Capital Markets and Securities Law

[By Soham Niyogi] The author is a student of Rajiv Gandhi National University of Law, Punjab.   Introduction A calamity may be overkill, but when giant conglomerates drop like flies and wither away, it would certainly raise some eyebrows about how this disaster occurred, or how it could have been avoided. Some of these behemoths find themselves in the guise of the SREI Infrastructure Finance Ltd. (hereinafter, “SREI”) or Infrastructure Leasing and Financial Services (hereinafter “ILFS”), these two major companies are buried in the annals of India’s financial history as they threatened disaster for the thousands of people who had put faith in these companies’ instruments. Public opinion lay restricted to blaming these companies for falsely inflating their bonds’ value and then disappointing investors with a liquidity crisis of upwards of 90,000 crores (in the case of ILFS). The overlooked villains of the story are the Credit Rating Agencies (hereinafter, “CRA”) which hyped up the bonds of SREI and ILFS to be of AAA-grade quality, a complete lie brought about by cronyism, bribes, and favour politics.     CRAs are bodies regulated by the Securities and Exchange Board of India (hereinafter, “SEBI”), to determine the ability of an issuer company to make good on its debt instruments, and timely disburse the principal and the interest. In the IL&FS crisis, recklessly CRAs had tagged IL&FS’ bonds to be of the highest grade rating, proportionate to being least likely to default. This illusion was broken by the crisis that struck, ending the market prospects of thousands of investors. SEBI had noted CRAs to be ‘financial gatekeepers’ and petty bribes along with promises of gifts shaken up the corporate debt market. The Grant Thornton Forensic Audit Report which scoped out the financial transactions of the subsidiaries of IL&FS confirmed that there were inconsistencies regarding IL&FS’ strategy of short-term borrowings against its long-term lending. Aside from dealings between IL&FS and its subsidiaries through third parties, the report also observed that loans were sanctioned at a negative spread which would be a cause for concern to any CRA.  Primarily, the Indian version of the ‘issuer-pays’ model is the culprit behind this situation, as it is a focal point that creates the camaraderie between CRAs and the instrument issuers in a quasi-closed market where it is tough for outside players to infiltrate. What the model entails is that an issuer such as IL&FS would pay a CRA to rate their instrument, one can see how there might be a conflict of interest persisting in this relation. The income of a CRA is dependent on the revenue that it extracts from the ratings it does for a body corporate. This conflict of interest wherein the sustainability of an issuer is dependent on the CRA’s ratings showcases a symbiotic relationship. There would never be an instance where a company pays the fees to a critical CRA which could rate their instruments lowly (the CRA would lose business). Simply put, it is a legally mandated bribe.   This conflicting relationship brings forth a situation known as ‘rating shopping’, wherein the issuer subscribes to ratings from the top CRAs, and only publishes the most favourable one. Fear of being discharged is a motive for the CRAs to give the best ratings possible. Even after observing the fall of SREI and ILFS, such has not been looked into by the SEBI per the SEBI (Credit Rating Agencies) Regulations 1999 (hereinafter, “CRA Regulations”) except for a lacklustre standing committee, mentioned in the following text. The amendments up until 2023 do not address this logical fallacy as under regulation 14 of the CRA Regulations, and the vicious cycle is perpetuated till now, as could be seen in the case of SREI’s default in 2021.   Regulation 16 (2) of the CRA Regulations permits a CRA to issue a credit rating even if a client company refuses to cooperate, based on incomplete public information only. If we could refer to the Report, IL&FS had also sent incomplete information to the CRAs. Unfortunately, this is a great disservice to the ordinary investor who would suffer due to their reliance on uncredible credit ratings by globally acclaimed CRAs with or without disclosure as per 16(2).   Cross-Jurisdictional Analysis of the Issuer-Pays Model   India’s efforts to mitigate the chances of a like crisis are realised in the form of an advisory report by the Standing Committee on Finance, wherein they criticise the issuer-based model while recommending measures such as the disclosure of confidential information such as the liquidity position of the issuer. None of the recommendations made by the committee were ever implemented, but we can find a similar solution to this problem in other jurisdictions aside from India, where a successful version of the issuer-paid model is in work, from which India can be inspired.   A comprehensive solution may be sought from separate jurisdictions, starting with the Basel Committee on Banking Supervision which has in its leagues, 45 member banks and central regulators with authorities hailing from 28 jurisdictions. The committee’s stringent laws to encourage issuer-investor relationships are admirable since they also comply with the issuer-based model with the investor’s interests in mind. The supervisory committee concurs with a system of the disclosure of liquidity ratio. Liquidity ratio is the measure of a company’s capability to pay off its short-term obligations, at the moment, no such system of disclosure exists in India.   From 2015 onwards, the Basel Committee made it mandatory for its members to reveal its liquidity coverage ratio, guided by two base objectives, to improve a bank’s short-term resilience by warranting that it has high liquidity assets at all times to show for, and to reduce funding risk over a long time, to ensure that the company is only allowed to invest in projects when they have sufficiently stable sources of income, and high reserves of liquidity. The Basel Committee directs its members to have a common public disclosure framework for the ease of the market participants. This scheme is still in practice and could very well

