Capital Markets and Securities Law

[By Ayushika Sinha] The author is a student of Symbiosis Law School, Pune. Introduction India’s IPO market in 2025 has shown remarkable resilience despite global uncertainties, with 108 IPO deals raising $4.6 billion in the first half of the year and a surge expected in the second half. A key factor is the trend of reverse flipping where startups are redomiciling their holding companies from overseas jurisdictions back to India. The Securities and Exchange Board of India (SEBI) held its 210th board meeting on 18 June 2025, following the public consultation undertaken in March 2025 introduced changes to simplify the IPO path in India’s maturing capital markets. This article examines SEBI’s recent regulatory overhaul to accelerate startup listings and ease capital flows. It focuses on three areas, including ESOP retention for founders, OFS eligibility for converted securities and accreditation under the AIF regime. While the reforms strengthen India’s position as a global innovation hub, the article critically examines both the opportunities and challenges it poses. Catalyzing Innovation: SEBI’s Bold Steps Firstly, SEBI approved a proposal for founders to retain Employee Stock Options (“ESOPs”) even after being designated as promoters and the company becoming a listed entity. It addressed the ambiguity of ‘one year look back period’ surrounding the proposed amendment on March 20, 2025, clarifying that now for retaining ESOPs must be granted at least one year prior to the filing of Draft Red Herring Prospectus (“DRHP”). Secondly, it has clarified regulation regarding investors holding Compulsorily Convertible Securities (“CCS”) under an approved scheme. According to previous guidelines such investors were subject to wait for at least a year following the IPO before selling their equity in the OFS. With the revised norms, SEBI has now permitted equity shares arising from converted CCS to be included in the OFS. Additionally, certain non-promoters (AIFs, FV, insurance companies, etc) can contribute converted shares towards the Minimum Promoter Contribution (“MPC”). Thirdly, SEBI mandated accreditation of all investors in Angel Funds without the requirement of a minimum investment threshold and will be conducted by SEBI-recognized agencies based on their financial strength and risk appetite. Under the new framework, an investor must meet one criterion: annual income exceeding ₹2 crore, annual income above ₹1 crore and a  net worth exceeding ₹5 crore (including at least ₹2.5 crore in financial assets), or a net worth exceeding ₹7.5 crore (including at least ₹3.75 crore in financial assets), replacing the earlier qualification based on net tangible assets of ₹2 crore, experience-based eligibility and a minimum ₹25 lakh investment. Lastly, Accredited investors (AIs) will be treated as “Qualified Institutional Buyers” (QIBs) solely for investments in angel funds pursuant to consultation paper issued on February 21, 2025. This circumvents the 200-investor cap imposed under Section 42(2) of the Companies Act, 2013. Decoding the Reforms This development has been welcomed across the startup ecosystem as it resolves regulatory hurdles ensuring that provision including amendments allowing startup founders to retain ESOP post-IPO under the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021, exemptions for equity converted from CCS from open offer requirement under Regulation 10(1)(d)(ii) of the SEBI Takeover Regulations and facilitation of accreditation of investors for participation under the SEBI (Alternative Investment Funds) Regulations, 2012 to incentivize long-term commitment rather than short-term structuring From a market standpoint, the reform will accelerate the IPO pipeline by making the public listing process more founder and investor friendly and reducing key deterrents such as ESOP forfeitures, compliance of heavy cap tables, delayed exits due to OFS and CCS restrictions and accredition hurdles for early investors for domestic IPO for high growth startups. The regulatory shift modernizes capital markets and attracts more startups to Indian exchanges in the current increase of volume of startups preparing for IPOs in India, especially companies like PhonePe, Zepto and Pine Labs.. ESOP Retention: Previously, SEBI listing rules made no distinction between traditional promoters and startup founders barring both from holding ESOPs once made public. Under Rule 12 of the Companies (Share Capital and Debenture) Rules, 2014, and Regulation 2(1)(i) of SEBI (Shared Based Employee Benefits and Sweat Equity) Regulations, 2021 promoters are not considered employees and thus cannot receive ESOPs, except in the case of startups within 10 years of incorporation. However, under Section 62(1)(b) of the Companies Act, 2013 and ICDR norms, founders are reclassified as promoters upon DRHP filing, As promoters they are no longer considered employees making them ineligible to hold ESOPs creating confusion and forcing them to forfeit ESOPs before an IPO.. This regulatory conflict hindered founders of startups because they often earned lower salaries depending upon ESOPs after equity dilution. This would happen across multiple fundraising rounds, especially in tech-driven startups. This forced many to rework their cap tables ahead of IPO just to maintain eligibility increasing complexity and uncertainty for deferred compensation. The recent approval aims to protect legitimate remuneration preventing regulatory misuse. The change enables founders to maintain their ESOPs post-listing aligning their incentives with the long-term performance of the company and remaining committed post-IPO. Although through new rules existing ESOPs can be retained, there are still no provisions for granting ESOPs post-IPO. Such limitation discourages long term incentives to promoters resulting in further dilution of their ownership with each new issuance. Approval of fresh ESOPs grants after listing would therefore provide greater protection and incentive for founders. Furthermore, critics also argue from a corporate governance standpoint that this can lead to double dipping wherein promoters already benefit from control, voting rights, Dual-class shares and often sweat equity (Section 54 of the Companies Act, 2013). This change will allow them to retain from employee-focused ESOPs creating conflict of interest. As it will enable promoters to extract disproportionate wealth at the expense of minority shareholders and prioritizing personal gains over company performance. For example, ESOPs could allow promoters profit from stock price appreciation driven by their strategic decisions along with their existing control potentially leading to self-benefitting actions such as inflating valuations or delaying exits to maximize ESOP gains. These may

