The Corporate & Commercial Law Society Blog, HNLU

Category: finance

  • CONSOLIDATION WITHOUT SAFEGUARDS: ANALYSING THE SEBI FPI MASTER CIRCULAR

    CONSOLIDATION WITHOUT SAFEGUARDS: ANALYSING THE SEBI FPI MASTER CIRCULAR

    BY KHUSHI JAIN AND UJJWAL GUPTA, SECOND – YEAR STUDENT AT DR. RAM MANOHAR LOHIYA NATIONAL LAW UNIVERSITY, LUCKNOW

    INTRODUCTION

    On 5 December 2025, the Securities and Exchange Board of India (‘SEBI’) issued a Consultation Paper on Review of Master Circular for Foreign Portfolio Investors (‘FPIs’) and Designated Depository Participants (‘DDPs’) (‘Consultation Paper’) proposing the consolidation of the existing consultation paper. This paper aims to streamline hitherto fragmented regulations by consolidating multiple circulars and guidelines into a single instrument. Through the Consultation Paper, efforts are made to revise disclosure and compliance for FPIs and DDPs, beneficial ownership norms, compliance obligations and the role of intermediaries.

    This piece first sets out the key changes introduced through the consolidation. Second, the impact of these changes is analysed on various stakeholders including FPIs and DDPs. Third, key concerns arising from the proposed structure are identified. Towards the end, the Indian approach within a comparative cross-jurisdictional regulatory perspective is discussed. The piece is concluded by offering plausible reforms to address the aforementioned concerns so as to preserve efficiency and accountability.

    KEY PROPOSED CHANGES

    The regulations of FPIs are governed by a layered statutory framework under the SEBI Act 1992, SEBI (Foreign Portfolio Investors) Regulations, 2019 (‘2019 Regulations’) and SEBI Master Circulars and Operational Guidelines. The Consultation Paper would reshape the enforceability provisions of FPI regulation.

    Prominently, the Consultation Paper proposes a comprehensive consolidation of multiple circulars, FAQs, and interpretative notes into a single revised Master Circular governing FPIs and DDPs. It operates as de facto subordinate legislation. Building on this, Regulation 4(c) of the 2019 Regulations mandates FPI to disclose beneficial ownership in accordance with the Prevention of Money Laundering Act, 2002 and Financial Action Task Force Recommendations. The Consultation Paper strengthens look-through obligations and identifies natural persons exercising “ownership or control” in a multi-layered investment structure.

    Substantiating on the above provisions, DDPs are provided with registration-related functions and limited ongoing oversight through Regulation 12 of the 2019 Regulations. The Consultation Paper rather shifts their role to frontline regulatory gatekeepers. It inculcates their responsibility for continuous validation of their compliance, enhancing due diligence on FPIs. They are supposed to develop Standard Operating Procedures (‘SOPs’) for validation, real-time monitoring of validation tools such as corporate group repositories, and freeze codes, straining systems under tight timelines like 7-Day Type I change notification.

    This fundamentally extends the disclosure, reporting, and compliance requirements for FPIs by way of more frequent reporting, monitoring and verification of investor information on a continuous basis, and ongoing compliance certification requirements.

    STAKEHOLDER IMPACT ANALYSIS

    There will be asymmetric effects of the proposed changes among the different groups of stakeholders. The changes redistribute regulatory risks and operational burden, having several unintended effects regarding market depth and stability.

    The compliance architecture model can disproportionately affect the passive institutional investors like pension funds and sovereign wealth funds because their investment approach is long-term and non-controlling in essence. Lack of any provision on punitive measures for transitional non-compliance can create considerable legal and commercial uncertainty for market participants. This could result in sudden FPI exits, higher cost of capital for Indian issuers, and higher volatility in the secondary markets, thereby violating Section 11 of the SEBI Act, 1992.

    The Consultation Paper enhances the supervisory authority of SEBI, that could earlier detect concentrated or opaque market positions. However, it also increases institutional dependence on delegated supervision by DDPs, raising coordination and accountability challenges. SEBI may face allegations of inconsistent enforcement or excessive discretion.

