safety, market integrity, and prevention of financial crimes to boost crypto’s social and financial credibility are vital. The mechanism must include : Guidance and infrastructure along with resources must be provided to the market participants through efficient policies. Strict enforcement regime for market players would help foster financial safety in the industry accompanied by KYC and anti-money laundering mechanisms in DeFi. Stricter capital rules regarding crypto may include minimum capital standards for private banks to maintain liquidity and prevent a shortage in the market. Similar conservative prudential