Capital Markets and Securities Law

[ Arushi Gupta & Durga Prasad Mohapatra ]   The authors are 3rd year students of NLU Odisha. Introduction The concept of PIPE(Private Investment in Public Equity), developed in the US with separate provisions regulating the same. However, Indian law has no such specific regulations which guide the PIPE deals .The PIPE deals in India are regulated by the preferential allotment rules elucidated by SEBI. Considering the fact that the PIPE deals in India are not really developed, the article attempts to draw a distinction between the take of the US and Indian laws by analyzing the relevant provisions. SEBI (Issue of Capital and Disclosure Requirements), 2009 The SEBI (Issue of Capital and Disclosure Requirements), 2009 (“ICDR”)deals with various modes of issuance of securities wherein Chapter VII of the ICDR Regulations lay down the provisions regarding preferential issue of securities. The main area of emphasis with regard to PIPE transactions will be upon Section 72(1)(a) and Section 78(2) of the ICDR Regulations. Section 72(1)(a)[i]lays down the conditions for preferential issue whereby a special resolution passed by the shareholders is a prerequisite in cases of preferential allotment. However, in the US, the shareholder approval[ii]is not mandatory and is guarded by threshold limits. With regards to the NASDAQ, the shareholder approval is not required in case of bonafide private financing. A bonafide private financing[iii]is a sale whereby the issuer sells the securities to multiple investors, provided, that no individual investor would have more than 5% of the shares of the common stock. This is an effective way to avoid dilution of control and may act as a safeguard for the shareholders in the cases where their approval is not taken. The NYSE rules, on the other hand, impose a threshold limit of 20%, whereby shareholder approval is required in cases where the issue would amount to more than 20% of the outstanding common stock. This rule is also shareholder centric as it aims at prevention of dilution of control unless otherwise approved by the shareholders. It can be inferred from the practices in the 2 jurisdictions that ‘control’ as a factor is relevant in case of PIPE transactions and an attempt is made to prevent the dilution of control in both the cases but by the usage of different mechanisms and techniques. Section 78(2)[iv]provides for a lock-in period of 1 year in case of preferential allotment of specified securities being made to persons other than the promoter. A lock in period[v]is basically a time frame within which an investor is forbidden from selling or redeeming shares.Under Section 144, Securities Act 1933,[vi]such securities are restricted in nature but can be resold on the trading market once a registration statement has been declared effective[vii]by the SEC. In case of US, the transaction provides a higher level of liquidity as the statement is declared effective within 45-90 days[viii]of closing of the deal. Liquidity is one of the key factors which make a PIPE deal suitable for investors. PIPE transactions are preferred over other alternatives due to the increased liquidity they offer to purchasers of registered security with the certainty and speed of a private placement.[ix]The problem of liquidity which the Indian law poses in this matter can be cited as one of the reasons for PIPE deals still being at a nascent stage. SEBI (Prohibition of Insider Trading) Regulations, 2015 An area of prime concern with regards to PIPE transactions is that it leaves room for insider trading. A due diligence test[x]i.e. a process by which the investor gathers all the necessary information in order to evaluate the potential risks involved  is conducted by the investor in order to better understand the potential pitfalls associated with the deal . Due diligence is not a concern in law, provided that the process does not lead to dissemination of Unpublished Price Sensitive Information (“UPSI”). UPSI[xi]refers to all such information which is directly or indirectly related to the company and has the potential of affecting the prices of securities of the company. Regulation 6 of Schedule II[xii]deals with disclosure of Price Sensitive Information to institutional investors whereby only public information can be provided to investors by the listed companies. With the recent amendment to the Insider Trading Regulations, any person who while conducting due diligence comes across UPSI would be referred to as an insider[xiii]. Furthermore, such a person is not allowed to deal with the securities of the company even if a confidentiality /non-disclosure agreement has been signed[xiv]between the parties. On the other hand, in US, the disclosures are governed by the Regulation Fair Disclosure[xv]wherein the acquirer of UPSI is allowed to trade in the securities of the company, provided that a confidentiality agreement has been signed between the parties. The disclosure regulations in India are stringent and hence may pose a threat to the investors as they would always apprehend the possibility of a liability being imposed upon them while conducting due diligence and consequently refrain from investing in PIPE deals. Conclusion The aspect of control whereby under the ICDR Regulations, the PE firms willing to invest in public companies have to deal with a lock in period of one year and hence cannot exit the companies even when they face heavy losses. With regards to the questions of insider trading, SEBI has put forth certain conditions such as appropriate confidentiality and non­disclosure agreements which have to be signed before any due diligence process begins as provided under Regulation 3(4) of the SEBI (Prohibition of Insider Trading) Regulations. Further, promoters often do not expect to cede any sort of control to private investors as they do not consider them to be an added source of expertise, they only expect them to be passive investors instead of a genuine source for newer perspective who can provide business guidance. Even though PIPE investments are a quick fix to gain financing especially by smaller companies who want immediate capital for working, the market environment in the country has still to be made conducive to such financing methods as a

