Capital Markets and Securities Law

[By Modit Mendiratta and Mahak Agarwal] The authors are students of Gujarat National Law University.   Introduction The Securities and Exchange Board of India (SEBI) has recently proposed extending the trading hours for equity derivatives in India. The proposal has garnered mixed reactions from market participants and experts. Currently, the trading hours for equity derivatives on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) are from 9:00 am to 3:30 pm Indian Standard Time (IST). However, the proposed change would extend the trading hours to 5:00 pm IST, allowing for an additional hour and a half of trading. The proposed extension of trading hours is aimed at aligning India’s trading hours with other global markets and catering to the needs of foreign investors who are active during these extended hours. Additionally, the extension would enable market participants to react to any global events that may have an impact on Indian markets. What does it mean for Investors? Extending trading hours in the equity segment in India could have both positive and negative impacts on investors. Increased liquidity and trading opportunities could make it easier for investors to enter and exit trades, potentially reducing bid-ask spreads and transaction costs. However, increased volatility, higher trading costs, and increased risk of errors could make the market riskier for investors, particularly for retail investors who may not have the same level of resources as institutional investors. The actual impact on investors would depend on factors such as the specific length of the extended trading hours, the reaction of market participants, and the regulatory framework in place to monitor and manage the market.[i] The extension of trading hours could attract more market participants, leading to higher trading volumes, and increased liquidity in the market. Increased liquidity could improve the efficiency of the market and reduce bid-ask spreads, making it easier for investors to enter and exit trades. Longer trading hours could allow for more time for market participants to react to news and events, leading to improved accuracy in price discovery. This could result in better pricing of securities, reducing the likelihood of mispricing’s, and reducing the overall risk of investing.[ii] Longer trading hours could provide traders with more opportunities to enter and exit trades, potentially leading to increased profitability in the market. [iii] Positive Impacts of Extended Trading Hours Extending trading hours in the Indian market could have several potential benefits. Firstly, it could lead to increased liquidity in the market by attracting more market participants, resulting in higher trading volumes. This increase in liquidity could help to improve the efficiency of the market and reduce bid-ask spreads, which could make it easier for investors to enter and exit trades. Secondly, longer trading hours could lead to improved price discovery. This could happen because market participants would have more time to react to news and events, which could lead to a more accurate pricing of securities. As a result, the likelihood of mispricing’s could decrease, reducing the overall risk of investing. Thirdly, longer trading hours could provide traders with more opportunities to enter and exit trades, potentially leading to increased profitability. Traders could also benefit from more time to adjust their positions in response to market news or events, which could reduce their overall risk exposure. Lastly, extending trading hours would align the Indian market with global norms, as many other major stock exchanges around the world already have extended trading hours. This could make the Indian market more attractive to international investors, potentially leading to increased foreign investment. Overall, extending trading hours in the Indian market could have several benefits, including increased liquidity, improved price discovery, increased trading opportunities, and alignment with global markets. Negative Impacts of Extended Trading Hours Extending trading hours in the market could have potential drawbacks. Firstly, it could lead to increased volatility, as traders would have more time to react to news and events, potentially leading to wider price swings. This increased volatility could make the market riskier for investors and create greater uncertainty. Secondly, longer trading hours could lead to higher trading costs for market participants. They would need to dedicate more time and resources to monitoring and participating in the market, which could be particularly challenging for retail investors who may not have the same level of resources as institutional investors. Thirdly, longer trading hours could increase the risk of errors, as traders and market participants may become fatigued or less attentive during extended sessions. This could lead to mistakes that could have significant consequences for both the individual and the market as a whole. Lastly, extending trading hours could have an impact on the work-life balance of employees in the financial sector. They may need to work longer hours to keep up with the extended trading schedule, which could have negative consequences for employee morale, productivity, and overall well-being. Overall, extending trading hours in the market could have potential drawbacks, including increased volatility, higher trading costs, increased risk of errors, and potential impact on employees. Comparison of Indian Trading Hours with the global markets The Indian stock market currently operates for six and a half hours, from 9:00 am to 3:30 pm Indian Standard Time. In comparison, many other major stock exchanges around the world have longer trading hours. For example, the New York Stock Exchange (NYSE) and the NASDAQ operate for 6.5 hours from 9:30 am to 4:00 pm Eastern Standard Time. The London Stock Exchange operates for 8.5 hours from 8:00 am to 4:30 pm Greenwich Mean Time. It is worth noting that while some exchanges have longer trading hours, others have shorter trading hours than the Indian market. For example, the Australian Securities Exchange operates for 6 hours from 10:00 am to 4:00 pm Australian Eastern Daylight Time. Overall, the trading hours of stock exchanges around the world vary widely, and there is no one-size-fits-all approach. The decision to extend trading hours in the equity segment in India will require careful consideration of the potential benefits and drawbacks,

