Capital Markets and Securities Law

[By Vaibhavi Pedhavi & Divik Silawat] The author is a student of Gujarat National Law University.   Abstract SEBI holds significant importance in the regulatory landscape of India’s securities market. After recognizing the importance of effective dispute resolution, SEBI has introduced “SEBI (Alternative Dispute Resolution Mechanism) (Amendment) Regulations, 2023”. The new amendment introduced by SEBI aims to enhance investor protection through dispute resolution. It covers a wide range of intermediary regulations, emphasizes on mediation and conciliation alongside arbitration, and introduces measures such as reducing timelines and recognizing designated bodies for grievance monitoring. This amendment has resulted in substantial modifications to the existing regulations that govern different entities operating in the securities market, with the aim of empowering investors. The authors of this article examine the scope of this new amendment introduced by SEBI and its impact on investor protection, with a focus on promoting transparency, trust, and confidence in the securities market through effective dispute resolution mechanisms. Dispute Resolution Mechanism of SEBI In order to safeguard investor interests, build trust, transparency, and awareness in the securities market, SEBI has Alternate Dispute Resolution (ADR) mechanism. This mechanism aims to provide an effective resolution platform for disputes between investors and regulated entities, ensuring their protection and enhancing confidence in the market. SEBI has established an online platform called the “SEBI Complaint Redress System” (hereinafter, SCORES) which allows investors to approach SEBI directly for dispute resolution without having to exhaust other channels first. By providing an accessible online platform, it simplifies the complaint registration process for investors. Within the framework of SCORES, investors have the opportunity to resolve disputes through arbitration if they hold an account with a depository participant or a broker. This option provides investors with an alternative means of resolving conflicts, further enhancing the effectiveness of SCORES mechanism in addressing grievances in the securities market. When an investor’s grievance remains unresolved by a stock exchange or depository due to disputes, the investor has the option to file for arbitration according to the rules and regulations of that specific stock exchange or depository. This mechanism provides for additional avenue for resolving conflicts and seeking fair resolutions in the securities market under  chapter 15 of the “Model Bye Laws of Stock Exchange”. SEBI’s ADR mechanism, facilitated through the SCORES platform, and the Model Bye Laws for Stock Exchange outline the procedure for arbitration in resolving investor disputes related to the securities market. These mechanisms establish the guidelines and framework for conducting arbitration proceedings, ensuring a structured and fair process for resolving conflicts between investors and market participants. About the amendment On July 4, 2023, SEBI introduced the “SEBI (Alternative Dispute Resolution Mechanism) (Amendment) Regulations, 2023”. These regulations were introduced to modify the existing 17 regulations that govern various SEBI-regulated intermediaries, such as Merchant Bankers, Mutual Funds, Credit Rating Agencies, Alternative Investment Funds, Investment Advisers, etc. For each category of market intermediaries, SEBI has formulated separate investor charters. These charters encompass crucial details regarding the services offered by intermediaries to investors, including specific timelines, significance of preserving relevant documents, and also outline the mechanism for resolving investor grievances. Additionally, the “SEBI (Listing Obligations and Disclosure Requirements) Regulations” for listed companies were also subject to amendments. The revised mechanism now includes clauses for “mediation, conciliation, and arbitration”, with the guidelines issued by the SEBI’s board for each intermediary. These amendments are primarily intended to create a thorough dispute resolution structure, which is essential in resolving any claims, disagreements or disputes that may arise between these entities and their clients or investors. Procedural modifications through the amendment Reducing timelines: This revamp includes reducing the timelines for resolving complaints, implementing an automatic routing system that directs complaints to the relevant regulated entities, and auto-escalating complaints when the prescribed timelines are not adhered to by the regulated entity. By implementing these provisions, the amendment ensures a more efficient and timely resolution of investor grievances, promoting transparency and accountability among regulated entities and ultimately enhancing investor protection in the securities market. Recognizing designated bodies for monitoring: The new amendment has brought about investor protection enhancements through dispute resolution by recognizing designated bodies responsible for monitoring and handling grievances filed by investors against regulated entities. This recognition ensures that there are specific entities assigned to oversee the resolution of investor complaints, providing a dedicated and specialized approach to addressing investor grievances. By establishing these designated bodies, the amendment strengthens the investor protection framework and ensures that their concerns are effectively addressed in a timely manner. Integration of SCORES and Online Dispute Resolution Platform: To enhance investor empowerment and improve the resolution of investor grievances in the securities market, SEBI has approved revamping of the SCORES. SCORES will be linked with an Online Dispute Resolution (ODR) platform, providing investors with an additional avenue for resolution. Lastly, a new portal will be created to collect market intelligence inputs. Two Levels of Review: Additionally, designated bodies will be recognized for monitoring and handling investor grievances, offering a two-level review process. In this process, if an investor is unsatisfied with the resolution provided by the regulated entity, the designated body responsible for monitoring and handling investor grievances will conduct the first review. If the investor remains dissatisfied even after the first review, the second review will be conducted by SEBI. Creation of a portal: This initiative is aimed at enhancing investor protection through dispute resolution by providing a platform for gathering valuable market insights. The new portal serves as a means to gather information and data that can contribute to a better understanding of market dynamics and potential issues that may affect investors. By utilizing this portal, regulators can stay informed and take proactive measures to address any emerging concerns, thereby strengthening investor protection in the securities market. Enhancing Investor Protection The new amendment introduced by SEBI differs from the previous framework in several significant ways. Unlike the previous framework, which may have had limited or specific provisions for dispute resolution, the new amendment covers all intermediary regulations. This means that it