    Lastly, the framework may influence volume, composition and stability of foreign capital flows from a market-wide perspective. It relaxes International Financial Services Authority-based FPIs, allowing up to 100% Non-resident Indians/ Overseas Citizens of India/ Resident Indian  participation under strict conditions like pooling, diversification (e.g., no more than 20% in one Indian entity), and independent managers. Foreign institutional investments in the long term may be discouraged due to increased complexities in complying with the debt and equity portions that are expected to be supported by foreign investments. Foreign passive institutional investors may decrease the overall efficiency of the market as a result of less participation in the secondary markets.

    KEY CONCERNS

    Consolidation would result in the conversion of interpretative guidance into mandatory compliance and the expansion of enforceable obligations without any amendment to the 2019 Regulations. It dilutes the effect of delegated legislation principles. Many provisions function as soft law and are not binding rules under Section 30 of the SEBI Act. Thus, the consolidation would make them a binding compliance standard, transforming advisory norms into enforceable duties.

    Moreover, unlike regulations, circulars are not subject to safeguards like legislative scrutiny. Consolidation would thus advance the power of SEBI to alter the compliance structure without any amendment. Consequently, it would also amend the scope of provisions through drafting techniques. Conditional, context-specific, or risk-based obligations are inculcated into general obligations that are to be applicable across the FPI ecosystem. The Consultation Paper could result in omission of caveats and qualifiers. It would broaden the regulatory net without re-examining the substantive framework set out in Regulations 4 and 22 of the 2019 Regulations.

    Furthermore, the Consultation Paper fails to address the doctrine of regulatory equivalence for entities domiciled in jurisdictions that are FATF-compliant. Contradicting the proportionality test, already regulated foreign investors can duplicate and disproportionate disclosure burdens.

    The expansion of the ambit of DDPs leads to regulatory outsourcing. However, it neither ensures any statutory immunity nor delineates liability in erroneous determinations or misclassification of risk. It raises pertinent concerns regarding liability attribution.

    Concerns about constitutional guarantees under Article 19(1)(g) and 19(6) are also raised. Serious concerns about ex post facto interpretation can also exist due to the absence of procedural safeguards of supervisory discretion. It may implicate the principles of audi alteram partem and predictability of the rule of law in financial regulation under the capital regime in India.

    For measures that limit market access, the SEBI Act has laid down a specific procedure to be followed. This includes the requirement that the actions under Section 11B, penal measures under Section 15-I, and suspension or cancellation under Section 12(3) all need a well-reasoned order, prior hearing, adherence to principles of natural justice, and can be challenged in the SAT under Section 15T. As opposed to this, the draft Master Circular for Foreign Portfolio Investors (FPIs) and Designated Depository Participants (DDPs)  (‘Master Circular’) allows trading restrictions via intermediary-led SOPs, without SEBI adjudication, hearing, or an order that can be appealed, and thus sidesteps essential safeguards given in law.

    CROSS-JURISDICTIONAL ANALYSIS

    In the United Kingdom (‘UK’), disclosure or Anti-Money Laundering (‘AML’) failures of foreign investment entities are dealt with by the Financial Conduct Authority through a formal enforcement procedure. Usually, non-compliance leads to supervisory engagement and, if necessary, formal enforcement proceedings initiated by a warning notice. The impacted entities can make representations before an adverse decision is taken against them, and the final decisions are made by the independent Regulatory Decisions Committee. Market access restrictions or licence limitations only arise from a reasoned decision that is subject to appellate review by the upper Tribunal. Unlike as contemplated under the Master Circular, coercive market access restrictions in the UK cannot be imposed by intermediaries and remain exclusively within the Financial Conduct Authority’s (‘FCA’) adjudicatory enforcement process.

    The European Union (‘EU’) framework for portfolio investment compliance operates through MiFID II and anti-money laundering directives. MiFID II does not prescribe automated investor account blocking for Know Your Costumer (‘KYC’) non-compliance; rather, it gives national competent authorities supervisory and investigatory powers, whilst any limitation on market participation must be derived from national law or the trading venue rules. The AML system requires customer due diligence and allows firms to suspend transactions as part of their internal compliance controls. Moreover, when a public authority orders a restriction, the measure is governed by the national procedural law which transposes EU directives and is further guaranteed fundamental procedural safeguards, such as the right to challenge administrative measures before an independent body, and not outsourced to intermediaries.