[Utkarsh Jhingan & Akhil Kumar]   Utkarsh and Akhil are 4th year students of NUALS, Kochi. Introduction Securities Exchange Board of India (hereinafter “SEBI”) vide Notification Number: SEBI/LAD-NRO/GN/2018/39, dated October 3, 2018 notified the Securities and Exchange Board of India (Appointment of Administrator and Procedure for Refunding to the Investors) Regulations, 2018, (hereinafter “Regulation”). These Regulations have been made by SEBI in exercise of the powers conferred by Section 30 read with sub-section (1) of Section 11 and Section 28A of the Securities and Exchange Board of India Act, 1992[i] (15 of 1992), Section 23JB of the Securities Contracts (Regulations) Act, 1956[ii] (42 of 1956) and Section 19-IB of the Depositories Act, 1996[iii] (22 of 1996). The Regulation aims to recover investors’ money in cases of felonious collective investment schemes. The provision of this Regulation shall apply mutatis mutandi in respect of the proceedings under the Securities Contracts (Regulation) Act, 1956 or the Depositories Act, 1996. These Regulations are a follow up to an earlier decision by the SEBI to empanel third party workers as receivers for management and sale of assets attached through regulatory orders for recovery of penalties and investors’ money from defaulters who have failed to return monies to the investors. The order in the case of Opee Stock Link[iv] was the first disgorgement order that was passed by the Supreme Court. In this case, shares of Jet Airways Limited and Infrastructure Development Finance Company Ltd. were offered to the public at large. The issue of shares in relation to both the companies had been oversubscribed. However, there were several irregularities that had been committed by certain persons related to both the companies. As a result of these irregularities, the Supreme Court ordered to compensate the retail investors. Further, the passing of these Regulations is a step taken forward by SEBI to seek disgorgement of unlawful gains from the culprits. Applicability The Regulation shall only be applicable in cases where a non-compliant entity of SEBI’s orders is untraceable. In such cases, the Recovery Officer (hereinafter “RO”) can appoint an administrator for the purpose of selling the attached properties and refunding the promoters. According to Provision 5 of the Regulation, only persons registered with Insolvency and Bankruptcy Board of India (hereinafter “IBBI”) as Insolvency Resolution Professionals (hereinafter “IRPs”) are eligible for such appointment. The administrator under Regulation 5(4) has a duty to provide an undertaking to the Board of absence of any conflict of interest with the defaulter, directors, promoters, key managerial personnel and the group entities.[v] Additionally, he should also be a person who is independent/impartial and devoid of any conflict of interest throughout the tenure. It has been provided that any dispute regarding the conflict of interest of the Administrator shall be decided by the RO. Terms of Appointment Regulation 6 provides that both the terms of appointment and remuneration shall be decided on a case to case basis after taking into consideration the amount of work, number of investors and the amount involved. Functions The administrator shall perform his functions as per the directions of the RO. He is empowered to obtain any document regarding ownership and possession of properties, claims of investors, details of amounts raised and the amount of settled debt from the defaulter or any other person. He shall also maintain a record of the properties attached in the process, the bank as well as dematerialized accounts and the value of monies and securities held by the defaulter. Furthermore, he shall also sell the attached properties as per the directions of the RO. The Regulations also empower the Administrator to carry out any act with the prior approval of the RO essential for the purpose of carrying out his duties thereto. In the process of discharging his functions, the Administrator can appoint independent charted accountants to verify the details of amount raised and the quantum of debt already settled. He shall also submit monthly report(s) as and when called by the RO for the purpose of determining the progress made by him.  Sale of properties The process of sale of properties will be undertaken by the Administrator after he conducts an independent valuation of the property. The Administrator also has the option of undertaking the sale of property via e-auction for which he can engage an e-auction agency. The RO after considering the valuation report may put a reserve price on the property. Regulation 9 states that the Administrator shall also issue advertisements in an English and Hindi Newspaper having nationwide circulation for the purpose of inviting claims from the investors. The defaulting company and its officers are also supposed to furnish an undertaking that they shall be liable for payment if any complaint is received in future by the Board from any investor. Cost incurred in Administration and Repayment Process The entire cost that is incurred in relation to the sale of properties, verification, remuneration of the administrator and any other person appointed by him in connection to the repayment process shall be borne by the defaulter. If he fails to pay, then the cost incurred in the administration and repayment process shall be given priority over other liabilities. Furthermore, the cost and expenses incurred should be reasonable, should be directly related to and necessary for the act and purpose mentioned in the Regulations. Priority in Distribution of Sale Proceeds The amount recovered from the sale of properties of the defaulters shall firstly be used for the purpose of adjusting the costs incurred by the Board including the charges to be paid to the administrator and persons appointed under him. Thereafter, the remaining amount shall go to the investors and the penalty/fee due from the defaulter to SEBI in the order of priority. Return of Monies Exceeding the Liability In circumstances where excess monies exist after the completion and payment of all the defaults and the amount due, it shall be paid to the defaulter upon the completion of three years after the completion of the refund process. It is