[By Vikram Singh Meena &Rajvi Shah] The authors are students of Gujarat National Law Univeristy, Gandhinagar.   Introduction Recently, the Securities Appellate Tribunal (“SAT”) set aside an order by the Securities and Exchange Board of India (SEBI) that would have compelled the National Stock Exchange (NSE) to disgorge Rs. 625 crores as a penalty for violating the SEBI (PFTUP) Regulations, 2003 in the co-location scam. In 2019, the NSE was ordered by the Whole Time Member (WTM) of SEBI to disgorge Rs. 624.89 crores (with interest at the rate of 12% p.a. from April 1, 2014) to the Investor Protection and Education Fund (IPEF), following an investigation by SEBI. SAT while setting aside this order noted that the “WTM had exonerated NSE of the charge of violating SEBI regulations”. The authors seek to analyse the approach of SAT towards SEBI in the NSE Co-location case, considering the amount of penalty involved along with the seriousness of the alleged fraud. About the scam  In the year 2009, the NSE introduced co-location facilities, offering traders and brokers the opportunity to house their servers within the NSE data centre for a monthly fee. This allowed them to enjoy advantages such as low latency connectivity, faster access to price information, and quicker transaction execution by being in close proximity to the stock exchange servers. A whistleblower claimed in various complaints to the market regulator in the year 2015 that certain brokers involved in algorithmic trading had access to the NSE systems via hardware specifications that allowed them to gain access to the data stream of the exchange in a fraction of a second faster than other brokers. Thus, a trader who connects to the NSE server using the least load would receive updates on buy/sell orders, cancellations, and modifications and traders before those who join the exchange server later. Unlike a broadcast, where everyone receives the pricing information at once, this ‘Tick-By-Tick’ (TBT) data feeds distributed information sequentially in the order the brokers connected or signed in to the server. SEBI’s order SEBI issued an order in the NSE co-location case in 2020, which involved allegations of unfair access to the NSE’s trading systems by certain traders, known as “co-location” clients. SEBI’s investigation found that the NSE’s systems and processes were unfair, non-transparent, and discriminatory, thereby violative of the provisions of the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 and the SEBI (PFUTP) Regulations, 2003. In its order, SEBI imposed a fine of Rs. 625 crores on the NSE for failure to ensure fair access to its trading systems. The regulator also barred the exchange from launching any new products or services for six months and directed it to conduct a forensic audit of its systems and processes. The NSE was also directed to put in place proper systems and processes to ensure fair access to its trading systems. SEBI also imposed a fine of Rs. 1 crore on the former Managing Director and Chief Executive Officer of NSE, Chitra Ramkrishna, and Rs. 25 lakhs each on three former executive directors of the exchange – Ravi Narain, R. Srinivasan and C. B. Bhave for their failure to ensure fair access to the trading systems. The SEBI order also imposed a fine of Rs. 5 crores on SUN Trading and Rs. 25 Lakhs each on three individuals, Rajendra Gupta, Ashok Kumar Jain and R. Venkattesh who were found to have availed unfair access to NSE systems. SEBI’s order also directed NSE to disgorge the amount of Rs. 62.50 crores, which has been calculated as the net profit made by the NSE due to the above-mentioned violation. This disgorgement amount was to be deposited with SEBI within 45 days from the date of the order. SAT’s order SAT set aside the order noting that the WTM had exonerated NSE of the charge of violating SEBI regulations. A bench of Justices Tarun Agarwala (Presiding Officer) and MT Joshi (Judicial Member) held in its order passed on January 23, “In the instant case, the lack of due diligence is not on account of any violation of any provisions of the Act or the Regulations or circulars but is on account of human failure to comply with the circulars completely in letter and spirit… …WTM has exonerated NSE of the charge of violation of the PFTUP Regulations holding that no fraud was committed by NSE or its employees. We, therefore, find that the activity of NSE was not in contravention of any provisions of the SEBI Act or the Regulations or circulars made therein and it is only a case of non-adherence of a circular to some extent.” The Appellate Tribunal, however, directed the NSE to deposit a sum amounting to ₹100 crores in the IPEF as a deterrent and as a penalty for lack of due diligence which resulted in -“a lapse which is not expected from a first-level regulator”. Moreover, SAT overturned the order that prohibited NSE from entering the securities market for six months and ordered NSE to conduct system audits regularly. Impact Analysis of the SAT order The entire saga, which is far from over, has taken a new turn since the SAT ruling. The order stated that SEBI’s approach was sluggish and lackadaisical, taking turns based on what transpired on the floor of parliament. The position of SAT in cases of disgorgement has been constant since the very establishment of the concept. In National Securities Depository Ltd. vs. SEBI, the SAT under the then-Presiding Officer Chief Justice N K Sodhi held that, “persons who have made illegal or unethical gains alone may be required to disgorge their ill-gotten gains.” This was in the context of the IPO scam (Roopalben Panchal Scam), in which SEBI issued a disgorgement order against depositories NSDL and CDSL for failing to conduct adequate due diligence by allowing certain key operators, financiers, and afferent account holders to create multiple demat accounts using photographs from Shaadi.com, and ultimately cornering the retail quota in as many as 21 IPOs. The SAT

[By Mainak Mukherjee] The author is a student of National Law University and Judicial Academy, Assam.   Introduction The Securities Exchange Board of India (SEBI), through its Consultation Paper dated May 18, 2023, has proposed an amendment to the definition of Unpublished Price Sensitive Information (UPSI) as outlined in the SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT). This proposed amendment seeks to incorporate the term “material events” following Regulation 30 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR) within the existing definition of UPSI as provided under Regulation 2(1)(n) of the PIT Regulations. This article explores how bringing ‘material events’ under the purview of UPSI could lead to increased confusion in the market, potentially contradicting the initial goal of implementing the amendment. Understanding UPSI and ‘material event’ under SEBI Regulations Before delving into this analysis, it is pertinent to understand the definition of UPSI and Regulation 30 of LODR. SEBI has defined UPSI in the matter of Biocon Limited. The watchdog has said that a host of factors determine if a UPSI exists; these are the nature of the transaction; progress and negotiation; increasing probability