Capital Markets and Securities Law

[By Nikita Singh & Aishana] The authors are students of Gujarat National Law University.   Introduction In the dynamic landscape of India’s financial sector, the persistent challenge of stressed loans has prompted regulatory interventions and innovative strategies to revitalize the economy and banking system. The exploration from Asset Reconstruction Companies (ARCs) to the emergence of Special Situation Funds (SSFs) as a specialized avenue for addressing the complexities of stressed assets meticulously designed to inject capital and release funds entangled in stressed loans within Banks and NBFCs. The blog navigates through the unique role of SSFs in the resolution and recovery of stressed loans and sheds light on the recent proposed amendments by the RBI in the consultation paper released by the Securities and Exchange Board of India (SEBI) and their potential impact on SSFs, investors, and the broader financial ecosystem. Unveiling the challenges and implications, this exploration aims to provide a comprehensive understanding of the regulatory framework surrounding SSFs and their pivotal role in fostering financial stability and efficient resolution mechanisms. Stressed Loan Conundrum: Evolution from ARCs to Special Situation Funds India grapples with a prolonged issue of stressed loans, significantly impacting the banking system and the economy. The Reserve Bank of India (RBI) reports a surge in the gross Non-Performing Assets (NPAs) ratio of Scheduled Commercial Banks (SCBs) from 3.8% in March 2015 to 11.5% in March 2018.[1] The stressed loan ratio, encompassing NPAs and restructured loans, reached 12.6% as of June 2021, with the total stressed loans in SCBs exceeding Rs 93,240 crore by September 2020. In response to this challenge, Asset Reconstruction Companies (ARCs) were established, supported by frameworks like the one in 2014 for revitalizing distressed assets, the 2015 Strategic Debt Restructuring Scheme, the 2016 Scheme for Sustainable Structuring of Stressed Assets,[2] and the 2018 Revised Framework for Resolution of Stressed Assets. ARCs, mandated by the RBI and governed by the SARFAESI Act, 2002, aimed to acquire stressed assets from financial institutions for resolution and recovery. However, hindered by capital constraints, funding issues, market illiquidity, valuation gaps, and legal and operational challenges, ARCs encountered limitations in effectively addressing the complexities of stressed loans. Special Situation Funds: A Specialized Approach to Stressed Asset Resilience Special Situation Funds (SSFs), a sub-category of Category I Alternative Investment Funds (AIFs) regulated by the Securities and Exchange Board of India (SEBI), exclusively focus on stressed assets. These assets include securities from investee companies whose stressed loans are acquired either through the RBI Master Directions on Transfer of Loan Exposures or an approved resolution plan under the Insolvency and Bankruptcy Code, 2016 (IBC). Unlike Asset Reconstruction Companies (ARCs), which acquire stressed assets from banks, SSFs invest in the securities of these companies. Classified under Category I AIFs, which target socially or economically desirable sectors, SSFs offer flexibility in their investment approach,[3] allowing them to engage in equity and equity-linked instruments of investee companies, as well as Security Receipts (SRs) issued by ARCs[4]. This flexibility, along with the ability to act as resolution applicants under the IBC, positions SSFs to bring in capital, expertise, and diverse strategies, facilitating improved price discovery, valuation, and reducing the burden on lenders. This distinctive role enables SSFs to complement and supplement the efforts of ARCs and other resolution applicants in addressing the challenges associated with stressed assets.[5] SEBI-RBI Synergy: The Framework for Special Situation Funds Special Situation Funds (SSFs), a distinctive category of Alternative Investment Funds (AIFs), operate in the domain of securities for companies undergoing financial distress or insolvency resolution. Regulated by both the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI), SSFs must comply with stringent regulations outlined by these authorities. Classified as a sub-category under Category I AIFs by SEBI, SSFs adhere to guidelines specified in the SEBI (Alternative Investment Funds) Regulations, 2012, and the SEBI circular dated 27 January 2022, governing eligibility, investment, transfer, monitoring, and supervision norms. Simultaneously, the RBI, through its Master Directions on Transfer of Loan Exposures and Prudential Framework for Resolution of Stressed Assets, delineates criteria, valuation, disclosure, and prudential norms for loan transfers from financial institutions to SSFs. However, a critical condition for SSFs to acquire stressed loans under RBI Master Directions is their inclusion in the Annex, a list of entities permitted by lenders for transferring stressed loan exposures. Despite the condition outlined in SEBI’s circular dated 27 January 2022, yet to be acknowledged by the RBI, the SEBI Consultation Paper highlights multiple suggestions for changes in the regulatory framework for SSFs, emphasizing eligibility criteria, valuation methodology, disclosure requirements, and prudential norms. Proposed Amendments: Enhancing AIF Regulations for Special Situation Assets and Oversight SEBI’s Consultation Paper, released on 28 November 2023, outlines crucial amendments to the regulatory framework for Special Situation Funds (SSFs).[6] The proposed amendments encompass key areas, starting with the definition and scope of Special Situation Asset (SSA), including it within the permissible investment scope for SSFs with specified conditions. Notably, the eligibility criteria for SSFs and their investors are under scrutiny, with proposals allowing SSFs with prior investments in stressed companies’ securities to acquire stressed loans, provided it aligns with regulatory guidelines. It emphasizes adherence to Section 29A of the IBC to ascertain investor eligibility, advising SSFs to refrain from investing in or acquiring SSA if any investors are disqualified under Section 29A of the IBC. Further, the proposed amendments explicitly bar SSFs from investing in their related parties, as per the Companies Act, 2013, defining related parties for SSFs as entities sharing common investors, directors, key managerial personnel, or sponsors with the SSF or its manager. Moreover, the minimum holding period for SSFs to retain SSA is set at one year, contingent upon the resolution of the stressed company. Moreover, SSFs can only transfer or sell SSA to entities enlisted in the Annex of the RBI Master Directions, subject to lender and resolution professional approval. To enhance transparency and oversight, the paper mandates SSFs to submit pertinent information to a designated trade reporting platform, including details