[By Nirukta Krishnan and Aditi Kotecha] The authors are students of Hidayatullah National Law University.   OVERVIEW: In light of the Public Interest Litigations filed by four social activists after the recent shorting of the Adani Group Stocks, questions are being raised once again concerning the ban on short selling and whether the regulatory authority is adequately equipped to deal with the potential negative consequences of short selling on the market. Short selling has for a long time been the subject of polarising opinions. On one hand, supporters consider it a fundamental practice of the market which keeps the market alive while critics believe that it is a highly volatile practice.  This article thus presents a critical analysis of the short selling laws in India operating at present and also attempts to provide certain recommendations with respect to changes that can be made to the existing regime keeping in view the recent Hindenburg report and the short selling of Adani stocks. MEANING- In simple terms, short selling is a practice where the short seller borrows the stock in terms of derivatives from a broker at a certain price and sells it in the market. When the price of the stock goes down, they proceed to buy it back at the lowered price and keep the difference. SEBI thus defines it as “a sale of a security that the seller does not own”. On a purely technical ground, there is nothing wrong with the practice. Buying and selling stocks in this manner through derivatives like futures and options is not wrong per se but the issue arises when this shorting is done to manipulate stock prices. In this case speculations are being made by experts that Anderson purposely partook in short selling because he knew the instability that would be caused by his report, which would jeopardize investor confidence and cause mass panic thus also leading to a sharp decline in price. This, according to them, is a clear attempt at manipulation. This is precisely the matter surrounding the Adani-Hindenburg debacle. NATHAN ANDERSON- MANIPULATION OR COINCIDENCE? The biggest reason why short selling came into question again is because of the report published by the Hindenburg Research group which caused complete mayhem amongst investors of the Adani Group amid allegations of fraud and manipulation among other things. After the dust settled with regard to the contents of the report itself, eyes turned to the person at the very center of it all – Nathan Anderson– who founded the organization and had previously conducted similar crusades against many large entities. While the report refused to publish the specifics of how they pulled it all off, they mentioned that they had obtained a “short position through US-traded bonds and non-Indian traded derivative instruments”. In direct terms, Anderson purchased and shorted US bonds of Adani after which he proceeded to release his report. With the magnitude of allegations contained in the report, the credit went down which then adversely affected the value of the bonds and securities of Adani. During this time when the market was distressed, he then purchased the bonds again at a lower price thus making a profit from the difference in the purchase and sale. The other method is mainly speculative, but many critics who have been trying to analyze how Anderson achieved this result, have suggested that he probably approached entities like global banks that trade in India and entered into a stock futures contract with them, who then entered the Indian market and shorted the stocks. WHAT DO INDIAN LAWS SAY ABOUT SHORT-SELLING? The discussion on short-selling first took place in 1996 when SEBI constituted a committee under Shri BD Shah. The committee suggested rules and regulations be put in place to regulate the trading practice in India. It was temporarily banned in 1998 and 2001. However, it was finally reviewed in 2003 by the Secondary Market Advisory Committee (SMAC) which took into consideration the practices followed in other states and permitted it on certain conditions. Short-selling poses a potential risk to the market and may lead to a rampant decline, if not regulated. SEBI and the stock exchanges in India have collectively released specific rules and guidelines to be followed while short-selling a stock. India and several other developed countries have not banned short-selling, and the International Organization of Securities Commissions (IOSCO) has also suggested that the practice be regulated rather than prohibited. Currently, in India, retail investors and institutional investors (such as mutual funds, FIIs, banks, insurance companies, etc.) are free to short-sell, provided derivative products are available of that stock. They (institutional investors) are required to disclose at the time of placement itself whether the stock is a short sale and their ability to borrow those stocks to the satisfaction of the broker, the same is not the case with retail investors. They can disclose this at the end of the trading hours on the day of the transaction. In addition to this, naked short-selling and day trading is prohibited. The present lending and borrowing scheme in India operates on clearing corporations/houses (CC/CH) of the stock exchanges, leaving very little scope for the investors to capitalize on the demand for securities. A  lending and borrowing system with CC/CH acting as Approved Intermediaries can be brought in. . However, appointing AIs must be done carefully, starting with appointing Banks as custodians in the first stage and so on. FPIs and Foreign Institutional Investors are explicitly prohibited from short selling as per the guidelines. However, foreign entities still trade in India through some other corporations or organizations which are still allowed to trade. The regulations do not go up to the source and limit themselves to regulating the direct intermediaries which do not solve the problem. Internationally, it is mostly seen that the securities market does not directly regulate the lending and borrowing processes because they are essentially held over the counter. The custodians and depositors run these lending and borrowing institutions. So, if India goes for

