Capital Markets and Securities Law

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

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

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

[By Anirudh Das] The author is a student of National Law University, Vishakapatanam.   Introduction The Securities Exchange Board of India, via the amendments to the LODR Regulations on June 14th, 2023, has introduced a rather peculiar sort of Obligation on a Listed Entity, specifically on India’s top 100 & 250 listed entities (based on market capitalization), who would have to with effect from October 1st, 2023 and April 1st, 2024 respectively mandatorily confirm, deny, or clarify market rumours to the stock exchanges. Now let’s try and analyze this move by SEBI and speculate on the potential impact of this regulatory step on the Indian securities market. We will try to provide a comprehensive analysis of the move, including its benefits, challenges, and potential implications for market participants and investors. By evaluating the regulatory framework and the underlying reasons for such a requirement, this study seeks to shed light on the effectiveness of this measure in enhancing market transparency and investor confidence. History of the Provision and Need for the Amendment SEBI’s existing regulations include guidelines on disclosure and transparency requirements for listed companies, mandate companies to promptly disclose any material information or events that could have a significant impact on their financial position or stock prices. However, the recent move goes a step further by specifically focusing on addressing rumors, rumors that often circulate in the market and have the potential to create confusion and market volatility. Prior to the recent move, SEBI had already instituted regulations to address issues related to market rumors and misinformation. Regulation 30(11) of the Listing Obligations and Disclosure requirements gave an option to Listed Entities to “..confirm or deny any reported event or information to stock exchange(s)”. Now it has become mandatory for the Top 250 Companies.  Dissecting the Words In order to fully appreciate the Obligation that this proviso confers let us break down the requirements for the Proviso to be triggered: Information must be in Mainstream Media Must not be General in Nature & Indicates Rumors of Impending Specific Event In terms of the Provision of this regulation Circulating amongst the Investing Public And in response to which the company must perform the following: Deny or Confirm any reported Material event or Information. Within a reasonable time or 24 hours from the time when the Event has been reported In trying to examine each and every element, we must pay close attention to the words used. Several of these words do not have any defined legal meaning and hence we would try and subject them to interpretation and define the Set of Conditions to be met in order for them to be fully met. Firstly, The expression ‘Mainstream media’ has been, in the prefaces of the amendment, said to include both print and electronic by stating that it would not just be “print media but television and Digital Media”. It is interesting to note that Social Media has not been mentioned as a source of news, implying quite literally that Rumors or news that is circulated on Social Media, which constitutes a significant avenue for news consumption, would fall outside the purview of this Regulation. The Jury’s out on whether it is a willful omission or a negligent one. Secondly, rumors that would qualify to be subject to clarification would require specific averments in reference to the Material Event or information. The Current Amendment quantifies by Para 3.1.6 , Material Events on specific Criteria. The criteria are based on a combination of turnover, net worth and profit/ loss after tax (PAT) where such event/ information is considered “material”, whose value or the expected impact in terms of value, exceeds the lower of the following; two per cent of turnover, as per the last audited consolidated financial statements of the listed entity; two per cent of net worth, as per the last audited consolidated financial statements of the listed entity, except in case the arithmetic value of the net worth is negative; five per cent of the average of absolute value of profit or loss after tax, as per the last three audited consolidated financial statements of the listed entity. Hence only such events that are probable to trigger the aforementioned thresholds would qualify for disclosure under this bracket. Additionally, the term used here is ‘impending’ Specific Event or information, and hence thereby must be an even that is set to happen in the near future. Meaning that speculations about events that said to occur in distant future or a general policy decision not relating to an event or information other than an event would not trigger the said Regulation. And lastly, it must be a piece of information that is circulated within the Investing Public, therefore any piece of information by merely becoming widely speculated would not attract the provision, since prosecution would have to prove that it is circulated within the Iinvesting public. All the same quantifying whether a certain information has been circulated to the Investing Public would be difficult. It wouldn’t be surprising to think that the amendment stems from the recent speculative train