Securities Regulation Archives

SEBI’s Take on Rumour Verification: Micromanagement or a Welcome Move?

Leave a Comment / Capital Markets and Securities Law / CBCL

[By Dharani Maddula & Anoushka Das] The authors are students of Symbiosis Law School, Pune. Introduction On 28 December 2023, the Securities and Exchange Board of India (“SEBI”) published a new Consultation Paper on Amendments to SEBI Regulations with respect to Verification of Market Rumours (“Consultation Paper”). The paper seeks to use material price movement instead of material event as defined under Regulation 30 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations 2015 (“(LODR) Regulations”) attributable to a rumour to determine when a rumour verification is necessary. The paper also aims to give more clarity on the determination of price change to be considered on stocks, bonds and valuation in buybacks while allowing for relaxation on the 24 hour timeline on the rumour verification. This consultation paper was published after taking into consideration various observations and suggestions put forth by the Industry Standard Forum (“ISF”) composed of representatives from industry bodies such as FICCI, ASSOCHAM, and CII. The need for such a framework can be traced back to the recent case of Reliance Industries Limited v. SEBI dealing with the JIO-Facebook deal where market rumours fuelled price variation. Proposed Changes  Through this paper, SEBI seeks to suggest the criteria of material price movement based on the price range of securities for determining the need for rumour verification. In order to ascertain a material price change, the price range of such a share needs to be taken into consideration. While accounting for shares falling within the higher price change, any small change in the price will be considered material in terms of absolute price, while a higher price change will be considered material for cheaper shares. The changes in benchmark indices will be a determining factor while accounting for market dynamics influencing such a price change. It notes that for shares falling under the high price range, a low percentage move would be considered as a material price change, and for shares falling in the lower price range, a higher percentage move in price would be considered as a material price change in order to determine the difference of prices in absolute terms in both price ranges. This shall also be determined by taking into account movement in the benchmark indices such as NIFTY50 and Sensex to factor in market dynamics.  The consultation paper suggests two frameworks for the determination of material price movement. “Framework A” entails considering the price from the day before the company confirmed the rumour while ignoring subsequent market changes to determine the transaction price. On the other hand “Framework B” entails  excluding the price variation in price due to the rumour and its subsequent confirmation from the Volume Weighted Average Price calculation and adjusting the same according to the daily prices. Irrespective of the Framework chosen, SEBI clearly intends to allow for fairness in price determination while acknowledging potential drawbacks in both the frameworks in its consultation paper.   The consultation paper also suggests a minor amendment to the proviso to Regulation 30(11) of the (LODR) Regulations which requires listed entities to verify, deny or clarify any rumours within 24 hours of its report in any mainstream media. This timeline is now suggested to be changed to within 24 hours from the material price movement. This is said to be implemented from 1st February 2024 for the top 100 listed companies and from 1st August 2024 for the top 250 listed companies.  The unaffected price as proposed by the ISF will be applicable from 60 days admeasuring from the date of confirmation of the rumour till the date of public announcement by the company or any other relevant disclosure such as a board approval by the company. In cases of competitive bidding for a potential M&A deal without an unidentified buyer, the applicable time period for unaffected price shall be 180 days from the date of confirmation of the rumour to the relevant date under the applicable regulations.  The rationale behind these implementations on the basis of material price movement is to provide an effective mechanism to combat false market sentiment and nullify any impact of the securities of such listed entities. The metric of material price movement helps in narrowing the pool of rumours of potential rumours that can cause an upheaval in the market. The consultation paper in order to reinforce this sentiment by casting an obligation upon the Key Managerial Personnel (“KMP”) to provide accurate and timely response as required under Regulation 30(11) of the (LODR) Regulations. The consultation paper also imposes a restriction upon the listed companies to not hide under the garb of UPSI when the same news report may be used by an insider as a defence. This initiative aims to establish and uphold industry standards for a more efficient business environment. Hurdles in practical implication and impact on the market  Regulation 30(11) of the (LODR) Regulations acts as a  general provision for listed entities to verify any market rumour. The consultation paper strengthens this obligation by imposing the same on all top 250 listed companies by 1st August 20024 which ensures that such listed entities give heed to rumours being spread through mainstream media. This is an interesting move as most companies choose not to comment on any such rumours due to internal policies. SEBI substantiated its resolution for combating misinformation by relying on similar mechanisms under Section-202.03 of the New York Stock Exchange (NYSE) Company Manual on “Dealing with Rumours or Unusual Market Activity” where companies are supposed to confirm, clarify or deny such rumours with appropriate public statements. After comparing the two statutes, it should be noted that there are a few deviations in SEBI’s methodology pertaining to such rumours. SEBI in the paper relies on Regulation 30(11) for the definition of a rumour which mentions that a rumour triggering this provision should not be general but specific in nature and deal with an impending material event. The yardstick on what will be considered “specific” is not spelt in the paper or any