[By Jay Shah and Aditya Sharma] The authors are students of Gujarat National Law University   Introduction Algorithmic trading refers to a method of trading wherein an algorithm is used to execute trade setups on basis of information as input by the trader in terms of, time, price, quantity and other other mathematical models. Essentially, algorithms scan the markets for appropriate trade setups, and when they find the proper ones, trades are executed and managed as per the instructions specified in the codes. Algo trading is incorporated as they generate profits faster than humans can and allow the user to take advantage of small directional movement of any stock. Stance of the Regulator: Evolution Securities and Exchange Board of India (‘SEBI’) is devising dedicated guidelines or regulations to govern how algo trading is to work and how say, in the event of an unlawful act, the remedy is to be exercised by the aggrieved when algo-trading takes centre stage. SEBI has released multiple circulars in attempt to regulate to algo trading. These standalone guidelines released in 2012, 2013 and 2015 deal with redressal mechanism, monitoring process, measures to put in place to disincentivize high daily order-to-trade ratio and procedure for auditing algo trading systems.  Further, the Discussion Paper of 2016 attempted to clarify the various technical concepts relating to algo trading. In this paper, algo trading was touted to be the broader concept, which provides greater speed to stock trading and also offers anonymity.  SEBI’s outlook towards algo-trading becomes clearer from the discussions that took place in April, 2018. These showed SEBI’s intent to restrict unfair use of algo trading. In this April 2018 discussion, SEBI proposed to discourage algo traders from placing huge orders and then subsequently cancelling them within a short span of time by prescribing a ‘minimum resting time’. This step was intended to lower down the instances of frequent cancellation of orders by the traders that intends to create phantom liquidity in the market. Post this, the Consultation Paper shifted the focus to retail investors. It proposed a potential framework that may be followed to engage in algo trading, which includes application programming interface (‘API’) access and automation of trades. In this backdrop , came a press release in June, 2022. The Consultation Paper seeks to classify all orders emanating from an API as an algo order and be subject to control by the stock broker. The APIs shall be tagged with the unique algo ID provided by the exchange. Thus, the stock broker shall have a  mandate to obtain approval of all the algorithms from the concerned exchange irrespective of whether the same is used for actual trading or not.. As per  the authors,    we propose a scenario  wherein  the stock brokers shoulder the responsibility of procuring requisite approvals in the cases of deployment of algorithmic trading by third-party algo providers, in line with the Consultation Paper. The stock brokers however, argue that it would be a tedious task for them to obtain approvals of algorithms enabled through APIs, since there can be numerous customized algo strategies that could be deployed by third-party vendors. Another circular, issued in September, 2022 also points to the cautious stance SEBI has long taken about algo trading. Vide this circular, SEBI issued strict guidelines for Stock Brokers providing algorithmic trading services. In brief, the same states that Stock Brokers who provide algorithmic trading services shall not – Make any reference to the past or expected future return/ performance of the algorithm. Associate with any platform providing any reference to the past or expected future return/ performance of the algorithm. In addition, Stock Brokers were required to monitor the compliance of this circular and submit a compliance report before SEBI before 01.11.2022. Outlook of the SEC Securities Exchange Commission (‘SEC’) actions in the U.S. have been on various occasions replicated by SEBI after appropriate customisations in the Indian securities market. It is no surprise that SEBI sought guidance from the SEC on the matter. In August 2020, the SEC released a staff report, which dealt with algorithmic trading in the U.S. capital markets. The report acknowledged the rapid growth of algo trading and the object of the report was to ensure that the interest of investors is not compromised. The report states that SEC undertook various measures, and is constantly attempting to increase transparency, mitigate volatility, enhance stability and otherwise improve market integrity. Apart from this SEC does not have a dedicated set of provisions that govern algo trading. Further, the SEC’s outlook is a little more relaxed in comparison to that of SEBI, as SEC in the report mentioned above discusses at great length the benefits brought on the table by algo trading. The SEC also opines that the efficacy of such mechanisms was greatly highlighted by the Covid-19 pandemic as well. Penalty Mechanism The parameters governing the imposition of penalty are unclear under the limited SEBI jurisprudence. The same is generally left at the behest of the stock exchanges. The NSE and the BSE have their threshold for levying penal charges when algorithms are used to manipulate the market. The guidelines governing such imposition have been laid down by the SEBI via its circular, as discussed above. The onus put on the stock exchanges in this respect is grave. SEBI, in this regard, has ensured that the stock exchanges are doing the needful to monitor algorithmic trading in isolation and its overall impact on market operations. SEBI’s strict imposition of penalty on the NSE in the matter of NSE Dark Fibre signifies the regulator’s stance in this respect. There is an inherent urge to regulate algo trading; however, with standalone circulars and notifications, only so much can be done. Even in terms of penalty imposition, which could very well become the bone of contention in matters dealing with algo trading, there is little clarity. For this particular instance, the violation was traced in a Circular from March 2012. Regarding penalty imposition, the regime in the EU must