[By Aryan Dama] The author is a student of Maharashtra National Law University, Mumbai. Introduction – The Process and The History In August 2023, the Securities and Exchange Board of India (‘SEBI’) floated a consultation paper to review voluntary delisting norms under the SEBI (Delisting of Equity Shares) Regulations, 2021 (the ‘Regulations’). Under the Regulations, to delist a company, the acquirer must provide an exit opportunity to all public shareholders of the company at a price discovered using the reverse book building process (‘RBB’). The RBB process begins with the calculation of a floor price in accordance with the Regulations. The acquirer can also provide an indicative price, which must be higher than the floor price. Second, public shareholders are required to tender their shares in favor of the acquirer through stock exchanges. If the shareholding of the acquirer does not cumulatively reach 90% (acquirer’s shareholding + shares tendered by the public shareholders in the acquirer’s favor), then the delisting is failed. Third, if the cumulative shareholding of the acquirer does reach 90% then a discovered price is determined based on eligible bids by the public shareholders. Fourth, the acquirer has the option to either accept (which would mean that the acquirer has agreed to buy the shares at the discovered price) or reject the discovered price. If the acquirer rejects the discovered price, then it can give a counteroffer at a price not less than the floor price. Fifth, the shareholders are allowed to tender their shares at the counter-offer price. If the post-counter-offer shareholding of the acquirer reaches 90%, then the delisting is successful. India is the only country that follows the RBB process. The RBB process was adopted in 2003. It was felt that the exit price offered under the fixed-price process then did not justify company fundamentals and its true worth. Moreover, minority shareholders felt compelled to sell their shares at the offered exit price, even if it was not attractive enough, or else they held a potentially illiquid stock. Thus, the RBB process was adopted – to harmonize the interests of the acquirers and shareholders. However, the RBB process has been far from successful prompting SEBI to keep making amendments to the delisting regulations from time to time. The changes proposed in the consultation paper are the latest slew of changes proposed to the Regulations, hopeful of ensure a smooth delisting of companies. Practical inefficiency of the RBB process Year Name of Company Floor Price (₹) Discovered Price (₹) Premium Public Shareholding Comments 2023 Shreyas Shipping & Logistics Ltd. 375 (indicative) 870 138.35% 29.56% Discovered price rejected. Counter offer of ₹400.   TTK Healthcare Ltd. 1,201.30 – – 25.44% Insufficient tender by public shareholders.   R Systems International Ltd. 262 – – 47.4% Insufficient tender by public shareholders. 2022 Universus Photo Imagings Ltd. 567.43 1,500 164.34% 25.45% Discovered price rejected by acquirer.   Jindal Photo Limited Ltd. 268.04 – – 27.28% Insufficient tender by public shareholders.   Xchanging Solutions Ltd. 39.23 – – 25% Insufficient tender by public shareholders. 2021 Shyam Telecom Limited Ltd. 6.15 – – 33.84% Insufficient tender by public shareholders.   Brady and Morris Engineering Company Ltd. 61.04 750 1128.70% 26.25% Discovered price rejected by acquirer. 2020 Vedanta Ltd. 87.25 – – 49.87% Insufficient tender by public shareholders.   Hexaware Technologies Ltd. 264.97 475 79.27% 37.92% Successful but at high premium. As evident, the two main causes of the failure of the RBB process are i) insufficient tender by public shareholders and ii) unrealistically high discovered price. Insufficient tender by public shareholders and high discovered price bring the delisting process to the end as the 90% threshold is not met or the discovered price is rejected by the board of directors of the respective company.  Thus, these two issues are the premise upon which SEBI has proposed the changes in the consultation paper. But before we move ahead to discuss the proposed changes, I think it is important to understand some inherent issues in the RBB process to truly appreciate the proposed changes. Fundamental problems with the RBB Process The RBB process is restricted to very limited participants – the public shareholders. Let us juxtapose the RBB process with the booking building (‘BB’) process used in an initial public offering. The BB process is open to the entire market, allowing for forces of demand and supply to operate freely. Since the sample size is so big, it results in a relatively fair price discovery. However, since the RBB process is open only to the public shareholders of the delisting company, the forces of demand and supply are not able to operate freely. Since the sample size is small, the determination of the discovered price is prone to manipulation by shareholders. Thus, the RBB process fails. Further, the exit price should be suggestive of the price the buyer is willing to pay. In the RBB process, the only reference points for the shareholders are the floor price and/or the indicative price. It is important to understand that neither of these prices is an actual representation of the price the acquirer is willing to pay for the strategic value of the company. This was also acknowledged by SEBI in the form that delisting without the knowledge of what the acquirer is willing to pay leads to a lot of speculation. This lack of information is a double-edged sword as it creates a scenario where the shareholders can either squeeze out the maximum price from the acquirer based on the idea that the acquirer might be willing to pay more, or it results in exploitative amounts of premium being sought. The uncertainty also causes the public shareholders to not tender their shares at all. These fundamental conceptual issues related to the RBB process along with the practical efficiency of the RBB proves as understood in the case studies prompted  SEBI to propose the changes in the voluntary delisting norms through the consultation paper. Solutions Proposed in the Consultation Paper As a part of the