    In Singapore, the Monetary Authority of Singapore (‘MAS’) supervises AML and disclosure compliance under the Securities and Futures Act through a risk-based supervisory framework. MAS deals with KYC or disclosure breaches by means of supervisory engagement, directions, penalties, or license-related action after the determination of the breach. Automatic trading suspensions or market access suspensions are not usual, and any such coercive restrictions follow well-reasoned decisions to guarantee proportionality and centralised enforcement. Importantly, MAS does not give coercive enforcement powers to market intermediaries, unlike the expanded role that has been considered for DDPs.

    Viewing these jurisdictions collectively, it can be observed that greater transparency and AML compliance can be achieved without having to rely on automated market exclusion mechanisms that bypass prior notice or independent assessment. In this context, the Master Circular delineates a stricter model of regulation than what is necessary, as shown by international practice.

    CONCLUSION AND SUGGESTIONS

    Based on lessons drawn from frameworks discussed above, it is possible that India could prescribe regulatory and procedural safeguards. The following developments can work in tandem for coherent enforcement. 

    Primarily, SEBI should expressly draw a distinction that consolidation of circulars does not transform interpretive guidance or FAQs into binding compliance requirements unless issued under the 2019 Regulations or Section 30 of the SEBI Act. Along with, any provision extending substantive requirements should be brought about only through formal regulatory amendment, following the prescribed legislative safeguards.

    Second, SEBI should desist from retaining conditionality, context-specific qualifiers and risk-based caveats in existing circulars. The Master Circular should operate as an operational guide rather than a source of new general obligations, ensuring that Regulations 4 and 22 of the 2019 Regulations remain the primary substantive framework.

    Third, the consolidated framework must specifically acknowledge the concept of regulatory equivalence applicable to FPIs incorporated in FATF-compliant and well-regulated countries. The requirement of disclosure and KYC must be customized in terms of risks associated with each jurisdiction and type of investor and system significance.

    Fourth, concerning the absence of any measures to shield FPIs from penalties for non-compliance in the transition period, SEBI should provide a definite period for existing FPIs during which non-compliance resulting solely from the newly consolidated obligations shall not be penalised. This will ease both uncertainty and avert sudden market exits.

    Finally, SEBI must clearly define the scope of DDPs’ authority, provide statutory protection for bona fide actions and specify liability allocation in cases of erroneous determinations or misclassification. Coercive or market-access-restrictive decisions should remain exclusively within SEBI’s domain.  Additionally, any restriction on trading, account operations or market access must be preceded by notice, opportunity of hearing, and a reasoned order passed by SEBI under Sections 11B, 12(3), or 15-I of the SEBI Act. Intermediary-led SOPs should not substitute statutory adjudication or appellate remedies under Section 15T.

    The Consultation Paper is veritably an important step towards simplifying the regulation of foreign portfolio investment through consolidation. However, as the authors point out, said consolidation should not weaken statutory protections, proportionality, accountability, or procedural fairness under the SEBI Act and the 2019 Regulations. If there are no adequate safeguards, the draft Master Circular may, in fact, increase the compliance and enforcement burdens and consequences beyond its legal basis. Whether or not this consolidation will ultimately strengthen India’s capital markets depends on the degree of care SEBI exercises in reconciling efficiency and legality in the final framework.

  • Balancing Act: Sebi’s Angel Fund Reforms For Inclusive Startup Growth

    Balancing Act: Sebi’s Angel Fund Reforms For Inclusive Startup Growth

    BY AADIT SHARMA, SECOND – YEAR STUDENT AT DR. RAM MANOHAR LOHIYA NATIONAL LAW UNIVERSITY, LUCKNOW

    INTRODUCTION

    India’s startup ecosystem plays a crucial role in economic growth, with angel funds providing essential early-stage investment and mentorship bridging the gap between early seed financing and seed financing. angel investors typically commit between USD 10,000 which can go upto USD 1 million (₹10 lakh to ₹ 8 crore), with greater amounts often provided by syndicates. Despite tighter capital markets and cautious investor sentiment, there were 103 registered angel funds in India holding commitments totalling ₹10,138 crores by Q1 2025. Although early-stage investments declined to approximately $3 billion across 1,500 deals in H1 2025, this sector remains vital for economic development. Recognising this, SEBI introduced reforms via the Alternative Investment Funds (Second Amendment) Regulations and two other circulars in the month of September and October, focusing on revised regulations and relaxed compliance timelines. Key changes introduced include mandating accredited investors, flexible lock-in periods and broadening permissible investments. These reforms aim to modernise angel investing in India.