[By Kumar Shubham] The author is a student of the National Law University, Odisha.   INTRODUCTION Early-stage firms or startups today have a variety of fundraising options. Over the years, hybrid investment vehicles such as Convertible Compulsory Debentures (“CCD”) and Compulsory Convertible Preference Shares (“CCPS”) have grown in popularity for raising funds. However, these firms have also ventured into new investing options, which have so far proved viable for both the companies and the investors. Simple Agreement for Future Equity (“SAFE”) & India Simple Agreement for Future Equity (“iSAFE”) are two such methods that have been prevalent in the investment paradigm. This article analyses the legal landscape surrounding investments through SAFE & iSAFE in India, and draws comparisons between the two. Further, the article provides how iSAFE transactions are beneficial and outlines suggestions for proper implementation of the same. SAFE & iSAFE INVESTMENTS SAFE was first proposed by American startup incubator Y Combinator. It was introduced as a better alternative to Convertible debt. It is a financing contract between a startup and an investor that grants the investor the right to acquire equity in the firm subject to specific activating events, such as a future equity fundraising (known as a Next Equity Financing, often led by an institutional venture capital (VC) fund). No maturity date or interest is accrued for SAFEs prior to a conversion event. The Indian venture capital firm “100X.VC” introduced a significantly modified version of the SAFE concept, i.e., the iSAFE. iSAFE is recognized as Compulsorily Convertible Preference Shares (“CCPS”) in order to maintain the transaction’s legality under Indian law. It is therefore regarded as a commitment to provide investors with CCPS. When the maturity period expires or if another event specified in the terms and circumstances occurs, CCPS, which are preference shares, are converted into equity. Legality of iSAFE & SAFE in India Since SAFEs are neither equity/preference shares, debt, convertible notes, nor any other type of instrument, they are not legally recognized in India. SAFE agreements can’t be categorized as “debt” because they don’t accrue interest or have a maturity date. Likewise, it cannot be referred to as “equity” because there are no dividends or other shareholder rights. This greatly reduces the instrument’s reliability and security, which is the primary cause of its failure in India. However, iSAFE is legally recognised as Compulsorily Convertible Preference Shares since there is no particular statute for such convertibles in India. Sections 42, 55, and 62 of the Companies Act of 2013 as well as the 2014 Rules for Companies (Share Capital and Debentures) and Companies (Prospectus and Allotment of Securities) regulate CCPS in India. Moreover, given that only registered companies may issue shares, the Companies Act of 2013 requires that the start-up be formed as a company before it may issue an iSAFE. As a result, an LLP or partnership firm cannot issue iSAFE notes. For accounting iSAFE notes in India, neither the accounting standards nor the Institute of Chartered Accountants of India have provided any precise guidelines. The iSAFE notes in India must be listed under the Preference Share Capital heading nonetheless, as they bear the legal designation of CCPS. These will eventually be listed on the balance sheet under the “Shareholder Funds” heading. Moreover, there is no explicit guidance on the taxation of iSAFE Notes in India because the concept of iSAFE is still relatively new here. However, Section 47(xb) of the Income Tax, 1961 can be examined because iSAFE notes are regarded as CCPS. This provision states that any conversion of a company’s preference shares into equity is not recognized as a transfer. As a result, there is no tax due when iSAFE notes are converted to equity. Comarative Aanalysis & Suggestions A SAFE note with a valuation cap can serve as a cap for the upcoming financing round and, in essence, functions as an anti-dilution clause. Additionally, it increases risk for the business. The holders of the SAFE notes will be entitled to assume a far bigger percentage ownership of the firm upon conversion, for example, if the company is valued substantially lower in a subsequent fundraising round than when the SAFE notes were issued. Furthermore, investors find it challenging to declare a default when there is no maturity date. There may be specific circumstances in which the triggers are not activated and the SAFE is not converted, leaving the investor with nothing, depending on its terms, and notwithstanding the identified triggering events. However, given that iSAFE notes essentially take the shape of CCPS, the likelihood of this happening is extremely remote in cases of iSAFE. The iSAFE notes issued in India are classed as preference shares under the Companies Act, 2013, which categorizes all share capital as either equity or preference and entitles the holders to a minimal dividend. Unlike the SAFE notes proposed by the Y Combinator, which do not guarantee or confer preference if a liquidity event occurs prior to the conversion date, the iSAFE notes will be entitled to a portion of the proceeds, due and payable to the iSAFE noteholders immediately in preference over the equity shareholders and secured creditors. Moreover, SAFE cannot be used for inviting foreign investments since the Capital instruments permitted for receiving foreign investment in an Indian company means equity shares, debentures, preference shares and share warrants issued by the Indian company, however, SAFE being a future equity, does not suffice the criteria of capital instruments as required under RBI regulations. Therefore, since iSAFE takes the form of CCPS in India, it will help the companies in easily accruing international funding through Foreign Direct Investment routes. The company needs to fill the FCGPR form while issuing CCPS/CCD to an individual/body corporate residing out of India. The Reserve Bank of India (RBI) issues Form FC-GPR when the Company receives a foreign investment and allots shares to a foreign investor in exchange for that investment. The Company is then required to file information regarding that share allotment using Form FC-GPR. iSAFE is actually just CCPS with a different

