Capital Markets and Securities Law

[By Sahil Sachin Salve] The author is a student of Maharashtra National Law Univeristy, Mumbai. Introduction: On June 5, 2024, SEBI issued a circular mandating that Clearing Corporations (CCs) directly credit securities to client demat accounts, effective October 14, 2024. Previously, SEBI had taken a significant step by discontinuing the use of pool accounts for mutual fund transactions from July 1, 2022. Initially, the direct payout into clients’ demat accounts was a voluntary practice but as per above circular from October 14, 2024 it will be mandatory for CCs to directly credit securities to client’s demat accounts. This move aims to enhance transparency and protect investors by ensuring that their securities are directly credited to their accounts, by passing intermediaries and reducing potential risks.  Such a new mechanism will replace the current practice where securities pass through broker pool accounts, which pose risks of misuse and lack transparency. The new mechanism aims to enhance investor protection, reduce misuse risks, and improve transparency. While it offers significant benefits like increased security and investor confidence, it also introduces challenges such as higher operational burdens, increased costs, and potential initial delays. Effective preparation and adaptation by stakeholders are crucial for a smooth transition.  Current Practice & Issues with current practice: Currently, the payout process involves transferring securities from the seller to depositories, then from the depositories to the Clearing Corporation (CC), and finally, the CC credits the securities into the broker’s pool account. This pool account, however, poses significant risks. It contains the securities of all the broker’s clients, making it challenging to distinguish between client-owned and broker-owned securities.  If brokers face financial difficulties or insolvency, the pooled securities could be jeopardized, leaving clients uncertain about the status of their investments and weakening their trust in the brokerage system. This practice has led to severe issues in the past, one example of such misuse is the Karvy Demat Scam of 2019. In this case, brokers misused approximately Rs. 2300 crore of investor funds by pledging them to banks for their use, affecting over 95,000 clients.  To prevent such scams and enhance investor protection, SEBI has mandated a new regime. This new mechanism requires Stock Exchanges, CCs, and Depositories to establish the necessary procedures and regulations to ensure compliance. By doing so, SEBI aims to safeguard client securities and restore confidence in the financial markets.  New Mechanism: SEBI has mandated that Trading Members (TMs) and Clearing Members (CMs) must now ensure the direct payout of securities to clients’ demat accounts via clearing corporations. This new rule effectively removes the broker’s pool account from the payout process, aiming to safeguard client securities and enhance transparency.  However, in some processes, the broker will still take part, for instance, “Funded stocks held by the TM/CM under the margin trading facility” must be handled differently. As per the amendment in the circular dated May 22, 2024, these funded stocks must be held by the TM/CM only through a pledge. These funded stocks, which are purchased with the financial assistance provided by the broker, must now be managed exclusively through a pledge system. This means that brokers are not allowed to retain full control over these securities; instead, they must be pledged as collateral to secure the loan provided for the purchase.  To ensure transparency and safeguard client assets, TMs and CMs are required to open a separate demat account named ‘Client Securities under Margin Funding Account’. This account is used solely for the purpose of margin funding, and no other transactions can take place within it. The separation of these securities from other accounts ensures that the client’s margin-funded stocks are clearly distinguished and protected from being mixed with other broker activities. Once a client purchases stocks using the margin trading facility, the securities are first transferred to the client’s demat account. From there, an auto-pledge is triggered, which means the stocks are automatically pledged in favour of the broker’s ‘Client Securities under Margin Funding Account’ without requiring specific instructions from the client. This pledge serves as collateral for the margin loan, ensuring the broker’s financial interest in the funded stocks while keeping the process seamless for the client. This new system enhances both operational efficiency and investor protection by keeping the broker’s involvement limited to secured pledges and reducing the risk of asset misuse.  Similarly, for unpaid securities (where the client has not paid in full), the procedure outlined in paragraph 45 of the May 22, 2024, circular will apply. The securities will be moved to the client’s demat account and will be automatically pledged under the reason “unpaid” to a distinct account named ‘Client Unpaid Securities Pledgee Account,’ which the TM/CM is required to establish.  The objective of these changes is to enhance operational efficiency and drastically reduce the risk of client securities being misused, which was a major concern in the old system where client and broker securities were pooled together. In the previous practice, brokers had control over pooled securities, creating risks of misuse, as seen in cases like the Karvy Demat Scam of 2019. SEBI’s new regime, by eliminating the need for broker pool accounts and directly crediting securities to client demat accounts, significantly strengthens investor protection. This mechanism not only prevents misappropriation of client assets but also restores and reinforces confidence in the financial markets.  Analysis of the New Securities Credit Mechanism: Benefits of New Mechanism: The new mechanism promises numerous benefits and enhanced protection for investors. By enabling the direct credit of securities to clients’ demat accounts, the risk of brokers misusing client securities is significantly reduced. Clients will have full control and visibility over their holdings, allowing them to track their investments accurately and reducing the likelihood of discrepancies. Separating client securities from broker-owned securities is crucial. This segregation prevents the mixing of assets and reduces the risk of brokers using client assets for unauthorized purposes such as leveraging or trading. This clear distinction between client and broker assets also aids in better risk management, ensuring that client assets are