of the transaction, and so on. Therefore, for each unique matter, the entire facts and circumstances of the matter must be examined without giving any undue weightage to any one aspect before arriving at a conclusion on the existence of UPSI. On the other hand, Regulation 30 of the LODR necessitates that listed companies promptly disclose all material events to the stock exchanges within 24 hours of the occurrence of such events. Material events encompass a range of significant occurrences, including acquisitions, potential investments, changes in management, and financial results. These events have the potential to impact the company’s share price significantly. Nevertheless, despite their impact, these events are not classified as UPSI but are announced through press releases. In its Consultation Paper, SEBI refers to a study conducted between January 2021 and September 2022, wherein 1,100 press releases issued by 100 listed companies were examined. The study revealed that in 227 instances, the index experienced price movements exceeding 2%. However, out of these 227 instances, only 209 press releases were not categorized as UPSI by the respective companies. Although, this demonstrates the need for SEBI to address this issue quickly; the question remains: Can UPSI under PIT and material events under LODR go hand-in-hand? Exploring the relationship between UPSI and ‘material events’ Sub-regulation 2 of Regulation 30 of LODR states that events specified under Para A of Part A of Schedule III are deemed material events, and all listed entities must disclose such events. This indicates that the LODR has a deeming fiction in play, and one must not refer to external factors to determine the necessity of disclosure. The Hon’ble Supreme Court in Smt. Sudha Rani Garg v. Sri Jagdish Kumar[1] has ruled that the usage of the word “deemed” in legislation expresses the legislative intent of creating fiction. On the other hand, the definition of UPSI outlines two main elements; firstly, the information should not be generally available, and secondly, the information, on becoming generally available, is like to affect the price of the securities materially. Interestingly, the definition further states that UPSI shall ‘ordinarily include, but not be restricted to…’ followed by certain aspects. The presence of the term “ordinarily” indicates that the list is non-exhaustive and that there could be information not covered by the list, which may be UPSI. This shows that the concept of “deemed” is absent in the definition of UPSI. The most crucial test for UPSI is whether the information will likely affect the price if it becomes generally available materially. This test is similar to the “Vendibility Test” of marketability formulated by the Supreme Court in Union of India v. Delhi Cloth and General Mills Company Limited. In this case, the apex court, while determining the existence of a market, stated that the presence of an actual market containing buyers and sellers should not be considered; instead, it should consider the aspect: whether a market exists or not. Similarly, when it comes to UPSI, the actual focus is not on the actual impact of securities’ prices but on the likelihood of such information materially affecting the price of securities upon becoming generally available. Moving on, Regulation 30(4) of LODR states the different criteria a company should consider for determining the materiality of information and events. Further, sub-clause (b) of sub-regulation 4 states that “the omission of an event or information is likely to result in a significant market reaction if the said omission came to light at a later date”. This throws light on the fact that there is a likelihood that such information will result in a market reaction if the said omission gets disclosed at a later date. Now reading the definition of UPSI and interconnecting it with Regulation 30 tells us that there could be situations where a piece of information which is deemed material under LODR can also be considered as a UPSI if it triggers materiality based on LODR Regulations 30(4)(b) – where a failure to disclose the information can create a market reaction when later revealed. Market reaction refers to interference with the market, which affects the demand, supply, and price. Therefore, a common thread exists between SEBI’s PIT Regulations and LODR Regulations, particularly the definition of UPSI and Regulation 30. Conversely, although listed in Para A, every material information under Regulation 30 is not a UPSI because the test for UPSI is one, whereas the test in LODR, particularly Regulation 30(4)(b), is three-fold. The test for UPSI is based on likelihood; that is, there must be a likelihood of information which can materially affect the price, so if this parameter is met, the information qualifies as material information as well as UPSI. To put it in simpler terms, since every UPSI will materially impact the price and likely result in a significant market reaction, it would be considered “material” under LODR. This means that every UPSI can be called material,

[By Riva Khan] The author is a student of Hidayatullah National Law University.   INTRODUCTION SEBI has unveiled its proposed regulatory reforms for Alternative Investment Funds (AIFs) in India through five consultation papers released on February 3, 2023. Seeking public feedback, these papers outline the next level of reforms SEBI is planning for AIFs. The proposed changes include enhanced regulatory norms that aim to improve investor protection and promote the growth of the AIF industry in India. If the proposals outlined in the consultation papers are adopted, they have the potential to trigger a significant transformation in the AIF industry, particularly in terms of improving transparency and facilitating greater transferability for investors. AN ANALYSIS OF THE SAME IS GIVEN BELOW Currently, according to Regulation 4(g) of SEBI AIF Regulations, at least one key managerial person of a Manager of the AIF must have “adequate experience” in managing pools of assets or wealth or portfolio management for a period of five years. However, it is being proposed that this requirement be substituted with the condition that the key investment team and the compliance officer of the Manager of the AIF must acquire relevant certification from an institution that has been notified by SEBI. The proposed alteration, which aims to replace the current prerequisite of possessing five years of experience with a certification requirement, is intended to ensure that the vital managerial personnel of an Alternative Investment Fund (AIF) possess the requisite knowledge and skills to efficiently handle the assets of the AIF. As per the proposed modification, the vital investment team and the compliance officer of the Alternative Investment Fund (AIF)’s manager would be mandated to obtain appropriate certification from an institution that has been notified by SEBI. This certification would indicate that the individuals have undergone training and have acquired the necessary knowledge and skills to manage the assets of the AIF. The advantage of this proposed change is that it would create a level playing field for all AIF managers. Currently, the requirement