Capital Markets and Securities Law

 [By Shaivi Nihal Shah & Palash Moolchandani] The authors are students at the National Law University Odisha. Introduction Infrastructure Investment Funds (“InvITs”) and Real Estate Investment Trusts (“REITs”), collectively referred to as ‘business trusts’, have recently witnessed increased popularity in the country. Over the past few months, Indigrid, an Indian InvIT (“I-InvIT”), put out a Rs. 1284 crore – rights issue and Brookfield India, an Indian REIT (“I-REIT”), listed a Rs. 3800 crore – public issue, showcasing the growing traction of business trusts. Some of the reasons investors find such trusts attractive are the tax benefits offered and the mandatory requirement to pay out 90% of distributable cash flows on a semi-annual basis. Recently, the government has made significant efforts to promote these trusts and make them more accessible to retail investors. For instance, in 2019, the Security and Exchange Board of India (“SEBI”) notified certain amendments to the SEBI (Infrastructure Investment Trusts) Regulations, 2014 and the SEBI (Real Estate Investment Trusts) Regulations, 2014 whereby a number of positive changes to the existing regime were introduced. In February 2021, the Finance Minister of India, Ms Nirmala Sitharaman, while releasing the Budget 2021-22, announced that business trusts would be exempted from Tax Deducted at Source, and advance tax payments would only be needed to be made when the amount of dividend income was announced. Notably, business trusts were also permitted to raise debt funds from foreign portfolio investors to reduce the liquidity crunch. However, despite the impetus given to business trusts by the government, India is still in a fairly nascent position as only 15 InvITs and 4 REITs are registered with the SEBI. This article attempts to analyse the regulatory framework of more mature business trust regimes and determine the key takeaways that India can replicate. Structure of Business Trusts In essence, business trusts can be considered to be collective investment schemes formulated as trusts. They are multi-tiered and comprise sponsors, trustees, investment managers and project managers. Certain requirements have been laid down by the SEBI to determine the eligibility of individuals and entities to qualify for these positions. The factors for eligibility are based on assets owned, net-worth and the relevant work experience. In terms of tiers, the sponsor acts as the anchor and creator of the trust. The sponsor then appoints the trustee, who is expected to oversee the work of the project manager and the investment manager. The investment manager typically supervises, manages and makes decisions regarding the investments and divestments of these trusts, and guarantees their activities. The duties of the project manager are to manage the assets of the trust and ensure that the projects undertaken by it are concluded in a timely manner. Deconstructing the Best Practices from Other Jurisdictions: Key Takeaways for India            I.         Investment in foreign assets All mature business trust regulatory jurisdictions do not restrict investments in foreign assets. Jurisdictions like Singapore have benefitted greatly from this and have experienced exponential growth in the last decade. In fact, its last 10 REIT IPOs have 100% of their assets outside Singapore while 80% of all the REITs in the country have investments in foreign assets. This is a clear indication of its transformation into an international hub for REIT listings. I-REITs/I-InvITs should also be allowed to invest in offshore assets as this would help them diversify their portfolio and explore different avenues of generating income. Further, the recent addition of institutional investors like mutual funds and insurance intermediaries as ‘strategic investors’ will ensure less shortage of funds for investments in foreign assets. This would also lead to higher investments from foreign and non-resident holders, as was observed in the case of Singapore. However, introducing such a provision should come with a caveat. Permitting investments in foreign assets can take attention away from Indian projects, contravening the very objective of introducing business trusts in India- to revive the cash strapped real estate and infrastructure sectors. Therefore, it is suggested that there should be a maximum limit on investment in foreign assets.         II.         Minimum Subscription Size SEBI has recently amended the minimum allotment and trading lot requirements for publicly issued business trusts. The minimum subscription for I-InvITs has now been reduced to 1 lakh from 10 lakhs and for I-REITs to 50,000 from 1 Lakh. However, in order to attract a larger base of retail investors, there is a need to further dilute the amount under this threshold or completely do away with it. The SEBI should take a cue from advanced jurisdictions like the United States (“US”), Australia, the United Kingdom, Germany, etc., who do not follow the principle of minimum subscription threshold.       III.         