[By Ayushman Shrivastava] The author is a student of Hidayatullah National Law University (HNLU), Raipur Introduction In July 2025, the Reserve Bank of India (“RBI”) issued its Master Direction – Reserve Bank of India (Electronic Trading Platforms) Directions, 2025 (“2025 Master Directions”), replacing the 2018 framework and the earlier 2024 draft. At its heart, this latest framework signals a decisive pivot: steering ETP activity firmly onshore. The RBI’s rationale is twofold. First, by bringing more trading within domestic regulation, it seeks to enhance transparency, prevent market abuse and strengthen risk controls—goals first signalled in its 2017 Statement on Developmental and Regulatory Policies.           Some of the key procedural refinements include scrapping the two-stage in principle approval (a six‑to‑twelve‑month preliminary hurdle) and shifting applications to the RBI’s PRAVAAH portal. Yet beneath this aim for efficiency lies a more stringent regime at its core. Banks and primary dealers enjoy an exemption but still remain subject to the RBI’s discretionary mandates. While the regulator’s Alert List has expanded, due diligence has been strengthened through cross-agency information-sharing, and selective licensing is now established as a “will” rather than a “may”. That is to say, where previous drafts implied the RBI would be at liberty to exercise discretion in determining who would be authorized to carry on ETPs, the 2025 Master Directions leave no doubt that the RBI will be selective.  Code, Compliance, and Control: RBI’s Stepwise Redesign of ETP Norms (2017–2025) India’s journey to regulate Electronic Trading Platforms (ETPs) is not just a chronological evolution, but also a systematic tightening of regulatory precision and technological scrutiny.. Its origin lies in RBI’s 2017 Statement on Developmental and Regulatory Policies, where it identified the necessity for a strong ETP framework—designed to promote transparency, prevent settlement risk and contain market manipulation. This was followed by the Electronic Trading Platforms (Reserve Bank) Directions, 2018, which further categorised ETPs as any electronic system (other than recognised stock exchanges) to carry out transactions in “eligible instruments” such as government securities, money market instruments and forex derivatives. The 2018 guidelines mandated ETP operators to have strong audit trail mechanisms, ensure end-to-end encryption, achieve uptime and latency standards and keep data locally. However, partial exemptions were chiselled out for scheduled commercial banks, which were exempted from similar eligibility criteria. In response to the emergence of new grey zones – especially those involving offshore operators and algorithmic trading – the 2024 Draft Directions were introduced by the Central Bank. Furthermore, these directions also marked a departure from old practices. They prescribed model risk management practices, pre- and post-trade measures and even mandatory FATF-country integration for offshore ETPs. Quarterly detailed disclosures were also required, which included spikes in latency, market abuse and cyber-attacks. The recent 2025 Master Directions, however, go further, not through rule volume, but precision, emphasising targeted controls over broad prescriptions.The residency clause has now been removed, and it has also subtly shifted the definition of “entity” to include anyone, anywhere. Algorithmic trading is now subject to specific control layers: message throttling, price collars, execution slippage analysis and audit logs. The requirements of information security are no less strict-compulsory CISA or CERT-In empanelled IT audit, BC-DR drills, real-time SIEM logging and role-based access governance are now a necessity. Most importantly, perhaps, RBI now has the authority to tap into the intelligence of any Indian regulator, SEBI, FIU, or the Ministry of Corporate Affairs, as the case may be. This sneaky insertion of cross-regulatory due diligence reflects a regulatory environment that is no longer content with surface-level compliance-based regulation, but one that is based on systemic control and traceability. Digitising Control: RBI’s Authorisation Framework Enters a New Era The 2025 Master Directions are a paradigm shift in the manner in which the Reserve Bank of India (RBI) exercises its gatekeeping functions over Electronic Trading Platforms (ETPs), namely by digitising its procedures and by tightening its  discretionary thresholds. On one hand, the administrative streamlining is being presented positively on the surface; on the other hand, the regulatory position is more discriminatory and control-oriented. Among the most important procedural innovations, it is worth noting the shift of the entire authorisation process to the PRAVAAH portal. Unlike the traditional manual filing system mandated  under the 2018 guidelines and reiterated in the 2024 Draft Directions, PRAVAAH enables streamlined processing through real-time monitoring, automated data entry, and document standardisation standardised documentation. As a matter of commercial law, this reduces procedural