[Vaidehi Soni]   Vaidehi is a 4th year student of NUALS , Kochi Background The Securities and Exchange Board of India (SEBI) announced to have a unified exchange regime from October 1, 2018, wherein stock exchanges would be allowed to offer to trade in commodity derivatives. Pursuant to the said approval, Bombay Stock Exchange (BSE) is set to launch commodity derivatives segments for the delivery-based futures contract in Gold (1 kg) and Silver (30 kg) and later add metals, energy products following by agricultural commodities such as processed/Un-processed farm produce whereas NSE apart from gold and silver will begin with mini gold (100 grams) contracts so as to attract small investors from October 12, 2018. Additionally, considering the fact, Multi Commodity Exchange (MCX) being the market leader, dominates in the trade volumes in non-agricultural commodities derivatives, BSE has decided to waive off the transaction charges for the first year of commodities market operations in order to encourage more participants to join commodity markets. Understanding Commodities market Commodities markets, globally and in India can be broadly categorised into two segments, namely, the market for spot transactions and the market for derivative transactions. The former market deals with the purchase (or sale) of commodities and the settlement of the transaction takes place simultaneously i.e. trade in commodity takes place either on a physical market place or on an electronic platform whereas the latter market deals with the exchange-traded commodity futures markets, which offer a highly standardized platform for trading financial instruments which derive their value from underlying physical commodities including settlement of trade at a future date. The commodity derivative market provides a platform for discovery of future prices of a commodity and also offer an opportunity to the participants in the spot market to hedge themselves against fluctuations in future prices of the underlying commodities. A sound derivative market through hedging delivers price discovery and price risk management by stakeholders including commodity traders, farmers, and market participants. Derivative trading in India takes place either on a separate segment of an existing Stock Exchange or on a separate and independent Derivative Exchange. The settlement & clearing of all trades on the Derivative Exchange/Segment would have to take place through a Clearing Corporation/House, which is unimpeded in governance and membership from the Derivative Exchange/Segment. Legal Framework for Derivative Market The derivatives market is governed by a central legislation, viz., Securities Contracts Regulation Act, 1956 (SCRA) which provides for the legal framework for organized derivatives trading and SEBI acts as the oversight regulator. In pursuance of recommendations made by the commodities derivatives advisory committee (CDAC), vide circular dated September 28, 2016, certain amendments/omissions were made to Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012 (SECC) so as to enable commodity derivatives exchanges to deal in Options. As per section 2(bc) of The Securities Contracts (Regulation) Act, 1956 (SCRA) a commodity derivatives contract can either be: Physical delivery of goods (not being a ready delivery contract) as notified by Central Government or For differences, which derives its value from prices or indices of prices of such underlying goods or activities, services, rights, interests and events, as may be notified by the Central Government, but cannot have securities. As per section 2(1) (fa) of SCRA, the commodity derivative exchange means a recognized stock exchange which assists, regulates or controls the business of buying, selling or dealing only in commodity derivatives. Since the Commodity derivative exchange cannot deal in any other product except for commodity derivatives, an option contract with commodity futures may not be eligible for trading on commodity derivatives exchanges. To overcome such legal hurdle, multifarious amendments are made including omission of the category of “Commodity Derivatives Exchange” under SECC regulation” with effect from October 1, 2018 so as to enable commodity derivatives exchanges to also organise trading in option contracts with commodity futures and accordingly  all norms issued for commodity derivative exchanges till date shall be applicable to commodity derivative segments of recognised stock exchanges/recognised clearing corporations to the extent of its applicability. Need for Integration of Spot and Derivative Markets With increasing commercialisation and changing demands of consumers, traders and other market participants; BSE’s foray into commodities derivatives The need for integration is more felt for the overall benefit to the primary producers and value chain participants as: Firstly, A comprehensive mechanism for integration would improve cohesion between futures and physical markets. Secondly, in case, the commodity is assayed before trading, it may also lead to lead to the standardization and assurance regarding the quality of commodity to the buyers. Thirdly, on an electronic spot exchange, as the price of a commodity would be determined by a wider cross-section of people from across the country in contrast to the present scenario where price discovery for commodities takes place only through local participation, such platform will bring about efficient price determination and will ensure transparency in price discovery. Fourthly, A single market may also lead to lower operational cost, reduction in timelines, wider market penetration as technological advancement would result in amelioration of accounting of all the transactions that are taking place in the market. Additionally, the Derivative market would achieve better convergence pursuant to development of a regulated electronic spot platform and/or regulated commodity spot exchanges as is evident from the success achieved by the securities market or the commodity derives market after moving to the electronic platform. Since the derivatives market assures that the future and spot price of a commodity converges on the day the derivative contract lapse for settlement, the discovery of real-time spot prices of a commodity on a pan-India electronic spot exchange will unequivocally strengthen the convergence of future and spot prices of a commodity thereby increasing efficiency of both spot and derivatives market. Thus, the functioning of these two markets could help Indian commodity markets improve its efficiencies and enhance the effectiveness of the overall functioning of the commodity ecosystem so as to benefit all the stakeholders.[1] Challenges and Recommendations Such integration poses a

