Capital Markets and Securities Law

[By Himanshi Garg] The author is a student at University Institute of Legal Studies, Panjab University, Chandigarh. Abstract The Supreme Court (Hereinafter as “SC”) in the case of the SEBI v Abhijit Rajan has held that the motive on the part of an insider is an essential element to hold an insider in violation of the provisions of the SEBI (PIT) Regulations 1992 .This present blog seeks to critically analyze the judgment of the SC referred to above in light of the insider trading jurisprudence developed in the U.S.A, by securities fraud scholars, courts, and commentaries. The author then tries to draw home her argument as to why the possession test should be used in determining the liability of the person charged for violating the Act and why the SC’s judgment sets a bad precedent. Analyzing Supreme Courts judgment holding ‘motive’ as an essential element in violating SEBI Act 1992 The brief facts of this case were as follows Mr. Abhijit Rajan was the chairman and managing director of Gammon Infrastructure Projects Limited  GIPL.  and another company Simplex Infrastructure Limited   SIL were awarded separate contracts by the National Highways Authority of India NHAI. However,in 2013, the Board of GIPL passed a resolution authorizing the termination of contracts. The information was communicated to the stock exchange 21 days later. During that period, Mr. Rajan had already sold his shares which became the subject matter of an investigation of insider trading shares by SEBI. The Securities regulator held Mr. Rajan liable for the violation of SEBI(PIT)Regulations, 1992, On appeal, the Securities Appellate Tribunal (Hereinafter as “SAT”) overturned the order of SEBI holding Mr. Rajan not guilty. The SAT order was now appealed before the SC by the SEBI. Two issues arose before the SC, one of which was Does the Sale of Equity Shares by Mr. Rajan, under the compelling circumstances amounts to insider trading? There is no requirement under the SEBI (PIT) Regulations,1992, for SEBI to prove the motive of the insider, only an essential requirement of possession of unpublished price-sensitive information (UPSI) on part of the insider is required to be established by SEBI to prove his liability. Mr. Rajan advanced his arguments by contending that the sale of shares was occasioned by the compelling need to save the bankruptcy of the parent company of GIPL and utilize the proceeds of the share sale towards it rather than making unlawful gains. He further advanced that he had no motive to use the UPSI to defraud the securities market. The SC in its turn went beyond the SEBI Regulations by applying a profit motive test.The Supreme Court observed that Mr. Rajan’s actions were contrary to the arithmetic movement of the Securities market, had the UPSI been disclosed. Based on this analysis, the SC concluded that Mr. Rajan’s actions did not originate from unlawful motives, but from a pressing need to prevent the parent company of GIPL from going into bankruptcy. In view of the Court, the result that is profit/loss from the resulting transaction may not provide an escape route to the insider, but one cannot ignore human conduct. The determining factor is whether the insider has the necessary motive to make unlawful gains and manipulate the securities market. However, one may observe that in holding ‘Motive’ as an essential requirement,both the SC and SAT have deviated from their past rulings. In Chairman, SEBI v Shriram Mutual Fund the SC held that unless the language of the statute otherwise indicates, it is unnecessary to ascertain whether the violation is intentional or not. A similar viewpoint was shared by SAT with SEBI in Hindustan Lever Ltd v SEBI. The Rationale of the Courts in adopting the Possession Test The fundamental provision governing insider trading in the U.S. is SEC Rule 10b-5, etched in the light of Section 10(b) of the Securities Exchange Act, 1934. This Section prohibits fraud in connection with the purchase and sale of any security. However, different Circuits have adopted different tests in determining the liability of the insider based on different rationales which are analyzed below. The first case that extensively dealt with this issue was United States v Teicher  in which a lawyer leaked the inside information to the defendant. The defendants argued that he had other reasons to trade such as his fundamental research about the value of the stock. His contention that there could only be a violation when trading was casually connected with the information established by the SEC was rejected by the Second Circuit, which upheld his conviction. Teicher case, therefore, stands for a Pro-Government approach, where a trader is judged for the worst reasons to trade and the reasons for trade are rejected.  The Second Circuit observed that it’s difficult to assume in light of human nature, that the UPSI would not have influenced the behavior of the insider and “Unlike a loaded weapon, ready to use but not used, material information cannot lay idle in the human brain and the Use Standard pose difficulties for the SEC in requiring factual inquires in the state of mind.” Motive Test: A Safe Harbour for the Insiders? The supporters of the Use test primarily argue that adopting the possession test to determine liability would encompass in its punishable net the innocent trader who did not use the UPSI. The innocent trader is no better than the uninformed trader because he did not use that information and no unfair disadvantage accures to the uninformed trader. The Ninth Circuit in United States Vs Smith took this view, in that Smith argued that the jury must prove that there is a causal connection between the information and trade to convict him. The Ninth Circuit accepted his arguments and acquitted him. The burden of proof shifts from the defendant to the SEC. Thus, the Ninth Circuit comes to a very stronger conclusion that if the insider does not use the information, there cannot be any inference of his motive to defraud the market. Why the Possession of