ride that was faced in Jio-Facebook deal,[1] but it could also be seen as a provision providing for greater transparency and robust regulatory environment. The Clarification Conundrum The most evident pitfall of the Regulation would definitely be the volume of such rumors. Consider, India has over 392 news channels and over 20, 278 newspapers. And hence the question that arises is that does any rumor or speculation that has been brought forth by these news outlet mandate a clarification by the company? Because if that is the case one could only imagine the volume of clarifications that would arise. It could also be argued and has been in fact contented in the feedback to the consultation brief that some listed entities subject to these conditions would lose their competitive Edge while vying for various contracts and Concession. The author feels that this argument has no merit since the Companies that would have to

[By Shyam Gandhi] The author is a student of National Law University, Jodhpur.   Introduction Recently, Securities and Exchange Board of India (“SEBI”), has stated that it will be framing rules and regulations regarding fin-influencers to protect the consumers. SEBI has emphasised on the potential dangers posed by influencers, particularly when individuals blindly adhere to their financial advice, promising substantial returns. Fin-influencers are individuals who have public social media profiles and use these platforms to offer advice and share personal experiences with matters pertaining to finances and investments in stocks. A concern has been raised that these fin-influencers lack the requite license and qualifications and they may possibly provide completely flawed advice to earn profit from the promoter of specific products illicitly, which results in loss to the innocent consumers who rely on them. Need For Regulations The SEBI plays a pivotal role in the facilitation of investor protection and the advancement of market development within the Indian context. In recent years, there is an increase in the number of fin-influencer. The emergence of financial influencers was propelled by the significant growth of the cryptocurrency market in 2017 and the subsequent impact of the COVID-19 pandemic, leading to an extraordinary jump in the stock market and attracting a larger audience of inexperienced investors. However, on the other side of the pendulum, financial literacy in India is only 27%. It implies, most of the investors lack the requisite knowledge and thus depend upon these fin-influencers. Usually, investors take their advice for granted and they act as per the instructions of fin-influencers. A fallacious or biased advice can cause irreparable loss to the investors. Take for example, SEBI’s action in the Vauld case. Further in case of Stock Recommendations using Social Media Channel (Telegram), it has been ascertained that the individuals responsible for managing the channel were found to be lacking registration as Research Analysts or Investment Advisors. Furthermore, it had come to light that these individuals had imposed fees on the innocent investors that were deemed to be unjust and inequitable. Thus, from the above the following can be culled out to be the reasons why such steps by SEBI were required: Unregulated Advice: Finfluencers, being private individuals or entities, are not necessarily subject to the same level of scrutiny as registered financial advisors or investment professionals. This lack of regulation can lead to a risk of misinformation or unverified advice, which could harm investors. Market Manipulation: In some cases, Finfluencers may have vested interests in certain stocks or financial products. They may use their influence to manipulate the market or promote certain assets without adequate disclosure, potentially harming investors who follow their advice without understanding the full picture. For example, Arshad Warsi through the fraudulent advice manipulated the share prices of Sadhna Broadcast and Sharpline Broadcast. Retail Investor Vulnerability: Retail investors, especially those new to investing, might be more susceptible to making decisions based on the recommendations of Finfluencers without conducting thorough due diligence. SEBI aims to protect these investors from potential risks arising from misleading or unverified information. Maintaining Market Integrity: A well-regulated market is crucial for its stability and long-term growth. By establishing rules and guidelines for Finfluencers, SEBI seeks to ensure that market participants, including influencers, adhere to ethical practices and maintain market integrity. Does SEBI Have Jurisdiction To Make Rules And Regulations? One of the key legal aspects is whether SEBI has the jurisdiction to make such rules and regulation. The SEBI Act, 1992 primarily empowers SEBI to regulate and oversee various entities and activities related to the securities market in India. These include stock exchanges, listed companies, brokers, portfolio managers, mutual funds, and other market intermediaries. Financial influencers, who provide financial advice and insights to their followers through various media channels, may not fall directly within the purview of entities typically regulated by SEBI. I. SEBI Investment Advisers Regulations, 2013 As per the SEBI Investment Advisers Regulations, 2013, under the proviso to Regulation 2(l), state that “investment advice given through a newspaper, a magazine, or any electronic, broadcasting, or telecommunications medium that is widely available to the public shall not be considered investment advice for these regulations.”Thus, as per the above provision, if advice has been given through a electronic medium, which is widely accepted, then that advice will not be considered as Investment advice.  