[By Vanshika Singh] The author is a student of Jindal Global Law School.   Introduction Ministry of Finance and Ministry of Corporate Affairs have been in the news lately as the discussion on listing of Indian equity on foreign stock exchanges is gaining traction. They have announced that the much-awaited framework for direct listing of Indian companies abroad could be introduced later this financial year. It is notably a significant development for the Indian companies as their exposure and opportunities to raise funds in the capital markets is going to expand at a global level. This international exposure brings with itself the need to balance certain pros and cons that the companies must be ready to explore wisely. Present Means of Raising Funds Internationally Currently, fund raising by Indian entities can be done in primarily three ways. Firstly, by raising debt in global markets by listing their debt securities via various bonds like masala bonds, foreign currency convertible bonds, etc. Second, by way of issuing depository receipts such as by issuing American Depositary Receipts (“ADR”) or Global Depository Receipts (“GDR”). This is an indirect way of listing on a foreign exchange by entering into an arrangement with a recognised depository facility in the relevant jurisdiction. Another way of issuing equity shares abroad is doing Regulation S (“Reg S”) and Rule 144A offerings under U.S. Securities Act, 1933. Doing a public issue under Rule 144A requires registration on the relevant foreign stock exchange and adherence to heavy reporting standard in such jurisdiction. Until 2020, listing of Indian companies on foreign exchanges was not permitted let alone standardized, therefore, this method could not be accessed. However, Rule 144A provides an exemption to such registration by allowing private placement of securities to only sophisticated investors, i.e., qualified institutional buyers (“QIBs”) in the U.S. and not the retail investors. The rationale behind the same is that sophisticated investors are resourceful and diligent enough to know the risk of entering an investment, and thereby need little regulation. On the other hand, Reg S offering is done outside the U.S. that allows Indian companies to tap primarily into the European markets such as London or Luxembourg Stock Exchange. An important difference between these two types of offerings is that the Rule 144A route requires higher disclosure and due diligence as compared to the Reg S route. The former requires a negative assurance letter, also known as the Rule 10b-5 letter, from the issuer’ or issuer’s lawyers. It provides a confirmation that nothing has come to their attention that gives them a reason to believe that the statements in the offering documents are untrue or inaccurate. This is a higher diligence standard than what is currently followed in the Indian market and places a higher liability on the entities such as law firms and merchant bankers who may issue such a letter. Proposed Change The buzz about this change started way back in 2018 when Securities and Exchange Board of India (‘SEBI’) released its expert committee report for public comments. Amongst other things, the expert committee scrutinized the economic effects of this change on the country and Indian companies. Additionally, they discussed various legal, operational and regulatory nitty-gritties that require a rehaul to implement this change and facilitate Indian companies in listing their equity share directly on foreign stock exchanges. It was clarified in the report that in case of unlisted Indian companies seeking to list aboard, the laws of foreign jurisdictions pertinent to listing will apply while ensuring compliance with Companies Act, 2013 (“Companies Act”). With respect to companies listed in India seeking to list abroad, the companies can expect to continue compliance with the relevant laws they are subjected to India and in case of variation, a comparative analysis of compliance is to be provided by such company. Such onerous requirements can inevitably result in longer timelines for conclusion of raising capital via this method. In late 2020, MCA, via the Companies (Amendment) Act, 2020 (“Amendment Act”), passed an amendment to S. 23, amongst other sections of the Companies Act to permit a particular class of public companies to list their securities abroad in permissible foreign jurisdictions or jurisdictions as may be prescribed. The permissible jurisdictions include Japan, China, U.S., South Korea, United Kingdom, Hong Kong, France Germany, Canada and Switzerland. This has been a momentous development because India’s current legal framework prohibits the direct listing of equity shares of domestically incorporated companies on international stock markets. Since the Amendment Act was passed in 2020, various provisions of the same have been notified from time to time but the amendment to S. 23 has not been notified yet. In light of the same, MCA and SEBI are proposing to introduce the much-awaited framework later soon to this allow such foreign listing. Expected Impact of this Change This much awaited change will not only result in increase in competitiveness for Indian companies but also bring better valuation to companies, increase and diversify the investor base, and most importantly provide an alternate source of capital for Indian companies. Moreover, companies that want to list their securities on international stock exchanges with sophisticated expertise and resources can expect to receive more accurate valuations for their assets as compared to the current valuations in India. This is because it will expose them to niche investors who have sectoral and institutional expertise, and are therefore better equipped to assess such shares on its own merit and also comparatively. The ability of Indian businesses to access larger, more diverse pools of money and cheaper costs of capital will serve to bolster their competitiveness in industries like technology and internet sectors where this change will lead to strategic advantages by overlooking geographical distances. Additionally, having more foreign investors on board may invite more robust international corporate governance practices, induce maximization of efficiency and fast-paced innovation to catch up with global competitors. It will also encourage embracing best practices, international cooperation and improve peer to peer benchmarking. At the same time, cross-listing may make