[By Zoya Farah Hussain & Digvijay Khatai] The authors are students of National Law University Odisha. Introduction The term “delisting” of securities means the removal of securities of a listed company from a stock exchange, providing an exit route for public shareholders from the company. Delisting can be either compulsory or voluntary. In the former case, a public company would delist itself following non-compliance with listing guidelines promulgated by the market regulator, unlike in the latter where the corporation voluntarily delists its securities after due approval of the board of directors and the consensus of major shareholders. Delisting facilitates companies to avoid regulatory compliances associated with being publicly traded in light of strategic shifts in the decisions of the company either due to mergers, acquisitions or other corporate reasons. Internationally, it is a crucial financial structuring instrument that controlling investors employ to increase the value of their investment.  Recently, the Securities and Exchange Board of India (‘SEBI’) has approved certain amendments based on proposals of a consultation paper released on August 2023, to ease up the delisting procedure in Indian stock markets by introducing ‘fixed price’ as an alternative to the ‘reverse book-building method’ (‘RBB’) to determine the exit price of the delisting offer. The Board has approved the amendment to make doing business easier, safeguard investors’ interests, and offer flexibility in the Voluntary Delisting framework.  While the Fixed Price Offer aims to simplify the delisting process and mitigate issues like speculative premiums, it may introduce a whole new set of challenges for minority shareholders and the price discovery process. The article compares both methods, highlighting their respective advantages and drawbacks, and suggests potential improvements, such as incorporating longer-term market price averages, to create a more balanced and transparent delisting framework.  Reverse Book-building method In India, the procedure of delisting is governed under the SEBI (Delisting of Equity Shares) Regulations, 2021. (‘Delisting rules’) Under the regulations, an ‘acquirer’ is a person who is willing to offer a ‘minimum price’ to the equity shareholders of a company, to which the latter agrees to transfer the shares in favour of the former. The floor price will have to be determined in terms of Regulation 8 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Regulations”). This regulation precisely embodies within itself, what we call the ‘reverse book-building method’.   The public shareholders upon being offered the floor price by the acquirer, determine the final price (‘discovered price’) using the RBB method, at which they are willing to sell their shares. The discovered price of the shares has to be such, that upon acquisition, the acquirer’s shareholding reaches up to ninety per cent of the total shareholding of the company. The acquirer is generally bound by the discovered price, provided it is equal to the floor price or an indicative price, if any, put up by the acquirer.   As per regulation 22 of the delisting rules, if the acquirer finds the discovered price unacceptable, the same has an option of producing a ‘counter offer’. This counteroffer price by the acquirer further cannot be less than the ‘book value’ of the company, certified by a merchant bank registered under SEBI appointed by the acquirer.  The price discovery mechanism of the existing delisting provisions simply prescribes a floor price of the shares, but not a maximum price. Public shareholders, especially major position holders, can influence the delisting price through the reverse book-building price discovery process. Further, a company’s announcement of delisting its equity shares may cause a rise in volatility and an increase in speculative activity in the company’s shares. The reverse book-building price discovery process provides the ability to public shareholders (especially entities with large positions) to have a say in determining the delisting price. These loopholes are the primary reasons that an alternative has been sought by SEBI.  Fixed Price Offer SEBI in its board meeting dated June 27, 2024, has approved a ‘fixed price offer’ (‘FPO’) mechanism as an alternative to the RBB method for the purposes of delisting of ‘frequently traded’ public companies. Under the new mechanism, the fixed price will be set at a 15% premium over the floor price that is determined by the delisting rules. The introduction of this method is primarily in furtherance of an aim to simplify the delisting process in light of the ease of Doing Business by not subjecting the acquirer to the hassles of a reverse mechanism and the delays caused by it.  Further, ‘adjusted book value’ has been added as an additional parameter to calculate the floor price of infrequently traded shares of companies under the delisting rules. Certified by an independent registered valuer, this is a key metric, to determine the fair market value of a listed company by subtracting liabilities from assets and adjusting for any intangible assets or liabilities.  Under the new amendments, the threshold for a counter offer by the acquirer has been relaxed to ‘seventy-five per cent’ of the total shareholding as opposed to the ninety per cent margin, provided that fifty per cent of the public shareholding has been tendered.  Is FPO a suitable alternative? While the recent SEBI discussions have put RBB in an auxiliary position, there needs to be a neutral evaluation of both the contesting methods before promoting either of them.   The loopholes cited in the meeting regarding the method of RBB were, firstly, that the Delisting Price often included an exorbitant premium (at times, more than 100%) over the Floor Price attributable majorly to the speculators who in anticipation of delisting start cornering shares to accumulate a sizeable shareholding to seek an unreasonable premium, thereby making the completion of the process of delisting cumbersome. Secondly, overdependence on public shareholders who are not necessarily equipped with share market information for price discovery leads to promoters being exploited for higher returns. In order to mitigate such loopholes, opinions incline towards the FPO method. While it is expected to provide certainty regarding the pricing of the delisting offer, it introduces new challenges

[By Anoushka Das, Dhaval Bothra & Arya Vansh Kamrah] The authors are students of SLS Pune.   Introduction The Securities and Exchange Board of India (SEBI) has recently released its circular dated August 20, 2024, detailing a cyber security framework for its Regulated Entities (REs) in light of the rapid increase in technological developments in the securities market. The integration of technology into the securities market poses a double-edged sword, which may expose the players in the market to cyber risks and cyber incidents. While the integration of technology brings efficiency and innovation, it simultaneously exposes market participants to potential cyber threats, including data breaches, ransomware attacks, and fraudulent activities. SEBI, after due consultation with the stakeholders, has prudently formulated a framework via its circular to meet its six cyber security goals for combating cybercrime, i.e., governance, identification, protection, detection, response, and evolution. SEBI has outlined a robust scheme designed to safeguard stakeholders from the complex and evolving cybersecurity threats facing the securities market.  Key Highlights of the Framework Under this framework, SEBI has categorized the REs into five categories based on the extent of operations, trade volume, number of clients, etc.  