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Municipal Bankruptcy: India’s Chapter 9 Moment?

Leave a Comment / Insolvency Law / CBCL

[By Bhaskar Vishwajeet] The author is a student of Jindal Global Law School. Introduction Municipal bonds have gathered steam in India. As of when this piece was written, the country has 29 active municipal bonds on the NSE’s IBMX index for municipal bonds. Municipal debt instruments are a great alternative to raising capital for public infrastructure/service works. That said, assuming that the debt obligation is watertight may not be prudent because the issuer is a sovereign. There may be issues with revenue generation and projects being delayed. However, a far more significant threat is the municipal corporation’s bankruptcy. This article aims to contextualize municipal bonds within India’s bankruptcy regime and assess whether these debt instruments and investors are secured through regulation in case of possible bankruptcy. We shall also refer to the United States to see how the sovereign’s promise of “faith and credit” to back the bond’s health is not always guaranteed. What are Municipal Bonds? Municipal bonds are government debt instruments financing public projects and utilities. They attract investors by allowing them to lend money to local government institutions in return for regular interest payments and the return of their principal when the bond matures. The potential tax benefits, such as income tax exemptions on interest income, make municipal bonds appealing, especially to investors in higher tax brackets. Municipal bonds are of two types: General Obligation (GO) bonds, supporting general development works through revenue from property tax and revenue cess, and Revenue Bonds, funding specific projects like schools and water filtration plants through project-generated revenue. Backed by the respective government’s reliability in repaying debts, municipal bonds receive ‘investment-grade’ ratings from agencies, exemplified by AA+ ratings for New Delhi Municipal Council and Navi Mumbai bonds. Municipal Bond Health Municipal Bonds are generally considered safer than other investments in the market for two primary reasons. First, municipal corporations are state instrumentalities. A sovereign pledge supports the bond’s health, and there is a sense of assurance that the state will make good on the interest income and any default whatsoever. Second, to reinforce investor confidence in the value and health of the bonds, regulators require municipal issuers to meet certain eligibility requirements. The SEBI (Issue and Listing of Municipal Debt Securities) Regulations 2015 stipulates eligibility requirements in regulation 4 and requires the issuing local government authority or ULB to, inter alia, not have a history of defaulting on debt repayments in the past 365 days of the issuance of a municipal bond and to have at least an investment grade credit rating (BBB- or above) by a SEBI-registered credit rating agency. The Detroit Case Study and Chapter 9 Protections Despite their perceived safety, municipal bonds face financial distress, as evidenced by the City of Detroit’s bankruptcy in 2013. Detroit’s case illustrates how legislative protections, such as Chapter 9 of the U.S. Bankruptcy Code (Adjustment of Debts of Municipalities), facilitated a resolution. Detroit had issued various bonds before its bankruptcy, including GO bonds backed by taxing power and Revenue bonds