[By Dhrutvi Modi & Harshit Chauhan] The authors are students of Gujarat National Law University. INTRODUCTION In recent years, the Indian real estate market has grown significantly, with Real Estate Investment Trusts (REITs) playing a crucial role in attracting investments. Introduced in India in 2014 to enable small investors to access the real estate market, the market has been primarily dominated by large-scale REITs due to high investment thresholds, restricting opportunities for small and medium-sized investors. In August 2020, SEBI proposed Micro, Small, and Medium REITs (MSM REITs) to address the limited investment opportunities for small and medium-sized investors in real estate. These REITs offer lower investment thresholds, providing capital sources for real estate developers and reducing reliance on traditional financing. Recently, in May 2023, SEBI released the regulatory framework for MSM REITs, aiming to stimulate the Indian REIT market’s growth by broadening investor participation and expanding financing options for developers. This article provides an analysis of the regulatory framework for MSM REITs released by the SEBI. The article evaluates the proposals put forth by the regulatory framework and assesses their potential impact on the REIT market in India. The article also examines the challenges faced by the REIT market in India, including high tax rates, limited availability of quality assets, and the need for regulatory clarity. It analyses how the regulatory framework for MSM REITs aims to address these challenges. ISSUES FACED DUE TO LACK OF PROPER REGULATION Lack of uniformity in disclosures – non-uniform disclosures on Fractional Ownership Platforms (FOPs) raise concerns due to involvement of non-institutional investors and untested real estate mechanisms. More transparency and oversight are needed, leaving investors with limited legal recourse for potential issues. Lack of assurance – FOPs issue unlisted securities for real estate investments, but they may not provide adequate exit information or liquidity options, which is unfavourable for investors’ long-term interests. Unclear claims of succession and inheritance after lapse of Power of Attorney (POA) – FOPs enabling joint real estate ownership through POA structures impose binding liabilities on the FOP and raise concerns about valuation, liquidity, transparency, and potential misuse of POAs. Investor’s death, insolvency, or bankruptcy may lead to POA lapses, exposing other owners to succession and inheritance claims on the stake of the deceased or insolvent investor. No application of Know Your Customer (KYC) and Anti-Money Laundering (AML) norms – The absence of financial sector regulation for FOPs means that they often do not adhere to KYC and AML norms. This non-alignment with Prevention of Money Laundering Act, 2002 and financial regulator’s KYC requirements leads to inconsistent customer identification practices, raising risks of identity misuse, fund source concealment, and money laundering, thereby posing a threat to the financial system. Absence of standardized grievance redressal mechanism – FOPs lack standardized grievance redressal mechanisms, each with its own policies that may not favour investors. Even if some FOPs are registered with state-level RERA as real estate agents, this registration does not imply comprehensive regulation of the FOP and its activities by RERA, leaving investor interests potentially unaddressed. Non-uniform selling practices – non-uniform selling practices and lack of independent valuation could lead to investors falling prey to mis-selling. REGULATORY FRAMEWORK FOR FOPs IN OTHER COUNTRIES United Kingdom In the UK, key regulations for fractional ownership include the Companies Act 2006, which mandates registration and reporting to Companies House, board of directors, and corporate governance standards. The Financial Services and Markets Act 2000 (FSMA) requires authorization from the Financial Conduct Authority (FCA) for public offerings, with FCA oversight and enforcement powers for non-compliance. There is a stamp duty land tax (SDLT) payable on purchasing the fractional interest in the property. The amount of SDLT depends on the purchase price of the property and the percentage interest being acquired. The rate of SDLT is generally 0.5%, but higher rates apply to second homes and buy-to-let properties. There may be ongoing tax liabilities associated with fractional interest ownership as well. When selling the fractional interest in the property, capital gains tax (CGT) may be payable on any profit made. CGT is charged on the gain made on the sale, calculated as the difference between the sale and purchase prices, deducting any allowable expenses. The CGT rate is determined by an individual’s overall taxable income and gains for the tax year, and it can vary between 10% and 28%. Hong Kong Real estate investment trusts (REITs) are collective investment schemes set up as unit trusts in Hong Kong. They are listed on the Hong Kong Stock Exchange and invest primarily (at least 75% of their gross asset value) in real estate assets that generate income. The purpose of REITs is to give investors returns resulting from ongoing rental revenue. A REIT Code and other guidelines on the authorization and management of REITs have been released by the Hong Kong Securities and Futures Commission. According to the REIT Code, REITs can only invest in vacant land if certain conditions are met, and they can only engage in property development activities if certain conditions are fulfilled. Additionally, REITs can borrow up to 50% of their gross asset value. REITs must pay their investors a dividend equal to at least 90% of their annual audited net income after taxes. United States of America The United States Securities and Exchange Commission (SEC) oversees the trading of securities in the country. Fractional ownership is classified as a security based on the criteria set forth in the Howey test, which was established by the US Supreme Court in the case of SEC v. W.J. Howey Co. Fractional ownership is typically sold as a security offering, which must be registered with the SEC unless an exemption applies. One standard exemption is for private placements of securities to accredited investors or investors who meet certain income or net worth thresholds. California has specific regulations for real estate fractional ownership, including disclosure requirements and provisions for escrow accounts to hold funds from investors. The state also requires fractional ownership interests to be sold through