As the fin-influencers utilize social media platforms as a means to distribute their expertise in the field of finance, leveraging the widespread accessibility of electronic media to reach a broad audience. Hence, it might be argued that the guidance provided by them does not meet the criteria of investment advice as outlined in the SEBI Investors Advisers Regulations. Therefore, it is not feasible to regulate fin-influencers within the scope of an ‘Investment Advisers’ regulations. II. SEBI Research Analysts Regulations, 2014 According to Regulation 7 of the SEBI Research Analysts Regulations 2014, individuals registered as Research Analysts, as well as those employed as research analysts as and partners involved in preparing and publishing research reports or analyses, must meet specific minimum qualifications and certification requirements issued by the National Institute of Securities Markets. However, even though fin-influencers may possess knowledge and have a substantial following, they may not have the necessary certification and training required to be registered as research analysts with SEBI. As a result, under the SEBI Research Analysts Regulations, 2014, they are not authorized to provide investment advice or research reports, and they may not be classified as research analysts. III. Advertising Standards Council of India Guidelines, 2013 Although, Advertising Standards Council of India [“ASCI”] has released the guidelines in this regard. As per the guidelines, If there is a material connection between the advertiser and the influencer, it must be disclosed and disclosure needs to be clearly and prominently presented to ensure that it is not overlooked by customers. Material connections includes but not limited to monetary compensation, discounts, gifts, etc. However, the guidelines of ASCI are not mandatorily applicable on these influencers. These guidelines do not

[By Sayali Dodal] The author is a student of Maharashtra National Law University Aurangabad.   Introduction Over the past few years, the Indian markets have witnessed a remarkable growth fuelled by ever evolving desire of General Partner (“GP”) and Limited Partners (“LP”) to take part in secondary transaction structures with an aim to deliver solutions to the challenge faced by investors which is lack of liquidity. These GP led Secondary Transaction such as Strip Sale or Continuation Funds are utilized when, in the opinion of the GP, the investments would not yield the expected returns at the originally expected due time of making exits for closed-end funds. In recent years, continuation funds which involves setting up a new fund to simply transfer unrealized investments out of an existing fund, have emerged as an innovative investing method. Continuation funds provide a solution by extending the investment life cycle of venture capital and private equity funds thereby providing liquidity to early investors while also supporting business growth. Presently, at the end of tenure of a scheme of an Alternative Investment Funds (“AIF”), the manager can seek extension of the tenure of the scheme by two years upon approval of two third of the investors which is decided on the basis of their investment in the scheme. Furthermore, after acquiring approval of at least 75% of the investors by value of their investment, the managers also have the option to distribute the assets of the AIF in-specie. In case neither of the aforementioned investors’ consent is received, or if the two-year extension  of  the AIF  is  complete without  investor  approval  for  in-specie distribution of  residual  assets, the AIF is left with no other option than to liquidate the scheme within one year in accordance with AIF Regulations of 2012. The Fund is expected to exit its investments during the harvesting period, and in any case, upon the completion of its tenure. However, sometimes it may be more conducive from a value generation perspective to have a longer holding period for some of these investments. This necessitates a fine balance of expectations, since not all LPs may be on board with extending the holding period and may seek liquidity by the end of the originally communicated tenure of the Fund. Over the past few years, the branding of GP led secondaries has improved particularly in the light of COVID-19, and GP-led secondaries are being used more frequently to continue investments in assets which can potentially provide higher returns in future commonly referred to as the “trophy assets”. One way to structure secondary transaction is by Continuation Funds. Mechanism Of Continuation Funds Continuation Funds are a form of restructuring, partaking transfer of assets by an existing fund to a new fund. These new funds often invest in existing portfolios of successful early-stage firms, allowing initial investors to earn partial returns while reinvesting in fresh prospects. LPs in the existing fund can quit their investments (“Dissenting Investors”) while still being exposed to potential future gains since continuation funds provide liquidity or roll into the new, longer