[By Aditi Kundu] The author is a student at Hidayatullah National Law University.   Introduction In an attempt to strengthen the sustainable financing regime in India, Securities and Exchange Board of India (SEBI) has revised its Green Debt Securities (GDS) framework, whereby it has expanded the definition of GDS, enhanced the disclosure requirements, and introduced guidelines to avoid greenwashing. SEBI’s review of the existing framework under Disclosure   Requirements   for   Issuance   and   Listing   of   Green   Debt Securities, 2017 is aimed at preventing misallocation of funds, ensuring transparency, and fighting greenwashing. GDS are green finance instruments specifically designed to fund environmentally sustainable projects. By SEBI (Issue and Listing of Non-Convertible Securities) (Amendment) Regulations, 2023 the definition of GDS has been expanded to include new categories of projects for which the proceeds from the issuance of bonds can be allocated. These include: climate change adaptation; pollution prevention and control; circular economy adapted products; blue bonds; yellow bonds; and transition bonds. Subsequently, SEBI also released a Revised Disclosure Requirement for Issuance and Listing of Green Debt Securities which mandates the appointment of a third-party certifier by the issuer who would audit and track the use and management of proceeds during both the pre-issue and post-issue phases. This requirement is applicable for two years from 1st April 2023 on a ‘comply or explain basis’. The initial and continuing disclosure requirements in financial statements and annual reports on the part of issuer have also been enhanced. These include details of process and criteria used for selection of eligible projects, green taxonomies/standards followed, details of temporary placement of unutilized funds, perceived risks and mitigation plan, details of the projects, and reporting of impact on environment. Further, most importantly, to curb the over-arching problem of greenwashing, SEBI released a guidance paper for do’s and don’ts relating to GDS. SEBI has made a monumental effort to define greenwashing as “making false, misleading, unsubstantiated, or otherwise incomplete claims about the sustainability of a product, service, or business operation”. Now, the issuers need to regularly monitor their use of funds and ensure that projects are contributing towards a sustainable economy by reducing adverse environment impact. Issuers are prohibited from using funds for purposes other than those mentioned in the definition of GDS, using misleading labels, and cherry picking data that works in their favour. Further, if funds are utilised for unqualified purposes, then, on the option of debenture holders, there can be an early redemption. At the centre of such regulatory revision lies India’s sustainable development and climate change action targets. India is a party to the Paris Agreement 2015 (the agreement), and the Nationally Determined Contributions (NDC) is an action plan for mitigating greenhouse gas emissions and adapting to climate change impacts under the agreement. According to NDCs, each country sets its Intended Nationally Determined Contributions (INDC) and identifies its climate action goals. India’s current INDC is reduction of emission intensity of its GDP by 33 to 35 % by 2030 from 2005 level and increase in share of non-fossil fuel based energy 40% by 2030. It also aims to cut emissions to net zero by 2070. However, estimates suggest that more than $10 trillion will be required only for power, green hydrogen and electric vehicles to meet such goals. Since such huge amounts are required for financing the green goals, climate/green finance which is intended to be used only for certain specified purposed becomes the key factor, and GDS is one of the promising ways to achieve the same. Based on the aforementioned premise, this articles provides a critical analysis of the regulatory mechanism of GDS. Analysis What does “Green” signify? SEBI has commendably amplified the definition of GDS as it increases the scope of categories of projects for which debt securities that can be issued. However, the current framework provides a description of GDS, instead of particularising the term ‘green’. It describes GDS as debt securities issued for raising funds which are utilised for certain categories of green and sustainable projects. SEBI has stuck to a list of vacuous subject areas that are generally considered crucial to sustainable development. There is no India-specific justification as to why subject areas like biodiversity conservation, sustainable waste management, etc. which are essentially general aspects of sustainable development have been included. There is a lack of logical co-relation between the subject areas and India’s INDCs. Due to the absence of well-defined criteria as to what constitutes green under the mentioned categories, issuers get more window to broaden the scope of their green activity and making it easier for them to squander the funds in the name of “green”. This ultimately discourages investors from buying green bonds. The issuers get more window to dictate the scope of their green activity, making it challenging for the investors to make informed decisions. A suggestion at this end would be that the GDS regulation should recognise major sectors in the economy and incorporate a sector-specific list of activities and the detailed environmental criteria these activities must meet to be labelled ‘green’. This list can be timely updated with emerging economic sectors, and the criteria for existing sectors may be changed by analysing their potential impact on India’s climate mitigation goals. Furthermore, the current framework requires the issuer to state the environmental sustainability objectives of the issuance. However, there is no reference to the environmental targets which are being pursued by the regulation. This creates a gap between the environmental goals intending to be achieved by the issuer and green targets of India. In this regard, it becomes imperative to formulate a standard green finance taxonomy which aligns with India’s environmental targets. Curating a taxonomy would mean a clear definition of ‘green’ and ‘sustainable’ by segregating both the concepts in terms of category of project for which the funds from GDS are to be utilised. This would result in a clear distinction and help identify sustainable activities from green economic activities. Currently, the issuers are at a liberty to take reference from any taxonomy/ standard as they