    However, questions remain whether they will enhance startup funding accessibility or create barriers, especially in underserved regions. This analysis explores the implications of the amendments on the domestic startup funding cycle, offers a comparative analysis with global practices and proposes strategies to improve investment accessibility in India.

    REFRAMING SEBI’S REGULATORY APPROACH TO ANGEL FUNDS

    The 2025 amendments to Securities Exchange Board of India (‘SEBI’)’s Alternative Investment Fund Regulations,2012, (‘AIF’) together with the accompanying circulars, represent a substantive development in the regulatory framework for early-stage investment in India. The regime moves decisively from a primarily prescriptive model to a hybrid approach combining mandatory requirements with enhanced outcome-based flexibility. A pivotal reform is the institution of mandatory investor accreditation  for angel funds, an accredited investor in India is an investor with annual income of Rs. 2 crore or net-worth of Rs. 7.5 crore with 3.5 crore in financial assets, replacing the previous system based solely on financial thresholds.

    This aligns the angel fund framework of India with global regulatory approaches with like that of US SEC Regulation D­ that limits participation on objective accreditation criteria, thereby limiting access to investors who meet specified financial and net-worth thresholds. These investors are presumed to be capable of independently assessing and bearing early-stage investment risk. The minimum investment per portfolio company has been lowered from ₹25 lakh to ₹10 lakh; minimum corpus and commitment thresholds have also been abolished easing fund formation. Notably, changes to the lock-in period will provide greater liquidity, permitting exits within six months in specific cases.

    Angel Funds must now onboard at least five accredited investors before their first close, a measure designed to streamline entry and strengthen fund discipline. The scope of eligible investments has expanded, including Limited Liability Partnerships (‘LLPs’), thereby supporting broader entrepreneurial participation.  Measures such as mandatory investor accreditation, lock-in periods, fund-level investment structures and strict compliance protocols are retained to guard against speculative behaviour. Enhanced transparency is mandated through allocation methodology disclosure in the Private Placement Memorandum (‘PPM’) with additional annual audit requirements for larger funds. The phased compliance timeline reflects SEBI’s intent to balance regulatory rigor with market adaptability. Collectively, these reforms embody SEBI’s model of ‘guided liberalisation’ aiming for a flexible yet robust capital formation environment anchored in transparency and governance.

    STRUCTURAL AND PRACTICAL CONCERNS IN SEBI’S ANGEL FUND REFORMS

    A careful reading of SEBI’s recent circulars indicates that while the reforms appear progressive, they also carry certain structural concerns. The introduction of mandatory accreditation for investors in angel funds, though intended to promote investor protection and align with global practices, may inadvertently restrict the flow of capital by excluding non-accredited investors such as traditional/ legacy angels. This change effectively shifts investment power towards  high-net-worth individuals and institutional syndicates that possess greater organisational structure, compliance capacity and financial depth. Such concentration of investment capacity could lead to capital elitism, gradually marginalising semi-professional angels who, despite lacking formal accreditation, often contribute crucial sectoral knowledge and mentorship to startups. The circular further restricts angel funds from offering units to more than 200 non-accredited investors until September 2026, thereby narrowing the investor pool available to early-stage business ventures and  discouraging investors. Additionally, SEBI’s mandate requiring at least five accredited investors before declaring the first close reverses the conventional practicein angel investing. Traditionally, fund managers identify promising startups first, then attract investors based on those opportunities. The circular imposes the opposite sequence, wherein investors must be secured before any startup is identified, which may slow fund launches, increase opportunity costs and discourage new fund managers. This requirement could also give rise to behavioural distortions where managers bring in passive backers merely to satisfy the regulatory threshold, making compliance formalistic rather than actual. Moreover, regional disparities may intensify as managers outside major hubs such as Bengaluru, Mumbai or Delhi may struggle to attract accredited investors, leading to capital concentration in established business ecosystems.

    Finally, while the reduction in the lock-in period enhances liquidity, it disproportionately benefits institutional syndicates with rapid fund rotation strategies. Thereby placing traditional angel networks whose investment model relies on longer holding periods and sustained founder engagement with the startup at a relative disadvantage as compared to institutional syndicates which are better positioned to benefit from accelerated exit timelines due to their portfolio-based and time bound strategies.