secured by specific project revenues. Financial problems, stemming from issues like population decline and rising pension costs, led to a severe budget deficit, prompting the city to file for Chapter 9 bankruptcy protection in July 2013. Chapter 9 allows municipalities to restructure debts without asset liquidation, enabling negotiations with creditors under court supervision. This ensures a fair repayment plan while maintaining essential services. Detroit emerged from bankruptcy in 2014 after a federal judge approved a financial restructuring plan. Does India’s Bankruptcy Regime Protect Municipal Issues? India’s Insolvency and Bankruptcy Code (IBC) lacks provisions akin to Chapter 9 in the U.S., raising concerns about the protection of municipal bondholders during bankruptcy. Even SEBI offers no guidance on municipal bankruptcies or defaults. Regulators seem to have complete faith in the sovereign pledge of these municipalities and the principle of not interfering with the state’s powers. This logic is akin to the history behind Chapter 9 in the United States, wherein the original municipal bankruptcy legislation from 1934 was held unconstitutional for violating the sovereignty of states. The United States Congress later revised the Act in 1937, which was constitutionally affirmed in United States v. Bekins, and subsequently retained as Chapter 9 through the 1978 Bankruptcy Reform Act. Chapter 9 is unique because it is tailored for municipal bankruptcies. It includes an automatic stay on any associated claims or litigation against the debtor. The provisions include restrictions on the court’s interference with the municipal debtor’s powers, such as not interfering with the municipality’s borrowing powers and converting the proceeding into a liquidation proceeding. These restrictions are necessary to preserve the constitutional status of Chapter 9 (as the borrower is a sovereign). As a corollary, the municipal debtor must propose a plan to adjust its debt since creditors cannot file plans under Chapter 9. The entire process provides space to negotiate and restructure a debt repayment plan for municipal debt. Indian law does not guarantee such a position. The problem worsens with the incompatibility of general bankruptcy laws as List I (Central) subjects with List II municipalities. As local governments, municipalities are state subjects in Entry 5 of List II. Multiple states have statutory municipal corporation acts (“Acts”), enabling municipal corporations to raise money by issuing debentures or other instruments (see Section 114A of the Uttar Pradesh Municipalities Act 1916). Almost every Act stipulates the security interests that may be created in a bondholder’s name. These range from municipal taxes, borrowed funds from public financial institutions and even, rarely, immovable property vested in the Corporation. Most municipal corporations/councils must maintain a municipal/sinking fund to ensure an adequate corpus to return the borrowings on debentures/loans. However, many Acts are unclear on whether the sinking fund can be used for other forms of issues, i.e., if the municipality chooses to issue, say – non-debt securities. There is some guidance concerning the order of payments. Section 151 of the erstwhile Municipal Corporation Act 2000 (Jammu and Kashmir) stated that interest income and loan repayments will be paramount. However, this instance is too remote for broad application. In isolation, these provisions