[Kartikey Kanojiya]   Kartikey is a 5th year student of Institute of Law, Nirma University Introduction Securities and Exchange Board of India (SEBI) by virtue of the consultation paper released on 20th of July proposed an idea whereby they will be making it mandatory for the Large Corporates to raise 1/4th (25%) of their finance through bond markets only. This idea was first proposed by Mr. Arun Jaitley, finance minister of India, during the budget session speech of 2018-2019. He said “SEBI will consider mandating, beginning with Large Corporates to raise 1/4th of the financial need through debt market only.”[1]Subsequently, SEBI took up this issue and finally released a consultation paper. In this article the author analyzes the feasibility of the proposed mandate of raising 25% of finance through bond market only. Applicability By virtue of this paper, the mandate will be applicable only to Large Corporates, which have been defined as: Any entity whose outstanding borrowing is more than 100 Crores; Has a credit rating of AA and above; An entity which intends to finance itself with long-term borrowings (Long term is defined here as any period above 1 year) and; Has listed its securities on any of the stock exchange.   The mandate will be applicable from April 1, 2019 on all the Large Corporates who as on 31st March of any financial year fulfills all four conditions mentioned above. Thus, if any entity as on March 31 of a financial year is identified as Large Corporate then from the next financial year i.e. from April 1, the mandate will be applicable. However, Scheduled Commercial banks as mentioned in Schedule 2 of the Reserve Bank of India Act, 1934 are exempted from this mandate.[2] Compliance Mechanism Under the compliance mechanism it says that the large corporate shall inform the stock exchange about the same. It also creates two blocks of compliances. The First block constitutes first two years of implementation and the second block constitutes the third and fourth year of implementation. Under First block i.e. first and second year of implementation, there is a process of comply and explain whereby, the Large Corporates will try to fulfill the requirements but if they fail to do so they have to explain the reasons for the failure in writing to the authority. Under second block i.e. third and fourth year of implementation it is mandatory for the Large Corporates to meet the mandate and if they fail to do so a penalty of 0.2% to 0.3% of the shortfall will be levied on them. [3] Analysis Trend of Bank v. Bond financing in India. If we look at the prevailing finance market in India, then there is a shift in the borrowing practices followed by the corporates. The data from financial year 2012-13 to 2016-17 i.e. data of 5 financial years shows that the trend line of bond financing is going upwards while the same of bank financing is sloping downwards. In future the trend of Bond Financing will increase because of the enactment of Insolvency and Bankruptcy Code, 2016. If we look at the preference which is given to the bond holders, then they are placed above the government and thus making it easy for the bond holders to recover during the liquidation period even before tax recovery.[4] General benefits of Bond Financing Better Borrowing terms: When a company goes for loan financing the rate of interest is already fixed but in the Bond financing the company can fix the interest keeping in mind the market conditions prevailing during the time and the predicted future of the company. This flexibility gives company an edge to go for Bond Financing.[5] Covenants and Restrictions: When a company goes for loan financing there may be a time where the lender puts some restriction such as that borrower cannot make any material change in the company without the affirmative vote of the creditor and thus making it difficult for the company to enter into any arrangement. In bond financing the only liability the bond issuer has is to repay the principle amount at the time of maturity and to pay interest as per the agreed terms. The bond holders do not get any control in the company as compared to the loan lender.[6] Non Dilution in the shareholding of the present shareholders: As and when new shares are issued to raise finance the shareholding of the present shareholder depletes because of the infusion of the shareholders. For example, I had 25% share in the company and thus, a material stake in the governance matters of the company but due to issuance of new shares and new shareholders entering the company my shareholding is reduced to 20% thus, making my clout in the governance of the company less. This is not the case with bond financing. Preference during the liquidation: After the enactment of Insolvency and Bankruptcy Code, 2016 the preference is given to the bondholders, and they are placed above the government and thus making it easy for the bond holders to recover during the liquidation period. This is a positive step to attract the the investors.[7] Disadvantages of Bond Financing Long and Complicated process: To issue bonds in the market SEBI (Issue and Listing of debt securities regulations), 2008 (“regulations”) are to be followed which makes it a complex process. As per the regulations, merchant bankers are to be appointed which also makes it financially difficult as compared to loan financing. Early Repayment: In bond financing the main issues is of repayment. Even if a company has money after some time they cannot pay the debt and settle it. In Bond financing there is no mechanism of early repayment of the claim and final setoff is done between the company and the bond holder. On the other side, in loan financing the money can be paid back soon after taking loan and there is no bar for doing the same except for a penalty which is levied upon the borrower. Bonds