of five years of experience can act as a barrier to entry for new players in the market. However, with the certification requirement, new players can also enter the market, provided they meet the certification criteria. Additionally, the certification requirement would ensure that the key managerial personnel of an AIF have a standardized level of knowledge and skills, which would enhance the overall professionalism and credibility of the industry. However, there could be some concerns with this proposed change. For instance, some investors might prefer experienced managers over certified managers. Moreover, the certification process might not adequately capture the practical knowledge and experience required to manage an AIF’s assets effectively. At present, an Alternative Investment Fund (AIF) is required to seek the agreement of 75% of its investors (based on the value of their investments) prior to making any investments in the associates or units of AIFs managed or sponsored by its Manager, Sponsor, or their associates. However, SEBI has proposed to expand this requirement to cover the buying and selling of investments from or to associates, including schemes of AIFs managed or sponsored by the Manager, Sponsor, or their associates. In other words, the AIF must also seek the approval of 75% of its investors (by the value of their investments) for such transactions. The reform claims that the suggested changes to the AIF Regulations are consistent with the Regulations’ spirit and will enhance their scope in identifying and dealing with conflicts of interest in a more efficient manner. However, without further context or specific details, it is difficult to evaluate the extent to which these changes will achieve their intended goals. Additionally, it is crucial to assess whether the proposed amendments address the most significant conflicts of interest issues in the AIF industry and whether they are enforceable and practical to implement. Despite the registration of more than 1000 Alternative Investment Funds (AIFs) with SEBI, only a handful have adhered to the stipulated procedure established by CDSL and NSDL for the dematerialization of their units. To ensure compliance across the board, SEBI has suggested that all AIFs should be required to dematerialise their units. By April 01, 2024, it will be mandatory for all AIF schemes with a corpus of more than INR 500 crore to dematerialise their units. At present, despite the registration of more than 1000 Alternative Investment Funds (AIFs) with SEBI, only a small number have fulfilled the procedure for the dematerialization of their units as per the protocols established by CDSL and NSDL. To ensure consistency and conformity, SEBI is proposing to make the dematerialization of AIF units obligatory. Starting from April 01, 2024, it will be mandatory for all Alternative Investment Fund (AIF) schemes that have a fund size exceeding INR 500 crore to convert their units into dematerialized form. SEBI has identified potential issues with double payment and mis-selling in AIF investments made through intermediaries such as placement agents or distributors. To address these concerns, SEBI has proposed two solutions: (a) A new requirement has been put in place for Alternative Investment Funds (AIFs) to provide investors with the option of a direct plan that does not involve any distribution or placement fees. This direct plan will offer investors a higher number of units compared to other investment plans. It is required that all investors, irrespective of their investment mode, receive an equivalent Net Asset Value (NAV) for their units. Furthermore, Alternative Investment Funds (AIFs) are accountable for directing investors who use intermediaries that levy fees towards the direct plan. (b) All Alternative Investment Funds (AIFs) are permitted to levy a placement or distribution fee on investors on a recurring basis. Nonetheless, for Category I and II AIFs, intermediaries may be paid an upfront amount of a greater proportion of the total distribution fee (equal to one-third of the present value) in the initial year. SEBI has proposed two measures to tackle the issue of mis-selling and double payment that may occur when investors invest in Alternative

[By Dhvani Shah] The author is a student of Gujarat National Law University.   Introduction An estimated USD 15 billion is floating around in India’s crypto-asset sector. Indian IPs accounted for 5% of worldwide crypto asset exchange traffic from January 2018 to December 2020, indicating a large crypto community. Recent research suggests that approximately 6 million people, or roughly 0.5% of India’s total population, are active in the crypto space. India’s crypto asset sector is expanding at an unprecedented rate. It is home to an estimated 15 million Virtual Digital Assets (VDA) investors and 350 crypto-based startups. Over the next 18-27 months, such enterprises plan to invest over USD 6.7 billion. It is estimated that Indians have invested roughly USD 10 billion into VDAs. The Reserve Bank of India (RBI) and the government seem against regulating the crypto market in 2014; the RBI issued a caveat to the public against the risks of trading in virtual assets and its violation of the then-existing foreign exchange laws in the country. The tussle between RBI and regulation of the crypto asset market has been long-standing for over 9 years and has been precisely discussed in the Representation before the Government of India. What constitutes Virtual Digital Assets (VDAs) Virtual Digital Assets (VDA) have been finally defined in the Finance Act, 2022 with the introduction of clause 47A to Section 2 of the Income Tax Act, 1961. The Indian Supreme Court, in the decision of Internet and Mobile Association of India v. RBI[1]relied on the definition of ‘virtual currency (VC)’ as per the FATF Report which described VCs as a digital unit that can be traded and serves as “(1) a medium of exchange, (2) a unit of account, and (3) a store of value in the digital economy, but is not a government-issued legal tender.” The Court also deciphered the definition of VCs by various courts in different jurisdictions to mean property, commodity, or payment method. Interestingly, the Hon’ble Court also deduced that VDAs can be treated as an ‘intangible property’ or ‘good’. (For this blog, VDAs, crypto assets, and crypto-currency are used interchangeably). The VDA market requires regulation as banning its trading could do more harm than good as buying and selling of crypto can be treated as an occupation, and a blanket ban on its trading can invoke the fundamental right to freedom of trade and profession.[2] The government is also on the path to introducing Central Banking Digital Currency (CBDC) which would again make regulation of the crypto market necessary before its introduction into the Indian economy. For instance, the Enforcement Directorate, India’s principal body for investigating money laundering offences and violation of foreign exchange laws, has issued notices to WazirX, a cryptocurrency exchange for suspected breach of the Foreign Exchange Management Act, 1999 (FEMA). It is challenging for crypto asset service providers to navigate regulatory frameworks without guidance from authorities on how FEMA or other laws may affect their industry. Regulatory stability plays a crucial role in fostering consumer confidence in a market and in order to increase people’s confidence in the financial system, strict regulation is required. What constitutes Securities Now that we’ve seen the ‘what’ and ‘why’ let’s dive into the placing of VDAs in the existing legal framework.           (i) VDAs as ‘Security’ Securities are tradeable financial instruments with monetary value issued to raise capital. The Securities Contract Regulation Act, 1956 (SCRA) under Section 2(h) defines “securities” to be inclusive of marketable securities in an incorporated company, government securities, and any such instrument notified by the Central Government as securities.[3] This definition is wide in its ambit as the government can notify and expand ‘securities’ to cover other additional instruments. ‘Marketability is an important characteristic of securities[4] and should mean something that is capable of being bought and sold in the market regardless of the market size and has high liquidity and ease of transferability.[5] While this ease of transferability is a characteristic restricted to securities of a publicly listed company, VDAs also possess this feature of ease of transferability. To dissect the quality of ‘marketability’ in VDAs, these assets are capable of being freely bought and sold in the market through crypto-exchange platforms like Wazir X, CoinDCX, ZebPay, etc. that aid investors in trading in the crypto market. However, these crypto-platforms, due to lack of any guidelines on the regulatory framework, operate cluelessly and often in the fear of violation of any law they might be unaware of to be complied with. While an average VDA transaction could take anywhere between 10 minutes to an hour, start-ups like Polygon in the crypto space are trying to develop platforms to expedite the transfer process. Ease of liquidity indicates the demand for an instrument in the market i.e., a readily available buyer or seller which brings stability to the market. VDAs can be converted to the fiat currency of a nation. Some crypto assets are more liquid than others which depends on their trade-ability. While the VDA market might be less liquid than other instruments right now, it is a rapidly booming sector with great potential for liquidity in the future. The VDAs can thus be deemed to be marketable security. The other roadblock in the existing definition of ‘securities’ to include VDA is that it is issued by an incorporated company ruling out a major chunk of the crypto assets. This is because crypto assets are created via minting anonymously and hence, even if a company mints crypto, the original issuer of the minted crypto-asset would be unidentified leaving it out of the ambit of the company. Crypto-currency exchanges like ZebPay have been incorporated with the Registrar of Companies (ROC) as private companies offering IT and Software services. Attempts to have a new company incorporated in India for the express purpose of operating as a cryptocurrency exchange have been denied by the ROC. Before rejecting an incorporation application, in a few cases, the ROC has provided notice to the applicant

[By Rajdeep Bhattacharjee and Aayush Ambasht] The authors are students of Symbiosis Law School, Pune.   Introduction By way of Circular dated April 5, 2023, the Securities Exchange Board of India (“SEBI”) devised a regulatory cobweb in order to regulate the code of conduct with regards to advertisements; which are to be strictly complied by the Investment Advisers (“IAs”) and Research Analysts (“RAs”) or who are popularly paralleled as social media handles which offer “financial and investment advice.” The Circular aims to clear pertinent conundrums pertaining to the behavioural aspect of both RAs and IAs in the aforementioned regard as well as aims to impose a degree of affirmative correspondence to conduct fair trade of securities in the Indian capital markets. In due furtherance of such interest, this research piece aims to dissect this Circular’s binding rationales and address its larger applicable discourse in the securities exchange regime. Further, the authors also highlight the following conundrums namely: Third party liability considerations, One-on-one communication concerns Limited material purview of registrations; of the SEBI’s Circular in conjunction with the U.S. Securities Exchange Commission’s amendment in this regard. Third Party Liability Considerations: A Double Edged Sword? The U.S. Securities Exchange Commission (“SEC”) vide amendment to Rule 206(4)-1, makes an explicit reference to ‘Marketing Rules” and “Third Party Statements” holding that any form of such advisers indulging in advertising financial insights (which may fuel market irregularities) shall also be liable to costs, as under the “Marketing Rules” concerning such communications with third parties. Pursuant to the same, it also outlines a requisite requirement for such advisers to comply with such marketing rules, independent of any third-party disseminations in this regard. As far as materiality thresholds are concerned pertaining to such third-party ratings, there is a definitive minimal imposition of $1,000 per calendar year backed by the adviser’s written statement as a blanket agreement to the same. Thus, the SEC not only clears the murkier waters of third-party liability, but also seems to hold a rational ground for ring fencing coherence on behalf of both: advisers and third-parties in the strictest regard. In the present instance, the SEBI fails to outline a parallel gordian knot of regulatory clarity as far as third-party liability in instances of falling under the verbiage of “advertisement” according to such IAs and RAs. Inadequacy along such lines leads to creating further arbitrary bottlenecks in identifying lapses and tracking grounds for holding the employees and/or subsidiaries who may also be liable in this regard. Further, the present Circular does not posit any clear regulatory dialogue as to whether third party statements such as disclaimer(s), endorsement(s) and testimonial(s) are to be incorporated under the definition of “advertisement” as an implied concern; including the treatment of proceeds arising out of such forms of advertisements. Lastly, affixing vicarious liability in cases revolving around a principal agent and/or master-servant contractual arrangements is another smokescreen, the aspect of which is absent in the present Circular. Therefore, the SEBI must furnish an informed interpretational autonomy in light of these pertinent discrepancies and address the growing salience of such lacunae at the earliest. One on One Communication Concerns: Are Physical Interactions Unguarded? One of the major lacunas of this Circular in question is that nothing is explicitly mentioned regarding one-on-one communication. The ambit of the definition of advertisement as is given is an umbrella one and mostly incorporates every form except the aforementioned form. This may amount to be problematic and defeat the entire purpose of the Circular as there are a plethora of finfluencer , IAs and RAs who conduct physical meet-ups wherein they extensively discuss stock