[By Anchal Raghuwanshi] The author is a student of Dharmashastra National Law University, Jabalpur.   INTRODUCTION Financial framework of a country represents the strong and efficient capital market inviting investors from around the world. The need for addressing disputes related to securities market has become crucial in order to have an effective capital market structure in the country. Investors who have suffered because of the mistakes of unscrupulous works of certain market players deserve a dispute resolution and complaint management system that is accessible, swift, and fair. Acts such as these not only reduce investor confidence but also affect India’s position at the global level. A strong and efficient dispute resolution will guarantee effective capital market operations. While creating laws and regulations, SEBI’s main objective is to govern and oversee the Indian commodity and securities markets. The regulatory framework of SEBI covers a wide spectrum of market participants, including listed businesses, stock exchanges, brokers, and investment advisers. The new ODR approach is poised to make resolving disputes more effective and affordable. ODR, which can be done online or in person, leverages technology to help the parties communicate and negotiate. This would increase the effectiveness and efficiency of India’s system for resolving investor disputes and increase its appeal to foreign investors. The objective of this paper is to look into the various facets of India’s Securities and Exchange Board’s dispute resolution process. COMPLAINT MANAGEMENT SYSTEM OF SEBI In June 2011, SEBI established the ‘SCORES’ centralized web-based complaints resolution system. The goal of SCORES is to provide an administrative venue for dissatisfied investors whose securities market issues have not been handled by the relevant listed company registered intermediary, or recognized market infrastructure institutions.[1] It accepts complaints arising from issues covered by the Securities and Exchange Board of India Act, 1992, the Depositories Act, 1996, the Securities Contract Regulation Act, 1956, the Companies Act, 2013, and rules and regulations made under the aforementioned acts.[2]The SCORE system emphasizes investor advocacy since investors can contact SEBI directly before exhausting other routes of redress. Complaints filed on SCORES are subject to a three-year limitation period from the date of the complaint’s causation date. In a circular dated March 26, 2018[3], investors were instructed to first address their concerns with the relevant firm before approaching SCORES. According to master circular dated November 07, 2022, the business must file the ATR within 30 days.[4]If an investor is dissatisfied with the entity’s settlement or the entity has not produced an Action Taken Report within 30 days, the issue escalates to SEBI and is addressed by a SEBI Dealing Officer[5]. When investors file a complaint with SCORES, they provide confirmation of the same by self-declaration. A sample research was conducted to determine if investors are approaching businesses first before self-declaring. It has been discovered that around 42% of investors who stated that they approached the business first, really approached SCORES directly[6]. The Dealing Officer will review the ATR upon receipt and, if satisfied, will close the complaint with reasoned closure remarks. If the Dealing Officer is dissatisfied, he may request explanation from the entity and/or the investor. A complaint is considered resolved/disposed/closed only when SEBI disposes/closes the complaint on SCORES. Once the complaint has been resolved, the investor has the ability to request a review within 15 days if he or she is dissatisfied with the resolution of the complaint.[7] The Division Chief of the concerned Dealing Officer, who handled the usual complaint, handles the review complaint. “Review complaints” are the name given to these types of complaints.[8] ARBITRATION MECHANISM In line with the terms of the Circular of 11 August 2010[9], read with Section 2(4) of the Arbitration and Conciliation Act, 1996[10], SEBI provides for an arbitration procedure for settling disputes between customers and members. Age, credentials, and expertise in financial services are all taken into account while forming the panel of arbitrators. When opposed to the usual filing of lawsuits in courts, conflict resolution through arbitration is a more cost-effective way of ADR. If an investor has an account with a Depository participant or a broker, he or she has the option of settling disputes through Arbitration under the SCORES process. If a Stock Exchange or Depository fails to resolve an investor’s grievance due to a disagreement, the investor may petition for Arbitration under the rules and regulations of that Stock Exchange or Depository. All disputes, claims, or disagreements between investors and stock brokers or Depository participants can be resolved through the Arbitration system. The steps for Stock Exchange Arbitration are summarised below: First, the Applicant files an Arbitration application to a Stock Exchange; the application is then verified and delivered to the Respondent. Following that, an Arbitrator is selected, and all papers are delivered to the Arbitrator; the Arbitrator then hears both parties’ contentions and issues the award. If a party is dissatisfied, he or she may submit an appeal. Following that, the appeal hearing is held, and the ultimate award is made. The time restriction for submitting arbitration claims is three years. A single arbitrator will hear an arbitration reference for a claim/counterclaim up to Rs 25 lakhs, while a panel of three arbitrators will hear claims beyond Rs 25 lakhs. The appointment of arbitrators should be completed within 30 days of the applicant’s application being received. Within four months after the appointment of arbitrators, the arbitration shall be finished by issuing an arbitral award. The arbitration facility must be provided at SEBI-designated arbitration centers.[11]Furthermore, if any party to the arbitration is unsatisfied with the award, the party may submit an appeal against the judgement through the Stock Exchange’s Appellate process. Also, Chapter 15 of the Model Bye Laws of the Stock Exchange[12] contains procedures for resolving securities disputes through the Arbitration and Conciliation process. As part of the Bye Laws, the provisions of the Arbitration and Conciliation Act of 1996 apply. ONLINE DISPUTE RESOLUTION SYSTEM The proposal to implement an ODR system and extend it to all registered intermediaries in the securities market was