Sandpapergate: ICC’s Failure to Save the Spirit of the Game from Orchestrated Cheating. [Ankit Sharma] Ankit Sharma is a 4th year student of B.Com.L.L.B (Hons.) at Gujarat National Law University. Introduction Given the evidentiary problems in insider trading cases, SEBI has resorted to the use of presumptions in its enforcement of the SEBI (Prohibition of Insider Trading) Regulations[1]. Hence, if an insider trades in securities whilst in the possession of Unpublished Price Sensitive Information (‘UPSI’ hereinafter) there is a presumption of guilt against him. The law also prohibits the immediate insiders from communicating UPSI to anybody who is not an insider. The research note seeks to examine if there exists any such presumption against the immediate insider also that he communicated UPSI to a relative or a spouse etc. in instances where any relative or spouse or any other connected person commits insider trading Analysis: SEBI (Prohibition of Insider Trading) Regulations, 2015 prohibit insiders from trading[2] in securities that are listed or proposed to be listed on a stock exchange when in possession of unpublished price sensitive information[3]. ‘Insider’[4] is anybody who is in possession of or has access to unpublished price sensitive information or is either a connected person, which includes spouse[5]. ‘Unpublished price sensitive information’ means any information, relating to a company or its securities, directly or indirectly, that is not generally available which upon becoming generally available, is likely to materially affect the price of the securities[6]. The note appended to regulation 4(1) casts a rebuttable presumption of guilt on a person who has traded in securities, whilst in possession of unpublished price sensitive information (UPSI), that such trade was motivated by the knowledge and awareness of such information in his possession, thereby making him guilty of Insider Trading. Further, regulation 3 prohibits any insider from communicating any UPSI relating to a company or securities listed or proposed to be listed, to any person including other insiders except where such communication is in furtherance of legitimate purposes, performance of duties or discharge of legal obligations. Thus, in case where a person is an insider possessing UPSI and the spouse or relative of such person commits insider trading, there will be a presumption of guilt against such individual  who is trading on securities but there has to be undertaken an inquiry as to whether such presumption of guilt will exist against the immediate insider possessing UPSI also that he communicated the information to spouse or relative and thus acted in contravention of prohibition under regulation 3. Though any express provision providing for such presumption under regulation 3 is absent, the existence of such presumption of guilt seems very natural and rational as the communication of UPSI by immediate insider is the only way that the spouse or any other connected person can garner such information. But be that as it may, such a presumption may not exist because of two cogent reasons. Presumption under Regulation 4 cannot be extended to                       Regulation 3. SEBI (Prohibition of Insider Trading) Regulations, 2015 is a penal statute[7]. It is a general rule[8] of construction that the provisions of a statute enacting an offence or imposing a penalty are strictly construed[9] and not be enlarged by implication[10]. If the statute requires the accused to disprove even by preponderance of probabilities a presumed fact which an essential element of the offence as distinguished from a proviso or exception, the statute may offend a due process clause in a constitution to design fair trial[11] and the provision may be read down strictly[12]. In any case a deeming provision which reverses the onus of proof in relation to an element of the offence has to be strictly construed and cannot be extended beyond its language to cover another offence[13]. In the instant matter also, the onus of proof and presumption under Regulation 4 should be read as to cover only the cases envisaged by the aforementioned regulation i.e. where there has been trading transaction on the basis of UPSI and should not extend to the cases where the immediate insider has communicated to UPSI to any insider/non insider when such communication was not made in furtherance of legitimate purposes, performance of duties or discharge of legal obligations. 2.Such presumption in Regulation 3 was intentionally omitted by        legislature. A statute is an edict of the Legislature[14]. The duty of judicature is to act upon the true intention of the Legislature—the mens or sententia legis”[15]. In the matrix at hand it can be reasonably presumed that the legislating authority never intended any such presumption against the communicator of UPSI under Regulation 3(1). According to the test laid down by Blackburn J. in R v. Cleworth[16], to determine what the correct presumption, arising from an omission in a statute should be, was whether what was omitted but sought to be brought within the legislative intention was “known” to the law makers, and could, therefore, be “supposed to have been omitted intentionally”[17]. To re-iterate, note appended to the regulation 4 unequivocally mentions that there will be a presumption against the trader that the transacted on the basis of UPSI if he did so while in the possession of UPSI. And hence it can be well deduced that the legislature was well aware that a presumption could be imposed in case of other offences also, or to be specific on the communicators of UPSI as envisaged in regulation 3(1). But the legislature chose to omit any such presumption in case of regulation 3(1) thereby satisfying the absence of any intention to treat the communicators of UPSI at par with the person who trades in securities while in possession of UPSI. Conclusion While it remains to be seen as to how judiciary clarifies the issue, the reasons suggesting the absence of presumption of guilt under Regulation 3 are highly persuasive and convincing. As a general rule of interpretation of penal statutes, presumptions are usually given a restricted effect and hence,