[By Hemang Arora & Ayush Pratap Singh] The authors are students of Gujarat National Law University. Abstract  On 21 July, 2022, SEBI issued a consultation paper proposing to bring online bond trading platforms under its regulatory purview. The SEBI raised concerns in the paper regarding the lack of regulation surrounding these online bond trading platforms and therefore provided recommendations to address the same. SEBI thus recommended manda­tory registration requirements, eligibility requirements etc., in order to address these concerns. This has come at a time when India is going through an evolution in its technological advancement, if we specifically talk about the securities market. This is evidenced by an approximate increase of six million retail investors within the Indian economy. The need for this regulation has arisen due to the sharp rise in retail investors in the country and the increasing knowledge of the common man in the field of securities. Online bond trading platforms usually provide an electronic interface to users on which buying and selling transactions are routed through a recognised exchange. Even though these bond platforms attract a variety of investors, especially non-institutional investors, the problem is that they are not subject to any regulatory oversight, meaning that the platform providers are not registered with any regulatory agency. Analysis of SEBI’s Proposed Framework                               Increase in the Number of Online Bond Trading Platforms In the consultation paper, SEBI has noted an increase in the number of online bond trading platforms in India due to low-interest rates on Fixed Deposits and the appeal of such platforms to non-institutional investors                                  Issues Surrounding Online Bond Trading Platforms SEBI has noted the increase in the number of investors on online bond trading platforms to be a positive sign but has also raised concerns that need to be addressed. The SEBI has provided a list of issues to be discussed. Lack of regulatory framework: SEBI has raised concerns about the lack of a regulatory framework governing online bond trading platforms and the lack of recourse for investors in the event of issues with transactions. No discernibility factor between listed and unlisted securities: Listed and unlisted securities are currently offered together on the same webpage, making it difficult for new investors to distinguish between them. No definite standard of KYC norms: SEBI observed that most of these platforms do not align and comply with the Prevention of Money Laundering Act, 2002 guidelines or SEBI KYC requirements. Improper and ambiguous redressal mechanisms: SEBI has emphasised the need for a framework for addressing investor grievances and providing an arbitration mechanism for dispute resolution on online bond trading platforms, similar to the Investor Services Cell on regulated platforms. Issues relating to conflict of interest, and mis-selling: SEBI has raised concerns about the potential for mis-selling of lower-rated securities as high-yield securities on online bond trading platforms, and the need for increased regulation if the platform has cross-holdings or management linkages with issuers. Deemed Public Issue (“DPI”): SEBI has raised concerns about the potential for the down selling of debt securities on private placement by online bond trading platforms to constitute a DPI. In some cases, the entire issue was reportedly down sold to over 200 investors within 15 days of allotment, according to SEBI data. SEBI has noted that the sale of securities on a private placement basis by online bond platforms to over 200 investors will violate Section 25(2)(a) of the Companies Act, 2013. Reporting of Trades: The current regulatory framework requires debt securities trading to be reported and settled through clearing corporations of exchanges. It is essential that online bond platforms be brought under this regulatory framework to ensure compliance with these provisions Issues relating to clearing and settlement: SEBI has observed procedural inconsistencies, including the bypassing of the role of stock exchanges and clearing corporations, in the processes followed by online bond platforms. In some cases, the platforms directly accepted funds from clients and processed security settlements through off-market mode, especially for unlisted bonds or transactions below Rs. 2 Lakhs.                                                 Recommendations by SEBI Mandatory registration requirements: SEBI has proposed mandatory registration of online bond platforms as stock brokers with SEBI or by SEBI registered brokers to give investors confidence and ensure the application of stock broker regulations for investor protection. Eligibility requirements: According to the proposal by SEBI, the debt securities to be offered on the platform shall only be listed in nature. Addressing the concerns relating to DPI: To address the issue of DPI, SEBI has proposed that listed securities offered on online bond platforms be locked in for six months from the date of allotment by the issuer. Channelising transactions: Exchange Platform-Debt Segment- SEBI has recommended routing transactions on online bond platforms through the trading platform of the debt segment of exchanges to reduce settlement risks and guarantee settlement on a T+2 basis. Request for quote platform (RFQ)- SEBI has also recommended using the RFQ platform of the Stock Exchange, where transactions will be settled and cleared on a Delivery Versus Payment (DVP-1) basis, as an alternative to the previously mentioned option SEBI has proposed that online bond platforms use Exchange platforms’ APIs to quickly integrate with Exchange systems. This proposal is similar to the trading mechanism used for equities transactions, in which stock brokers create their own front-end for clients to place orders, and the transactions are carried out on the trading platforms of the Exchange. This would allow the platforms to preserve their current web interface and display a list of available debt securities, ratings, risk information, and other details on their website.                                Opinion of the authors on the Regulatory Framework According to the authors, the benefits of the regulatory framework would be manyfold. For instance, the implementation of standard KYC norms and the applicability of a code of conduct applicable to stock brokers will ensure fairness. Further, the overall regulatory inspection and oversight shall bring investor confidence in the process. If we talk about the routing of transactions, it would also bring about