[By Vidushi Dubey] The author is a student of Amity University.   Introduction  India’s stock broking landscape is on the cusp of a significant shift, empowered by the Securities Exchange Board of India’s (SEBI) recent circular. Announced on January 12, 2024 and set for implementation on July 1st, 2024, this initiative introduces a groundbreaking facility of voluntary online access freeze/block for trading accounts. This marks a crucial step towards promoting investor protection and fostering a more regulated securities market. Earlier, there was limited control over online trading accounts. This new facility empowers investors to take charge of enhanced security against suspicious activity or unauthorized transactions. The users can simply freeze their accounts, safeguarding the assets and reputation. They can also decide how long to restrict access, putting their online trading activity under your complete control. This move by SEBI tends to encourage continued participation in the online trading arena. Verification and validation of transactions will also became easier, potentially reducing conflicts and disputes between investors and trading members.  Legal Considerations for the Facility  SEBI’s landmark circular empowers investors with the legal right to freeze their online trading accounts, carries several legal implications to take in account. It is issued under Issued under SEBI Act, 1992 and SEBI (Stock Brokers) Regulations, 1992, which reflects SEBI’s commitment to investor protection and market regulation. It aligns with demat account regulations, SEBI (Depositories and Participants), 2018  ensuring consistency and familiarity for investors. The circular mandates clear communication and acknowledgement procedure for freeze/block requests. It also establishes new legal rights for investors to control their online access and imposes corresponding obligations on brokers to comply with ISF and SEBI guidelines. The update makes it clear that breach of the circular will attract penal provisions under SEBI regulations, triggering disciplinary actions. The redressal mechanism facilitates dispute resolution, enhancing legal recourse for investors. Overall, the update augments market stability through increased investor confidence and contributes to a more robust and transparent regulatory framework.  The Rationale Behind India’s Trading Account Freeze Facility  Prior to SEBI’s recent circular, Indian investors faced significant vulnerabilities in the online trading arena. The alarming prevalence of unauthorized activity, as evidenced by the 1,819 complaints to SEBI in 2019-20 (representing 12.5% of all complaints), exposed investors to financial losses and reputational damage. According to SEBI’s annual report for 2021-22, complaints related to unauthorized activity in online trading surged by 20% compared to the previous year, reaching a total of 2,235 complaints. This represents a 15% share of all complaints received by SEBI, highlighting the growing concern among investors. In 2022-2023, a concerning number of 1,481 complaints were registered with SEBI pertaining to unauthorized trading activity. Phishing scams, hacking incidents, and insider trading posed constant threats, highlighting the need for immediate action capabilities.  Further compounding the issue was the lack of control over online access. Unlike with demat accounts, investors had no option to directly freeze or block their trading accounts, leaving them reliant on brokers in case of suspicious activity. This dependence inevitably led to delays and inefficiencies in resolving concerns, leaving investors exposed during critical periods. The disparity in regulations between demat and trading accounts created additional challenges. The existing facility for freezing/blocking demat accounts demonstrated the feasibility and benefits of such a mechanism. The absence of a similar option for trading accounts not only caused confusion but also hindered investor confidence in the overall market structure.   Recognizing these critical issues, SEBI’s introduction of the voluntary trading account freeze/block facility aims to address them comprehensively. This initiative fosters a more secure and investor-centric environment by empowering individuals to take control of their online trading activity. The ability to immediately freeze accounts in case of suspected fraud or unauthorized transactions significantly enhances investor protection, while promoting increased confidence and participation in the market.   The new facility is recognized as a significant step in enhancing investor protection as it aligns with global best practices like The European Union’s Markets in Financial Instruments Directive (MiFID II), which mandates investment firms to provide clients with tools to control online access and prevent unauthorized activity. Similarly, the Securities and Exchange Commission (SEC) in the United States emphasizes investor education and encourages the use of strong authentication protocols to safeguard accounts. The framework established by the Brokers’ Industry Standards Forum (ISF) aligns with global efforts to standardize investor protection measures and ensure consistent practices across different markets.   