Internally Managed v. Externally Managed The question of whether business trusts should be managed internally or externally has always been proffered to regulators around the world. The US-REIT market, which is the largest in the world, predominantly follows an internal management system, whereas in the Asia Pacific region, apart from Australia, REITs are mostly externally managed. The latter has historically faced challenges regarding fee structures and conflicts of interest between the external management and the unitholders of the REIT. Thus, while an external manager offers better expertise, resources, personnel and influence than an internal manager, it is extremely difficult to align the interests of the manager with that of unitholders. To counter these challenges, countries have adopted strong corporate governance requirements to ensure better market discipline and accountability of business trust managers to the unitholders. For instance, the Monetary Authority of Singapore’s (“MAS”) Licensing Guidelines require licensed management companies registered on the Singapore Exchange to mandatorily conform to the country’s Code of Corporate Governance. In India, in order to prevent any unscrupulous activities by trust managers, a minimum of 50% of the managing company’s governing board must be independent directors who are not directors on the board of another business trust. However, the regulations do not envisage the responsibilities and explicit liabilities of independent directors of such companies. In this regard, a cue can be

[By Anumeha Agrawal] The author is a student at the Symbiosis Law School, Pune Introduction A Special Purpose Acquisition Company (hereinafter referred to as “SPAC”) as the nomenclature suggests is a company incorporated with the sole aim to acquire another private company thus converting it into a public company. The first step involved in the functioning of SPAC is the incorporation of the company with the promoters having expertise in the field of investment or the identified sector (if any). The second step is conducting an IPO where the public will invest in the company (without any business except for acquiring a private company), here the importance of reputed promoters arises as the investors are essentially banking on the technical know-how of the market and the identified sector for the acquisition. Following the IPO is the identification of the private company for the proposed acquisition and once identified the shareholders’ approval is required. The SPAC can only proceed with the proposed transaction if the proposed transaction secures a certain percentage of votes (differing in different jurisdictions, mostly lies between 50-90%). In case the requisite majority is achieved the dissenting shareholders have a right to get their investment returned (subsequent to a nominal deduction). The target company is acquired and the company becomes public by virtue of reverse merger and has the capital raised by the SPAC. In the event the requisite majority is not achieved then the SPAC can either identify another target company or liquidate depending on how much time has passed from its incorporation (differing in different jurisdictions, mostly lies between 18-36 months). Upon liquidation, the investors are paid back their investment with the interest accumulated in the escrow account (if any ) however the management is at the bottom of the sequence of payment, hence liquidation of SPAC is most detrimental to the interests of the promoters and the managerial personnel of SPACs. Commercial Viability: The SPAC is a commercially viable investment vehicle as its structure is sustainable and there is a tangible need for the same in the market. There is a clear imbalance between the credit availability to small and medium corporations and the stringent eligibility criteria corporations are required to adhere to owing to the interest of the prospective equity investors. According to NASDAQ the year 2020 was the year of SPACs as their IPOs raised gross proceeds of 79.89 billion US dollars which was an increase of 462%. The Mckinsey Report of the year 2020 Asia can annually dispense 800 billion US dollars for funding midsized to large corporations, thus reinstating the commercial potential of SPACs[i]. Experts like Goldman Sachs have expected 2021 to be the year of SPACs in Asia.[ii] International Legal Scenario SPACs are descendants of the blank check companies, which were companies in a development stage company that has no specific plan or purpose or has indicated their business plan is to engage in a merger/ acquisition with an unidentified company other person.