trading. Furthermore, this could amount to prospective influencers accepting any solicited information and, as a result, this strengthens a veiled affirmation of inflating and/or deflating a stock without any accountability whatsoever, underlying such verbally communicated opinions. This loophole has proven to be exploited in other jurisdictions as well, especially the United States post which the SEC had to step in and extensively address this issue. Finally, failing to hold accountable such verbal tips and one on one communications, the SEC was compelled to exclude such communications from the advertisement regulatory regime. The backing behind such exclusion was cited to be the inability of tracking and garnering of material evidence. In the SEC’s amendments to Rule 206(4)-1 of the Investment Advisers Act of 1940 which went on to implement the regulator’s new Marketing Rule, it was firmly held that the exclusion shall be applicable to both – a single person with an account as well as multiple persons bearing the representation of a single account. However, such exclusion is not applicable in the case of electronic communication that is being disseminated in bulk. Duplicated advise herein inserts into otherwise tailored one-on-one communications to individual investors, for example, constitute advertisements, while the tailored portions are exempted. Therefore, this lacuna could have been addressed by SEBI in a more tacit manner, taking in cognizance the wide mode of personal methods of dissemination, barring the forms of publications. Enforceability of Registrations: Demystifying its Materiality Purview At the very outset of the Circular, it can be found that the people addressed are registered IAs and RAs. However, keeping in mind the problem that SEBI has sought to solve vide this Circular has somewhat remained un-addressed due to the principal blanket of registration that the regulator has propounded at the very inception of this document. The principal predicament in the current epoch with the rise of social media influencing, which has given rise to unregulated financial advisory related to investing in securities, was sought to be addressed by the regulator and the fundamental essence of the Circular puts forward the same as the definition of advertisement has been made somewhat exhaustive. However, despite such endeavour, the major conflicting issue of being able to regulate such unregulated and unaccountable financial advisory is defeated due to the incorporation of registration criteria, which in turn jeopardises the entire stratagem envisaged by the regulator; to deal with such unsolicited

[By Aditya Mehrotra] The author is a student of Symbiosis Law School, Pune.   Abstract Insider trading is essentially the unlawful trading of stocks having access to non-public information that, if published, would alter the market price of shares. In light of prior rulings on insider trading, the Supreme Court and SAT have rejected the use of circumstantial evidence in identifying insider trading offences, however they have given due weight to circumstantial evidence when exonerating corporations. In their own way, these instances constitute the establishment of a “new standard of proof” to be upheld by SEBI in insider trading cases, but they also cause doubt over the application of the law. To identify insider trading violations, it is necessary to do further assessments of the stated UPSI’s relevance, its application, and the trading behaviour of the companies. Curiously, the SEBI Rules, 2015 do not define the term “insider trading,” but a person is found guilty of insider trading if all of the following conditions are met: (i) this person is an insider of a firm whose listed securities he trades; and (ii) this person traded directly or indirectly in the listed securities with respect to which he holds unpublished price-sensitive information (“UPSI”). If these two conditions have been satisfied, the duty of establishing innocence shifts to the insider, who may use any of the permitted defences. In this study, the author will thus give a basic criticism of the current Insider Trading Regulation in India while assessing its legitimacy. In addition, the author will investigate the basis of Judicial Dictums on Insider Trading and provide proposals and recommendations for their proper implementation. Introduction Indian securities rules ban insider trading, which happens when a person “possesses” unpublished price-sensitive information (“UPSI”) on a publicly listed company’s shares and then trades in those equities. The restriction is triggered by “possession,” which does not require “use,” of the information. This regulation is meant to maintain “even playing fields” in securities trading. In other words, it aims to prevent an insider from gaining an unfair advantage over public investors by just holding UPSI, which is referred to as “information asymmetry” in the context of insider trading. Insider trading is defined as “the use of material non-public knowledge to trade business shares by a corporate insider or any other person having a fiduciary duty to the firm.” Hence, the 2015 SEBI (Prohibition of Insider Trading) Regulation has superseded the 1992 SEBI (Prohibition of Insider Trading) Regulation. SEBI enacted these limits upon the proposal of a high-level committee. Former head of the Securities Appellate Tribunal, Justice Shri N.K. Sodhi presided over the committee (SAT) which elaborated that, “the obvious need and understandable concern about the damage to public confidence that insider dealing is likely to cause, as well as the clear intention to prevent, to the greatest extent possible, what amounts to cheating when those with inside information use that information to profit in dealings with others”. The Insider Trading Regulations establish two offenses: first, the communication offense, wherein an insider is liable for communicating price-sensitive information to a third party, and second, the trading offense, wherein an insider is liable for trading while in possession of price-sensitive information. The communication violation not only creates an insider trading barrier for the person who communicates the information, but also penalizes anybody who attempts to induce or compel an insider into revealing the information. There are, though, exceptions that must be considered. Although evidence of malicious intent is not required, the trade crime has a high threshold and stringent standard. It presume that a person with the knowledge has traded on it, rather than needing evidence that price-sensitive non-public information was used to trade. Evidentiary Burden vis a vis Insider Trading Jurisprudence SEBI as a regulator is unable to garner sufficient support from the language of the Insider Trading Regulations, particularly in terms of evidence presentation, for establishing the insider trading offense. In the case of Mr. V.K. Kaul v. The Adjudicating Officer, SEBI, the Supreme Court of India ruled that relying on circumstantial evidence to establish an insider trading offense is not in conflict with the regulatory framework prescribed by SEBI, and that SEBI/SAT may consider circumstantial evidence when deciding an insider trading case. While attempting to