    INTERNATIONAL PARALLELS AND DIVERGENCES

    The statutory framework of the United States (‘U.S.’) and the United Kingdom (‘U.K.)’ have been chosen for comparison as they represent leading common-law jurisdictions with advanced angel investment frameworks that balance investor protection with capital access and whose regulatory models have guided international best practices in early-stage financing and angel investing.

    In the United States early-stage investment is regulated by the US Securities and Exchange Commission,(‘US SEC**’**), particularly Regulation A, Regulation D and Regulation Crowdfunding (‘Reg. CF’). Rule 501 of Regulation D defines an accredited investor, determining eligibility for participation in early-stage investing. Rule 506(b) permits no limit on accredited investors and up to 35 sophisticated non-accredited investors, but prohibits general solicitation, while Rule 506(c) allows general solicitation solely for accredited investors with verified status. Rule 504 limits offerings at $10 million over twelve months and without general solicitation. Regulation A ‘Mini-IPO’ broadens access by allowing non-accredited investors who are subject to investment limits based on income or net worth.

    The 2012 JOBS Act significantly expanded access through Regulation Crowdfunding (‘Reg. CF’) enables startups to solicit investments from non-accredited individuals within statutory caps of a certain income threshold, thereby democratising angel investment and mitigating the concentration of opportunities among only high-net-worth and institutional investors. Reg. CF says that if an investor’s annual income or net worth is below USD107,000 they can invest only a small capped amount in crowd-funding each year. If both are above USD 107,000 they are allowed to invest more but still within a fixed annual limit.

    In the United Kingdom, angel investments fall under the Financial Conduct Authority (‘FCA’) framework, which requires investors to qualify as either high-net-worth or sophisticated investors. The UK distinguishes itself through strong fiscal incentives under the Seed Enterprise Investment Scheme (‘SEIS’) and Enterprise Investment Scheme (‘EIS’), offering income tax relief and loss offset mechanisms to mitigate early-stage risk in investment. Its private placement regime further supports AIFs under controlled conditions, balancing accessibility with investor protection. Viewed against the U.S. and U.K. frameworks, SEBI’s 2025 reforms represent a cautious convergence with global best practices, particularly in investor accreditation, disclosure and governance-led oversight. Similar to the U.S. Regulation D and the UK FCA’s sophisticated investor regime, India’s accreditation model embeds financial competence within regulatory prudence. However, unlike these jurisdictions, India’s approach remains comparatively cautious  lacking fiscal incentives such as the U.K. SEIS/EIS or the participatory openness promoted under the U.S. Reg. CF.

    At national level this cautious approach has been tried to partially offset by recent policy measures aimed at improving the investment climate. The union government announced in the Union Budget 2024 the abolition of  ‘angel tax’ for all classes of investors with effect from the financial year 2025-26, thereby reducing tax-related frictions for early-stage capital formation. In parallel, certain States have introduced sub-national incentives to encourage angel investment. For instance the state of Bihar’s startup policy provides for a ‘success fee’ payable to startups that successfully mobilise investment from registered angel investors. Other states have also adopted broader startup support frameworks through grants, seed funding, incubation support and reimbursement-based incentives, although few have explicitly linked such incentives to angel investment outcomes. These developments suggest that while SEBI’s regulatory architecture remains institutionally cautious, complementary fiscal and state-level interventions are gradually emerging to mitigate the exclusionary effects of accreditation-centric regulation.

    Recent data from the market suggests that the entry level barriers such as mandatory investor accreditation have led to contraction in the angel fund investing. In H2 2025, angel investment rounds dropped nearly 60% to 265 deals, compared with 671 deals a year earlier while funding fell 46% to USD 1.48 billion, from USD 2.73 billion.

    FORWARD OUTLOOK

    The angel funding regime in India comprises diverse investors, including traditional angels and institutional investors with traditional investors more prevalent and institutional ones being at a fast developing stage with a growth of 69% in the last two years, necessitating regulatory frameworks that accommodate their varied investment behaviours, risk tolerances and operational structures. SEBI’s 2025 reforms attempt to align the regime with international practices by enhancing investor protection, transparency and market discipline through mandatory accreditation and flexibility in investment terms. To further optimise these reforms, policy should focus on balancing investor accreditation with inclusivity, incorporating differentiated criteria for underrepresented regions to democratize access to angel funding beyond established business hubs.