[By Tanishq vijay] The author is a student of Gujarat National Law University.   Introduction Anti-avoidance provisions prevent taxpayers from using contrived and non-commercial arrangements to abstain from or reduce their tax liability.[1] These provisions in the realm of market regulation can be relevant in curbing tax leaks from corporate entities who devise various schemes to circumvent share market rules. SEBI has recently pitched before the committee appointed by the Supreme Court looking after Adani mayhem for anti-avoidance provisions to regulate corporates who devise innovative schemes to avoid share market rules.[2] SEBI wants a proviso similar to General Anti Avoidance Rules (GAAR) in the Income Tax Act 1961. This will help regulators stop activities like insider trading and transactions violating market rules.[3] General Anti-Avoidance Rules GAAR is a system to prevent tax evasion. It is covered under Chapter X-A of the Income Tax Act of 1961.[4] It contains impermissible avoidance arrangements, which are entered into to create tax benefits. A transaction that is a result of misuse of the act or does not have a bona fide explanation or commercial solidarity to it is covered in this arrangement. The Hon’ble SC in Vodafone International Holdings B.V v. Union of India & Anr.[5] GAAR “intends to prevent tax avoidance, which is inequitable and undesirable.” The court further provided valuable insight into the necessity of legislation of this nature. The lack of provisions and effective legislation gives rise to judicial uncertainty. Hence, maintaining market stability and complying with market rules and regulations will prevent tax avoidance motives and boost genuine commercial transactions. Instances of Anti-avoidance Provisions in SEBI The Securities and Exchange Board of India Act, 1992 (SEBI Act hereinafter)  does not provide for any specific anti-avoidance provision.  Within the framework of the SEBI Act, 1992, Section 12A stands as the closest provision addressing anti-avoidance measures. [6]  This section explicitly prohibits the use of manipulative, deceptive to defraud or deceive any person engaged in stock exchange securities. It also prohibits insider trading. It gives powers to SEBI to take action against those who try to use deceptive practices to defraud investors. Still, the problem with this is that it deals mainly with defrauding a company or stock exchanges which may include siphoning of a company’s funds or artificially increasing or decreasing the prices of the stock exchanges. It does not provide for a compliance regime against corporate transactions that seek to avoid compliance with the rules of SEBI. Chapter VIA of the SEBI Act, 1992[7], delves into penalties and adjudication. It is founded on the tenet that anyone who violates or disregards any provision of the Act, the regulations, or any directions issued by SEBI is subject to penalty or adjudication, regardless of whether they had any malicious intent or rationale. However, we cannot equate it with Anti-avoidance rules as it is a specific provision intended towards imposing and adjudicating penalties in case of an artificial increase or  a decrease in share price. At the same time, anti-avoidance in market regulation is a more general principle based on substance over form, where transactions inconsistent with the economic stability and leading to immoral gains to a corporation are discouraged. Enhancing Transparency in foreign portfolio investors SEBI has recently proposed more transparency and stricter disclosure norms for Foreign Portfolio Investors (FPI) in the backdrop of the Adani-Hindenburg saga. SEBI wants additional information regarding foreign investors investing in Indian entities with a concentrated holding in one single entity so they can be monitored more closely.