[iii] These companies were common instruments of fraud in the 1980s and particularly issued penny stocks. Congress in 1990 enacted legislation requiring strict disclosures and management requirements on blank check companies, i.e., Securities Enforcement Remedies and Penny Stock Reform Act of 1990[iv]. In particular, Rule 419 accorded several protective measures to the investors when dealing with the blank check companies like a deposit of IPO funds raised and securities issued in an escrow account; an 18 month limit on the company’s right to retain investor funds without completing an acquisition; a prohibition on the trading of securities held in escrow; filing of a post-effective amendment upon the consummation of an acquisition; refund for investors disapproving a proposed acquisition; and a requirement that the acquisition must account for at least eighty percent of the funds held in escrow. These rules significantly decreased the fraudulent activities associated with respect to blank check companies. By the mid-1990s US economy emerged from a deep recession and the small companies started to grow and then further companies initiated incorporation for the sole purpose of merging with a private entity however the shares were not penny stocks, therefore, the same was not governed by Rule 419, thus SPAC were formed. Few differences between blank check companies and SPACs were the former had 18months to complete an acquisition as compared to the latter which had 24 months. The success of private equity in European countries led to the introduction of SPACs in several European countries around 2005, it is a more viable option due to less stringent requirements as compared to the NASDAQ and NYSE norms. For example, incorporating SPAC with specifically targeted company in mind is allowed and there is no requirement of the minimum fair accounting value of the target company to be 80% of the trust. The SPACs are also provided greater flexibility in the selection of target companies and multiple investment cycles for a SPAC. In Europe, multiple smaller acquisitions are executed in contrast to the single large transactions that are typical to US SPAC. Despite the developed scenario of private equity in the Asian markets, there are only three jurisdictions that have noteworthy SPAC transactions, China, Malaysia and South Korea. Malaysia and South Korea officially recognize SPAC as an investment vehicle and are largely based on the US and UK laws, whereas China has several SPAC transactions owing to the need of Chinese companies to raise foreign investment and get listed on international stock exchanges like NYSE and NASDAQ however the jurisdiction lacks governing legislation. Governing Indian Laws There are no special legislations governing SPACs in India and the general corporate laws govern them including Companies Act, 2013[v], Securities Exchange Board of India  Act, 1992[vi], Rules and Regulations and listing of corporate entities are SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018[vii] and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015[viii]. One of the requirements of commencement of business by a company within 180 days of incorporation[ix] will have to be amended for SPAC as the SPAC do

[By Mathangi K ] The author is a student at the Gujarat National Law University. Introduction The idea of a Stewardship Code has gained prominence across the world, with the UK adopting the world’s first Code for its domestic financial market in 2010.[i] The principal objective behind the UK’s adoption of the Stewardship Code was to incentivize its ‘rationally passive’ shareholders to monitor the company’s management, thus helping them become responsible and actively engaged shareholders. Soon after the UK adopted the Code, such Codes proliferated throughout Asia; India followed suit with the Insurance Regulatory and Development Authority of India (IRDAI), the nodal agency for regulating the insurance sector, enacting a set of stewardship guidelines for the insurers in 2017.[ii] This was followed by the Pension Fund Regulatory and Development Authority’s (PFRDA)guidelines for pension funds in India in 2018,[iii] followed by the Securities and Exchange Board of India’s (SEBI)guidelines for mutual funds and alternative investment funds in 2019.[iv]The most recent development is the enactment of procedural guidelines for proxy advisories in India by the SEBI in August 2020.[v] This article aims to explain why the Code will have a minimal impact and may not bring a considerable difference in the Indian corporate governance regime. It traces through the poor implementation and redressal mechanism of the various codes and suggests suitable measures with a view to improving the same. The Problem of Enforcement However, even after the enactment of these Codes, they have been at the center of the debate over their effectiveness and implementation. Globally, the most critical verdict on the Code’s implementation was featured in the FRC’s Kingman Review 2018, which commented that ‘the Code remains simply a driver of boilerplate reporting, serious consideration should be given to its abolition’.[vi] In terms of its enforcement mechanism, the Stewardship Code in India differs largely from the UK’s idea of ‘soft law instrument’. Firstly, there is a lack of a single code in the form of soft law, but instead, several mandatory guidelines have been issued by the regulatory agencies for their respective stakeholders. This extreme fragmentation of codes in India leads to contradictions, both in theory and the enforcement of these codes. For instance, the code issued by the IRDAI is based on the ‘comply-or-explain’ basis. On the other hand,  the code by the PFRDA lays down that the pension funds ‘shall follow’ and the code by SEBI for mutual funds and alternative investment funds lays down that the funds ‘shall mandatorily follow’ the code.  