Key Changes and Legal Implications  This legal and regulatory shift promises to transform online trading in India, fostering trust, stability, and growth for all stakeholders. While challenges remain, primarily for brokers in implementation, the long-term impact can be transformative, solidifying investor protection and establishing a robust regulatory framework for India’s online trading landscape. The circular enshrines the legal right for investors to voluntarily freeze or block their online access, empowering them to take control of their financial security. This aligns with principles of natural justice, granting individuals the legal authority to respond to suspected unauthorized activity or personal needs. The Brokers’ Industry Standards Forum (ISF), established as a pilot project by SEBI in collaboration with stock exchanges, will set up a clear framework. BISF will facilitate the formulation of clear guidelines to address the concerns of brokers as it was set up with the motive to empower brokers and investors to make informed decisions by establishing common standards for areas like risk management, client handling, and dispute resolution. Since its establishment, the Brokers’ Industry Standards Forum (ISF) has played a crucial role in shaping important SEBI circulars addressing concerns like upstreaming of client funds and the removal of duplicate submissions. The ISF will establish standardized communication templates for brokers to inform investors about their freeze/block options and the associated procedures. The forum can also develop uniform timelines for processing freeze/block requests, ensuring consistent investor experience across different brokers   SEBI oversight guarantees adherence to the framework, upholding accountability and legal compliance across market participants. This will be achieved by empowering investors to immediately freeze their accounts in case of any suspected unauthorized activity in their trading account, preventing further losses and allowing them to investigate the situation without relying solely on their broker. The regulations

[By Arnav Gulati] The author is a student of Jindal Global Law School.   Introduction:  In the burgeoning digital finance arena, financial influencers, termed as ‘finfluencers’ have emerged as influential arbiters of financial decision-making, however their actions continue to be uncontrolled. The absence of regulatory oversight in this domain has created a vacuum that has been used by such finfluencers, who often lack the requisite credentials, to propagate inaccurate and deceptive financial information. The Securities and Exchange Board of India (SEBI) has acknowledged the significant effect of social media on stock markets, the process of price discovery, and the susceptibility of novice investors who are prone to being swayed by “tips” or suggestions. Through the notorious ‘Telegram Case,’ i the dark underbelly of unregulated financial advice was brought to the fore. In the aforementioned case, titled “Re: Stock Recommendations using Social Media Channel (Telegram)” – the trading activity in a particular stock was momentarily influenced by the quantity of channel members and the number of tips/recommendations shared on Telegram, which gave rise to concerns within the framework of the Prevention of Unfair Trade Practices Regulations (PFUTP). The decision made by SEBI signified a noteworthy advancement in acknowledging the impact of social media on stock markets, while simultaneously ensuring market integrity by combating unregistered operations and unfair activities. This decision of January 2022 served as a strong indication from SEBI that persons without sufficient regulatory control are prohibited from offering financial advice or suggestions, hence imposing challenges on finfluencers seeking to perform their services in an unregulated way. The Telegram case, along with other cases such as Sadhna Broadcast Limitedii and Mansun Consultancyiii have drawn attention to the recognition by SEBI of the potential for stock price manipulation associated with a substantial subscriber base.   SEBI’s new consultation paper and the Advertising Standard Council of India’s (ASCI) revised guidelines mark India’s foray into uncharted regulatory waters. Herein, I critically appraise these emerging regulatory propositions, dissecting their potential efficacy, overreaches, and the nuanced challenges they may inadvertently usher in.  The Double-Edged Sword of Transparency Mandates:  Right off the bat, I firmly believe that SEBI’s insistence on rigorous disclosure norms is a commendable attempt to infuse transparency into the finfluencer ecosystem. However, the mandate’s viability teeters on practical enforcement. The digital sphere’s fluidity, coupled with the sheer volume of finfluencer-generated content, raises significant concerns about the effective monitoring of these disclosures. Moreover, there’s a thin line between ensuring transparency and inundating consumers with excessive information, potentially leading to decision paralysis rather than informed financial choices.  Furthermore, the requirement for finfluencers to disclose all affiliations (Paragraph 4.4 of the consultation paper) could inadvertently create a skewed perception. For instance, a finfluencer with multiple disclosures might either be seen as more trustworthy due to transparency or be perceived as biased due to numerous affiliations, regardless of the actual content quality. This paradox underscores the need for a more nuanced approach to disclosures, perhaps emphasizing the quality and relevance of affiliations over sheer quantity.  The Quagmire of Defining ‘Financial Advice’:  One of the most contentious aspects of the emerging regulations will be to define what constitutes as ‘financial advice.’ SEBI currently defines ‘investment advice’, but not ‘financial advice’.   This legislative uncertainty might place influencers, regulatory agencies, and consumers at risk. Without a defined, legally enforceable definition of ‘financial advice,’ content providers might design their messages to avoid seeming to give explicit investment advice while nevertheless driving audience behaviors. Known as “dog-whistling” in other situations, this phenomenon uses coded language to send specialized signals to those who understand it.  