opacity, while formalising the way RBI gathers data and audit trails. This gives the regulator systematic visibility into applicant behaviour and compliance preparedness. Just as important is the elimination of the “in-principle” approval process, which under the 2024 Draft was a soft filter with a six-month shelf life. The 2025 Directions subsume the two-step model into one full-fledged application. Although this might eliminate procedural exhaustion, it also requires the institutional world to be fully ready from the beginning. Significantly, the RBI has changed its stance from permissive to selective. The text of Section 9(b) of the 2025 Directions is that RBI “will be selective” in granting ETP authorisations, abandoning the discretionary “may” of the previous draft. This transition from optional discretion to mandatory selectivity has profound commercial implications. Legal entities including entities with pre-existing foreign approvals are now required to prove capital adequacy, operating resilience and strong systems of compliance attuned to Indian legal standards. In effect, RBI’s digitalisation drive is not merely administrative, but also structural. Authorisation is no longer just a compliance formality; it is a threshold test for market entry, tightly guarded by centralised, data-driven discretion. Jurisdictional Retrenchment: Phasing Out Offshore ETPs and Redrawing Boundaries One of the major policy changes that is evident in the 2025 Master Directions is the explicit removal of the extensive offshore ETP system proposed in the 2024 Draft Directions. The draft proposed a systematic form of regulatory regime on offshore platforms, which included incorporation in a jurisdiction identified by FATF, individual registration by RBI and prohibition on rupee derivatives trading. It also comprised the requirement of continuous monitoring, reporting

[ By Anikait Chawla and Chinmaya Saraswat] The authors are students of Gujarat National Law University On 7 August 2025, the Securities and Exchange Board of India released a consultation paper called, “Proposals for Ease of Doing Business for Investment Advisers and Research Analysts” (the Paper). The Paper aims to lower procedural barriers for advisers and analysts while keeping investor protections in place. It builds on changes from December 2024 that gave advisers more fee flexibility and cleared up onboarding steps. The Paper addresses six persistent market concerns: the limited ability to share past performance, unclear rules on second-opinion services, short corporatization timelines, narrow qualification criteria, and repetitive documentary checks. SEBI tied these easing measures to safeguards such as certification, disclaimers and time limits. The regulator wants to make life easier for advisers while keeping verification where it matters. Regulatory backdrop and principal proposals The Investment Advisers Regulations, 2013 (IA) and the Research Analysts Regulations, 2014 (RA) set rules for who may advise, how research should be published, and what disclosures advisers must make. Those rules helped professionalise a market that had relied on informal practice. As advisory work evolved, the rules showed strain. Firms and solo advisers report repeated documentary checks, academic thresholds that block experienced practitioners, and disruption when individuals convert to a corporate form. Small advisers feel these burdens most because they lack in-house compliance teams. SEBI responds with a significant change aimed at broadening eligibility. Any graduate could register if they pass the relevant NISM exam. That keeps a baseline of competence while allowing more professionals to enter the market. The Paper would permit one-to-one sharing of certified past-performance data when a prospective client requests it. Advisers may present certified results to interested clients, with mandatory disclaimers and a time-limited allowance. The approach lets advisers show a genuine track record without enabling mass-market promotion of unverified returns. The Paper also formalises second-opinion services. Advisers often give informal second opinions on products distributed by others. SEBI would let advisers charge for those services within capped arrangements and with clear disclosure. The Paper references a 2.5 percent ceiling as a guardrail. It also proposes annual consent for ongoing fee arrangements so clients stay informed about layered charges. On corporatization, SEBI proposes a longer transition window and limited client onboarding during conversion. The current short period often forces advisers to pause or alter services. Extending the window, while requiring continued professional-liability cover and client notice, aims to smooth the process without reducing accountability. Additionally, the Paper aims to prune redundant documentary checks. Repeated proofs of address, multiple credit reports and duplicate tax submissions add time and cost without improving oversight. SEBI suggests replacing many routine checks with digital verification, sworn declarations and targeted spot checks. That approach redirects supervisory effort toward risks that matter for investors. Taken together, these measures show SEBI trying to reduce admin friction while keeping guardrails. Certification, templates and sunset clauses serve as those guardrails. The outcome depends on how precise and operable the implementing rules become. Implementation challenges and standardisation requirements The reforms will succeed only if SEBI provides clear technical guidance and reasonable timelines, beginning with standardisation, since past-performance disclosures help clients only when advisers calculate and report returns uniformly.. SEBI should mandate a template that shows one-, three- and five-year gross returns, the corresponding net returns after fees, the benchmark used for each period, start and end dates, and a short note on the calculation method. The template should explain how to