[By Mainak Mukherjee] The author is a student of National Law University and Judicial Academy, Assam. Introduction Delegated legislation acts as a tool for the legislature to reduce the burden from its shoulder. However, considering the thin line that separates delegated legislation from excessive delegation of power, it is pertinent for the legislature to exercise more control over the executive even when legislative powers have been delegated. Moreover, delegated legislation can often lead to a lack of transparency and accountability as the administrative bodies are not subjected to a similar level of scrutiny and debate as laws made by the legislature. One such example of excessive delegation of power is the Securities and Exchange Board of India’s (SEBI) power to issue Supplementary Show Cause Notices at any given point of a proceeding. SEBI undertakes quasi-judicial proceedings based on the principle of natural justice, and notices serve an essential function to heed natural justice as it allows the other side to know the charges that are being labeled against them. That being said, the question still beckons: if there should be a regulatory framework for SEBI to issue Supplementary Show Cause Notices—after a show cause notice has already been issued—especially when the statute remains silent about the same. In this article, the author will first discuss SEBI’s power to arbitrarily issue Supplementary Show Cause Notices at any given point of a proceeding. In the latter half of the article, he will analyze how the Parliament has not conferred SEBI with the power to issue Supplementary Show Cause Notices and why a properly laid-down framework for the same is the need of the hour. The curious case of Supplementary Show Cause Notices issued by SEBI Nemo judex causa sua and Audi alteram partem are essentially two essential principles of any quasi-judicial proceeding. As mentioned earlier, issuing a notice—in this case: Supplementary Show Cause Notices—to the concerned person, informing them about the charges framed, and the actions to be taken is sine qua non of a fair hearing. Nevertheless, not having a proper regulatory framework on Supplementary Show Cause Notices—as in, when it can be served—can go against the very principle of natural justice. For example, when a matter has already gone before adjudication based on the Show Cause Notice, and the noticee has prepared their defense, and suddenly they get hit by a Supplementary Show Cause Notice adding new facts to the case. Power can often transform into misusage. In this scenario, the power to issue Supplementary Show Cause Notices, without a just regulatory framework, can be used as a tool by SEBI to post facto improve its case. Further, a Supplementary Show Cause Notice can also defeat the explanations put forth by the noticee in their reply to the Show Cause Notice. The same arguments were raised by the noticees in Adjudication Order in respect of NSE in the matter of Karvy Stock Broking Limited. The noticees argued that SEBI uses the Supplementary Show Cause Notice at a later stage of a proceeding to improve its case, which defeats the purpose of the show cause notice. SEBI, in its order, stated that additional facts were found and went on to justify the issuance of the Supplementary Show Cause Notice under the garb of natural justice in a quasi-judicial proceeding. SEBI has, on multiple occasions, taken the defense of natural justice whenever noticees have raised an issue on SEBI’s power to issue Supplementary Show Cause Notices. For example, in both, Adjudication Order in the matter of Fixed Maturity Plans Series 127, 183, 187, 189, 193, and 194 of Kotak Mahindra Mutual Fund and Order in the matter of GDR issue of Morepen Laboratories Ltd, SEBI passed an order stating: “supplementary show cause notice is an inbuilt requirement in any quasi-judicial proceedings as a part and parcel of principles of provided for in the legislation.” Further, the order against Morepen Laboratories Ltd. was later appealed to the Hon’ble Securities Appellate Tribunal (SAT). SAT’s order—in the appeal—throws out of the window SEBI’s power of issuing notices at any time as “the SEBI Act, 1992 (SEBI Act) is not time-barred”. SAT, in its order, stated that although there is no period of limitation prescribed in the SEBI Act and other regulations, the issuance of notices for the completion of adjudication proceedings must be done within a reasonable period of time to avoid inordinate delay. Reliance was placed on the Hon’ble Supreme Court’s judgment in Adjudicating Officer, Securities, and Exchange Board of India vs. Bhavesh Pabari[1]. Not only did this SAT order impose restrictions on SEBI’s boundless power of issuing notices, but it also acted as an antithesis to SEBI’s notion: that if something is not covered under its laws, then it is not bound by those laws—in the present case, the concept of time-barred limitation. Further, this SAT order also becomes relevant in the context of Supplementary Show Cause Notices. It poses two big questions: does SEBI have the power to issue Supplementary Show Cause Notices in a proceeding just because anything contrary to this has not been mentioned in any of its laws? If yes, then is this power absolute without any restrictions? In arguendo: Parliament has conferred other agencies with the power of issuing Supplementary Show Cause Notices In the context of the argument raised against the nature of SEBI’s power to issue Supplementary Show Cause Notices, it becomes relevant to mention that whenever the Parliament has thought of conferring any agency with the power of issuing Supplementary Show Cause Notices, the legislature has explicitly so provided. For example, the Finance Act 2018 amended the Customs Act 1962 to include Supplementary Show Cause Notices under the legislation; however, nothing was done for the SEBI Act. Further, Sections 28(7A) and 124 of the Customs Act, 1962 outline the circumstances under which “a proper officer” can issue a supplementary notice. Additionally, the erstwhile Income Tax Act 1869 also contained Section 23, which gave power to the Collector to issue a fresh notice when he “has reason to believe that, in assessing any person under the Act, any