This offers a complicated issue for regulators. First, monitoring the large amount of information on numerous platforms, each with its own language and regulations, is logistically tough. Not only is content volume important, but linguistic complexities demand sophisticated comprehension and interpretation, which is not readily scalable for wide regulatory supervision. Second, regulating this disguised communication without infringing on casual financial talk is very difficult. Regulators must safeguard customers from deceptive information that might harm their finances without intruding on free speech and expression, protected under Article 19 of the Constitution. The framework should define what is and is not ‘financial advice’, giving content providers and customers more clarity and safety. To empower people in this digital era of information overload, authorities should examine ways to spread awareness on how to distinguish expert financial advice from informal comments.  Potential Pitfalls in the Enforcement Mechanism:  As we delve deeper into the regulatory landscape, it becomes clear that good intentions alone may not suffice. The real test lies in how these rules are put into practice. While the emerging regulations are well-intentioned, their success hinges on the robustness of the enforcement mechanism. SEBI has used the current framework comprising of the SEBI PFUTP Regulations, Settlement Proceedings Regulations 2018, and Investment Advisers’ Regulations 2013 to address the activities of social media influencers. To create investment advisors as a separate category of market intermediaries, SEBI enacted the Investment Advisers Regulations. These rules were created to protect investors’ interests and avoid any potential conflicts of interest that could result from advisors also serving as financial product distributors. Additionally, SEBI significantly changed these laws in July 2020 to coincide with the rise in finfluencer activity during the COVID-19 lockdown period. The consequences of non-compliance are not sufficiently addressed by these adjustments, which included revisions to the qualification, certification, and net worth criteria for investment advisers. This strategy is not, however, streamlined. The upcoming regulations run the danger of becoming paper tigers without severe fines and a methodical enforcement strategy. Furthermore, platforms that host finfluencer material will bear the bulk of the responsibility for maintaining compliance. This assumption might result in uneven enforcement as platforms with different competencies will try to implement laws consistently. As a result, there is a growing risk of “regulatory arbitrage,” in which finfluencers move to less restrictive platforms, so evading the same scrutiny that regulations aim to provide.   Overlooking the Consumer’s Role:  The Ministry of Consumer Affairs’ most recent “Endorsements Know-hows” will have

[By Aniket Panchal & Shubhankar Sharan] The authors are students of Gujarat National Law University.   Introduction An interesting chain of events transpired centered on Edelweiss (a registered Professional Clearing Member (“PCM”), against whom appeals were filed in response to directives from the Member and Core Settlement Guarantee Fund Committee (“Committee”) of NSE Clearing Ltd (“NCL”). These directives ordered Edelweiss to reinstate securities that were disposed of in violation of the Securities and Exchange Board of India (“SEBI”) Circular and NCL Regulations. The contentious issue arose when Edelweiss, providing clearing and settlement services, sold collateral worth Rs. 460 Crore from broker and trading member Anugrah to fulfill clearing obligations.   The central issue here was that the PCM liquidated the securities of the Trading Member’s clients to offset the trading member’s debit balance. The Committee found Edelweiss on the wrong side, underlining a failure to ensure that clients’ securities were used solely for meeting their obligations, thus violating NCL Rules. Similarly, accusations regarding the misuse of client securities emerged in appeals involving other Clearing Members, including Yes Bank and SMC Global.   The Edelweiss order sheds light on the pressing issue of intermediary misconduct in handling client funds.  In light of this, the authors examine SEBI’s previous initiatives in curbing such malpractices and then discuss the roles of clearing members and the ambit of powers vested with NCL.   Past to Present: SEBI’s strides in countering misuse of client funds  Throughout the course of its existence, SEBI has actively tried to curb the menace of misuse of clients’ funds by Stock Brokers (“SB”) and Clearing Members (“CM”). A string of circulars has been released to further the objective. The premise was set by its 1993 circular, which prescribed maintenance of separate accounts of Member Brokers and their clients. It set the course for future actions against misuse. A brief leap in time necessitated SEBI to release another set of circulars in this regard. More importantly, all of them have been laid out prima facie to combat misuse of funds and client collaterals. Several actions in the form of alerting and monitoring mechanisms and enhanced supervision over SBs have been devised by SEBI. Not to mention, SEBI has been proactive in not only outlining the measures but also prescribing guidelines for implementing those measures. A look at some of the circulars, as mentioned in the SAT Order, underscores the principle highlighted in the 1993 Circular.   