treat cash flows and whether to use time-weighted or money-weighted returns. It should also describe how to present multi-asset strategies. Without that clarity, numbers will be hard to compare and easy to manipulate. Verification should remain proportionate, and while chartered-accountant certification provides a strong safeguard, its costs weigh most heavily on small advisers. . SEBI should provide tiered options wherein larger firms can use full certification, mid-sized firms can rely on accredited third-party verifiers or audited internal reports and the small advisers can face random audits or accept higher liability if they self-certify. These alternatives keep oversight while avoiding a one-size-fits-all burden. Record-keeping and consent require fundamental digital systems. To track consent renewals, provide client-specific performance, and maintain auditable records, advisers will require secure solutions. SEBI ought to establish minimal technical requirements and permit gradual adherence. In order to prevent smaller firms from falling behind, the regulator can also promote open-source toolkits and low-cost vendors. Supervisory inspections will be sped up and conflicts will be decreased with the explicit guidelines on encryption, retention periods, and access limits. Digital verification can reduce documentation without compromising oversight. By connecting checks to trustworthy databases like PAN and verified tax records, SEBI can implement a verify-once paradigm. This lessens the need for duplicate checks, but it also necessitates privacy protections, backup plans in case of system failures, and a clear understanding of who is responsible for automated checks that go wrong. Efficiency and safety would be balanced by a hybrid architecture that automates regular inspections and saves manual review for outliers. The chartered-accountant requirement raises timing and cost questions such as who bears the charge and when must certification occur? SEBI could allow phased certification, for example a short self-certification period followed by formal attestation within a defined window, or it could permit accredited data providers to give standard attestations. Both options would maintain verification while easing the burden on small firms. Surveillance and enforcement must match a lighter prescriptive approach. A disclosure-led model needs better detection tools such as sample audits, anomaly detection and proportionate penalties that deter misuse. SEBI should build risk-scoring systems that flag outliers and support those systems with periodic manual checks. Targeted enforcement will keep the regime credible without reverting to blanket paperwork requirements. Finally, continuing competence matters. NISM exams can remain the baseline, but advisers should complete modest annual training and face occasional competency checks. Regular education and random assessments will keep standards current and reduce the risk of persistent low-quality advice. These measures, precise templates, tiered

[By Aditya Pandey] The author is a student of National Law University Odisha. Introduction Related-party transactions (RPTs) – deals between a company and persons or entities in its orbit (promoters, relatives, subsidiaries, etc.) – pose inherent conflict-of-interest risks. Under India’s Securities and Exchange Board of India (SEBI) rules and the Companies Act, these must be scrutinized and disclosed to protect minority shareholders. In recent years SEBI has dramatically broadened the RPT regime. The 2015 LODR Regulations (as amended) now sweep in not only a listed company’s dealings with its own related parties, but also inter-group arrangements and even certain third-party transactions that “benefit” insiders. For example, SEBI’s January 2021 amendments defined RPTs to include transactions between either a listed company or any of its subsidiaries and any related party of any group entity. In practice, this means a listed parent must track and approve a wide variety of inter-corporate deals at both Indian and foreign subsidiaries. SEBI’s rationale – echoed by experts – is that effective RPT oversight requires a group-wide lens. The obligations have cascading effects: the listed parent must identify its own related parties and inform its subsidiaries, while subsidiaries (even unlisted ones) must identify their related parties and report any material RPTs up the chain. As one law firm analysis explains, “to carry out the implementation of the RPT framework at the holding company level, the subsidiaries are also required to identify their related parties” and track their own RPTs against the approval thresholds of the listed parent. This group-wide definition promotes consistency but also creates ambiguity, especially for unlisted or foreign subsidiaries that are not directly governed by LODR. SEBI itself acknowledged this gap: in October 2024 it informally advised that unlisted subsidiaries must nonetheless use the LODR definition to identify related parties and RPTs. This “entity-agnostic” approach promotes uniformity; however, it gives rise to complex questions (discussed below) regarding the applicable legal framework in specific contexts. Key Regulatory Developments SEBI has continuously tightened RPT rules, particularly since 2021. Key changes include: Expanded scope (2021–22). Effective April 2022, SEBI’s amendments swept in cross-entity transactions. RPTs now cover, for example, deals between a listed company and the related parties of its subsidiaries, or between a subsidiary and related parties of the parent or another subsidiary. In other words, all group-related transactions are “RPTs” subject to audit committee and shareholder approvals under LODR. Similarly, any individual holding equity in the company on a beneficial basis was classified as a related party: initially, this applied to those with 20% ownership (from April 2022), and later, the threshold was reduced to 10% (from April 2023). These changes