Lastly, the procedural guidelines for proxy advisories lay down that these advisories ‘shall comply’ with these guidelines. Secondly, while these codes lay down the principles, none of these adequately provide for a redressal mechanism or lay down the consequences of violation or non-compliance to the principles indicated in the guidelines. The Feasibility of the Comply-or-Explain Approach The IRDAI’s guidelines for the insurers work on the basis of the ‘comply-or-explain’ approach; wherein, the insurers are required to indicate reasons and justifications for the deviation or non-compliance to the principles enshrined in the guidelines. On the face of it, the comply-or-explain approach has the inherent advantage of tailoring the principles to the unique characteristics of individual companies, thus appearing to be better than the “one size fits all” approach. At the same time, the effectiveness of this approach presupposes the presence of various institutional conditions such as the ownership and control structure, transparency of financial operations of the company, the ability of the shareholders to assess the behavior of companies. All of these factors are an extremely costly as well as challenging task in an emerging economy like India. This approach has proven to be ineffective even in a developed economy such as the United Kingdom; for instance, a study of compliance behavior of firms belonging to the FTSE350 companies in the UK between 1998 to 2004 reports that more than 50% of the companies that did not comply with the corporate governance codes and failed to deliver specific explanations, while more than 15% failed to provide any kind of explanations at all.[vii]This lack of compliance of the entities with the codes and subsequent failure to provide explanations, exposes the little initiative taken by companies for fine-tuning their governance policies since there was hardly any movement towards providing adequate explanations. Further, in this approach, there are two judges to the alternative proposal structures or explanations provided by the insurers- the market and the regulator. Firstly, the market, which encompasses the shareholders, is a costly way of enforcement. The ultimate sufferer due to the fall in the shares’ price is the shareholders themselves, thus becoming counter-intuitive to the purpose for which it was created. Secondly, for the regulator to be the judge can be a challenging task, in an emerging economy like India. The market regulators in India are still in the process of framing governance standards and therefore do not have well established and tested benchmarks against which the sufficiency of the explanations provided by the insurers can be judged. The Lack of an Enforcement Mechanism While the PFRDA’s and SEBI’s guidelines for mutual and alternative investment funds introduce a far more stringent approach to ensure compliance, these fail to lay down a concrete enforcement mechanism. Until today, the consequences faced by an institutional investor upon failure to comply with the code remains a grey area. Consequently, these guidelines will fail to translate into action unless accompanied by a well-established enforcement mechanism. Contrary to these guidelines, the SEBI’s latest guideline for the proxy advisories lays down a concrete enforcement mechanism by adopting specific provisions for establishing a grievance redressal forum. Failure to Regulate International Proxy Advisories The problem with the guidelines for proxy advisories is not its enforceability but rather its exclusion. By way of the code, the regulatory agency seeks to bring only the homegrown proxy advisories under its purview, thus excluding the foreign proxy advisories that continue to play a significant role in the Indian market. For instance, two international proxy advisories – Institutional Shareholder

[By Akshat Dangayach] The author is a student at the National Law School of India University, Bangalore. In September of this year, the Government of India notified the Companies (Amendment) Act, 2020 in the official gazette. The move, which has been welcomed by corporations across the spectrum, comes in consonance with the recent series of reforms in response to the growing economic inconsistency in the country, especially in light of the COVID-19 pandemic’s devastating impact on commerce and industry. The amendment has introduced several key changes in the company law regime of the country with the aim of improving the ease of doing business and relaxing regulatory restrictions to a significant extent. This paper focuses on the amendment made to Section 23 of the Companies Act, 2013. The amended Section 23, by way of the addition of Sections 23(3) and 23(4), permits a certain class of public companies incorporated in India to issue a particular class of securities for the purposes of listing on permitted stock exchanges in permissible foreign jurisdictions. The move is sure to provide impetus to Indian start-ups and established corporates alike to raise capital through foreign investors. In the larger scheme of things, the initiative will also provide the necessary infrastructure for the integration of the Indian corporate landscape with the global capital market. In the