life fund. The purchase of interests from cashing-out LPs is funded by subscription funds from new LPs or current LPs increasing their stakes. Additionally, these new funds are typically managed by the same GP thus mirroring the old fund. Continuation Funds provides General Partners two options: first, they can retain those assets that have given satisfactory returns and may generate additional value in future, and second, they can let the weaker performing assets to stabilise by giving it more time. A continuation vehicle can also be used strategically to create additional funds to be used in expansion prospects by investing in newer buildings or equipment. SEBI’s Take On Continuation Funds Keeping in view the growing popularity of Continuation Funds, Securities and Exchange Board of India (“SEBI”) issued a Consultation Paper in February, 2023 with the proposal to allow AIFs and the managers to carry forward unliquidated investment of a scheme upon completion of its tenure to a new scheme of the same AIF. As per the Consultation Paper, this step came as a response to the sample data collected by SEBI which highlighted the expiration of 24 AIF schemes with a total valuation of Rs. 3,037 crores in FY 2023-24. Another 43 schemes with a valuation of Rs. 13,450 would also expire in the subsequent FY 2024-25. With closure of an existing fund, the introduction of Continuation funds would benefit the investors by providing them the required liquidity while also ensuring disclosure, recognising its asset value  and tracing fund performance. Accordingly, AIFs/managers can transfer unliquidated assets to a new scheme at the end of its tenure with the consent of 75% of investors by value. One condition to be imposed on such AIFs/managers is to arrange bids for atleast 25% of the unliquidated investment in order to provide liquidity to the investors who do not wish to continue. When the bid is obtained from related parties of the AIF/manager/sponsor or existing investors, it has to be disclosed to the investor for transperancy and according to SEBI “such bids can only be used to provide pro-rata exit to other remaining investors”. It is assumed therefore, that to provide liquidity to the dissenting investor who do not wish to transfer to the new scheme, bids obtained from related parties or existing investors can only be utilised. But this pose the question that wouldn’t bids from parties who do not fall in this purview be used to provide liquidity? Another interesting point is that this obligation to obtain bids for 25% of the unliquidated investment is not mandatory since the proposal itself provides an alternative.  In case such bids cannot be arranged, the closing valuation of the scheme will be based on the liquidation value as determined under IBBI Regulation, 2016 or other IBC norms. The ambiguity concerning whether Dissenting investors have to be paid or not poses another issue. In the scenario when 25%  bids are obtained for the unliquidated assets,

[By Siddharth Sharma] The author is a student of Institute of Law (Nirma University).   Introduction In the world of the securities market, insider trading is one of the most heard and frowned upon terms. The term insider trading in its simplest connotation implies the advantage churned out of some confidential information, where the information lies with the person due to the position or privilege he holds in an entity and the information is of such nature which has the potential to either soar the value of the securities or plunge it. The indulgence in selling and purchasing of securities on the basis of such information that is generally not available to the public consequently results in insider trading Across jurisdictions, the practice of insider trading has been considered to be both immoral as well as illegal in nature. This article analyses the judgment of the Supreme Court of India in the case of SEBI v. Abhijit Ranjan. The Apex Court through its judgement in the aforesaid case has changed the yardstick for holding a person guilty of insider trading to some extent. The article further delves into the question of whether this decision of the apex court is an overreach. The Factual Matrix of the Case The respondent in the present case, Mr. Abhijit Ranjan was the chairman and managing Director of Gammon Infrastructure Projects Limited (GIPL) till 20th September 2013 and thereafter he continued only as director of the company. In the year 2012, a special purpose vehicle (SPV), Vijayawada Gundugolanu Road Project Pvt. Ltd. (VGRPPL), was created for the execution of the project worth Rs 1648 Crores which was awarded to GIPL by the National Highway Authority of India (NHAI).  