In pursuance of SEBI’s focus on cybersecurity and cyber resilience, the market regulator has framed the following guidelines in accordance with its cybersecurity functions:  Governance: SEBI has mandated that all REs continuously allocate and communicate clear roles and responsibilities related to cybersecurity risk management. Additionally, it has introduced the Cyber Capability Index (CCI) as a tool to assess and monitor the cybersecurity progress of Market Infrastructure Institutions and Qualified REs  Identification:  REs are mandated to identify and classify critical systems according to their operational importance and sensitivity. This includes periodic IT risk assessments and prioritizing responses based on current threats and vulnerabilities.  Protection: REs must ensure that a robust authentication and access policy is in place with due log collection and documentation. Moreover, SEBI has enumerated a list of guidelines, including audits, vulnerability assessment and penetration testing, and security solutions that need to be mandatorily implemented.   Detection: The REs are mandated to institute a Security Operations Centre (SOC), either internally or via third parties, and ensure that the functional efficacy of the same is measured on a half-yearly or yearly basis based on the category it belongs to.   Response: The REs must compulsorily formulate a Cyber Crisis Management Plan (CCMP), and in the event of any incident, a Root Cause Analysis (RCA) must be conducted to understand the root cause of the incident.   Recovery: SEBI in its circular has provided an indicative recovery plan based on which REs must document a comprehensive plan for response and recovery from cyberattacks.   Evolution: SEBI has mandated that the REs must formulate “adaptive and evolving” controls to tackle vulnerabilities. The circular takes cognizance of the ever-evolving nature of technology and its role in the securities market and undertakes to evolve with the changing times by making updates to the circular as and when the need arises. This forward-looking approach leaves enough room for the framework to evolve while making a sufficient attempt at tackling the pre-existing problems.   Implementation of the CSCRF SEBI has phased the implementation of CSCRF compliance based on the categories in which the REs fall. The implementation date for the six categories of REs that already have circulars in place is January 1, 2025, while for REs to which the CSCRF measures are being extended for the first time, the implementation date is April 1, 2025. The market regulator has considered the challenges that first-time compliance imposes on regulators and has allowed a relaxed timeline to accommodate these difficulties.  A robust monitoring mechanism further underscores the efficacy of the framework. The CSCRF has divided the compliance reporting between two authorities. For Security Brokers and Depository Participants classified as Qualified REs, the reporting authority will be the relevant stock exchange or depository. For MIIs and the remaining Qualified REs, SEBI will serve as the reporting authority. While CSCRF does not provide for obligations of the REs in case of non-compliance of the implementation dates, SEBI has power under the SEBI Act, 1992, to impose penalties on REs that fail to comply with its directives and frameworks.  Analysing the Impact of the Framework The REs are now burdened with the additional responsibility of adhering to the cybersecurity measures outlined in the circular. On one hand, the compliance requirements and strengthened governance structures may bolster investor confidence in the securities market. Complying with the CSCRF framework can help the REs align with international cybersecurity standards and enhance their reputation and credibility in the global market. The rigorous standards may drive innovation in cybersecurity technology and solutions as REs look for efficient methods to fulfil compliance without compromising productivity.   However, on the other hand, the framework is likely to compel the REs to overhaul their internal systems, procedures and infrastructure to meet the new cybersecurity standards. The additional list of compliances would result in significant expenses for the REs. Smaller REs could face considerable challenges in complying with the CSCRF standards. This may further lead to a competitive disadvantage and an increased dependency on larger institutions for cybersecurity and cyber resilience support. Moreover, the lack of regulation regarding external SOCs leads to a regulatory gap and creates uncertainty with respect to the obligations of REs that opt for third-party SOCs, in case of non-compliance with CSCRF standards.   The circular is a progressive step in addressing the cybersecurity issues prevalent in the market. However, the effectiveness of the circular can only be adjudged upon observing the cooperation of the REs and the diligent monitoring of market players against the established standards once implementation begins.  Recommendations The CSCRF aims to ensure uniformity of cybersecurity guidelines for all REs. However, the framework may not fully address the unique challenges faced by different categories, potentially leading to compliance issues and security gaps. For example, while the CSCRF’s cybersecurity controls are crucial for market safety, they are resource-intensive, especially for smaller REs, which may struggle with the

[By Debarchita Pradhan] The author is a student of National Law School of India University, Bangalore.   Introduction Put simply, insider trading means trading by a person in a company’s securities while he/she has some secret price-sensitive information that is not generally available to the public. However, there have been substantial issues regarding whether the information is generally available to all.   In the recent case concerning allegations of insider trading in Future Retail Ltd. (FRL) scrip, the Securities Appellate Tribunal (SAT) opined that if the information is published in media, then it would cease to be unpublished and would be considered generally available. However, it was the last opportunity to form such an opinion because later, the amendment to the SEBI (Prohibition of Insider Trading) Regulations, 2015 (hereby referred to as “2015 Regulations”) excluded “unverified event or information reported in print or electronic media’ from the definition of “generally available information” (hereby referred to as GAI).   The paper argues that this amendment is too restrictive and would further disincentivize the investors rather than protect them. It would first, give a brief overview of the jurisprudence around information being generally available under insider trading law. Secondly, it would provide the repercussions that may flow from the recent amendment. Thirdly, it will provide a pragmatic alternative to the amendment. Fourthly, the paper will conclude.  Chapter I: Development of the idea of “generally available information” Presently, in the 2015 Regulations, an insider is defined to be someone who is either a connected person or one who possesses unpublished price-sensitive information (UPSI). In the SEBI (Prohibition of Insider Trading) Regulations, 1992 (hereby referred to as “1992 Regulations”), the definition of “unpublished price-sensitive information” provided that for information to be UPSI, it should not be generally known or published by the company. The use of “or” indicates that information can be generally known in ways other than the publication by the company itself. This rationale was visible in the order passed in Hindustan Lever Ltd v. SEBI1, where it was observed that expectations regarding an event, being already in the media, were considered to be generally known. Later, through an amendment in 2002, the definition of “unpublished” was given. It provided that information would be considered unpublished if it is not “published by the company or its agents. This indicates that for the information to be generally available, it needs to be made available by the company itself. So, the 2002 amendment was narrower than the 1992 Regulations with regards to the meaning of generally available information.   