context of this development, this piece seeks to argue that despite the various benefits of the development allowing the direct listing of Indian corporations in foreign jurisdictions, there are still a series of challenges in the Indian corporate regulatory framework which need to be adequately tackled before Indian companies are effectively able to reap the intended benefits of the policy advancements. Benefits of access to global capital markets for companies Before delving into a detailed analysis of the newly added provisions, it is pertinent to briefly contextualize the discussion by developing an understanding of the multiple routes available to corporations for raising capital through cross-border listing. There are primarily two ways in which companies can generate capital from overseas listing, besides opting for an Initial Public Offering in a foreign market: direct listing and indirect listing. A direct listing is when a corporation converts its existing ownership into stock and subsequently offers equity directly to the general public via a stock exchange. On the other hand, an indirect listing is executed through depository receipts (DR). Under this mechanism, the corporation is required to issue its securities to depository intermediaries (traditionally banks) and underwriters incorporated in a foreign jurisdiction which, in turn, issue DRs to investors in their jurisdiction. Prior to the latest amendment, the Indian regulatory framework only allowed for such indirect listing predominantly in the form of listing of American Depository Receipts (ADRs) or Global Depository Receipts (GDRs). In addition to this, corporations were also permitted to issue debt securities in the form of foreign currency convertible bonds and foreign currency exchangeable bonds on stock exchanges. While certain companies (such as Wipro and Infosys) do employ these mechanisms, there exist several hurdles that companies have to go through in order to take this route. In fact, due to allegations of malpractice and market manipulation, SEBI banned around 20 companies from using DRs to raise capital in the year 2017. Further, such actions are often under strict scrutiny from the regulators, given the lack of transparency involved in the indirect listing process.. Such regulatory restrictions, coupled with the overhead costs in the form of charges levied by underwriters and financial institutions, dramatically disincentivised Indian corporations from taking this route. On the other hand, direct listing provides regulators and corporations with a more transparent mechanism for transactions and an easier method of tracking said transactions, thereby streamlining the process of inviting foreign investment. In light of these concerns, SEBI constituted a high-level expert committee in 2018 to formulate a report and suggest policy changes to pave the way for cross-border direct listing of equity shares of companies incorporated in India. The 2020 amendment to Section 23 of the Companies Act comes in response to the report submitted by this committee which firmly advocated direct listing. The Road Ahead: Institutional Challenges and Hurdles However, despite the obvious benefits of the introduction of the new regime for Indian corporations, there are still a number of institutional inconsistencies and hurdles that must be resolved in order for companies looking to get directly listed abroad to realise the actual potential of these benefits. Primarily, the Indian regulatory and legal framework needs to be considerably overhauled to assist the cross-border functioning of corporations. For starters, under the present state of affairs, companies will have to comply with the laws and regulations of two distinct jurisdictions. For instance, companies seeking to list abroad will have to comply with the regulatory requirements of beneficial ownership and disclosure of the foreign stock exchange. Similarly, the Foreign Exchange Management (Non-Debt Instruments) Rules 2019 impose strict requirements on how Indian companies may hold foreign currency. This will inevitably translate into drastically increased compliance costs, especially given that SEBI might also impose certain additional requirements as it has an extra-territorial jurisdiction as per the ruling in SEBI v. PAN Asia Advisors Ltd. and Anr. While this particular issue is ostensibly quite intuitive in nature, it merits some attention and might even require SEBI to substantially modify its own regulations to bring them in line with that of major foreign jurisdictions or even to relax some of its requirements for companies seeking to list abroad. Additionally, the Reserve Bank of India’s (“RBI”) Liberalised Remittance Scheme places restrictions on investments made by Indian residents on assets abroad. If these restrictions are not reconsidered, it would severely limit Indian investors from investing in Indian companies and put them at a considerable disadvantage relative to foreign investors. Further, the RBI must also address concerns regarding how equity shares that are rupee-denominated will be marketable in stock exchanges that are premised on other currencies. So far, the RBI has not released any guidelines in this regard.