Precisely, the Circular dated 20 June 2019 proscribes the usage of clients’ funds by SBs for themselves or any other client (as provided in Securities Contracts (Regulation) Act 1956 (“SCRA”) and Securities Contracts Regulation Rules, 1957 (“SCRR”). Lastly, some of the immediate circulars dated 11 November 2022 and 12 December 2023 fortify SEBI’s position on misuse of clients’ funds. The former deals with handling clients’ securities by Trading Members (“TMs”)/CMs, while the latter lists the criteria for receipt/payment of funds by SB and CMs from/to clients. An essential requirement that stands out is establishing clear time frames for completing the transactions with clients.  Stock Exchanges, too, have been on the heels of SEBI. NSE circulars, for instance, reproduce the intent of the SEBI circulars. A case in point can be that of its June 2023 circular, wherein it established detailed guidelines for immediate actions against misuse of clients’ funds. “Enhanced Supervision” principles form the bedrock of implementing those administrative guidelines. The administrative actions referred to in the circular are in addition to pre-defined measures against Trading Members, as existing in the NSE circular no. 82/2022.   Several cases have been reported on misutilization of clients’ funds, of which the case of Karvy Group takes most of the light. The concerned company was involved in creating a labyrinth of transactions in order to misuse clients’ securities. Subsequently, it was expelled by the NSE and deregistered by SEBI on account of misutilizing clients’ funds and securities.  Analysis PCM and CM – Cut from the same cloth?   On this count, the main contention of Edelweiss was that based on the bye-laws of NCL, a PCM cannot be considered as a CM; therefore, circulars issued by SEBI/NSE/NCL will hold no applicability on the PCM. As a corollary, it was argued that the word “constituent” under NCL bye-laws can only encompass trading members with which a PCM has an agreement and not the end clients of the trading member. Based on this, it was contended that a PCM has no duty of care to a TM’s clients. Edelweiss urged that the clients of trading members do not have any legal or beneficial ownership over their shares once the trading members transfer the same to a PCM.  To rebut Edelweiss’s contention that a PCM is not the same as a CM, the tribunal referenced two provisions of the Futures & Options (“F&O”) Regulations. Firstly, the definition of F&O CM defines it as a member of the Clearing Corporation and includes all categories of clearing members. Secondly, a PCM is defined as a clearing member admitted by the relevant authority. Based on this, the tribunal noted that a PCM is nothing but a type of CM.   In any case, the whole discussion, at best, was academic since the tribunal found Edelweiss was registered as a CM and not as a PCM. As stated in the Order too, it is by virtue of the recent amendment to the Securities and Exchange Board of India (Stock Brokers) Regulations, 1992, that a PCM got defined under Section 2(ca). the reason being that, as per the Schedule appended to the Regulations PCM requires higher net worth than other sub-categories of CM. Otherwise, any member having clearing and settlement rights is a CM.   Interestingly, Edelweiss drew parallels between a PCM and a Senior Counsel to further its contention that PCM bears no liability to the trading member’s client. The analogy rested on the premise that Senior Counsel’s accountability lies only with the instructing advocate and not the end client. Likewise, PCM shall be answerable only to trading members (its client) and

[By Srishti Multani & Aryan Birewar] The authors are students of Symbiosis Law School, Pune.   Introduction   The Securities and Exchange Board of India (‘SEBI’) on 31st August 2023, issued a Consultation Paper to propose a Performance Validation Agency (‘PVA’). The objective of such an institution is to validate performance claims of SEBI-registered intermediaries. Such validation will enable the entities to catapult their customer-base in the securities market. There was a pressing need ​for transparency and authenticity in the claims made to attract investors. In this article, the authors examine the rationale behind a PVA, stress-points of the consultation paper, and critically analyze the benefits and challenges posed by the establishment of a PVA. Furthermore, they suggest certain solutions to address the forthcoming said challenges.   Need & Rationale   The urging requirement of credibility in the securities market pushed the regulator to produce this proposal. All the SEBI-registered intermediaries seek to increase their customer-base, which requires them to build investor trust. Such validation by the PVA will allow the intermediaries to attract investor clients in the market by highlighting their performance claims. An independent body like the PVA will facilitate the trust-building process ​between market intermediaries and investor entities.   Presently, SEBI has imposed differential restrictions on the market intermediaries in making performance claims to expand their service-base to more investor clients.   ​​​Claims of Asset Management Companies (‘AMC’) and Portfolio Managers are self-verified. There is absence of any independent body to validate their claims.   Claims of Investment Advisers (‘IA’) and Research Analysts (‘RA’) cannot be made in reference to their past performance. As per the existing SEBI Advertising Code, any ‘buy/sell/hold’ recommendation by these intermediaries cannot be made in reference to past performance and by usage of any superlative terms. For example, ‘best’, ‘top’, ‘leading’, etc.   Claims of Stockbrokers pertaining to past or future returns ensuing from algorithmic trading is not permissible.   The regulator recognized the need for intermediaries like IA’s, RA’s, Stockbrokers, etc. to showcase their performance claims to increase their clients. The same must be predated with an independent and impartial performance claim validation agency to ensure accuracy and correctness of claims floated in the securities market.   