Later, a High-Level Committee was appointed under the chairmanship of Justice N.K. Sodhi to review the 1992 Regulations and further provide a draft for the 2015 Regulations.  In these regulations, GAI is separately defined.  It is broader than the 2002 amendment since the only condition required for information to be generally available is that it should be available to the public in a non-discriminatory manner. This broader view was recently evident in the ruling given by SAT in the Future Corporate Resources Pvt. Ltd. (FCRPL) v. SEBI. The SAT opined that the information doesn’t need to be only from the company itself to be considered as generally available. The same logic was also followed in previous cases that arose after the 2015 Regulations. However, later through an amendment to the definition of GAI on 18 May 2024, “unverified event or information reported in print or electronic media” were excluded from its ambit.   Chapter II: Repercussions That Follow [A] Ignoring the Channel When holding someone accountable for insider trading, especially if they are not directly connected but are said to have used undisclosed price-sensitive information (UPSI) for trading, it’s important to consider whether there is any evidence about how the accused received this information and from whom. In many cases where SEBI has omitted this requirement, the SAT has come down heavily on it. For instance, in Shruti Vora and Ors. v. SEBI, the question was whether a “forwarded as received” WhatsApp message regarding the quarterly financial results of a Company, before the company’s official publication, would amount to a UPSI. In this case, the SEBI admitted that despite their thorough investigation, they could not find the original leakage of the information. On such admission, the SAT rightly condemned SEBI for downplaying the requirement of establishing a linkage between the source of UPSI and the person alleged to have possession of UPSI before pinning liability on anyone. Similarly, in Samir C. Arora v. SEBI, SAT held that SEBI has the burden to provide concrete evidence showing that the accused actually received the UPSI from a source. However, the recent amendment closes the doors for inquiring whether there was any such linkage or where an un-connected person has received the UPSI from. No matter the existence of any such linkage, if a person, alleged to be an insider, trades while possessing information published only in unverified media, he may still be liable. This is particularly concerning when such liabilities require a higher degree of proof than a normal civil suit.  [B] Reducing assistance for investors: The above issue is further concerning when the conditions for information to be UPSI as well as that of disclosures of UPSI is already lowered. Nowhere in the Regulations, it is mentioned that the UPSI should be only concrete information. In the Satyam Computer case, the AO had clarified that not only concrete decisions, but any information (including proposals, etc.), which if published is likely to materially affect the price of securities of a company, would constitute price-sensitive information (PSI). Further, in the K.K. Maheswari case, the AO reiterated that PSI would include “any information”, i.e., not only a ‘final decision’ but would include the probable and most likely event. So, UPSI can include proposals or just mere possibilities of an event.  Now, as per Schedule A of the 2015 Regulations, there should be prompt public disclosure of UPSI no sooner than “credible and concrete information” comes into being to make such information generally

[By Siddharth Melepurath] The author is a student of National Law University Odisha.   Introduction Recently, the Securities and Exchange Board of India (“SEBI”) released a consultation paper in which it proposed measures to curb speculative activity in Futures and Options (“F&O”) trading. Speculative trading involves taking guesses at the direction in which the market will go and trying to make money from an unexpected market volatility. SEBI note that a lot of speculative activity happens on the day of contract expiry, particularly in the last hour, which happens to be the most volatile time as compared to other days. Such speculative activity causes unnatural alterations to the actual value of companies, leading to instability in the secondary market.   There are three major objectives with which SEBI has taken this measure – first, to protect the interests of retail investors, second, to promote stability in the derivative market and third, to ensure sustained capital formation from the derivatives market. This post aims to analyse the implications of this move for the derivative market and to evaluate whether it effectively fulfils the rationale behind it or not.  Background The market regulator had conducted a study in January 2023, titled “Analysis of Profit and Loss of Individual Traders dealing in Equity F&O segment”, which showcased that over 89% of individual traders in the equity F&O segment incurred losses in 2022. Data shows that the share of volume in derivative trading has risen from 2% in 2018 to 41% in 2024. According to the Economic Survey of 2023-2024, this increase in retail participation is due to ‘gambling instincts’ among the retail traders, since it holds potential for outsized gains.   The impact of such speculative trading is two-fold. First, it may lead to large-scale price fluctuations, especially caused when speculators buy or sell large quantities of derivatives. Second, it may infuse a large number of investors into the market, creating market price bubbles, or escalation in the underlying value of assets. Consequently, it may severely impact market stability, especially due to the large volume of retail traders incurring losses.  In view of all this, SEBI had created an Expert Working Group (“EWG”) to examine and suggest measures to ensure stability in the derivatives market and to protect investors by improving risk metrics. SEBI’s Secondary Market Advisory Committee (“SMAC”) reviewed these recommendations, pursuant to which SEBI proposed these measures for the index derivatives segment. This move also comes in the backdrop of the Government hiking the Securities Transaction Tax (STT) to 0.1% in options and 0.2% in futures, up from 0.0625% and 0.0125% respectively.  Analysing the proposals: What has changed? SEBI has recommended 7 broad changes to the existing framework, some of which directly impact retail investors trading in the secondary market. Two primary changes – increasing the minimum contract size for index derivatives and rationalisation of weekly index products are aimed at reducing speculation and have a direct impact on retail traders.  