[By Parv Jain & Palash Varyani] The authors are students of Institute of Law, NIrma University.   Introduction Recently, in a breakthrough announcement, the Securities and Exchange Board of India (SEBI) Chairperson, Mrs. Madhabi Puri Buch has declared that the SEBI intends to implement one-hour trade settlement in Indian stock exchanges by March 2024. According to her, India will be the first jurisdiction in the globe to move towards one hour trade settlement and it will be a stepping-stone to instantaneous settlement. This article provides an insightful analysis of SEBI’s introduction of the one-hour trade settlement system in India. It highlights certain advantages of this system, encompassing increased market efficiency and reduced settlement risk. Furthermore, it predominantly focuses on potential concerns, notably amplified market volatility and the imperative for substantial technological enhancements. The article places significant emphasis on the meticulous execution and training requisite for the seamless adoption of the new settlement framework. Additionally, it underscores the potential susceptibility to fraudulent activities, necessitating robust risk management strategies. What is One-Hour Trade Settlement? Settlement is a two-way process that involves the transfer of money and securities on the settlement date. A transaction settlement is considered to be complete when stocks, once purchased from a listed company are delivered to the buyer and the seller receives payment. From February 25, 2022, India became the second nation in the world to begin the ‘trade-plus-one’ (T+1) settlement cycle in top-listed securities, offering operational efficiency, quicker fund transfers, share delivery, and ease for stock market players. Trade-plus-one (T+1) settlement cycle means that settlement relating to trades will take place within a day. But now, with the introduction of one hour trade settlement, when an investor would sell a share, the sale proceeds would be deposited to his account within an hour, and the purchaser would receive the sold shares in their demat account within the same time period. This will lead to a significant reduction in settlement time compared to the existing T+1 settlement. Merits of Implementing the One-Hour Trade Settlement Regimen The one-hour trade settlement system is a revolutionary approach that brings numerous advantages to the financial markets. This innovative system has been meticulously designed to significantly bolster market efficiency while simultaneously reducing settlement risks, particularly those associated with counterparties and market fluctuations. The core premise of this system is the swift settlement of trades within a mere one-hour timeframe, a feature that unlocks a plethora of benefits for investors and the broader financial ecosystem. The primary benefit of this rapid settlement cycle is the speed at which investors can access their assets and the proceeds from their trades. This newfound agility promotes liquidity within the market, allowing investors to quickly reinvest their funds. Consequently, this not only benefits individual investors but also contributes to the overall stability of the market. By minimizing the duration during which financial commitments are open, this system mitigates the potential for market disruptions and enhances reliance on the financial infrastructure. In addition to these advantages, the implementation of such an innovative system places India at the forefront of global financial innovation. It underscores India’s commitment to nurturing a technologically advanced and competitive market ecosystem. This move not only attracts domestic investors but also positions India as an attractive destination for international investors seeking a cutting-edge and efficient financial marketplace. The one-hour trade settlement system represents a significant leap forward in the realm of financial markets. Drawbacks of the One-Hour Trade Settlement System The introduction of the one-hour trade settlement system showcases a promising future for the financial ecosystem. However, it is crucial to acknowledge that this progressive shift may also present certain drawbacks and challenges that warrant careful consideration. The potential drawbacks can be outlined as follows: Market Volatility: With the introduction of one-hour trade settlement system and swift transfer of funds; liquidity would exponentially increase. This increase in liquidity can lead to a sense of urgency among market participants, which may influence their trading behaviour. Generally, more liquidity and increased volumes of trade are appreciated but this has some drawbacks too. For example, more liquidity may lead to less stability and more volatility, and due to this, traders may feel compelled to make rapid decisions, especially in times of market uncertainty or breaking news. They may not have sufficient time to thoroughly analyse market conditions or company fundamentals before executing trades. This can result in impulsive trading decisions thereby resulting in regular hitting of upper and lower circuits. The compressed settlement window encourages traders to buy or sell securities within a shorter timeframe. As a result, price fluctuations can become more pronounced as traders rush to complete their transactions, potentially leading to increased price volatility. Furthermore, traders may react more impulsively to news events, earnings releases, or economic data, leading to exaggerated market moves. In a one-hour settlement system, there would be limited time for the information to be digested and for rational decision-making, increasing the risk of overreactions and herding behaviour. Hence, the perception of a more volatile market may discourage long-term investors, such as institutional funds or retail investors, from participating. They may opt for less risky assets or investment vehicles with longer settlement cycles. Technological & Infrastructural Constraints: Transitioning to a one-hour trade settlement system requires substantial upgrades to the technology and infrastructure of stock exchanges, brokers, and other market participants. This includes enhancing trading platforms, and communication networks to handle the increased volume and speed of transactions. In such a system, all trade-related data, including order execution, trade confirmation, and settlement instructions, must be processed in real time. This necessitates high-speed data processing and analytics capabilities to ensure accuracy and minimize errors. Regulators will require robust technology solutions for real-time monitoring, surveillance, and reporting. They must be able to track and investigate trading irregularities and market abuses promptly. SEBI Chairperson, Mrs. Madhabi Puri Buch has indicated that the necessary technology for achieving a one-hour trade settlement is presently available. However, the implementation of a one-hour trade settlement system demands a comprehensive overhaul