mirror global practices (for example, LODR borrowed the UK rule that a third-party deal is an RPT if its “purpose and effect” benefits an insider). Subsidiaries and thresholds. SEBI added detailed rules for subsidiaries’ RPTs. If a subsidiary (including foreign ones) transacts with any related party beyond certain thresholds, the listed parent’s audit committee must approve it. Specifically, any deal by a subsidiary (with its own related party) exceeding 10% of the listed parent’s consolidated turnover (or 10% of the subsidiary’s standalone turnover from Apr 2023) must get the parent audit committee’s nod. This effectively gives the Indian-listed parent oversight – even veto power – over large transactions by its overseas subsidiaries. Analysts note this raises potential conflicts (a parent’s directors approving deals in foreign subsidiaries) but also ensures uniform governance across the group. Approval processes and disclosures. SEBI has beefed up information and approval requirements. Audit committees must review long-term or “material” modifications to RPTs and obtain detailed information (business rationale, financial terms, valuations, etc.) before approval. Investor-level scrutiny also increased: in 2022, SEBI made it easier to trigger the requirement for shareholder approval by lowering the applicable threshold. Now any RPT exceeding ₹1,000 crore or 10% of consolidated turnover (whichever is lower) must go to shareholders – dramatically expanding the number of RPTs on which the public votes. (Previously the threshold was simply 10%.) Shareholders must receive detailed explanatory statements, including external valuation reports, to justify why even arms-length RPTs are in the company’s interest. Recent streamlining (2024). Late in 2024, SEBI responded to industry feedback for ease-of-doing-business. The December 2024 LODR amendments introduced some relief: routine transactions like uniform retail purchases by promoters or employees can be excluded from “related party” treatment if made on arm’s-length terms. Companies may now ratify small RPTs (under ₹1 crore annually) after the fact, whereas before every RPT required pre-approval. Remuneration to directors/KMPs below materiality need not go to the audit committee each time. Importantly, SEBI formally extended its omnibus approval mechanism to cover RPTs by subsidiaries. And new compliance was eased by integrating RPT disclosures into a single “integrated filings” framework. Overall, these amendments aim to balance transparency and efficiency. They underscore that RPT regulation is still evolving – most recently SEBI has issued model “Industry Standards” for the information to be given to committees/shareholders (effective late 2025) to further standardize disclosures. In practice, vigilant boards and audit committees must scrutinize RPTs. Audit members should demand justification and valuation reports for any significant deal, ensuring shareholders understand the rationale. As analysts have noted, post-amendment companies face a “sea-change in the regulatory framework for RPTs,” meaning they must step up internal processes – from identifying related parties to pre-approving and reporting transactions. In particular, audit committees now bear extra duty: beyond routine approvals they must actively review subsidiaries’ transactions (even foreign ones) and their material modifications. Compliance Challenges Despite these rules, practical challenges abound. A key issue is identification of related parties across the group. Under LODR Reg.2(1)(zb), a “related party” of a listed company includes anyone in its promoter/promoter-group, persons holding ≥10% (beneficial) shares, and others (including as per accounting standards). But what about unlisted or foreign subsidiaries? SEBI’s recent informal guidance says yes – even unlisted subsidiaries must follow the same LODR definition to identify their related parties for RPT compliance. This group-wide approach ensures consistency but can over-extend the law.

[By Prayas Das] The author is a student of National Law University, Odisha.   Introduction The Securities and Exchange Board of India (the Board), in recent times, has provided numerous investment options for the people, such as Mutual Funds, which offer stable returns with less risk to investors, thanks to tighter regulations under SEBI’s supervision. As temporal tides advance with the growth in the economy and increasing number of  High Net-worth Individuals (HNIs) who can afford to take more risk in terms of investment, SEBI introduced the SEBI  (Alternative Investment Funds) Regulations, 2012 to cater to the requirements and needs of the HNIs who wanted to invest beyond the stock market to gain more profit by taking more risk with less regulations from the board. The AIF is defined under Regulation 2(1)(b) as a privately pooled investment vehicle that collects funds from investors (Indian or Foreign). The minimum investment amount is Rs 1 Crore for investors, and for Directors, Employees, and Managers, the limit is Rs 25 Lakh. Recent SEBI investigations into HDFC Capital Affordable Real Estate Fund- I, which is a Category II AIF, sparked curiosity about the governance lapses, bias and influence of the sponsor, which can jeopardise the investors’ investment in the respective AIF. This article explores the structures of AIFs, SEBI’s governance rules, what went wrong in a recent case, and how the sponsor can influence the investment decision-making for its benefit at the expense of investors. Structure and Types of Alternative Investment Funds Under Regulation 3(1) of Chapter II, an AIF has to obtain a certificate of registration mandatorily from the Board, and only upon completion of that step can it perform as an AIF. Any entity shall seek registration as an AIF under three categories, which are given below: – Category I Alternative Investment Fund – This category is viewed as a nation builder, as it promotes socially and economically desirable