    The sharp contraction in angel investment activity observed in H2 2025 highlights the need for dynamic regulatory calibration rather than static compliance thresholds. SEBI could consider a tiered accreditation framework that differentiates between institutional syndicates, experienced legacy angels and first-time investors based on experience, ticket size and risk exposure. In parallel, region-specific pilot relaxations, implemented in coordination with State startup agencies may help address capital access constraints beyond major metropolitan hubs. Periodic post-implementation impact assessments linked to deal flow and regional dispersion would further ensure that investor protection objectives do not inadvertently suppress early-stage capital formation.

    Strengthening capacity-building for emerging angel networks and instituting impact assessments will ensure adaptive and equitable regulation. Additionally introducing fiscal incentives in the tax regime similar to those in the U.K. could incentivize broader participation and retain traditional angels which are important to the startup ecosystem. Though the government scrapped the angel tax and also provides tax exemption under section 54GB of the Income Tax Act, to along with specific relaxations and incentives as introduced by the states, the investors through capital gain exemptions but these exemptions are moderate in nature and limited in scope.  Phased compliance combined with empirical monitoring of fund flows and startup outcomes will support regulatory refinement aligned with India’s diverse entrepreneurial landscape, fostering a resilient and accessible financing environment conducive to innovation a­nd economic growth.

  • Are Depositories Becoming Systemic Risk Guardians? SEBI’s Quiet Shift in 2025

    Are Depositories Becoming Systemic Risk Guardians? SEBI’s Quiet Shift in 2025

    BY KEERTANA R MENON, THIRD YEAR STUDENT AT NUALS, KOCHI

    INTRODUCTION

    The concept of “systemic risk” has traditionally been synonymous with the banking sector, the giant lenders and financial intermediaries whose collapse could send shockwaves across the economy. The assumption here is that capital market infrastructure is mainly operational in nature. When we refer to infrastructure here, we make a special mention of depositories. In India, the Reserve Bank of India (‘RBI’) has stringent regulatory frameworks for these entities, formally labelling them as Domestic Systemically Important Banks (‘D-SIBs’).

    In contrast, market infrastructure entities, including depositories like the National Securities Depository Limited (‘NSDL’) and the Central Depository Services Limited (‘CDSL’), have occupied a much humbler space in the regulatory system. They are perceived as operational backbones that act as passive service layers. They are considered dedicated to record-keeping, dematerialization, and settlement facilitation. They are concerned with Market Infrastructure (‘FMI’), but most importantly, they are not market drivers. They do not engage in lending or funding activities that traditionally trigger systemic crises.

    This decades-old perception, however, has just been challenged by the SEBI (Depositories and Participants) 3rd Amendment Regulations, 2025 (‘Amendment’). This amendment is not merely about tightening internal governance or implementing standard operational updates. Instead, it suggests a strategic change by the Securities and Exchange Board of India (‘SEBI’). By dramatically increasing oversight and mandating specialized technical roles, SEBI is now subtly positioning depositories as entities whose collapse could destabilise the entire market. This suggests that this amendment is the first step toward treating depositories as systemic fault points. SEBI is starting to regulate these entities in a manner similar to how the RBI scrutinizes the larger banks, breaking down the old divide between banking oversight and market oversight.

    THE RISE OF DIGITAL RISK: WHY THE OLD PARADIGM FAILED

    For decades, SEBI’s regulation of depositories largely focused on fiduciary duties, investor safety, and compliance. All of these are concerns suitable for paper-based or human-error risks. The idea that a depository could pose a systemic threat, and that too one capable of taking down the entire market, was dismissed. This dismissal was because they do not carry financial risk in the way that banks or major brokerages do.

    However, the nature of systemic risk has fundamentally changed. The capital market has taken a “cyber-first” shift. In a fully digitized ecosystem, the real point of failure is no longer human conduct or a default in capital, but system vulnerability.  A technical failure or a cyberattack can halt settlements, shut down exchanges, and freeze the whole cycle in seconds. Financial losses usually give regulators some time to react. Technical failures don’t. They spread immediately and shake the entire market.

    The infamous NSE trading halt in February 2021, caused by a technical glitch, became a stark, domestic reminder that trading stops if infrastructure goes down, irrespective of price movements or trader defaults.

    Depositories are what keep the market alive. They hold the core ownership records for all demat securities. Prices can swing wildly, and the market will still cope, but if these records fail, everything comes to a standstill. A depository outage shuts the entire market. In this sense, depositories were already systemically important, just not officially acknowledged or regulated as such. SEBI seems to be preparing for a future where systemic risk comes from the server room, not the boardroom.