[By Bipasha Kundu] The author is a student at WBNUJS, Kolkata. Introduction The real estate sector holds special importance in the Indian economy, owing not only to its role as one of the major employers but also due to the multiplier effect it has on various other industries operating in the economy. As of 2022, as many as 5,00,000 real estate housing projects were stalled in India and were worth around Rs. 4.48 lakh crores. The same is a manifestation of the liquidity crisis which the real estate sector seems to be perpetually marred with. Traditional routes of financing are proving to be inadequate to keep this sector afloat all by themselves. Meanwhile, Alternative Investment Funds (“AIFs”) are increasingly gaining prominence in India.  As per data published by the Securities and Exchange Board of India (“SEBI”), as of 30th June, 2023, commitments worth around Rs. 8.45 lakh crores were raised, funds worth about Rs. 3.74 lakh crores were raised, and about Rs. 3.50 lakh crore worth of investments were made by registered AIFs cumulatively. Several Category II AIFs have their investment strategy focussed on real estate projects. These AIFs, with time, have become important for financing a number of real estate projects so that they can reach the stage of completion. In this article, I attempt to unpack the nuances of the liquidity crisis in the real estate sector and analyse how AIFs are mitigating the same. Understanding the Liquidity Crisis in the Real Estate Sector The premise of the article is that there exists a liquidity gap in the real estate sector in India. Naturally, it becomes imperative to address what exactly does liquidity mean and what the factors contributing to the same are, as far as the real estate sector is concerned. Liquidity in the market determines how difficult or easy it becomes for real estate project developers to arrange construction finance. Construction finance is not only necessary for the project developers to start the construction of the project, but  also to contribute heavily to the working capital. As per some estimates, working capital can amount to around half of the entire cost of the project, and lack of the same can adversely affect the sustenance of this sector. One of the major reasons for the liquidity crisis in the real estate sector is the NBFC crisis. The NBFC crisis was triggered by the IL&FS blow-up of 2018. IL&FS defaulted on its repayment for the very first time in June 2018, which was worth about Rs. 450 crores. Three months later, IL&FS defaulted again, and this time it is worth around Rs. 1,000 crores. This is when IL&FS’ credit rating starts to significantly decrease. It was estimated that IL&FS was under a massive debt of around Rs. 91,091 crores at that point in time. A possible reason for this crisis could be the fact that IL&FS chose to fund long-term projects by means of short-term loans. However, as the total debt of IL&FS increased, the cost of borrowing increased too. Consequently, taking more short-term loans became increasingly difficult, which in turn led to a delay in the projects. Ultimately, it became difficult for IL&FS to make timely repayments. Meanwhile, it becomes more and more expensive for the NBFCs to borrow. Additionally, mutual funds become extremely cautious in lending to NBFCs. The share of both commercial and housing real estate has consistently risen in NBFC lending. Funding in the real estate sector has become more and more dependent on NBFCs in light of the contracted lending from banks. The increased dependence of the real estate sector on NBFCs for funding makes them more vulnerable in light of cautious lending of NBFCs. RBI released a circular on 19th April, 2022, specifying the regulatory restrictions on lending activities of NBFCs of the middle and upper layers. The circular categorically mentions that loans to the real estate sector are to be disbursed only when the borrower has obtained all the required permits and clearances from the appropriate statutory bodies. The circular came into effect on 1st October, 2022. In light of the 2018 NBFC crisis, these regulatory restrictions seem to be a prudent step in ensuring that NBFCs does not undertake disproportionately high amount of risk. However, NBFC funding has been the most crucial in the very initial stages of real estate projects and these regulatory restrictions could potentially have an adverse effect on it. The onset of the COVID-19 pandemic further widened the liquidity gap created in the market due to the NBFC crisis as lending decreased significantly. The focus of banks also shifted from commercial real estate to retail loans in the housing sector in order to minimize risk. The cost of common raw materials like cement and steel has also witnessed a significant increase due to the pandemic. What are Real Estate Based AIFs? In India, AIFs are regulated by Alternative Investment Funds Regulations, 2012. AIFs are “privately pooled investment vehicles.” The fund itself can be structured as a trust, company, limited liability partnership, or a body corporate and it has to invest the collected funds according to the defined investment policy. Even though the fund needs to be incorporated in India, it can collect investments from both Indian and Foreign investors. However, funds that come under the ambit of SEBI’s other regulations (like the Mutual Funds Regulations and Collective Investment Schemes Regulations) do not qualify as AIFs. There are three categories of AIFs. Category I AIFs are supposed to be “socially and economically desirable.” Category II is the residuary category. Category III AIFs are those that employ very “diverse and sophisticated” trading strategies. Real estate based AIFs fall under Category II. However, it is important to note that these AIFs cannot directly invest in any real estate projects. They can only invest in securities of the real estate project developer companies. Any such real estate based AIF cannot invest more than 25% of its investible funds in a single company. Real estate based AIFs are considered comparatively