sectors that the government or regulators want to encourage. The AIFs under this category are generally perceived to have a positive spillover effect on the economy, with the government considering providing such funds, incentives, or concessions. These funds include venture capital funds, social impact funds (SME Funds), etc. Category II Alternative Investment Fund – These types of funds do not fall under category I or III. They do not take on leverage or borrowing other than to meet daily operational requirements. These funds invest in long-term assets that offer good returns with manageable risks to knowledgeable investors. These consist of funds such as private equity funds (buying of shares in unlisted companies), debt funds (earning interest on capital, the funds used to buy bonds or debentures), etc. The funds registered under this category are ineligible to receive any specific concessions from the government. Category III Alternative Investment Funds – This type of fund is for those who want to employ diverse or complex trading strategies by employing leverage or borrowings. They are famous for their risk control strategies to make a profit during unstable market situations. One such fund is a hedge fund, which trades to make short-term returns with high risk. It also receives no specific concessions from the government. SEBI permits an Alternative Investment Fund under SEBI (AIF) Regulations, 2012 to be established as a trust, a limited liability partnership (LLP), or as a company. In these three structures, we can find trust as the most common mode of formation of an AIF, and popular due to the tax pass-through benefits it offers, where the investors have to pay taxes on the profit, not the trust under which as AIF is legally formed. Why AIFs Matter An AIF has a diverse portfolio as it invests in assets beyond the stock market, such as investing in unlisted companies, venture capital and infrastructure, which are not available through mutual funds or direct stock investing. With a high risk, it offers a higher return than other investment options due to the large pooled amount and flexible investment options with fewer regulations. The system of investments allows a company or organisation to seek investments, even if it is an unlisted one. This system of investment allows the investee and investors to grow more efficiently with less regulation from the regulator. The SEBI May 2025 Order: What Went Wrong Being a Category-II AIF is significant because such funds typically invest in long-term unlisted assets like real estate and private equity, and are subject to specific restrictions on leverage and regulatory exemptions that shape both their risk profile and fiduciary obligations.  In this context, HDFC Capital Advisors Limited (Applicant No. 1) acted as the Investment Manager for HDFC Capital Affordable Real Estate Fund – I (Applicant No. 2), which is categorized as a Category-II Alternative Investment Fund, with HDFC Bank Ltd. designated as its sponsor. Applicant No. 2 allocated Rs. 200 crores towards Non-Convertible Debentures (NCDs) of Acme Realties Pvt. Ltd (ARPL), in addition to Rs. 99 crores further invested in NCDs issued to ARPL by Ascent Construction Private Ltd. (ACPL). Both ARPL and ACPL were subsidiaries of Acme Housing (India) Pvt. Ltd (AHIPL), with HDFC Bank Ltd., as a sponsor of Applicant No. 2 being an existing lender to both subsidiaries of AHIPL. To simplify, both ARPL and ACPL (both subsidiaries of AHIPL) received funds from the AIF managed by HDFC Capital, which was sponsored by HDFC Bank, a creditor to all three entities. The amount invested by Applicant No. 2 in the NCDs of ARPL was transferred to the loan accounts (credit lines) of ARPL and AHIPL with HDFC (sponsor). These funds were utilized not only for the construction projects but also to repay existing loans and interest owed to HDFC Bank. It violates Regulation 21 (1) of the SEBI (AIF) Regulations, 2012, which mandates that the sponsor and investment manager must act in the best interest of the investors and disclose conflicts of interest. Redirecting investor capital to settle sponsor dues breaches fiduciary obligations and raises governance concerns. Why was this a governance

[By Adeeb Bakhtavar] The author is a student of Dr. B.R. Ambedkar National Law University, Sonepat. Introduction Early 2025 saw the ‘reverse flip’ of RazorPay from its US-based holding company to an indian parent entity after receiving the nod from the Ministry of Corporate Affairs. Zepto, a quick commerce startup, also received formal approvals from both the Singapore court and India’s National Company Law Tribunal to execute its cross-border merger, thereby becoming an Indian parent entity. According to a recent white paper published by Bay Capital shows that the value of India’s publicly listed digital-first firms is $90 million. While headlines celebrated it as a win for the startups and indian markets, what remained unsaid was that, how such structural shifts like these can cloak opaque capital arrangements under the guise of regulatory compliance? Reverse mergers that were once deployed as alternative IPO routes, are now being strategically used to embed shadow capital, exploit jurisdictional leniencies, and bypass regulatory gatekeeping. This blog will examine how the entities are leveraging the gaps in Indian corporate and securities law to channel shadow capital via reverse mergers. Conceptual Prelude: Reverse Mergers & Shadow Capital Reverse mergers, traditionally used as listing shortcuts (also known as reverse takeovers, RTOs) can be referred to as transactions where a private company acquires a publicly listed shell company. It allows the private company to bypass lengthy regulatory scrutiny and gain access to capital markets through corporate restructuring. According to the OECD Shadow Banking Report, “Shadow Capital” refers to the opaque, non-traditional sources of private capital that are not regulated, are often outside the