    ANATOMY OF THE SHIFT: SIFI GOVERNANCE IN THE DEPOSITORY SECTOR

    The SEBI (Depositories and Participants) 3rd Amendment Regulations, 2025, gazetted in November 2025, has three primary aims: i) enhance corporate governance and strengthen risk management, ii) operational resilience and iii) introduce technology and cybersecurity leadership. The biggest changes that this amendment brings in involve the composition and responsibilities of the key management personnel. Through Regulations 24 and 26A, it raises the governance bar by adding Executive Directors (‘ED’) to the Board and reorganising leadership so that one ED oversees infrastructure and systems, while another handles risk management. The Managing Director is now directly responsible for compliance, day-to-day affairs, and stability of the depository’s core systems.

    SEBI also provides for a tech-focused oversight through Regulation 81B and 81C. Every depository must now appoint a Chief Technology Officer (‘CTO’) to manage all technology systems, IT risks, and respond to tech-audit findings. Similarly, they must also appoint a Chief Information Security Officer (‘CISO’) to handle cybersecurity threats. Senior executives are now barred from sitting on external boards without approval so that conflict-management norms are applied to highly sensitive financial entities.

    This is the kind of structure that was historically only seen in the regulation of Domestic Systemically Important Banks (‘D-SIBs’). SEBI wants to avoid this label, but the aim is clear. The rules now treat depositories as core institutions, not just background service providers.

    ARE DEPOSITORIES BEING BUILT TO BE TOO RESILIENT TO FAIL?

    Instead of going all the way and calling depositories “systemically important,” SEBI seems to be taking a slower, quieter route. A formal label would set off alarms immediately. It would pull depositories into the kind of scrutiny banks face, raise questions about capital rules that don’t really fit them, and force India to line up quickly with global standards. SEBI clearly doesn’t want that kind of regulatory shock.

    So, it’s choosing to build strength from the ground up. By tightening governance, creating specific tech and cyber roles, and placing responsibility on senior management, SEBI is making depositories sturdier without suddenly demanding capital buffers or liquidity norms they were never designed for. It’s a gradual hardening of the system instead of a problematic shift.

    This also nudges the market towards a more honest view of where its real risks lie. If everything is digital, then the infrastructure carrying that digital load becomes the sole point of vulnerability. SEBI is preparing for a world where the biggest threat to market stability isn’t a bad loan or a rogue trader but a server glitch, a cyber intrusion, or a system freeze.

    There’s also a quieter international angle here. Regulators like European Securities and Markets Authority and the US Securities and Exchange Commission have already started treating market infrastructures as potential systemic risks. SEBI appears to be moving in that direction without announcing it as a policy shift.  The idea guiding all of this is quite simple: SEBI doesn’t want to declare depositories “too critical to fail.” Instead, it’s trying to make them strong enough that the question never arises

    Depositories don’t give out credit. They don’t lend. But they hold the backbone of the market, which is the record of who owns what. 

    THE BIGGER QUESTION: WHAT COMES NEXT?

    If the 2025 amendment is really the first step towards regulating systemic risk in financial market infrastructure, the next steps will mostly focus on making depositories stronger and more resilient. We might see stress tests for systems and cyber defences, or even minimum resilience capital. The future may also witness coordinated contingency plans with SEBI, RBI, and exchanges, and regular independent cyber audits to check that the CTO and CISO roles are meeting their purpose.

    As the market becomes more digital, depositories are moving from simple back-office utilities to the backbone of the system. The amendment may be quiet, but it sends a clear message: the next big threat to market stability will be a failure in the infrastructure itself. SEBI is acting early to make sure these institutions are strong enough to withstand it by bringing securities oversight closer to the kind of robust framework banks have long followed. By tightening the screws before anything breaks, SEBI is signalling that resilience has to be built into the plumbing, not patched in after a shock. It’s a quiet shift, but one that will shape how India thinks about market stability in a digital market for years to come.