[By Saima Khan] The author is a student of Dr. Ram Manohar Lohiya National Law University, Lucknow. Introduction: During the Covid-19 pandemic, the Indian Stock Market witnessed a massive rise in the number of retail investors with remarkable participation from millennials and Gen-Z. According to the National Stock Exchange, retail shareholding in Indian companies reached a 15-year high in June 2022. This is indeed good news for our country’s economy. However, retail investor participation in India still has a long way to go.  The legal and regulatory framework of the Indian Capital markets is such that it disincentivizes investors from participating in the market. For instance, the Companies Act, 2013 (hereinafter referred to as “CA-13”) does not permit investors to purchase or hold fractional shares. A fractional share refers to a unit of stock that is less than one full share. Fractional shares make the world of investment more accessible to retail investors. For instance, one MRF share is currently priced at around Rs. 90,000. Now, let’s say a college student with limited savings wants to purchase this share. Since the existing regime does not allow shareholders to hold less than a whole share, it would be impossible for them to buy even one share of MRF. On the contrary, if fractional share investing were allowed in India, such investors could easily buy a fraction of the share, for example, 1/30th part of the share amounting to Rs. 3,000. Thus, Indian market participants are pitching for changes in the current framework, enabling them to buy fractional shares of the companies of their choice.  Pursuant to their demands, the Company Law Committee (hereinafter referred to as “CLC”), in its report dated March 21, 2022, has recommended certain amendments to the CA-13 to pave the way for fractional share investing in India. Through this article, the author attempts to examine the impact of these recommendations on the present regime while discussing the future course of fractional share investing in India by providing a detailed comparison between the operation of stock trading in the USA and India. Recommendations Of The Committee: The CLC has, inter alia, proposed the amendment of  Section 4(1)(e)(i) and paragraph 4 of Table F – Schedule 1 of the CA-13 which restrict the issuance and holding of fractional shares in India. Section 4(1)(e)(i) creates a bar on the holding of fractional shares by stating that the amount of share capital to which the subscribers to the Memorandum of Association agree to subscribe shall not be less than one share. Notwithstanding the above restrictions, corporate actions such as stock splits, mergers and acquisitions may give rise to fractional shares in India. However, in practice, fractional shares resulting from such actions are not allotted to the shareholders. In stock splits, a company divides its shares into smaller units to lower the price per share and make the company’s stock more attainable for investors. Similarly, in the case of mergers, the share value is redefined and the shares held by the investor are converted into shares of the new entity formed by the merger, in a specific ratio, say 1:4. So, if an investor holds 17 shares of the company, 16 of his shares will be converted into 4 shares of the new entity. The remaining one share will result in 4 ¼  shares. In such cases, the resultant fractional shares are either converted into a whole number of shares or a trustee is appointed by the Board of the company, who buys back the fractional shares and credits the proceeds to the linked bank account. The Report of the CLC has not only recommended the holding of fractional shares, but also their issuance and transfer. Once these recommendations are implemented, shareholders would be entitled to hold fractional shares resulting from such corporate actions. Furthermore, the buying and selling of fractional shares would also become possible. Fractional Share Investing: A Boon For Investors?  The introduction of fractional shares would open the floodgates for retail investing in India owing to their inherent advantages. In the above example, we have seen how fractional shares enable small investors to buy shares of the companies which offer their shares at high prices. Further, owning fractional shares when one has a low capital to invest can help one maintain a diversified portfolio. As the saying goes, “Don’t put all your eggs in one basket”. Hence, it would be prudent for an investor with Rs.10,000 to invest Rs.1,000 by purchasing fractional units of ten different companies rather than buying a single share of one company for Rs. 10,000. Fractional shares also enable investors to receive dividends which are proportionate to the shares held by them. However, the other side of the coin is that fractional shares do not confer voting rights to investors. To tackle this problem, several brokers offering fractional shares have come up with proxy voting rights wherein the broker votes on behalf of the shareholders by aggregating the votes and reporting the results to the shareholders. Another drawback of fractional shares is the excessive fees charged by the brokers which makes it unfeasible to invest in them. Fractional Share Trading In The USA: A Comparative Analysis In the USA, Interactive Brokers set the ball rolling for fractional trade investing by offering investors the option to sell or purchase fractional shares. In response, other prominent brokers such as Schwab, Robinhood and Fidelity jumped on the bandwagon by announcing fractional share trading on their platforms. Similarly, brokers in Canada and Japan have also introduced fractional share trading. The popularity of fractional shares in these countries has inspired the CLC to recommend fractional share investing in India. However, in its report, the CLC has overlooked the fundamental differences between the working of the Indian and the US Stock markets. In India, brokers act as agents of investors. They collect the orders from investors and send them to the exchanges for execution. Thus, in the present system, shares are not held by brokers but by depositories such as Central Depository