The functioning of such an agency will preclude eventualities of false, misleading, and inflated performance claims floated to attract investors. It will ensure that all participating intermediaries resort to fair and correct practices to expand their services to the investor clients. It is important to recognize that relying on verification from just one brokerage company can be misleading for investors, as it does not offer a comprehensive view of trading performance across all accounts. This makes the existence of a PVA all the more important.   Proposal by SEBI  The following proposals encapsulate the major highlights in SEBI’s Consultation Paper:  Criteria for Grant of Recognition   SEBI has mandated the PVA’s to be subsidiary entities of Market Infrastructure Institutions (‘MII’s). The rationale provided by them is that MII’s are the sole components of the securities market, which deal with ​a large​​ amount of investor data daily. As per the Bimal Jalan Panel (2010), they defined MII’s to be inclusive of Stock Exchanges, Depositories, Clearing Corporations, etc.   PVA’s are thus mandated to be wholly-owner or jointly-owner subsidiary entities of MII’s.   PVA’s will be recognized by SEBI only, when their parent MII fulfill the eligibility criteria prescribed by SEBI.   Obligations of a PVA  The paper prescribes the task of claim validation to be based on the parameters of risk, return, volatility, or any other parameter deemed suitable by SEBI. It is PVA’ duty to ensure that all information shared to them by the investors or intermediaries is kept confidential. Since, the major function is validation of investor data, SEBI permits ​PVA to partner with credit rating agencies for the purpose of validation, who aid in evaluating credit worthiness of debt securities and their issuers. Notably, the PVA can charge a reasonable fee for the validation of performance claims.   Categories of Claims validated by PVA.   Actual Profit – The PVA validates the actual profit minted by the investor basis the advice rendered by the SEBI-registered intermediary.   Algorithm – The recommendation rendered by PVA is derived from a certain algorithm. PVA undertakes performance evaluation of such algorithms over a prospective reasonable test period.   Stock/Portfolio – In order to evaluate recommendation of a stock/portfolio, the PVA must ​furnish​​ the recommendation on the day of recommendation and period of holding by the SEBI-registered intermediary.   Display of Recommendations   ​​​Exclusive Access– The validation of such recommendations is required to be published on their websites with access exclusively with clients.  Public Recommendations – Once the intermediaries publish the recommendations they can be accessed on the websites of the intermediaries and PVA both.  Specific Recommendation – When the intermediaries seek validation of a specific portfolio recommendation, then it shall be published on the websites of the intermediary and PVA in the format prescribed by the industry practice.  The unique attribute in these proposals is the “No Cherry-Picking” principle. As per this principle, the PVA cannot arbitrarily select clients, results, or events to their favor. Any validation of a performance claim must be done for all clients to prevent ​biases in the results. Furthermore, all such claims must be verified from third-party independent sources excluding the entity making the claim.  Analysis of the Proposals   The principal reason for this proposal was the pressing need ​for transparency​​ ​and investor reliance. By virtue of ​being an​​ independent verification body, it benefits both the investor and registered intermediaries – eliminating inflated performance claims and permitting marketing of successful investment advice, respectively.   For the investors, they place reliance on the stock and portfolio recommendations furnished by the SEBI-registered intermediaries to reap good returns. It becomes vital that an independent, third-party evaluator validates these recommendations. Especially, in cases of claims made by Asset Management Companies and Portfolio Managers, they are self-verified sans being subject to any external system of checks.  For the SEBI-registered intermediaries, they pressed the regulator for such an initiative as they want to increase their service-base to maximum investors. By

[By Ansh Chaurasia] The author is a student of Dr Ram Manohar Lohiya National Law University.   Introduction  The Securities and Exchange Board of India (“SEBI”) has actively endeavoured to ease and promote access for the general public in pursuance of an announcement made as part of the FY 2023-24 budget. On 9 December 2023, SEBI introduced a consultation paper (“paper”) aiming to make sweeping changes in the bond market. The proposed amendments have the potential to bring unprecedented levels of non-institutional investors’ participation in the bond market. Retail investors played an essential role in the recent sustained rally in the stock market indices, making a case for their inclusion within the bond market.  