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Navigating SEBI’s Directive on MITC: Simplifying Broker-Client Relationships

Leave a Comment / Capital Markets and Securities Law / CBCL

[By Subhasish Pamegam & Hrishikesh Goswami] The authors are students of Gujarat National Law University. Introduction While advertisements regularly encourage retail investors to ‘read all investment related documents carefully’ prior to investments in the securities markets, reading through voluminous documents and making sense of the complex legalities discussed in them is nearly impossible for an uninitiated individual. Wouldn’t it be simpler if there were a set of terms and conditions that were declared as the most important ones? Keeping these concerns in mind, the Securities Exchange Board of India (SEBI), through its November 13, 2023 circular, declared that the Most Important Terms and Conditions (MITC) shall be notified by competent authorities in order to simplify the following documents which were declared to be crucial in formalizing the broker-client relationship- i. Account opening form ii. Rights and obligations iii. Risk disclosure documents iv. Guidance note v. Policies and procedures vi. Tariff sheet This circular revises the Master Circular for Stock Brokers and marks a pivotal shift in the broker-client relationship within the Indian securities market. This also represents the initiation of a concerted effort to streamline and enhance transparency in the often complex and voluminous documentation governing these relationships to make sure clients understand the important terms and conditions associated with the investments they make. Additionally, SEBI has set strict timelines for brokers to intimate both new and existing clients about the MITC guidelines. This was done after considering the readiness of the market participants with the an intention to allow a smooth transition to the new regime. The authors in the present article attempt to analyze the dynamics of broker-client relationships and the implications of MITC on these relationships. This article also examines SEBI’s role in protecting investor’s interests and MITC’s conformity with this function. Additionally, this paper aims to explore the potential challenges that might arise out of this circular and suggest appropriate measures to mitigate them. Broker-Client Relationship A broker is legally defined as a ‘member of the stock exchange’ who is duly certified by SEBI. However, for a layman, a stock-broker is a person who acts as an intermediary and assists retail investors in buying and selling securities from registered stock exchanges. Brokers in India are bound by a code of conduct which specifies standards of professional conduct and holds brokers responsible for faithfully executing orders on behalf of investors without discriminating based on the volume of business involved. This code further rests a responsibility on brokers to refrain from engaging in malpractices that can prove detrimental to the interest of investors and also requires them to fairly disclose details, including conflicts of interest, while also holding that brokers shouldn’t provide investment advice to investors. SEBI, over the years has expressly recognized the fact that the securities markets often fall prey to fraudulent activities, which endanger the interests of retail investors, who are often unfamiliar with the technical intricacies involved. In recognition of this threat, Mr. U.K Sinha, ex-chairman of SEBI, stated that the protection of retail investors from such exploitation is one of the key objectives of the regulator. MITC as a Solution to Voluminous Documentation: When considering MITC as a solution to voluminous documentation, it is crucial to acknowledge the challenges SEBI faces in effectively regulating intermediaries like stock brokers. Brokers form the backbone of the capital market, yet instances of technical glitches caused by errors on the part of these intermediaries have inflicted significant losses upon investors. These documents often distract investors from noticing critical aspects of their relationship with brokers due to their complex and voluminous nature. This surplus of information tends to obscure the essential terms and conditions, making it difficult for investors to discern the crucial elements, which exposes them to risk. MITC emerges as a focused solution to mitigate this issue by streamlining the extensive and complex documents governing these broker-client relationships. By providing the most critical terms and conditions in a standardized format, MITC will provide investors with clearer and more comprehensible information. This focused approach not only simplifies the information overload but also provides a shield against potential misinterpretation or manipulation by stock brokers. In Reliance Securities Ltd vs Vivek Sharma, the stock brokers were made liable for losses incurred by investors due to technical glitches and lack of understanding of their online trading platform. This case highlighted the responsibility of brokers to protect investors from losses due to technical shortcomings. The complexity and volume of documentation often exacerbate these technical issues. MITC’s implementation would also solve such issues by formalizing the broker-client relationship with clearer terms. SEBI’s Role in Protecting the Rights of Investors In Adjudicating Officer, Securities and Exchange Board of India v. Bhavesh Pabari, the Court underscored the objective of the SEBI Act to establish a board for protecting the interests of the investors in the securities market. SEBI mandates that stockbrokers safeguard the investors by ensuring protection regarding dividends, bonus shares and similar rights related to transactions. They are obligated to reconcile accounts, issue detailed contract notes promptly after trades and ensure swift payout of funds or securities within prescribed timelines, thereby securing the interests of the investors/clients. The mandate upon stockbrokers under Schedule II of the SEBI (Stock Brokers And Sub-Brokers) Regulations, 1992, to act in the interests of the investors and ensure fairness to their clients is in line with the role of MITC to ensure transparency and simplifying the broker-client relationship. In line with SEBI’s mandate to protect investors, MITC focuses on critical aspects and empowers investors to make informed decisions, which aligns with SEBI’s commitment to promote transparency and investor awareness through initiatives like the Investor Charter. This charter ensures that investors have access to standardized and understandable documentation, fostering trust, confidence and informed decision-making in the market. But the real challenge for SEBI will lie in ensuring compliance to these standards across the vast spectrum of brokers and investors, thereby raising concerns about uniformity and consistent adherence to MITC. This will impose a new obligation on

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Decoding MCA’s move allowing Direct Listing of Indian Securities on Foreign Exchange