[By Praveen Sharma & Sakshi Nalawade] The authors are students of Maharashtra National Law University, Mumbai. On 8th July 2022, the Securities Exchange Board of India (SEBI) released a consultation paper seeking the opinion & comments of the public on its desire to extend the scope of SEBI Prohibition of Insider Trading (PIT Regulations), 2015 to include the dealings in the units of mutual funds. It is vital to take note of the fact that this move has come after the  Axis Mutual Fund Front Running Controversy and  Franklin Templeton case. In this blog, the authors argue that this move by SEBI might be too hard on mutual funds. While the issue needs immediate attention, simply putting mutual funds under the umbrella of PIT Regulations could be onerous for the mutual fund industry Background Currently, the PIT Regulations regulate dealings in securities of listed companies or proposed to be listed, when in possession of Unpublished Price Sensitive Information (UPSI) and it explicitly excludes the transactions in mutual funds. The objective sought to be fulfilled is to harmonize the regulations governing trading in securities and mutual funds, while one is in possession of UPSI. There have been instances wherein officials from the mutual funds’ investment regulating the industry, for instance, employees of Asset Management Companies (AMC(s)) and Trustees of mutual funds have redeemed their holdings in mutual funds schemes being privy to Price Sensitive Information not made public i.e., information not known to the unit holders. Thus, by taking undue advantage of their position they either saved themselves from loss or incurred huge profits. In the Axis Bank Front Running controversy, two of the executives were sacked by Axis Mutual Fund on the accusation of front-running. This resulted in a huge blow to the market as the fund was 7th largest mutual fund in India and such instances at a large fund definitely bought out the lacuna in the mutual fund industry. The case of  Franklin Templeton primarily further might have triggered this harmonization by the SEBI. Vivek Kudva, head of Franklin Templeton’s Asia Pacific, an International Asset Management Company, and his wife Roopa Kudva withdrew an investment of Rs. 30.70 crores from six debt funds of the company before they were shut for redemption. This withdrawal was after it was decided to wind up these six debt schemes as they were not performing well and before the actual date of winding up. Kudva also redeemed his mother’s investment from these schemes. Accordingly, he saved himself and his family members from loss in MF by using UPSI. The Proposal by SEBI The paper has defined the terms ‘Insider’, ‘Connected Person’, and ‘Designated Persons’ concerning mutual fund transactions and has laid down conditions to which these people will be subjected while dealing in mutual fund schemes. Essentially, the person coming under the purview of ‘Designated Persons’, their ‘immediate relative’, and ‘any person from whom such designated person takes trading decisions’ must report their trading of mutual fund units to the Compliance Officer. Further, AMC will disclose their details of holdings in the units of mutual funds on an independent platform as specified by SEBI quarterly. In addition, during the ‘Closure Period,’ a period during which the above-mentioned people can reasonably be expected to have possession of UPSI will be entirely restricted from dealing in the mutual fund units. And when such a closure period is not applicable, they are to take a pre-clearance from the compliance officer to make transactions. It defines UPSI as any information about a scheme of a mutual fund that is not yet generally available and which could materially impact the Net Asset Value or materially affect the interest of unit holders, certain instances of the same have been particularly mentioned. Analysing the move While it is certain that SEBI is strengthening itself when it comes to market regulation and is being as precise as possible. With the SEBI circular already covering insider trading provisions, this move is an extra attempt by SEBI to curb insider trading. SEBI has previously imposed limitations on fund managers and staff members of AMCs for dealing in the securities market through several circulars. At first, there were only restrictions on trading listed securities, but in 2021, through a circular dated October 28, 2021, employees, AMC directors, trustee board members, and access persons (as defined in the said Circular) were also forbidden from engaging in any scheme while in possession of certain sensitive information. It is possible to argue that SEBI’s recent decision to include mutual funds under the ambit of the Insider Trading Regulations is nothing more than an effort to greatly consolidate the previously existing regulation. But this action is unprecedented and unethical (disproportionate). As correctly pointed out by Mr. Sandeep Parekh (Securities Lawyer and Ex-ED at SEBI), in ET blog, SEBI in its paper seeks to add ‘two new classes of people under the ‘connected persons’ category namely, the people working with the mutual fund executives like lawyers and research analysts and unconnected people trying to avoid insider trading allegations by dealing in mutual funds like judges and accounting firms. He correctly brings out the lacuna in this process as it further complicates the enforcement process for SEBI. For the former, just doing their jobs would make them a connected person, further, if they invest in that company’s shares having no access to any UPSI and it happens to make good quarterly numbers, this will open them to criminal charges. Accordingly, years after their association with any mutual fund deal, they might face allegations associated with it and might be put in a position where they must rebut the ‘presumption of guilt’ so formed. Additionally, the definition of UPSI includes many instances of routine changes which would make any piece of information affecting daily transactions in mutual fund sensitive information. Following this, every person who has some knowledge about the routine changes such as ‘change in accounting policy’, which are not even material and has relations with an MF