Understanding the SEBI Order in the Matter of PwC. [Udyan Arya] The author is a fourth-year student at National Law Institute University, Bhopal. On January 10, 2018, the Securities and Exchange Board of India (“SEBI”) passed an order against accounting firms practicing under the brand Price Waterhouse (“PwC”). The order bars PwC from issuing audit and compliance certificates to listed companies for a period of two years and imposes a penalty of Rs. 13.09 crores with interest. The genesis of the present order can be traced back to the 2010 Bombay High Court judgment in the case of Price Waterhouse & Co. v. SEBI,[1] wherein the Court ruled that SEBI possessed the necessary powers to initiate investigations against an auditor of a listed company for alleged wrongdoing. PwC’s challenge to this ruling, by way of a special leave petition in the Supreme Court, was dismissed in 2013.[2] Background SEBI issued Show Cause Notices (“SCNs”) to PwC pertaining to PwC’s audit of Satyam Computer Services Limited (“Satyam”). SEBI, in its investigation, had found false and inflated current account bank balances, fixed deposit balances, fictitious interest income revenue from sales and debtors’ figures in the books of account and the financial statements of Satyam for several years. The SCNs alleged that the statutory auditors of Satyam had connived with the directors and employees in falsifying the financial statements of Satyam. The SCNs sought to initiate action against PwC under Sections 11, 11(4), and 11B of the SEBI Act, 1992 and Regulation 11 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Markets) Regulations, 2003. The Bombay High Court Judgment PwC filed a writ petition before the Bombay High Court challenging the SCNs claiming that SEBI did not have jurisdiction to initiate action against auditors discharging their duties as Chartered Accountants (“CAs”). Only the Institute of Chartered Accountants of India (“ICAI”) established under the Chartered Accountants Act, 1949 could impose restrictions on CAs and determine if there has been a violation of the applicable auditing norms. SEBI, therefore, was encroaching upon the powers of ICAI by issuing the impugned SCNs. The Court observed that SEBI’s powers under the SEBI Act were of wide amplitude and could take within its sweep a CA if his activities are detrimental to the interests of the investors or the securities market,[3] and that taking remedial measures to protect the securities market could not be equated with regulating the accounting profession.[4] Since investors are guided by the audited balance sheets of the company, the auditor’s statutory duties may have a direct bearing on the interests of the investors and the stability of the securities market.[5] The Court, however, asked SEBI to confine the exercise of its jurisdiction to the object of protecting the interests of investors and regulating the securities market and, ultimately, its jurisdiction over CAs would depend upon the evidence which it could adduce during the course of inquiry.[6] If the evidence showed that there were no intentional or wilful omissions or lapses by the auditors, SEBI could not pass directions. The Supreme Court, on appeal, upheld the decision. The SEBI Order Jurisdiction of SEBI Taking note of the decision of the Bombay High Court, SEBI held that if the evidence sufficiently indicates the possibility of there being a role of the auditors in the alleged fraud, then SEBI, as a securities market regulator, is empowered to protect the interests of the investors and could proceed to pass appropriate directions as proposed in the SCNs. Duties of Auditors The order has extensively dwelled upon the duties of auditors under the regulatory framework in India and whether the auditors in question had discharged their professional duties in accordance with the principles that regulate the undertaking of an independent audit.[7] The auditor’s conduct was checked against the applicable accounting standards and principles, and significant departures were found in the audit. It was noted that 70 percent of the Satyam’s assets comprised of bank balances, which, being a high-risk asset prone to fraud and misappropriation, warranted significant audit attention. However, the auditors failed to maintain essential control over the process of external confirmations and verifications, as mandated under the Audit & Accounting Standards of ICAI. The role of independent auditors in a public company was emphasized.[8] Since the certifications issued by auditors have a definite influence on the minds of the investors, it was held that the auditors owe an obligation to the shareholders of a company to report the true and correct facts about its financials since they are appointed by the shareholders themselves. Findings Finding PwC grossly lacking in fulfilling their duties as statutory auditors, SEBI noted that the acts of the auditor induced the public to trade consistently in the shares of the company. It was noted that the auditors made material representations in the certifications without any supporting document, pointing towards gross negligence and fraudulent misrepresentation. The auditors failed to show any evidence to the effect that they had done their job in consonance with the standards of professional duty and care as required and they were well aware of the consequences of their omissions which made them liable for commission of fraud for the purposes of the SEBI Act and the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.[9] Liability of the PwC Network The SCNs sought to impugn liability on all firms operating under the banner of PwC in India. The PwC network firms were found to be linked to each other on the basis of the following facts: The firms forming part of the network are either members of or connected with Price Waterhouse Coopers International Ltd. (“PwCIL”), a UK-based private company; The said firms entered into Resource Sharing Agreements with each other. The webpage of PwC global (https://www.PwC.com/gx/en/about/corporategovernance/ network-structure.html), showed PwC as “the brand under which the member firms of PricewaterhouseCoopers International Limited (PwCIL) operate and provide professional services.” Member firms of PwCIL were given the benefit of using the name of PwC and