[By Hemant Tewari & Apoorva Singh Rathaur] The authors are students of Dharmashastra National Law University, Jabalpur.   Introduction Exchange Traded Funds (ETFs) stand as mutual fund instruments affording access to an index or a collection of securities, trading on exchanges akin to individual stocks. Investors can seamlessly trade ETF units at prevailing market prices, enjoying exposure to distinct sectors, styles, asset categories, industries, or nations. ETFs offer cost efficiency surpassing conventional open-end funds, coupled with trading flexibility, diversification, and heightened transparency. The buy-and-forget strategy is often forced down retail investors’ throats with all finfluencers standing mighty behind it. As a retail investor, one can buy instruments like mutual funds and ETFs and only hope helplessly that their value increases. But retail investors are left without options when they would want to hedge their portfolios or short-sell securities. Derivatives like futures, options, and short-selling are risky and expensive ways of facilitating your bearish ambitions. On such occasions, Inverse ETFs become the harbinger of financial justice. The goal of inverse exchange-traded funds is to produce returns that are the opposite of those of an underlying index or benchmark. Inverse ETFs use financial derivatives like futures contracts to achieve their inverse performance. They are cheaper as compared to traditional shorting of stocks and using derivatives, with no need of maintaining a margin account or pay a stock loan fee. Daily churning is the norm with inverse ETFs and they are recommended for investors with a short-term view of the index. Currently, Inverse ETFs are not allowed in India and are regulated by SEBI. Introducing inverse ETFs would provide a wider range of financial products to retail investors and can facilitate the development of the market. It would also improve the ease of doing business without compromising the basic tenets of investor protection and risk mitigation in the market ecosystem. Present Standings In India, the first ETF, called Nifty BeEs, was launched in 2002 by Benchmark MF. The ETF industry has matured since then, the number of passive mutual fund schemes in March 2023 was 349, up from 229 in June 2022, representing a 52% increase with a net Asset under management(AUM) upwards of 5 lakh crores. It represents the growing trend of passive investors and the strength of the ETF market. Benchmark MF had submitted a document proposing setting up India’s first Inverse ETF in 2004 but later withdrew the document after it was acquired by Reliance from Goldman Sachs. No such attempts have been made by any AMC since and Inverse ETFs were unable to garner any support from SEBI or any AMC. The Indian Regulator does not allow Inverse ETFs in India. However, the National Stock Exchange(NSE) has two Inverse indices that the AMCs or retail investors can track- NIFTY50 PR 1x Inverse Index NIFTY50 TR 1x Inverse Index Inverse ETFs that track these Indian indices do exist. They are however listed in foreign jurisdictions and not in India. Fubon Asset Management, located in Taiwan, launched the Nifty50 PR 1X Inverse ETF in October 2014. Similarly, in 2016, Hong Kong-based CSOP Asset Management created the CSOP Nifty 50 Daily (-1x) Inverse ETF. Inverse ETFs have grown in developed markets with the introduction of leveraged inverse ETFs wherein a move in any direction in the index is inversely mirrored by 200% i.e. if the leverage is 2x. Recently, Horizons ETF became the first fund to release the Bitcoin inverse ETF called the BetaPro Inverse Bitcoin ETF (“BITI”) on the Toronto stock exchange. The Indian markets also welcomed for the first time, debt ETFs in the markets. Internationally, there are Inverse ETFs for almost all the major global markets e.g. Europe (ProShares UltraShort FTSE Europe), China (Direxion Daily CSI 300 China A Share Bear 1X Shares), Japan (UltraShort MSCI Japan ProShares), Brazil (ProShares UltraShort MSCI Brazil), Emerging Markets (UltraShort MSCI Emerging Markets). There are Inverse ETFs for currencies as well like e.g. ProShares Short Euro (EUFX); which seeks to deliver minus 1x return of EUR over USD. Such developments in developed and emerging markets signify a strong demand for Inverse tracking products and subsequently indicate the robustness of Inverse ETFs. Benefits Inverse index ETFs offer several compelling advantages: Limited Risk: When investing in inverse index ETFs, the maximum potential loss is confined to the unit price of the ETF, similar to purchasing regular stocks. This is a significant improvement over alternative bearish strategies like shorting stocks or utilizing option strategies, both of which can lead to potentially unlimited losses. In this sense, using inverse index ETFs provides a more controlled risk environment. Daily Profit Potential: Investors leveraging inverse index ETFs have the unique opportunity to profit from declining stock prices on a daily basis. This ability to benefit from short-term market movements provides a dynamic approach for capitalizing on bearish trends. Cost-Effective Approach: Inverse index ETFs serve as a cost-effective means to express a bearish stance. Comparable to other exchange-traded funds, they typically maintain low expense ratios. This cost efficiency is particularly valuable for investors seeking to implement tactical strategies without incurring substantial fees. For domestic investors, options for bearish strategies are limited. Shorting stock or index futures is risky. Buying index or stock put options can be easier, but timing the market is challenging due to time value. Additionally, less-traded options and the volatile volatility index are risky alternatives, especially during turbulent times. Foreign Jurisdictions A direct comparison with developed markets might not be the best comparative strategy but comparing Indian markets to such jurisdictions where the markets are somewhat similar in size and socio-political context might help. For example, in Asia, countries like Japan, South Korea, Taiwan, and Hong Kong, have Inverse ETF products where total assets in such instruments at the end of 2022 amounted to about $20bn. The first Inverse ETF in Asia was launched by Deutsche Bank on the Singapore stock exchange tracking the S&P500 index. Outside Asia, New Zealand, and France have allowed Inverse ETFs. Maybank Asset Management is preparing to introduce Malaysia’s inaugural mutual