Bonds are fixed-income securities, i.e., debt securities that pay fixed interest, called coupon rates at regular intervals. They are an essential financial instrument for governments and corporations to raise funds without giving up a share in the equity. The value of the bond decided by the issuer is called ‘face value’. It is the amount promised to the bondholder upon the bond’s maturity, and the coupon value is evaluated from the face value. SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (“NCS”) enables the issuance of debt securities or non-convertible securities to raise funds (Reg 2(1)(k) and Reg 2(1)(x)). The listing and issuance of bonds are governed by a circular of SEBI that lays down procedural requirements, listing obligations, and disclosures to be made by the issuer of such instruments. These time-bound disclosures and procedural requirements provide an opportunity for informed investment decisions. Crucial disclosures regarding financial results and defaults on repayment of loans mandated under the circular have a significant bearing on investment   Bonds play an important role in diversifying an investor’s portfolio. Although stocks offer greater returns, they are proportionately riskier. However, bonds, specifically as suggested in the paper, reduce the risk by ensuring a lower yet stable coupon rate and predetermined maturity date. The opportunity to invest in the bond market for retail investors that primarily invest in the stock market would provide their investment with a cushion from frequent stock market shocks. However, the success of this proposal is concomitant with multiple factors that are discussed hereafter. The paper includes multiple proposals concerning the bond market; however, the analysis in this blog focuses primarily on issues regarding the entry and participation of retail investors into the bond market.    Recent Changes in the framework of the bond market  The gradual change within the bond market began in 2022 through a decision in a board meeting to decrease the face value of privately placed debt securities and subsequent amendment to the circular. The board considered the high face value’s deterrent effect that withheld non-institutional investors from the bond market. Consequently, face value was reduced from Rs ten lakh to Rs one lakh. The next significant change was the introduction of the regulatory framework for the online bond platforms to ensure transparency, disclosure and availability of redressal mechanisms on platforms that facilitate buying and selling on such platforms. These changes aimed to attract and benefit the participants and facilitate a secure transaction. However, during June-September 2023, the share of non-institutional investors in funds raised through bonds was four per cent compared to the general average of less than one per cent. Institutional investors dominate the corporate debt market in India because a large portion of bonds are issued to selected investors or institutional investors through private placement. The paper reveals a worrisome figure of ninety-five per cent of the issuers resorting to the private placement account for ninety-eight per cent of the funds. The participation of non-institutional investors remains abysmally low at just 2 per cent. The average participation by non-institutional investors for FY 2021-22 and FY 2022-23 remained below two per cent (Annexure III).  There are strong economic reasons to push for retail investor participation; not only do they help to diversify the portfolio for the retail investor, but they also allow the issuer (government or corporation) to diversify and distribute their risk. The burden distribution from the central bank or the conventional investors becomes crucial during economic hardships when overreliance on a particular set of mainstream investors can further aggravate the situation.    The proposed impetus to retail investors by SEBI  SEBI has proposed to further reduce the face value from Rs one lakh to Rs ten thousand to do away with the barrier of face value. It has specified such bonds to be ‘plain vanilla’ bonds. Plain vanilla instruments have simple interest rates and predetermined maturity dates thereby containing the risk. After the 2008 financial crisis, economies across the globe are more inclined to issue plain vanilla debt instruments. The US introduced the Dodd-Frank Wall Street Reform and Consumer Protection Act that promoted the issuance of plain vanilla debt instruments and raised the burden of disclosures and compliance for non-vanilla debt instrument issuers.   The securitised debt instruments, i.e., bonds backed by assets such as loans or leases that generate cash flow, are also being increasingly issued with corporate bonds as the underlying asset. Given the prevalence of securitised debt instruments, all proposals concerning bonds have been made applicable to such instruments as well. These recommendations to safeguard potential retail investors are crucial, but they only deal with seemingly overt threats.   Risks intrinsic to the retail investors  Multiple factors have a bearing on bonds, and most of which are not apparent on the face of it. There lies the problem. The significant factors for consideration in the case of stocks are market risk and company-specific risk, information about both of which is readily available and easily comprehensible.   In the case of bonds, the major factors are interest rate and credit rating. The interplay of interest rate (the repo rate decided by RBI in India) on the one hand and bond price and yield to maturity, on the other hand, is difficult to comprehend for a retail investor. However, the interplay can be summarised as an inverse relation between the market rate and the value of the bond. Since bonds are long-term investments, an informed decision on bond investment and a deeper understanding of interplay are required,