Currently, the minimum contract size for index derivatives stands between 5 lakhs and 10 lakhs. SEBI has now proposed to increase this in two phases, with the first phase being 15 lakhs to 20 lakhs and the second phase subsequently being increased to 20 lakhs to 30 lakhs bracket. This measure, which SEBI terms ‘reverse sachetization’, has been done in light of the high risk that derivatives markets pose, and to reduce the leverage that retail traders currently have.   While it is definitely an effective strategy to counter speculative trading, it also impacts beginner options traders entering the market with lower amounts and also leads to an increase in margins. This will also impact in a large-scale decrease in volume, with investors moving out of the market, possibly shifting to the primary market or even outside the primary market. Dabba trading, an illegal form of trading which is executed outside SEBI-recognised stock exchanges is also expected to become popular, in view of investor exits caused by the move. However, it is pertinent to note that SEBI has maintained its position with respect to the equity cash market – stating that there will be no restrictions in the intraday equity cash market as of now.  Further, SEBI notes that due to expiry of weekly contracts almost on all 5 trading days of the week, there exists a lot of speculative trading in the secondary market. Exchange data shows that there is increased volatility on expiry day which leads to a lot of speculative activity. Therefore, as a direct measure to curb this speculation, SEBI has suggested fewer weekly expiries. While this move would counter speculative behaviour by creating a systematic secondary market, it results in the market becoming relatively less liquid. This, in turn, directly impacts discount brokers and stock exchanges catering to retail traders, who benefit from the liquidity rates in the market. Although the regulator has only aimed at reducing the hyperactive trading on the expiry day and has tried to ensure that there is no restriction on trading, market-making or hedging, it will inadvertently affect the volumes in these exchanges due to large-scale exits.   Implications of the move The earlier model of normal-price, high volume has now been replaced by a more stabilised high-price, low volume in the options segment of the derivative market. The extreme price movements, often caused by traders engaging in speculative activity are mitigated through these measures. These measures also reduce the chances of heavy losses incurred by retail investors. Therefore, there is a pressing need to have a threshold to allow investors into derivative markets, which this move has only partially done.  While this move will aid retail traders in the market, who, as per SEBI statistics are incurring losses and contributing to market instability, there are some concerns which the proposed measures pose. One may argue that SEBI has proposed to protect the interests of retail investors by flushing most of them out of the market. However, these measures are expected to have a direct impact on premiums, which will be forced to have

[By Paavanta & Samriddhi Mishra] The authors are students at National Law University Odisha.   INTRODUCTION Securities and Exchange Board of India (SEBI) recently amended the SEBI (Alternative Investment Funds) Regulations 2012 (AIF Regulations) regulation to enhance ease of doing business. To provide more flexibility to Category I and II Alternative Investment Funds (AIFs), SEBI has allowed to create encumbrance on their holding in certain infrastructure companies. This was done to facilitate the raising of debt in the infrastructure companies as it acts as a backbone for all other sectors. The Budget Announcement for financial year 2023-24 identifies “Infrastructure & Investment” as one of seven priorities, and emphasizes the need for private money in supporting infrastructure investment. Thus, a resilient and inclusive infrastructure is necessary for growth in a developing economy and therefore it is necessary to find multiple sources of funding including private investment for infrastructure. This significant amendment can allow infrastructure companies to raise debt against equity which is a common industry practice to raise funds for companies in the infrastructure sector. This can both amplify returns and losses for the investor. Thus, the amendment brings along itself potential risks for both the investor and investee companies. This article thus, analyses the implications and effectiveness of the amendment from the perspective of the investor and investee company while considering the potential to expand the amendment’s scope to other business sectors.   SEBI GREENLIGHTS EQUITY ENCUMBRANC BY AIFs In a bold stride towards improving transparency and ease of doing business for Category I and II AIFs, SEBI amended AIF Regulations to allow the creation of encumbrance on the holding of equity in investee companies. The term “encumbrance” is broadly defined in Regulation 28(3) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 as “any restriction on the free and marketable title to shares, by whatever name called, whether executed directly or indirectly; pledge, lien, negative lien, non-disposal undertaking; or any  covenant, transaction, condition  or  arrangement  in  the  nature  of encumbrance,  by  whatever  name  called,  whether  executed  directly  or indirectly.” Accordingly, the encumbrance can be created on the equity of the investee company which operates in the infrastructure sub-sectors listed in the Harmonised Master List of Infrastructure (HMLI) issued by the Central Government.   Additionally, a disclosure in the Private Placement Memorandum (PPM) is mandatory to continue an encumbrance created before 25 April 2024. SEBI discourages all encumbrances that were created for the investee companies other than those mentioned in the HMLI that too without the appropriate disclosure in the PPM. However, the regulatory watchdog allows the creation of encumbrance that was not disclosed in the PPM but created for the companies mentioned in HMLI with a condition of obtaining mandatory consent of all the investors in the scheme of the AIF.   Moreover, the encumbrance on equity is permitted solely for borrowing by the investee company of which duration shall not be greater than the residual tenure of the scheme. Thus, the funds raised through this borrowing can only be used for the specific purpose for which they were borrowed.   It is important to note that the creation of encumbrance is prohibited for investments in foreign investee companies. Additionally, SEBI mandates Category I and II AIFs with significant foreign involvement (with more than 50% investment) to comply with the Reserve Bank of India’s master direction related to foreign investments for pledging shares of Indian investee companies by non-residents.   CRITICAL ANALYSIS Investor perspective This change has been done to give a boost to the financing of infrastructure companies in India. While this can help raise debt for the infrastructure company, it can also increase risk for the investor. In case of default of the company, the investor can lose all of their equity resulting in the investor’s loss. Furthermore, availing loans by investee companies on the pledge of the AIF’s equity holdings might result in indirect and extra leverage. To mitigate these concerns there is a strong emphasis on the twin pillars of consent and disclosure.  