[8] FPIs with over 25,000 crores or 50% Asset Under Management (AUM) must make additional disclosures. This was done so that promoters do not circumvent the minimum public shareholding requirement.[9] Under the Prevention of Money Laundering (Maintenance of Records) Rules 2005, a ‘beneficial owner’ is defined as an individual with a controlling ownership interest of more than 25% in the case of companies.[10] SEBI aims to obtain granular information regarding ownership, economic interest and control rights of these FPIs, which will help categorise these based on risk. SEBI had observed that some foreign investors have a large portion of investments in a single company for an extended period.[11] The current requirement for minimum public shareholding is 25% which means that the company’s promoters must maintain at least 25% of its share capital to the public. To bypass this regulation, the promoters invest through FPI by concentrating a substantial portion of the equity in one single investee company ultimately resulting into a deflective image of the actual situation of the publicly traded shares. SEBI has also observed that it is difficult to identify the beneficial owner of FPI based simply on economic interest. Most investor entities fall below the threshold required for identification as Beneficial owners.[12] The same Beneficial Owner holds ownership in FPI through different entities, each falling below a certain requirement that needs to be followed to become a beneficial owner, leading to decreased transparency. For example, there is a FPI company based in Mauritius named ABC Funds. It has multiple shareholders in the name of X,Y,Z Ltd holding 9% each and 73% being held by others. SEBI’s guidelines states that Beneficial Owner of an FPI is a natural person who owns or controls more than 25 of that FPI. However, here ABC Funds Beneficial owner is hidden by different entities below 25%. This leads to a creation of a loophole in SEBI’s requirements resulting in exploitation of disclosure agreements and a breach in transparency. This is one instance of anti-avoidance measures to bring transparency in market regulation. The big corporates will not be able to use loopy laws to circumvent the shareholding requirement resulting in irregular increase or decrease in the price of shares. Impact of Anti-avoidance provision in SEBI on foreign institutional investors According to section 2 (f) of the SEBI (FII) Regulations 1995, FII is “institutions established or incorporated outside India which proposes to invest in India in securities”[13]. Companies pool large amounts of money from investors and invest it in securities, real estate, and other assets.[14] Anti-avoidance proviso in

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

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

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

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

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

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