Minimum Public Float Under the Securities Contracts (Regulations) Act, 1956 [Ashlesha Mittal] The author is a student of National Law University, Jodhpur. The Securities Contracts (Regulation) Act, 1956 (SCRA) was enacted to prevent undesirable transactions in securities by regulating the business of dealings therein, and by providing for certain other matters connected therewith. Section 21 of the SCRA mandates all listed companies to comply with the conditions of the listing agreement with the stock exchange. The provisions of the Securities Contracts (Regulation) Rules, 1957 (SCRR) and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR) provide a framework to maintain this balance. The blog article examines the framework, the rationale therefor and the implications of the same on the market in general and the shareholders in particular. Regulatory Framework and its Evolution The SEBI regulates financial markets, and minimum public shareholding ensures that listed companies offer their shares to the public in order to increase liquidity and ensure maximum protection of interest. The SEBI regulations have been centered around the protection of individual shareholders, and hence strict compliance of all the laws is mandatory. Any deviation leads to imposition of penalty, and even delisting of securities in some instances. The framework relating to minimum public shareholders has evolved through the years. From a regime of extensive restrictions, it has moved towards a liberated market, and recently the trend has again been to increase restrictions. Prior to 1993, listed companies were required to issue 60% of their shares to the public. This was eventually relaxed to 25% and then to 10% to ease listing requirements as companies with large amount of share capital did not require such amount of outside funds.[1] However, to maintain liquidity of shares and prevent price manipulations, the SCRR was amended vide the Securities Contracts (Regulation) (Amendment) Rules, 2010 to amend rule 19(2)(b) and insert rule 19A, and increase the public shareholding threshold from 10% to 25%. Companies with capital above Rs. 1600 crore were given a period of 3 years to achieve the threshold, by using methods prescribed by SEBI. Rule 19A of the SCRR provides that maintaining public shareholding of at least 25% is a requirement for continued listing. Where the public shareholding in a listed company falls below 25% at any time, such company shall bring the public shareholding to 25% within a maximum period of twelve months from the date of such fall. The increased threshold of 25% was made applicable on listed public sector companies in 2014 by the Securities Contracts (Regulation) (Second Amendment) Rules, 2014 and had to be met within three years from the commencement of the amendment. The amendment not only increased opportunities for investors to invest in PSUs, but also assisted Government’s disinvestment programme. To avoid undervalued transfer of shares of the public-sector companies and distress sale of government stocks, the period for compliance was increased to four years by the Securities Contracts (Regulation) (Third Amendment) Rules, 2017. Further, regulation 38 of the LODR provides that the listed entity shall comply with minimum public shareholding requirements in the manner as specified by the SEBI from time to time. This was earlier provided in clause 40A of the Listing Agreement. SEBI via its circular has also prescribed methods by which the minimum level of public shareholding specified in rule 19(2)(b) and/or rule 19A of the SCRR can be achieved.[2] These methods are: issuance of shares to public through prospectus; offer for sale of shares held by promoters to public through prospectus; sale of shares held by promoters through the secondary market in terms of SEBI circular CIR/MRD/DP/05/2012 dated February 1, 2012; institutional placement programme in terms of Chapter VIIIA of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009; rights issue to public shareholders, with promoter/promoter group shareholders forgoing their entitlement to equity shares, that may arise from such issue; bonus issues to public shareholders, with promoter/promoter group shareholders forgoing their entitlement to equity shares, that may arise from such issue; any other method as may be approved by SEBI on a case to case basis. Implementation of the Regulations Shareholders of a public company have an advantage that the shares are freely transferable and that there is quick liquidity of investment. The liquidity arises due to ready availability of buyers and sellers in the market, and an established procedure for the transfers. However, if the promoter group refrains from trading in their shares, the number of buyer and sellers reduces in the market, thus affecting the liquidity factor. In June 2013, when the deadline for complying with the requirement of 25% public shareholding ended, SEBI issued an order against 108 companies which failed to do so. The rights of the promoters with respect to shares exceeding the maximum promoter shareholding were frozen. Restrictions were imposed on trading of shares of these companies by promoters except for the purpose of complying with the minimum public shareholding, and also on the promoters holding any new position of director in any listed company. All the restrictions were to apply till the minimum public shareholding threshold was finally met by the company.[3] In the Bombay Rayon’s case,[4] the delay in compliance with minimum public shareholding requirement occurred on account of the CDR process pursued by Bombay Rayon with its lenders. Sufficient period of non-compliance had lapsed in ensuring implementation of the CDR package, which inter alia was also subject to necessary approvals from SEBI. As noted in the confirmatory order dated December 11, 2015, the restructuring of Bombay Rayon’s debt by CDR–EG was for the company’s “sound growth, which in effect will benefit its shareholders also.” Since the non-compliance was beyond the control of the company and was only due to the conversion of GDRs into equity, the SEBI reversed the penalty imposed on the company. Rationale and Implications Minimum public participation in listed companies has always been advocated by the regulators as this ensures liquidity in the market and discovery of fair price.[5] Further, the availability of requisite floating stock ensures reasonable market depth. This enables an investor