regulated fund structure, and mimic institutional capital but are under grey zones. Shadow capital lacks fiduciary supervision as the investors may not be bound by LPAs (Limited Partner Agreements) or SEBI audit rules, which can be used to bypass the disclosures regarding the beneficial ownership or voting rights to SEBI, MCA, or the exchanges. The National Company Law Tribunal’s 2024 ruling in Hologram Holdings Private Limited v. NCLT introduced what is now referred to as the “Substantive Business Purpose Test” under Section 232 of the Companies Act, 2013. Moving beyond the formalities of statutory compliance, the Tribunal held that merger schemes must demonstrate a genuine business rationale or contribute meaningfully to the public interest. The court concluded that such arrangements constituted “merely accommodation entries or paper transactions” designed to “artificially increase the share prices and use the merged company as a vehicle of tax evasion and money laundering” 2025 Regulatory Framework Landscape The Stock Exchange Board of India (SEBI) amended the Issue of Capital and Disclosure Requirements (ICDR) regulations in March 2025, which marked the most significant regulatory evolution in reverse merger oversight since the original framework was established. As per the technical analysis of these amendments, the regulations struggle to be comprehensive yet contain some fundamental structural deficiencies that continue to enable sophisticated shadow capital deployment. The amended pre IPO transaction reporting framework, that is the regulation 58B(1): “(1) Every issuer shall, within twenty-four hours of such transaction, disclose to the recognised stock exchange(s) and simultaneously on its website, all pre-issuance placements of equity or convertible securities which aggregate to an amount in excess of ₹25 crore” Mandates all pre-IPO transactions exceeding ₹25 crore to must be reported to stock exchanges within 24 hours, despite this regulatory framework shadow capital operators can exploit the regulations through the method called “cascade structure” method, according to which a private entity involves structuring a transaction through multiple sub-₹25 crore tranches across different entities throughout a 12-month period in order to inject shadow capital into a listed shell company. While each transaction on its own is below the requirement for reporting threshold, the total amount of shadow capital deployed is significant. Such structured transactions are not recognised by SEBI’s current monitoring systems simply because of their lack in real-time aggregation capabilities. This is the concept of “connected transactions,” that very crucial in determining shadow capital but is not defined in ICDR regulations, and is not included by amended Regulation 58B(1). The subsidiary companies can subsequently merge with their parent company through simplified merger procedures under Section 233 of the Companies Act 2013, which can effectively infuse substantial shadow capital without triggering enhanced disclosure obligations. The enhanced materiality thresholds under the regulation 32A(4) introduce tiered materiality thresholds which includes ₹10 crore or 2% of net worth (whichever is lower) for companies with net worth below ₹500 crore, and ₹25 crore or 1% of net worth for companies with net worth exceeding ₹500 crore. In contrast, the U.S. Securities and Exchange Commission’s Aggregation Rule under Section 13(d) of the Securities Exchange Act codified in 17 C.F.R. § 240.13d‑3(c) mandates the disclosure of beneficial ownership by aggregating holdings across related entities and coordinated investors, while the European Union’s transparency regime under the Shareholder Rights Directive and Disclosure Regulation (EU 2017/1129) requires consolidated reporting of financial exposures, thereby preventing circumvention through fragmented sub-threshold structures, a safeguard currently absent in India’s regulatory framework. As per the subsidiary parking strategy, for example, any XYZ Limited, a listed shell company with net worth of ₹450 crore, can create multiple wholly-owned subsidiaries. Then, shadow capital is injected through transactions of ₹9.5 crore each into different subsidiaries over a 18-month period. Each transaction remains below the 2% materiality threshold, avoiding consolidated disclosure requirements. This successfully infuses shadow capital through reverse mergers, without triggering SEBI regulations. Furthermore, the amended LODR Regulation 27B Related Party Transaction (RPT) requires disclosure of all RPTs exceeding ₹1 crore on a consolidated basis, quarterly monitoring of cumulative RPT exposure, and an Independent director certification of arm’s length pricing. The current RPT disclosure requirements focus on individual transaction materiality rather than cumulative economic impact.  For example, A sophisticated shadow capital scheme involving Entity A (shadow capital source) creating apparent arm’s length transactions with Entity B (reverse merger target) could include Entity A providing “consultancy services” to Entity B at inflated rates (₹95 lakh per quarter to remain below disclosure thresholds). Then, Entity B could lease