Large quantities of extra leverage, especially if it is layered and piled across several firms, can pose a systemic danger to the financial services industry. Global securities market authorities (such as the SEC and FCA in the United States and the United Kingdom, respectively), as well as IOSCO, have warned of the potential of systemic financial sector leverage resulting from private capital investments.  Infrastructure is a wide expression that umbrellas various kinds of businesses, including power, roads, trains, ports, airports, telecommunications, and urban development allowing investors to have diversified portfolios. But infrastructure is a high-risk high-return investment, with low liquidity. There is a higher risk of loss in the case of infrastructure companies owing to the long gestation period and its vulnerability to external factors like changes in policies, cost overruns, and long delays.   Investee Company Perspective Infrastructure companies’ dynamic and vulnerable nature to external as well as internal changes such as policy changes, delays in clearance, inflation, interest rate sensitivity, leverage, and environmental, social, and governance considerations make it difficult to raise funds via traditional methods. Therefore, infrastructure industries raise the majority of funds through “project finance” to share the potential risk associated with other stakeholders. Project financing offers a strategic advantage by keeping debt off- companies’ balance sheets, safeguarding credit capacity for diverse purposes. This off-balance sheet approach is particularly advantageous for firms seeking financial agility. Since infrastructure funds deal with long-term finance, with a significant gap in the creation of the project’s assets, it thus becomes difficult for the lenders to source the collateral or mortgage for the loans at the time of investment. Therefore, it is an industry practice where via project finance infrastructure sector or funds pledge their equity in exchange for the cash. This is also done via the creation of a Special Purpose Vehicle (SPV) by the company for the execution of the project and pledging the SPV’s shares to the lender. This technique firstly provides a security cushion to the lender in the case of default by the company and secondly, it improves the borrowing capacity

[By Arnav Laroia & Shashank Pandey] The authors are students of West Bengal National University of Juridical Sciences, Kolkata.   Introduction The Securities and Exchange Board of India (‘SEBI’) recently made significant changes to the Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations, 2014 (‘Regulations’) by an amendment, signalling a watershed moment in the evolution of the Indian real estate investment landscape. The SEBI (Real Estate Investment Trusts) (Amendment) Regulations, 2024 (‘Amendment’) seek to improve accountability, reliability, and operational efficiency in the Real Estate Investment Trusts (‘REITs’) sector, reflecting SEBI’s commitment to creating a strong and dynamic investment environment. Furthermore, the Amendment aims to make real estate investments more accessible to retail investors, especially through Small and Medium REITs (‘SM REITs’), thereby boosting confidence in investment in commercial real estate. REITs are companies that own, operate, or finance income-generating real estate properties, allowing investors to earn dividends from real estate investments without directly owning property.   It is worth noting that these changes come at a critical time as the Indian real estate market matures and attracts a wide range of domestic and international investors. The updated Regulations, which address key areas such as regulatory compliance, disclosure requirements, and investor rights, are expected to boost the credibility and appeal of REITs in India.   This article delves into the specific changes resulting from the Amendment, their implications for stakeholders, and the overall impact on the Indian real estate investment ecosystem.  Regulatory Initiatives: Enhancing Accessibility The Regulations prior to the amendment simply defined a REIT under Regulation 2(1)(zm)  as a trust registered under the Regulations. The Amendment has expanded the definition of REIT under Explanation 1 of Regulation 2(1)(zm) to include SM REITs, as added under Chapter VIB of the regulations. An SM REIT under Regulation 26H(c) is defined as a REIT that pools investor funds into one or more schemes in accordance with sub-regulation (2) of Regulation 26P. Regulation 26P(2) allows an SM REIT scheme to make an offer of units if the proposed asset size is between Rs. 50 crores and Rs. 500 crores, and the minimum number of unitholders, excluding the investment manager, its related parties, and associates, is at least 200 investors.  The Amendment’s recognition and regulation of Small and Medium Real Estate Investments is a critical step towards protecting investments and increasing investor trust in this specialised investment industry. Furthermore, by establishing asset size requirements and a minimum number of unitholders, this regulatory measure will also stabilise the Small and Medium Real Estate Investment market, which is a high-risk market. The following will encourage investment in smaller and emerging real estate projects that might not meet the thresholds for traditional REITs, which are set at a minimum value of Rs. 500 crores under Regulation 14. This is a significant step towards increasing investment in smaller projects and cities, making it easier to invest in REITs for relatively smaller investors.   Notably, India’s small cities and towns are becoming significant regional job markets due to economic expansion and infrastructure improvements. According to reports, Tier-II and Tier-III locations offer talent and real estate costs at least 30% lower than Tier-I cities. Therefore, enterprises are increasing their presence in regional cities to meet rising consumer demand, contributing to the growth of the real estate market. Additionally, the requirement for a minimum number of 200 unitholders helps spread investment risk across a large group of investors, potentially lowering individual risk and increasing market stability. This could also possibly lead to increased diversity and inclusion of willing investors who were otherwise excluded from such REITs because of a lack of opportunity to invest.  Protection of Assets: Ensuring Accountability The Amendment under Regulation 26R mandates that the investment manager identify and provide information in a draft scheme offer document on the real estate assets or properties it intends to purchase. The document must be filed with SEBI and with the designated stock exchange. The minimum price for each unit of the SM REIT scheme is Rs. 10 lakhs, with each scheme identified by a separate name. As previously mentioned, each scheme’s real estate assets must be worth at least fifty crore rupees.  