Simplex Infrastructure Limited (SIL) was similarly awarded a contract worth Rs. 940 Crores by NHAI for a project in Jharkhand and West Bengal. For the execution of this project, SIL set up an SPV called Maa Durga Expressway Private Ltd. (MDEPL). Thereafter two shareholders agreement was signed between SIL and GIPL, pursuant to these agreements SIL had to invest in VGRPPL and similarly GIPL had to make an investment in MDEPL. The structure of this investment effectively meant that each of the parties would have 49% stakes in each other’s project. However, on 09.08.2013, the abovementioned agreements between the parties were terminated by the GIPL Board. Later, the respondent on 22.08.2013 sold a total of 114 lakhs of his shares of GIPL worth Rs. 10.28 crore. The disclosure regarding the termination of the shareholder’s agreement was made to the National Stock Exchange of India (NSE) and the Bombay Stock Exchange (BSE) was made on 30/08/ 2013. The Securities and Exchange Board of India (SEBI), based on the input of the NSE regarding the transaction and the possibility of the trade being concluded based on unpublished price sensitive information (UPSI), conducted a preliminary enquiry, wherein it prima facie held that the respondent violated the provisions of Section 12A(d) and (e) of the SEBI Act, 1992. This was later confirmed, upon hearing the respondent, by its order dated 23.03.2015. Further, notices were served upon to the respondent and another company named, Consolidated Infrastructure Company Pvt Ltd (CICPL) along with its two directors. Upon receiving the replies and hearing the notices, an order holding the respondent guilty of insider trading was passed and he was made liable to disgorge Rs. 1.09 crores, which is the said amount of unlawful gain from the trade. However, the other noticee i.e., CICPL. Subsequently, a statutory appeal was filed by the respondent which was ruled in its favour and thus the SEBI went to appeal against it before the apex court, which is the present case. The Bone of Contention The apex court in this appeal by the SEBI formulated primarily a three-pronged issue for consideration. Two of the main issues were: (i) Whether the decision of the board to terminate the aforesaid agreements can be characterized as ‘Price Sensitive Information’ within the meaning of section 2h(a) of the SEBI (Prohibition of Insider Trading) Regulations, 1992. (ii) Whether the said sale of the shares by the Respondent would amount to insider trading under Regulation 3(i) and Regulation 4. A. Unpublished Prince Sensitive Information The expression Price Sensitive Information has been defined under Regulation 2(ha) of the SEBI (Prohibition of Insider Trading) Regulations, 1992. It is defined as ‘any information which relates directly or indirectly to a company and which if published is likely to materially affect the price of securities of company.’ The explanation to regulation 2(ha) provides 6 specific pieces of information which are to be characterized as price sensitive, whereas the seventh sub-point of explanation mentions a relatively broad entry i.e., significant changes in policies, plans or operations of the country. The term ‘unpublished’ has been defined under regulation 2k as ‘information which is not published by the company or its agents and is not specific in nature. Further, regulation 3 prohibits dealing, communicating or counselling on matters related to insider trading. Any person who enters into a transaction of securities in contravention of the provisions mentioned under regulation 3/3A was made to be held guilty of the mischief of insider trading. Therefore, for rendering a person guilty of insider trading two essentials are to be fulfilled in accordance with Regulation 4, they are a) the person happens to be an insider b) the transaction in securities should be in violation of regulation 3/3A. The apex court held in its judgement that the information which resided with the respondent would definitely fall within the category of Unpublished Price Sensitive Information as it found the information regarding the termination of the said agreements capable enough to materially affect the price of the security in the market where the effect of such information could either be beneficial or have an adverse effect. B. Guilt of Insider Trading: Introduction of a New Element While the apex court affirmatively answered the essentials with regard to the said information being rendered to be a UPSI and

[By Shivesh Didwania] The author is a student of Maharashtra National Law University, Mumbai.   Introduction Corporate Transparency Act (hereinafter ‘CTA’) was brought forth by the Congress of the USA on 1 January, 2021. CTA is a part of the Anti-Money Laundering Act of 2020. Financial Crimes Enforcement Network of the Department of the Treasury (hereinafter ‘FinCEN’) finalized the guidelines for implementation of the CTA on 30 September, 2022. The CTA will come into force from 1 January, 2024 for new companies and from 1 January, 2025 for the already existing companies. The objective of the enactment is to is to fight money laundering, tax evasions, etc. by the way of mandatory corporate reporting which will enhance corporate transparency. However, the CTA has been hailed as a ‘seismic shift’ towards achieving a better version of corporate transparency in the USA. It will help in curtailing the illegality that is carried on by the activities of shell companies.[i] In India, such corporate reporting which is mandatory for the companies is governed and regulated by the Securities and Exchange Board of India’s Listing Obligations and Disclosure Requirements (hereinafter ‘LODR’) 2015. The objective of these regulations is to make transparency an intrinsic part of the Indian corporate regime. The objective of this article is to make the reader aware of the new legislation – the CTA of the USA and the loopholes that it suffers from. It will be followed by a comparison of the CTA with the existing regime of LODR in India. Corporate Transparency Act: What does it entail? The USA had a weak legal regime to tackle the transparency with regard to the beneficial ownership information. The CTA creates a federal framework for the information relating to the beneficial ownership in the USA.