Leave a Comment / Company Law / CBCL

[By Anand Vardhan & Piyush Raj Jain] The authors are students of Gujarat National Law University. Introduction The Ministry of Corporate Affairs has enforced section 5 of The Companies (Amendment) Act, 2020, through a notification dated 30th October, 2023 . This has led to an addition to section 23 of The Companies Act 2013 . It is a welcome move as it seeks to boom the Indian Economy by opening the routes for Indian Companies to raise funds by directly listing their equity on foreign stock exchanges and also opening a million-dollar Indian market for foreign Investors. There is a need for diversification of investors across the Indian economy given ongoing evolution and internationalization of capital market across the globe. As foreign competitiveness being the need of the hour for our corporate culture, this post analyzes the earlier regime, present amendment and its analysis along with our suggestions for the proposed framework by uncovering the lacunae in the proposal and the regulatory framework needed to address such lacunae. Earlier regime Under the existing framework, if an Indian company wished to access the global market to list its equity capital, it can only get listed through the American Depository Receipts (ADR) and Global Depository Receipts (GDR). These depository receipts acted as a security certificate representing a certain number of a share of a company of other country, not listed on stock exchange of that country, which can be purchased by investors. Further, an Indian company can directly list its debt securities on foreign stock exchange through Foreign Currency Convertible Bonds (FCCB), also known as masala bonds, and foreign currency exchangeable bonds, which are issued by companies in currencies other than the domestic currency of the company issuing it. Present Amendment The new provision allows direct listing of the public companies registered in India on foreign stock exchanges as permitted by the government. The added provision also empowers Central Government to exempt certain classes of public companies from following the procedural requirement prescribed in the Companies Act to get listed on the stock exchange, which may include declaration by beneficiary to the company share, filing return of significant beneficial owners of the company, punishment on non-payment of dividend etc. Analysis Implications One of the most important implications and benefits which this amendment would provide to Indian Companies, especially startups is the option of a new jurisdiction to raise funds. Further, this will also help the companies in increasing their valuation. The option for companies incorporated in India to list their shares on Foreign Exchanges will enhance and diversify their sources and pool of capital as well as provide them with a larger and diverse base of investors. This will help the Indian Companies to trade their securities in major currencies across the world, like Euro, Dollar, or Renminbi. As discussed earlier, for raising funds overseas in the earlier regime, ADR and GDR were used to list in the foreign exchanges, but it required a complex procedure even a complex restructuring such as externalization, but this amendment may do away with any such requirements by providing an alternate route to raise funds overseas. Further, this will even allow companies incorporated in India to access foreign funds at a lower cost. In the earlier regime, Indian companies had to invest cost and time for accounting in Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) for ADR and GDR respectively, but the direct listing will allow Indian companies to prepare accounts in Indian Accounting Standards (IndAS) only which will help them to reduce the cost and time involved as IndAS is now globally accepted. The implications that this amendment will have on the Indian Economy are threefold, i.e., it will lead to the spreading of the strength of the “India” brand across the globe. Along with it, the amendment will also lead to boost competitiveness for Indian Companies which will further lead to boost efficiency and growth for Indian Economy. This amendment to the Companies Act will also contribute to the development of a clear and advanced legal regime for reverse-flipping the holding structure of companies incorporated in India by allowing the shifting of such holdings’ domicile to India. Lacunae There are certain lacunae concerning the amendment. These need to be clarified by the MCA at the earliest through detailed rules and regulations so that the companies incorporated in India can get the benefits of listing in a foreign exchange and explore the foreign market. Certain points which need to be clarified by MCA at the earliest are that which kind of securities can be listed in the foreign exchanges, in which foreign exchanges could the listing be done and by which class of companies it can be done. The amendment even talks about the power of the Central Government to exempt any class of public companies from procedural requirements under the Companies Act, but it doesn’t talk about what kind of exemptions and the procedure to give those exemptions along with the eligibility of the companies to avail those exemptions. The other lacunae that revolve around these amendments are will the investors give the valuation same to the company listed on foreign exchange same as that they would have provided in India and also what will be the commercial benefits of the listing of a company incorporated in India on a Foreign Exchange. There are other legal challenges, mainly related to the disparities between the compliances required by the companies in the Indian regime vis-à-vis the securities regime of the overseas countries where the company intend to be listed. The implementation of the amendment will also require the amendments to the current legal regime governing the listing of securities on stock exchanges and foreign exchanges, namely FEMA, Companies Act and SEBI Regulations. Suggestions for Proposed Framework In order to do away with the above-discussed lacunae, the MCA could take its route through the following proposed frameworks. The main question before the MCA being the criterion to choose the

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