From Blurred Line to Bright Line: Concept of Control under the Takeover Law. [Deeksha Malik] The author is a Fifth Year B.A. LL.B. (Hons.) student at NLIU, Bhopal The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (hereinafter “Takeover Code”) prescribes a threshold limit of 25% of shares or voting rights in the target company which, when triggered, would require the acquirer of such shares or voting rights to make an open offer by way of a public announcement.[1] Irrespective of such acquisition, an acquirer is also obligated to make such an offer when he acquires control over the target company.[2] Regulation 2(1)(e) of the Takeover Code provides an inclusive definition of “control”, taking within its ambit the right to appoint majority of directors to the Board of the target company or to control the management or policy decisions of the said company by a person acting individually or in concert with other persons, either directly or indirectly, including by virtue of their shareholding, management rights, shareholder agreements, voting agreements or in any other manner. The definition expressly excludes exercise of control by a director or other officer of the target company merely by virtue of his holding such position. At this juncture, it is pertinent to note that the Bhagwati Committee, the recommendation of which formed the basis on which the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 were framed, suggested that though it is difficult to lay down a precise definition of “control” on account of the numerous different ways in which it could be exercised over a company, it is necessary to provide a broad inclusive definition which would “serve to indicate the circumstances when compliance with the provisions of the Regulations would be necessitated, even where there has been no acquisition of shares, so that SEBI would not be on an unchartered sea in investigating whether there has been change in control.”[3] It is against this backdrop that SEBI on March 14, 2016 came out with a discussion paper seeking comments from the public over the issue of the concept of control under the takeover law.[4] Various Approaches to Determination of Acquisition of Control Essentially, there are both objective and subjective tests to determine acquisition of control. The quantitative approach focuses on numerical thresholds in order to ascertain whether or not there has been an acquisition of control over the target. Many jurisdictions, including the European Union[1], Hong Kong[2], Italy[3] and Austria[4] opt for this approach on account of the relative efficiency and consistency in its application; such standards also significantly reduce the need for litigation. However, there appears to be considerable variation as regards the fixation of the shareholding percentage threshold for voting rights which would trigger the mandatory offer rule (ranging from 20% to 50% voting rights).[1] Much depends on the shareholding pattern that generally prevails in a particular jurisdiction; if shareholding is dispersed in that it is spread over a large number of shareholders, the trigger limit should be kept low, and vice-versa.[2] Objective standard has its own share of disadvantages. Being ‘mechanical’ in its application, it increases the possibility of sophisticated avoidance attempts. Let us take example of an acquirer ‘A’ in India, the takeover law of which provides for a trigger limit of 25% voting rights. ‘A’ acquires 24.5% of the voting rights in a company, thereby doing away with the requirement of an open offer and the economic cost it entails. If there is no other shareholder that exercises similar voting rights, one may reasonably draw the inference that A has a de facto control over the company. Similarly, there could be various kinds of agreements enabling a ‘stealthy’ acquisition of voting rights, and a takeover regulation providing for only an objective standard would not be able to catch hold of such an acquirer. On the other hand, some countries adopt the subjective route, enabling courts and regulators to check any kind of de facto control over the target. In countries such as Canada, France and Spain, an entity is deemed to be having control over another company if it is has the right to exercise majority of the voting rights at the general meeting of the company or has the ability to control the composition of a majority of the board members of the company.[3] Likewise, countries such as Brazil, China and Indonesia define control in terms of the ability to exercise influence over the company’s policies or its shareholder meetings.[4] Therefore, we find that a de facto concept of control essentially encompasses various modes through which an acquirer may gain control. Some of these modes could be the right of an acquirer to appoint or remove majority of the board of directors, ability to directly or indirectly determine the management or policy of the company[5], and the like. The process envisages fact-specific determination, making the law highly uncertain and unpredictable. In fact, many jurisdictions which previously had subjective definitions of control switched to objective definitions.[6] Indeed, such standards fail to take into account many situations where, as a protective measure, financial investors or borrowers seek certain rights in the company without any intention to seek control. The Combined Approach in India India follows both quantitative and qualitative approaches to determination of acquisition of control, providing a numerical threshold of 25% while at the same time giving a subjective definition under regulation 2(1)(e). As a result, the jurisprudence developed over time shows inconsistency among judicial decisions and multiple opinions as regards the scope of control. In 2001, the Securities Appellate Tribunal (SAT) held the acquirer in question to be in control over the target as it had veto rights on major decisions on structural and strategic changes.[7] More recently, in 2010, SAT significantly changed its stance in the much-talked-about case of Subhkam Ventures (I) Pvt. Ltd. v. SEBI[8]. In this case, Subhkam acquired more than 15% in the target company and made a public announcement in term of Regulation 10