show the previously enumerated aspects of the breach, the quantity of evidence necessary for a conviction for insider trading is the most important factor to consider. In Samir C. Arora v. SEBI, for instance, the Supreme Court of India ruled that in cases involving securities market breaches, SEBI is not needed to prove its case beyond a reasonable doubt; nonetheless, “legally sustainable evidence” must be present in order to convict an individual of such accusations. In contrast, in Dilip S. Pendse v. SEBI (‘Pendse’), SAT said that “the charge of insider trading is one of the most serious infractions relating to the securities market, and given the gravity of this breach, the preponderance of likelihood required to prove the same must be larger.” But, the Supreme Court’s judgement in SEBI v. Kishore R. Ajmera (Ajmera) has ruled in favor of the lower criterion. In this case, while addressing a violation of the SEBI (Prohibition of Fraudulent and Unfair Trading Practices Relating to Securities Market) Regulations, 2003, the Supreme Court said that “the test would always be what inferential approach a reasonable/prudent man would use to reach a conclusion.” In a related case, the Supreme Court determined, based on its own decision in Ajmera, that the appropriate standard of proof would be the preponderance of responsibility rather than proof beyond a reasonable doubt, despite the fact that the relevant violations would result in criminal penalties for the defaulters. The Supreme Court’s announced opinion is incontestable. In circumstances where only a monetary penalty is imposed under the SEBI Act, submitting SEBI to the criminal standard of proof would make the Insider Trading Rules essentially ineffective due to the difficulties of gathering evidence to support an insider trading accusation. Analysing the Underpinnings of

[By Muskan Madhogaria, Lavanya Bhattacharya and Srishti Gupta] The authors are students of Jindal Global Law School.   Introduction  The Securities and Exchange Board of India (“SEBI”) recently by way of a Consultation Paper dated 21st February 2023, proposed mandatory disclosure requirements for listed entities by amending Regulation 30 of the LODR along with certain other shareholder approval mechanisms. This has prompted several suggestions for consideration, some of which are discussed in this paper. What amounts to ‘impact’? Listed entities are required to disclose agreements that have an ‘impact on the management and control’ of their businesses, but the use of the word “impact” lacks a threshold value to avoid imposing unnecessary compliance burdens on companies. Under such a broad scope, investors are prone to receiving information that is irrelevant and distracting to their investment and voting decisions. Additionally, listed entities must ensure that the information they disclose is not misleading, false, or deceptive and does not omit anything that may affect the interpretation of such information. Discrepancies with the Pre-Existing Framework Under Regulation 30 of the LODR, any disclosure requirements must meet the standard of materiality laid down in Clause 2(e) of Chapter II. This requires the listed entity to provide accurate and timely disclosure on all significant matters, including the financial situation, performance, ownership, and governance of the listed entity. However, it’s uncertain whether agreements that ‘impact management or control’ or impose any restrictions or liabilities would always be deemed material to the company. In cases where such agreements don’t meet the materiality standard, the listed entity won’t be liable for informing its shareholders about them. SEBI should also clarify the distinction between transactions covered under this regime and the Related Party Transactions (RPT) regime and adopt a more nuanced approach that is able to harmonize the pre-existing regulatory framework to better compliance. It is also important to note that SHAs typically include change in control clauses as they can provide important protections and mechanisms for shareholders in the event of a change in ownership or control of the company. However, the specific terms of these clauses can vary widely depending on the preferences of the shareholders involved and the nature of the company’s business and ownership structure. Whether a particular SHA requires disclosure of change in control should be pertinent to decide whether such disclosures are to be made to the shareholder. Additional Compliance and Regulatory Burden The board or audit committee members will be held responsible for determining whether a detailed opinion on the proposed agreements requiring disclosure is necessary for seeking shareholder approval. This expanded role of evaluating these agreements would primarily be assigned to the audit committee, independent directors, and the Board, as executive directors are usually representatives of the promoter group, which would inevitably increase the regulatory burden on them. Insufficient Time Period for Disclosure Compared to the US and UK frameworks, which allow for up to 4 business days and 21 calendar days, respectively, the 24-hour time period is very short and puts a burden on both the listed entity and the shareholders to ensure timely disclosure. Industry standards suggest that the time period for such disclosures should be reasonably extended to allow for more thoughtful and informed decision-making by shareholders. Obtaining Shareholder Approval for Agreements That Impose a Restriction or Liability Agreements of such nature are typically subject to incorporation into the company’s AoA, which itself requires shareholder approval. Creating a double requirement for shareholder approval in all those situations will only add to the compliance burden. Without reference to the nature, magnitude or materiality of these restrictions/ liability, any and all agreements at the shareholder level having any impact on a listed entity, will trigger the specified disclosure and approvals. Consequently, this renewed shift of power shall be susceptible to challenges such as the risk of decision-making errors and shifting of agency costs by retail shareholders upon institutional shareholders. For any agreement that might really inflict restrictions or obligations, regardless of whether the listed entity is directly engaged, the proposed update also demands shareholder approval. While this is a good corporate governance measure, applying it retrospectively to existing agreements could create compliance issues. Shareholders may have vested interests in past agreements and revisiting them now could cause complications for the company, especially if significant business decisions have already been made based on these agreements. However, for agreements that provide protective rights or board seats to the listed entity and are not already included in the company’s articles of association, disclosure and approval will be required at the first AGM or EGM meeting after April 01, 2023. Future obligations arising from such agreements will depend on shareholder ratification. Status of Special Rights issue to Directors in the United States and key takeaways for SEBI Stock markets work on the basic principle that all shareholders