[ii] The CTA creates a rule for a ‘reporting company’ to disclose beneficial owners of the company.[iii] The company is required to disclose this information to the FinCEN, which will maintain a central registry.[iv] The information is to be provided on an annual basis. If there is a change in the ownership structure which needs to be reported, then the company must intimate the change to the FinCEN within period of thirty days.[v] FinCEN, in turn, shares the information with investigation authorities as and when the need arises. These authorities may very well include any federal enforcement agency or may also include any overseas law enforcement bodies who have made request to a federal enforcement agency. However, there are stringent safeguards to ensure the data protection and privacy concerns.[vi] Beneficial owners according to the CTA Beneficial owners are persons/ entities that directly or indirectly have a substantial control over the reporting company; or which hold at least 25% in the reporting company. Substantial control essentially means that the entity/person has an intrinsic role to play in decision making in the affairs of the reporting company. This means that the person/entity holds a substantial control over the main company. It is important to note that ‘substantial control’ is not defined adequately in the CTA. A senior officer of a reporting company will also be said to have a substantial control over the affairs of the reporting company. Moreover, a person having control over the appointment or removal of the senior officer or the majority of the board of directors will also be said to have a substantial control over the reporting company.[vii] However, this interpretation of substantial control is not exhaustive in nature.[viii] Moreover, persons/ entities are beneficial owners irrespective of their citizenship or residency.[ix] However, serious data privacy and confidentiality aspects may arise when the requesting party is a foreign agency. It may be justified when it is under a treaty between USA and the requesting country. However, it will be a matter of concern when the request is not made in furtherance of a treaty.[x] Beneficial owner may also include a person/ entity that receive substantial economic benefits from the assets of the reporting company. This wide definition or, as some people argue, lack of a proper definition opens the gate for the FinCEN to include numerous actors within the ambit of the CTA.[xi] CTA is not free from loopholes The CTA has been lauded as a land and mark step towards tackling corporate shell crimes. However, this legislation is also not without flaws. One of the problems that this mechanism may face is the time period of reporting the information. This mechanism may require the companies to report the required data on an annual basis which may, in turn, lead to untimely and non-updated information.[xii] Another problem is that this mechanism does not lay down rules for entities like trusts.[xiii] These bodies may take advantage if they are kept outside the regime of the CTA. The information demanded is to be kept confidential and only the prescribed government agencies can access the same. However, there are arguments that whether the CTA really promotes transparency if the beneficial ownership information is highly confidential and secretive.[xiv] The scope of financial institutions to which information may be shared is also a restricted one and includes only a certain class of institutions as governed by the CTA.[xv] Access to the information can only be acquired so as to ensure requirements relating to the customer due diligence (CDD).[xvi] This might pacify the concerns of the companies that may be worried about the horizon of the disclosure of the beneficial ownership information. There can be serious privacy concerns about the data that is reported by the reporting company. The question posed may be that whether the right of a reporting company to keep its data confidential is greater than the importance of tracking the illegality pursued by shell companies.[xvii] Another major problem is that companies may have reservations in declaring the information which might be available in the public domain.[xviii] They may be concerned about the extent of information that the CTA might effectively demand. This criticism will be present for a very long time because the USA might very well

[By Palash Varyani] The author is a student of Institute of Law, Nirma University.   Introduction Recently, the Securities and Exchange Board of India (SEBI) has made a significant breakthrough by explicitly addressing and defining the practice of “spoofing” in its recent order. Spoofing, a method employed by traders worldwide to extract illegitimate profit from the stock market, has been a longstanding concern. This article focuses on the SEBI’s order concerning Nimi Enterprises, highlighting the concept of spoofing and recent developments in its regulation within India’s financial landscape. By examining the implications of the SEBI’s action and the measures taken to combat spoofing, this article sheds light on the evolving dynamics of market integrity and investor protection. The Practice of Spoofing Spoofing entails a manipulative strategy employed in financial markets, wherein a trader deliberately places deceptive buy or sell orders, without genuine