In addition, the books of accounts, bank accounts, investment or demat accounts, and assets are all required to be ring-fenced and separated by the trustee and investment manager. The trustee must ensure the property papers proving the title to the real estate assets or properties once a year and keep them in safe deposit boxes at a designated commercial bank. Furthermore, the draft scheme offer document shall be hosted on the websites of the SEBI, approved stock exchanges, and merchant bankers involved in the matter for a period of 21 days, therefore becoming publicly accessible.  These are some significant steps towards achieving the goals of the Amendment, as the inclusion of real estate assets in the draft scheme offer document and its 21-day public disclosure period increase confidence and transparency, enabling prospective investors to make well-informed decisions. In addition, including SEBI in the evaluation of the draft scheme offer document and providing feedback guarantees that the schemes comply with regulatory requirements and that any prospective issues are resolved before the scheme’s disclosure to the public. This regulatory monitoring has some resemblance to securities market norms, such as businesses’ publishing of the Draft Red Herring Prospectus, which is essential to maintaining investor confidence and the integrity of the SM REIT market.  Additionally, the minimum unit price of Rs. 10 lakhs ensures that the investments are significant and that the investors are financially capable of understanding and accepting the associated risks, given the high-risk nature of this market. Moreover, asset segregation and safekeeping safeguard investors’ funds and ensure accountable management. The explicit requirement to keep property documents secure, as well as the trustee’s annual inspection, ensures accountability and proper management of real estate assets.  Provision for Distributions: Streamlining Interests The amendment further stipulates under Regulation 26ZK that, in accordance with the Companies Act, 2013, the investment manager must transfer 95% of the Special Purpose

[By Priya Sharma & Archisman Chaterjee] The authors are students of National Law University Odisha   Introduction  To facilitate a uniform approach for verifying market rumours by listed entities, the Securities and Exchange Board of India (SEBI) recently notified the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2024 (the Amendments). These amendments were accompanied by a Circular on ‘Industry Standards on verification of market rumours’ (the Circular).  Effective from 17 May 2024, the Amendments provide criteria for verification of market rumours in terms of material price movement instead of materiality of event or information and the mechanism to consider unaffected price with respect to transactions related to securities. The Circular requires the Industry Standards Forum (comprising representatives from ASSOCHAM, CII and FICCI) to formulate industry standards applicable to the implementation of the requirement to verify market rumours under Regulation 30(11) of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”). Accordingly, the requirement to verify market rumours shall apply to the top 100 listed companies, effective June 1, and to the next 150 listed companies, effective 1 December 2024.  While the amendments are a welcome step in promoting uniformity and revamping the regulatory framework for market rumours, SEBI may have missed the opportunity to close regulatory gaps. Specifically, there is inadequate oversight on social media platforms and potential for false denial or confirmation of rumours.  ​​​The latest Amendments and accompanying developments In pursuance of the Amendments, the Industry Standards Forum has published ‘Industry Standards Note on verification of market rumours under Regulation 30(11) of LODR Regulations’ (“Guidance Note”). The Guidance Note defines ‘Mainstream Media’ and the news sources that will be included within its ambit. It shall be the responsibility of the listed entity to put in place proper technology solutions and engage social media agencies to track the news reported in Mainstream Media. The requirement under Regulation 30(11) will only be applicable to the market rumours reported in this Mainstream Media.   Criteria for Verification In order to activate the applicability of Regulation 30(11), the market rumour in question must not be vague or general in nature. Instead, it must provide specifically identifiable details of a matter/event or provide quotes or be attributed to those who are reasonably expected to be knowledgeable about the matter. Another prerequisite is that there must be ‘material price movement’ in the scrip of the listed entity, as opposed to the previous ‘materiality of event or information’ criteria. The listed entities usually avail services from agents or develop in-house teams to track such movement in their scrip. The obligation is placed on the promoters, directors, KMP and senior management of the entity to provide adequate and accurate responses to the queries raised to them. However, there are significant gaps in regulation that warrant attention.  ​​​Exclusion of Social Media: a missed opportunity The rumour verification requirement was originally introduced to avoid false narratives that may impact the price of the securities of a listed entity. Notably, the definition of Mainstream Media excludes social media, which means that social media channels/accounts, such as those run by finfluencers having lakhs of followers, fall outside its scope.   Finfluencers are known to influence their audience by providing financial education and offering investment recommendations. In many cases, these finfluencers are unregistered, and may not adhere to any disclosure requirements. Apart from advice, finfluencer channels may also contribute or give rise to market rumours, which may in turn affect the scrip of a listed entity. Such market investment scams are on the rise. SEBI, in the recent past, has been cracking down on such activities, but these actions will largely remain ineffective in dealing with the menace of finfluencers in the long run. Currently, there is no specific legal framework dealing with finfluencers who are not registered as either Investment Advisors or Research Analysts. Therefore, considering the current regulatory gap, it is crucial for SEBI to tighten its regulatory grip on social media channels as well. The regulatory mechanism could incorporate an oversight mechanism to verify compliance by social media intermediaries and finfluencers.   In the present case, Mainstream Media must also include social media within its ambit, considering the fact that investment channels run by finfluencers have become one of the most important sources of investment information and financial literacy in recent times. Such inclusion may increase compliance costs, but will ultimately further SEBI’s overarching objective of protecting interests of investors.  While broadening the scope to include social media will be a step forward, there are other notable issues that need addressing.  Regulatory Gaps As per the Guidance Note, the listed entity is required to either confirm or deny the rumour in case of material price movement. According to the price framework post confirmation of the rumour (price framework), the price would be frozen only if the said rumour is accepted to be true. In case the entity opts to deny the rumour, the price would be left to pan out in the usual course of business. Upon verification of the rumour, the price framework comes into effect. It envisages the mechanism for calculating the volume weighted average price (‘VWAP’), which dictates the price of a transaction. It is computed by deducting the variation in weighted average price (‘WAP’) from the daily WAP during the period between the date of material price movement and the trading day after rumour verification. However, there is uncertainty as to what would happen if an entity opts to deny the rumour, but later proceeds with the said rumoured transaction which specifically identifies the said entity. The present regulations which encompass both the LODR regulations as well as SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (“Takeover Regulations”) do not explicitly dictate the recourse in such a scenario.  To understand how such a situation may be dealt with, it is necessary to look at the ‘Put up or Shut up’ rule (outlined in the UK’s Takeover Code) implemented in the UK. The

