Capital Markets and Securities Law

[By Ojas Singh & Tanuj Goyal] The authors are students of Symbiosis Law School, Pune.   INTRODUCTION On 27 June 2024, SEBI in its board meeting, paved the way for public companies to be delisted through the Fixed Price Offer (FPO), as an alternative mechanism to Reverse Book Building (RBB). The move comes following the release of the consultation paper on 14th August 2023, which included crucial modifications to the SEBI (Delisting of Equity Shares) Regulations 2021 ( Delisting Regulations).   While the RBB model was detected with some irregularities, such as inflated share prices driven by speculative trading and manipulation by some shareholders, a new mechanism is being proposed. The market regulator intends to protect the interests of promoters as well as the shareholders by bringing in a fixed premium and adjusted book value calculations that would reduce market volatility and increase efficiency. However, notwithstanding these intentions, the new framework is not without its share of criticisms and possible pitfalls. This article would consist of a primer on the RBB and the new FPO process, and would then proceed to analyse the benefits and pitfalls of the proposed mechanism.   BACKGROUND The RBB mechanism was introduced in 2003 through the SEBI (Delisting of Securities) Guidelines 2003. In the RBB process, a delisting company is required to ascertain a minimum floor price for the shares of the company. The calculation of the floor price is very similar to the floor price for an open offer under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 (Takeover Code). The price was determined based on many aspects including book value, average market price, and future growth potential. Investors would discover the price through bidding, stating the minimum price at which they were willing to sell their shares. A minimum of 90% of the shareholding had to be acquired by the acquirer through this method to ensure successful delisting.   The delisting, when accepted, leads to the purchase of all shares at a price at or below the Delisting Price, at the Delisting Price. This Delisting Price can be further negotiated by the acquirer through the process of ‘counter-offer’.   Because promoters have to agree for the price discovered through RBB to delist, getting enough public shareholders interested in a delisting proposal and the price at which most shares are offered by public shareholders heavily affects the success of a delisting.  A successful delisting can be elusive, as the discovered price through RBB would find itself having an inordinate premium, maybe even above 100% of the Floor Price. For instance as seen in delisting’s such as Brady and Morris Engineering Company Ltd (1128.70%), Universus Photo Imagings Ltd. (164.34%), Shreyas Shipping & Logistics Ltd. (138.35%) and Linde India (517%).  In all these cases, delisting attempts were found unsuccessful as the acquirers were not ready to pay the excessively high discovered prices. For example, in the delisting of Universus Photo Imagings Ltd., it could be noted that the discovered price of ₹ 1,500 (Rupees One Thousand Five Hundred) per share was not consented upon by the acquirers, as it was way above the price offered by them (₹ 568 or Rupees five hundred sixty eight per share). Additionally, in some delisting cases, even having an excessive premium over the indicative price offered by the acquirers may not result it in being successful. As seen in the delisting of Elcid Investments Limited, whose market price per share was ₹ 15 (Rupees Fifteen), but the floor price per share was computed to ₹1,61,023 (Rupees One Lakh Sixty-One Thousand Twenty Three) per share. Despite the premium of around 9,50,000%, the delisting price was rejected initially by the shareholders. This delisting underscores the flaws in the RBB process, where even a huge premium over the market price can fail to secure an approval from the shareholders. This trend of inflated pricing under the RBB process, not only thwarted several delisting attempts but also led to a misalignment between the acquirers and shareholders. Additionally, shareholders who would often hold out to higher prices, would further stall the delisting process. SEBI found that most firms that voluntarily delisted through the RBB process paid premiums with a median value of 125% from 2015 to 2018. This shows the unsustainable financial burden faced by the companies, meanwhile the speculative shareholders were allowed to manipulate the process. This manipulation was further aggravated by the rule that promoters could submit counter-offers only if their post-offer shareholding exceeded 90% of the company’s total issued shares. These concerns were reiterated by the SEBI chairperson, who stated that the companies looking to acquire more than 90%, would find the prices heavily inflated due to certain shareholders who would acquire shares to cross the 10%. Subsequently, counter-offers under the RBB could only be made, if the acquirers post-offer shareholding turned out to be above 90% of the company’s total issued shares. These rules give the shareholders the ability to manipulate and exert control over the discovered price.  SEBI acknowledged these concerns in its consultation paper released on August 14, 2023. Accordingly, the regulatory authority introduced the FPO with an aim to reduce speculative trading and provide a balance between the interests of the investors and the acquirers.   DECODING THE CHANGES Delisting through fixed price offer: As per the modifications under the Delisting Regulations, the delisting price must be at least 15% over the market price of a share. Public shareholders now only need to decide if they want to tender their shares at a fixed price. A delisting is successful, only when an acquirer’s post-offer shareholding exceeds 90% of a company’s total share capital.  Insertion of Adjusted Book Value for the computation of Floor price: Before, the ‘floor price’ was computed based on several factors such as Volume Weighted Average Price (VWAP) of acquired shares during 52 weeks prior to the reference date, VWAP of 60 days preceding the reference date etc. as per Regulation 8 of the Takeover Code. Now, adjusted book value will be used as an additional parameter to