intent for their execution within the market. This deceptive practice frequently relies on the deployment of algorithms and automated bots, with the objective of distorting market dynamics and asset prices by fabricating a false impression of supply or demand. In simple terms, spoofing refers to the act of a trader initiating orders to purchase or sell a specific security, only to subsequently alter or cancel those orders with the aim of extracting profits. For example, Mr. A submits a purchase request for 5000 shares of XYZ company, which will lead to an increased demand for the stock. Consequently, the price of the stock will escalate. Later on, he cancels the order and proceeds to sell his existing shares. By doing so, he aims to generate an artificial demand and achieve a higher selling price than originally anticipated. This practice is also known as “Layering” which encompasses the utilization of a disruptive algorithmic trading strategy. This particular approach can potentially instigate either excessive “optimism” or “pessimism” within the market. It constitutes a form of illicit market manipulation that is prohibited in the majority of countries worldwide. Within the USA, engaging in such conduct is deemed unlawful and classified as a criminal offence according to the Dodd-Frank Act of 2010. In the UK, spoofing is governed by Article 15 of the Market Abuse Regulation, and sections 89 and 90 of the Financial Services Act, 2012. SEBI and the Nimi Enterprises case The SEBI has recently passed an order against “Nimi Enterprises” and has ruled that it was involved in spoofing of shares in the Indian securities market. The firm was involved in securities trading and was subject to an investigation regarding its trading operations to determine whether it violated the regulations outlined in the SEBI Act and the Prohibition of Fraudulent and Unfair Trade Practices Regulations, 2003. Throughout the probe, SEBI uncovered evidence indicating that the firm engaged in a trading scheme designed to artificially manipulate the perception of demand or supply for specific stocks. As an illustration, the firm placed substantial buy orders for a security, offering a price significantly distinct from the current market value. Subsequently, the firm would place another order for the same stock, but at a price in line with market rates, although for a lower number of shares. After this order was executed, they would cancel the initial order, which consisted of a higher quantity of shares. As a result of the public disclosure of these activities, the parties concerned received a “Show Cause Notice”. The firm asserted that its approach of placing many large purchase and sell orders, some of which were executed at prices higher or lower than the current market price, was driven by the anticipated price changes caused by a variety of causes. Certain big orders, however, were not fulfilled and were subsequently cancelled in order to free up the “margin” for trading in alternative equities. Furthermore, they claimed ignorance of the word “spoofing” used in the “Show Cause Notice”, emphasising that it was not defined by SEBI. Moreover, they asserted that their actions evidenced a genuine intention to carry out the orders, as they openly disclosed them to participants of the market. According to their argument, a trader who harbours no intention of executing an order would refrain from making such disclosures. Consequently, they contended that there was no substantiated proof indicating any fraudulent motives behind the activities in question. SEBI’s investigation determined that there was a brief time interval, often just seconds, between the fulfilment of “small orders” and the subsequent cancellation of “large orders”. On multiple days, a similar trend was observed for several stocks. This information revealed the firm’s recurrent mode of operation as a usual trade practice. SEBI also emphasised the rules of the stock exchanges, which require traders to reveal to market participants either the complete quantity of their order or at least 10% of the overall quantity. A further amount equal to 10% of the total quantity then becomes publicly viewable in the “Order book” once the revealed quantity has been traded. According to SEBI’s inquiry, the firm purposefully disclosed all of their significant orders in the “Order book”. They chose to report only a portion of shares, however, while making deals involving significantly lower amounts for the same stocks. Based on this factual investigation, SEBI reached the conclusion that the firm had placed “large orders” with no genuine motive of executing them. Instead, they harboured a “malicious intent” to rig the price of the stock. By capitalizing on the non-authentic demand or supply generated within those stocks, the firm was able to purchase or sell shares at the price that was influenced by these artificial market conditions. This unethical practice ultimately affected the interests of sincere investors trading in the stock market. In this order, the SEBI also defined spoofing for the first time as: “The unlawful practice of placing orders containing a large number of shares on one side of the market (buy/sell) and eventually executing orders containing relatively smaller quantities of shares on the opposite side (sell/buy) and cancelling the orders containing large orders.” According to SEBI, the firm was involved in the act of spoofing and its