are created equal. Therefore, any special rights that are negotiated at the PE stage usually fall away post listing. However, it is usual for some governance rights to be negotiated to remain in effect after a company goes public. Private equity investors may request a position on the board or observer rights, and sometimes they retain veto power in specific situations after the IPO. In the United States, there existsa proper difference between dual class and single class IPOs since the former is subjected to more scrutiny. A dataset created by searching the IPO documents of around 1,870 companies in the United States that went public from 2000 to 2020 suggested that companies often grant disproportionate rights to shareholders through a combination of agreements. These control rights typically exist in tandem with other control rights relating to the board of directors, which allows insider shareholders to have the power not only to choose who sits on the board, but also to control their decision-making process. However, these shares are treated as single class in form and therefore subject to a lower threshold. Empirical literature suggests that the option of issuing dual class shares has pushed a

[By Saumya Mittal] The author is a student of Gujarat National Law University.   Introduction The implementation of the Social Stock Exchange (“SSE”) in India exemplifies a point where socialism and capitalism intersect with the appropriate balance, providing a fitting illustration. Although in existence for more than two decades around the globe, SSE was mentioned for the first time in India in the Union Budget of 2019-20. The then-Finance Minister had declared the objective of SSE to be realisation of the social goal by way of our capital markets. Consequently, SEBI constituted a Working and a Technical group, which submitted their reports and recommendations on 1st June 2021 and 6th May 2021, respectively. Finally, on 22nd February 2023, SEBI gave its final approval to NSE for the constitution of SSE. But what exactly is an SSE?; What are the regulations that SEBI has mandated, and how is this whole concept going to be realised in the end? These are some aspects that this article shall try to address. Meaning of Social Stock Exchange Regulation 292A of the SEBI (ICDR) Regulations, 2022 defines SSE as a separate segment of a recognised stock exchange with which a Non-Profit Organisation (“NPO”) can be registered and/or its securities can be listed with SSE. But what is SSE? It is a stock exchange, where NPOs shall be listed rather than commercial entities. Like a company listed on a stock exchange for raising capital, an NPO gets listed on SSE for raising funds for its operations. The amount it receives is a donation which people donate without expecting any monetary return. Definition of NPO NPO stands for- Not-For-Profit Organisation. Their main objective is social welfare, and their primary sources of income are donations, subscriptions, etc. Regulation 292A(e) defines NPO as any entity constituted under the Indian Trust Act, 1882; the Public Trust statute of the relevant state; the Societies Registration Act, 1860; Section 8 of the Companies Act, 2013; or as may be specified by the Board. Definition of For-Profit Social Enterprise (FPE) It is an enterprise whose primary objective is to do social service in a specified way and, at the same time, earn profit through such activities. It aims to maximise both profit and social welfare. An instance of such an organisation can be a business that employs marginalised people to manufacture jute bags (to act as an alternative to plastic bags). Regulation 292A defines it as a company/body corporate operating for profit and within the purview of a social enterprise. FPEs and NPOs are collectively called ‘social enterprises.’ Brief History SSE has been introduced in 7 countries till now, of which only three exchanges are currently active. SSE in Brazil, Portugal, South Africa and the UK failed and thus became non-functional, whereas the same in Canada, Jamaica, and Singapore are still operational. The focus of Canada and Singapore is solely on helping small and mid-cap companies raise capital through SSE. Social organisations, in general, are excluded from getting listed on the exchange. On the other hand, Jamaica is gearing up to introduce NPO under the aegis of SSE. The failure of SSE has been observed to be due to a lack of focus on NPOs and diversion of funding towards FPEs only, major project-based funding and a dearth of social funding culture. India needs to learn from the mistakes of such predecessors. Objectives of SSE SSE intends to reduce the adverse economic impact of COVID-19 by utilising social finance to restore the lives of pandemic-hit people. It aims to address this urgent issue by unlocking vast reserves of social finance and fostering collaboration between social and commercial capital. It emphasises the importance of generating profits for social goals as a critical component of sustainability (this rationale only applies to an FPE). How will the SSE function? SEBI (ICDR) Regulations, 2022 state that SSE regulations apply only to NPOs registered and/or listed with it and to FPEs that want to be recognised as social enterprises. It is important to note here that it neither talks about registering FPEs nor listing their securities on SSE. This is because Regulation 292G (b) states that if an FPE wants to raise funds, it shall do so via the main Board (NSE/BSE), the SME platform, Alternative Investment Fund or by issuing debt securities. So, it can be inferred that, at present, SEBI has no intention of allowing FPEs to raise capital directly from SSE or even be registered with it. The Listing and Registration at present are limited to NPOs only, although the SSE framework provisions apply to FPEs as well. Also, SSE can only be accessed by institutional and non-institutional investors. Along with this, an SSE Governing Council shall also be constituted to monitor its functions. Further, in 292E, areas of social work have been provided from which political or religious organisations, corporate foundations and housing companies have been explicitly excluded. The framework provides for only two securities through which money can be raised by NPO – Zero Coupon Zero Principal Instruments and donations through mutual funds. The former is a financial instrument in which no coupon is provided, and no principal money is paid on maturity. It can be compared to a bond. Generally, when an entity issues a bond (which is a debt security), it has to make interest payments on the same and there’s final payment of principal money on the maturity of bonds. In Zero Coupon Zero Principal instrument, any interested investor can purchase these securities but he shall receive neither the interest nor the principal money. So instead of a debt, it’s a donation in essence. But it’s still similar to a bond due to its structure i.e. it shall be issued for a certain time or a certain project, albeit the monetary returns. Similarly, donations can be made in the form of investment in mutual funds offered by the NPOs. For issuance of any security, NPO is required to file a draft fundraising document with SEBI. Advantages of SSE in