[By Tejas Venkatesh] The author is a student of Jindal Global Law School.   Introduction On 16th August 2024, the Securities and Exchange Board of India (“SEBI”) released a consultation paper on Expanding the Scope of Sustainable Finance Framework in the Indian Securities Market. The purpose of the paper is to solicit public comments on the appropriateness and adequacy of the proposed new framework for ESG debt securities and sustainable securitized debt instruments. The new framework incentivizes sustainable debt financing and also provides much-needed flexibility to issuers who aim to pursue projects that align with their ESG objectives. Yet, the proposal raises certain vital concerns.  SEBI’s Existing regime on Sustainable financing in India SEBI’s approach to encouraging sustainable finance has mainly focused on the Indian debt markets. The focus on the debt market seems to stem from the need for a large pool of potential investments in various sustainable projects. An estimate by the Reserve Bank of India (“RBI”), indicates that a green finance pool of up to 2.5% of the GDP is necessary to meet the infrastructure gaps resulting from disastrous climate events in India.   In 2023, in an effort to boost investments in the sustainable debt financing market, SEBI introduced the Securities and Exchange Board of India (Issue and Listing of Non-Convertible Securities) (Amendment) Regulations, 2023, wherein it allowed for the issuance of “Green Debt Securities” as a debt security instrument to raise funds for sustainable projects like renewable energy plants, clean transportation, pollution prevention and biodiversity conservation projects. Although the issuance of “Green Debt Securities” was allowed under the SEBI (Non-Convertible Securities) Regulation, 2021, the scope and ambit of activities that could be financed through the instrument remained vague and ambiguous until an illustrative list of activities was provided in the amended regulations in 2023. Further, the board continuously revised and expanded the scope of activities to include blue, yellow, and transition bonds as other sub-forms of green debt securities under the regulations.  In order to align the framework for the issuance of green debt securities with globally accepted standards like the Green Bond Principles (GBP), issued by the International Capital Markets Association (ICMA), SEBI introduced additional disclosures for green debt securities. The focus of the revised disclosure requirements was on ex-ante disclosures regarding the utilization of proceeds, the process for evaluation and selection of a project, management of proceeds, and improved reporting mechanisms. Impact reporting and involvement of third-party reviewers or certifiers were sought to be strengthened to ensure transparency and reliability in the utilization of bond monies by issuers.  However, the growing need to adopt an intersectional approach for tackling economic, social, and environmental aspects of sustainable development has been felt. Further, the tremendous lag in funding for the attainment of Sustainable Development Goals (SDG) has prompted SEBI to propose the introduction of Social Bonds, Sustainable Bonds, and Sustainability Linked Bonds (which together with Green Debt Securities would be termed ESG debt securities). Additionally, to leverage the underlying sustainable finance credit facilities for the benefit of potential investors, SEBI also seeks to introduce ‘Sustainable Securitised Debt Instruments’ as a form of finance that has the backing of the underlying sustainable credit.  Proposed framework for ESG debt securities The introduction of Social Bonds and Sustainable Bonds marks an addition to the theme of Use of Proceeds (UoP) Bonds, wherein the proceeds are earmarked for specific projects designed to achieve the intended impact. Whereas, Sustainability-Linked Bonds (SLB) are categorized as Key Performance Indicator (KPI) bonds wherein the proceeds are not tied to a specific project but are intended for the issuer to achieve self-imposed sustainability targets in the course of their operation.   Although SEBI has not specified the scope of projects falling within the ambit of Social Bonds, the Social Bond Principles (SBP) given by the ICMA provide valuable direction. The SBP includes a wide ambit of activities including projects that aim to provide affordable basic infrastructure like water, sanitation, health, housing, and food security. However, Sustainable Bonds are an effort to acknowledge the intersectional co-benefits that a combination of Green and Social projects present.   The extant framework for the regulation of Use of Proceeds Bonds (i.e. Green, social, and Sustainable Bonds) remains uniform with a special focus on core components such as the mechanism for categorization of projects, criteria for project evaluation and selection, managing proceeds, and reporting. However, the focus on transparency and accountability is diluted due to the voluntary nature of the guidelines given by the ICMA. The framework provides no liability mechanism in instances of greenwashing or failure to meet intended targets.   Unlike UoP Bonds, Sustainability-linked bonds are debt instruments that are catered to finance the incorporation and achievement of forward-looking ESG outcomes by the issuer. The core components of the bonds include the selection of Key Performance Indicators (KPIs) and calibration of Sustainability Performance Targets (SPTs) by the issuers. The focus is on the declaration of bond characteristics, reporting on the attainment of targets, and third-party verification of bond targets achieved.   Critical Analysis The new debt instruments raise several concerns as regards their ambit and effectiveness. First, the qualifying factor for the utilization of bond proceeds of a Social Bond is that the monies have to be committed to generating a ‘social impact.’ Although the ICMA Social Bond Principles (SBP) provide guidance on projects that can be pursued by the issuance of Social Bonds, pertinent questions regarding the quantification of the term “impact” arise. For instance, it is unclear whether a social project can avoid generating a negative environmental impact. Therefore, in instances such as affordable housing projects wherein the social impact contrasts with the environmental impact, there is no direction on what interest will prevail.  Further, the Social Bonds framework fails to differentiate between challenges posed by varied timelines for achieving the desired impact For instance, a loan-based social bond will achieve its social impact merely by financing the beneficiary using the proceeds received whereas other forms of social bonds require active collaboration between the beneficiary and the issuer. The

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

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

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

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

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

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