[By Shreya Saswati & Sruti Patra] The authors are students of National Law University Odisha.   Introduction The Securities and Exchange Board of India (SEBI) recently published a comprehensive consultation paper with a view of promoting ease of doing business by relaxing regulations followed in the securities market. The paper also introduces the concept of Fast Track public issuance and listing of debt securities while proposing norms for the same.  Proposed Relaxations to SEBI Regulations   SEBI’s regulations play a crucial role in regulating financial markets and listed entities, impacting the ease of doing business in India. They outline stringent compliance standards for listed entities, ensuring transparency, disclosure, and investor protection. However, excessive requirements pose challenges for businesses, especially smaller entities, impacting the ease of operations. Hence, striking a balance between robust regulations and reducing unnecessary administrative burdens is crucial to foster a conducive business environment in the country.  Reducing the face value of securities  SEBI had recently updated the minimum face value of debt securities such as Non-Convertible Securities (NCS) and Non-Convertible Redeemable Preference Shares (NCRPS) to Rs.1 Lakh as opposed to Rs.10 lakhs earlier. This reduction works as a means for greater involvement from non-institutional investors. In fact, SEBI observed an increase in their participation during July-September 2023 after this reduction. Even public feedback increasingly held high face value to be a barrier for such investors for market participation.   Hence, the consultation paper proposes two things. Firstly, issuance of NCDs or NCRPS with a reduced face value of Rs.10,000. Secondly, issuance of Securitized Debt Instruments (SDI) via private placement with face value of either Rs.1 lakh or Rs.10,000. The catch is, the issuer must appoint a merchant banker who shall conduct due diligence before issuing them. Furthermore, NCDs and NCRPS shall adhere to a straightforward structure without complex credit enhancement features or structured obligations.  Reshaping the NCS Regulations  The consultation paper also proposes changes to Schedule-I of the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021, which deals with disclosures for audited financials. The current inclusion of audited standalone and consolidated financial statements for the last three financial years, along with stub period financials, in the Offer Document has caused challenges due to technical complexities. To address these concerns, the paper suggests reducing file size by including links rather than inserting financial statements directly into the document. Additionally, leveraging QR codes has been proposed to redirect users to Stock Exchange’s website hosting relevant financial data and simplifying access to this information for potential investors.  When it comes to disclosures, firstly, the paper proposes issuers to provide certain relevant information required under the Schedule1 till the latest quarter of the current financial year instead of until date of issuance in order to ease this process. Secondly, to bring uniformity, the paper proposes standardizing the record dates, i.e., the date when an investor gains ownership of debt securities  to 15 days before the interest payment or redemption due date.   Lastly, the consultation paper proposes the use of a standard format for due diligence certificate. The NCS Regulations require the issuer to obtain a due diligence certificate from the debenture trustee at the time of filing draft offer document or while listing securities. But SEBI’s Master Circular for Debenture Trustees consists of two different formats depending on their purpose. A standard format ensures clarity, consistency and easier evaluation.   Publication standards vis-a-vis LODR regulations  The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR) outlines that a listed entity is required to publish its financial results within two working days after the board of directors’ meeting. This publication needs to occur in at least one English national daily newspaper that circulates across the nation or a significant portion of India.2 But LODR Regulations already necessitate submission of financial results to stock exchanges within thirty minutes of the board meeting and immediate online publication which is accessible to debenture holders. Publishing results again in newspapers after two days is superfluous, hence, the paper proposes publication on newspaper to be optional within the designated time frame, which would help reduce unnecessary costs. Given the current digital age and the immediate accessibility of financial data online, this proposal seems pragmatic to reduce redundant costs. Balancing cost-efficiency with transparency and stakeholder communication remains pivotal in making informed decisions regarding this proposed amendment to the LODR.  Fast Track Public Issuance and Listing of Debt Securities  NCS are generally utilized by companies to secure long-term funds through public issuance of shares at a higher rate of return to the lender. The NCS Regulations govern the issuance and listing of debt securities through both public issuance of securities and private placement. Recently, Indian companies have mostly resorted to issuance and utilization of shares through private placement and that being the case, the corporate debt market raises these funds not through single placement rather multiple issuances all through the year. The decline in IPO filings can be attributed to many reasons like market volatility due to recession or hike in interest rates etc. Therefore, a need arises to increase the scope for the corporate debt market to revitalize public issue of debt securities and that too in the primary market so as to broaden the investor base and bond market in less time and cost. SEBI, through this consultation paper, tries to address the issue by suggesting a Fast Track Public Issue Process.   Technicalities & Modalities  This fast track public issue shall be kept open for a maximum of 10 working days, with a minimum one working day, with no minimum subscription for financing entities. With respect to the retention limit in case of over subscription, the same has been fixed at five times of base issue size, the same is the maximum limit.  On July 3, 2023, SEBI came up with the 2nd Amendment to the NCS Rules where it introduced the concepts of General Information Document (GID) and Key Information Document (KID) in order to serve the purpose of avoiding repetition in filings of documents by the