[By Vashmath Potluri & Shubhranshu] The authors are students of NALSAR, Hyderabad.   Introduction In December 2024, Asian News International (ANI) filed a copyright infringement suit against OpenAI, alleging that its large language models (“LLMs”) had reproduced ANI’s news content without consent. While the case is widely perceived as a test of India’s copyright regime, it reveals a deeper and more systemic competition law issue: OpenAI, backed by Microsoft’s infrastructural and financial resources, enjoys exclusive control over high-quality training data through Reddit and Stack Overflow, and privileged integration into Microsoft’s software and cloud ecosystems as its models power AI features across Microsoft 365 Copilot and GitHub Copilot via the Azure OpenAI Service.. In 2024, over 60% of professionals in India reported using tools like ChatGPT and Microsoft Copilot, signalling the rapid mainstreaming of generative AI. Yet Indian AI startups attracted only $92 million in funding that year, compared to $13 billion in the United States, an imbalance that highlights the structural disadvantage domestic firms face in accessing essential AI inputs like data, computing, and distribution. This article uses the ANI v. OpenAI dispute as a lens to introduce a competition law perspective that has been largely overlooked. It argues that OpenAI’s conduct may amount to abuse of dominance under Section 4 of the Competition Act, 2002 (“The Act”), and calls for a suo motu investigation by the Competition Commission of India (“CCI”). This argument proceeds in two parts. First, it defines the relevant market as upstream and downstream, comprising access to training data and development of Application Programming Interface (“API”) which are software tools that enable developers to integrate AI models into their products and services, to establish a denial of market access and vertical leveraging which refers to the use of dominance in one market, such as access to data, to gain an unfair advantage in another, such as enterprise-facing AI services. Secondly, it highlights doctrinal gaps in the Act to deal with non-pricing exclusionary conduct, which conduct restricts rival participation not through higher prices, but through control over essential inputs, technical lock-ins, and bundling arrangements. Accordingly, it proposes a two-pronged reform drawing inspiration from the EU, UK, and USA to strengthen the ex-ante framework of India’s competition regime in the era of AI. Delineating the Relevant Market: A Layered Approach A scrutiny of potential abuse of dominance by the CCI against OpenAI should begin with defining the relevant market under Sections 2(r), 2(s), and 2(t) r/w 19(7) of the Act. These sections together provide for traditional factors like substitutability, price sensitivity, and consumer choices, but they become inadequate in the context of generative AI, where market power is determined by access to high-quality training data and compute infrastructure. To address this, the article adopts a layered market structure: an upstream market for access to training data and a downstream market for API’s. This approach finds support in Shamsher Kataria v. Honda Siel Cars India Ltd., where the CCI held that the aftermarket for spare parts and services was distinct from the primary car market due to structural lock-in, limited alternatives, and information asymmetry. Though linked technologically, the markets were considered economically independent by the CCI. This reasoning directly applies here. In Upstream, access to high-value training data is scarce and non-replicable, granting early movers like OpenAI a durable edge. In Downstream, developers integrating proprietary models via APIs face high switching costs, limited interoperability, and opaque performance metrics. These conditions result in technical and contractual lock-ins, which create sustained reliance on the dominant provider’s ecosystem. Together, these combined features justify treating the training and deployment layers as separate, yet interrelated, markets. Upstream Market: Denial of Access to Training Data Section 4(2)(c) of the Competition Act, 2002 prohibits a dominant company from doing anything that leads to the denial of market access “in any manner.” In Umar Javeed, Sukarma Thapar, Aaqib Javeed v. Google LLC & Ors, this phrase was interpreted broadly to hold that unfair conditions, creation of technical barriers, or lack of transparency constitute denial of access. This applies directly to OpenAI’s conduct in the upstream market of generative AI, which involves access to large, high-quality datasets like news articles, coding forums, and online discussions. These data sources are essential for training LLM’s. However, the real advantage lies not in general access to data, but in control over high-quality, non-replicable datasets that significantly improve model performance. OpenAI’s exclusive deals with platforms like Reddit and Stack Overflow give it early access to high-quality conversational data crucial for fine-tuning large language models. Indian developers, however, face major hurdles: India’s copyright law lacks a text and data mining (TDM) exception, annotated datasets in local languages are scarce, and compute access remains prohibitively expensive. While there’s no formal refusal of access, these combined legal and infrastructural barriers make it commercially unviable for domestic firms to compete. This amounts to a constructive denial of market access, which constitutes an abuse under Section 4(2)(c) of the Act where exclusion occurs not through outright refusal but through systemic disadvantage. This pattern of exclusion is reinforced by OpenAI’s own GPT-4 Technical Report, which acknowledges the use of a mix of public and licensed data, highlighting the importance of access to curated datasets. Similarly, the UK Competition and Markets Authority (CMA) has cautioned that exclusive control over high-quality, non-public datasets can give certain firms an undue competitive advantage and restrict market competition. In its recent assessments of foundation models, the CMA has treated such data as a core input and highlighted the risk of market foreclosure resulting from closed data ecosystems. This framework provides a valuable basis for the CCI in applying Section 19(4) of the Act, which focuses on factors such as control over key inputs, barriers to entry, and the ability to operate independently of competitive constraints. Recognising data as infrastructure allows the CCI to identify exclusionary conduct even in markets where price or output manipulation is absent. OpenAI reflects this structure: it controls critical training data, is deeply integrated into Microsoft’s infrastructure, and