[By Biraj Kuanar] The author is a student of National Law University Odisha.   Introduction  The recent amendments to the SEBI (Alternative Investment Funds) Regulations 2012, introduced by SEBI on 25 April 2024, when read along with the circular issued by the Securities and Exchange Board of India (SEBI) on 26 April 2024, aim to create a tectonic shift in the alternative investment landscape in India. The goal of these amendments is to provide flexibility to Alternate Investment Funds (AIFs) and their investors while concurrently addressing regulatory arbitrage and circumvention of law concerns.  Before discussing the changes incorporated by the recent amendments, it is important to understand how AIF exits operate. These funds usually have a fixed tenure, after which they enter a liquidation phase. During this phase, fund managers are tasked with selling off the remaining investments and returning capital to the investors. However, fund managers face numerous hurdles when dealing with illiquid assets that can’t be easily divested within the stipulated timeline. This challenge thereby sets the stage for the recent amendments.  At the core of the changes lies the introduction of a “dissolution period” for AIFs, which promises to revolutionise the handling of unliquidated investments. Prior to the amendment, AIFs were presented with limited options while dealing with unsold assets due to a lack of liquidity at the end of their tenures. The first option is the distribution of assets taking place in-specie, which is the practice of distributing an AIF’s assets to investors in their current form instead of conducting the sale of assets and distributing cash so acquired. While such distribution allows for the fund’s closure on time, it creates difficulties for investors who may not be equipped to manage these assets on their own.  The second option for dealing with unsold assets is to set up liquidation schemes for holding or acquiring such assets. The amendments, by providing greater flexibility in handling such situations, ensure investor protection to a great extent.  The new dissolution period offers a more nuanced alternative aimed at streamlining the process under which, post-expiry of the traditional one-year liquidation period, AIFs can enter into the dissolution period after garnering approval from at least 75% of their investors. Meanwhile, the AIFs can sell the unliquidated investments or continue distributing them in-specie to the investors.  This flexibility, however, comes with strings attached. AIFs going down this route must first arrange bids for the remaining 25% of unliquidated investments to provide dissenting investors an option to exit. If, upon the exit of the dissenting investors, any portions of the bids remain, they are to be provided to non-dissenting investors for pro-rata exit, in case they choose to do so. What is important to note is that the dissolution period can’t exceed the AIF’s original tenure, nor are extensions permitted. In addition to this, neither fresh commitments from investors nor new investments by the AIFs are permitted to ensure that the liquidation of remaining assets is not hindered.  The launch of new liquidation schemes from 25 April 2024, has also been prohibited by SEBI. As in previous times, AIFs would set up separate liquidation schemes in order to acquire and hold the unliquidated investments of AIF schemes that were on the verge of expiring. This has been done to counter the notoriety of the mechanism, which plagued the commercial viability of the schemes.  Encumbrances on AIFs Equity: A Boost for Infrastructure Investments  The amendments have also ushered in changes to ‘encumbrances’ on equity holdings of AIFs. Category I and II AIFs have been permitted to create encumbrances on the equity of their investee companies. However, permission has only been provided for companies delving into projects in the infrastructure subsectors as listed in the “Harmonised Master List of Infrastructure” and for the sole purpose of borrowing by the investee company. And such encumbrances are to be explicitly disclosed in the AIF scheme’s private placement memorandum.  SEBI’s firm stance in addressing regulatory arbitrage and circumvention of law concerns  SEBI has taken a firm stance by imposing obligations on the AIFs, their managers, and Key Management Personnel (KMPs), to exercise caution while conducting due diligence concerning their investors and investments in particular on foreign investments. KMPs include senior executives such as the fund manager, chief investment officer, and other key decision-makers responsible for the fund’s operation and investment strategies, while also ensuring compliance with regulatory requirements. The inclusion of KMPs in the new due diligence obligations underscores SEBI’s emphasis on personal accountability for regulatory compliance at all levels of AIF management. All of which is aimed at preventing any attempted circumvention of regulations or laws administered by SEBI and other financial regulators.  Temporary reprieve to select AIFs by SEBI  In addressing concerns, SEBI has provided much-needed reprieve by allowing one-time flexibility for select AIFs. This flexibility is provided for schemes that have already expired or are expiring by 24 July 2024, and do not have any investor complaints pending concerning the non-receipt of funds as of 25 April 2024, wherein, upon meeting such conditions, an additional liquidation period until 24 April 2025 will be granted.  All of this is carried out to make sure that AIFs can fully liquidate their investments, carry out in-specie distribution, or opt for the dissolution period that has been brought into the picture via the recent amendments. Further, the circular, which was issued by SEBI on 26 April 2024, also acts as a guiding light in implementing the various changes that SEBI has brought in through the amendments.  Balancing Flexibility and Oversight: Implications and Analysis  The recent amendment represents how the landscape of alternate investments is evolving in India by showcasing the steps taken in the right direction to address the challenges faced by AIFs and their investors in trying to balance flexibility provided to AIFs and investors with the regulatory oversight over them by regulators. The newly brought-in dissolution period acts as a pragmatic and streamlined approach to the problem of unliquidated investments and the handling of unsold assets at