  • Opportunism or Omission? Dual Facets of Customs Misclassification Saga

    Opportunism or Omission? Dual Facets of Customs Misclassification Saga

    Riya Poddar, Fourth- Year student at Amity University, Noida

    INTRODUCTION

    Proper classification of goods, as per the guidelines provided by the Harmonised System of Nomenclature ( ‘HSN Code’), is an important dimension in cross-border trade, which not only assists in determining tariff rates but also facilitates free flow of goods across borders. Unperturbed by such a structured foundation, disputes with regard to misclassification continue to remain a persistent challenge within the customs law. The point of conflict often stems from either intended tax fraud or deliberate or unintentional misinterpretation by the department, causing a tussle between the taxpayer and the authorities.

    The recent case of Skoda Auto Volkswagen India Pvt. Ltd. v. Union of India and Ors. (2025), (‘Skoda’) has once again brought to the forefront the debate over the systemic defaults within India’s customs landscape. What is controversial is whether the ambiguity in the classification norms is being used very conveniently as a loophole to avoid duty under the mask of interpretation. While the error may be innocent, the likelihood of intentional misinterpretation by the department raises significant questions in the minds of the taxpayers. This blog seeks to analyse the given case in order to uncover the systemic flaws surrounding the misclassification issue and propose a way forward.

    SCRUTINY OF THE ISSUE SURROUNDING MISCLASSIFICATION

    The Customs Department served a Show Cause Notice to Skoda Volkswagen in September 2024 under Section 28(4) of the Customs Act, 1962 (‘the Act’), raising a substantial demand of $1.4 billion, alleging deliberate misclassification of imported goods to lower import duty payment.

    It is well-settled law that the customs authorities can carry out reassessment proceedings for up to five years only. However, the allegations posed by the Directorate of Revenue Intelligence on Skoda Volkswagen for deliberately misleading the custom authorities since 2012 by misclassifying import of cars as “individual parts” rather than “Completely Knocked Down Units” (‘CKD Units’), raises questions about their own intentions as to why the concerned authority remained mum for such a prolonged duration. Such inaction invokes suspicion of either incompetence or a deliberate plan to delay prosecution.  

    Further, it is pertinent to note that before 2011, the term ‘CKD Units’ lacked a precise and clear definition, leaving it open to subjective interpretation. Ambiguity with regard to the same was addressed on 1st March 2011, when the Central Board for Indirect Tax and Customs (‘CBIC’) issued Notification No. 21/2011-Customs, where CKD Unit has been defined as a kit consisting of necessary parts of a vehicle apart from gearbox and pre-assembled engine. Failure to clearly delineate such important elements provided a foundation for controversies, as seen in Skoda.

    INTENT OR OVERSIGHT: THE GREY ZONE

    The current Skoda Volkswagen misclassification dispute highlights the multifaceted dynamics between the intentional corporate wrongdoings and the probable negligence of the concerned authorities. Resolution of this ongoing controversy will provide the much-needed clarity on disputes surrounding the misclassification issue.

    Examining ‘Intent’ and ‘Oversight’

    Notably, the customs authorities have accused Skoda Volkswagen of paying lower import duty on goods for the past 12 years, but the fact that the authorities never raised a single objection on the same for such a significant duration weakens the credibility of their allegations. It is essential to determine whether the delay was a strategic move by the authorities, using it as a revenue-generating tool. Such an approach, if intentional, reflects a broader structural flaw where the authorities prioritise revenue generation, amplifying financial burden on businesses.

    Another aspect worth mentioning is the vague and ambiguous classification of HSN Codes. Disputes pertaining to tariffs continue to arise, primarily because they are based on technical product characteristics that lack a clear definition. For instance, car seats, despite being an integral component of a motor vehicle, are classified under Heading 940120 as “seats of a kind used for motor vehicle” rather than Heading 87089900, which deals with “parts and accessories of a motor vehicle”. Such vague and ambiguous distinction in the key terms and norms provides authorities with an upper hand to interpret it in a manner that aligns with their revenue objectives and undermines the very purpose of having codified rules and regulations relating to the same.

    THE BIGGER PICTURE: CHALLENGES AND WAY FORWARD

    Over the past few years, the customs framework has become increasingly technical and compliance-oriented, thereby heightening the burden on taxpayers. The structural inequality becomes increasingly significant when equating the capabilities of large corporations with those of small businesses and entities. While businesses having ample resources can ensure seamless compliance, in contrast, the smaller entities are disproportionately charged. Recognising this, the Federation of Indian Micro and Small and Medium Enterprises, the leading advocacy association for Indian Small and Medium Enterprises (‘SME’), has also reportedly advocated for simplified and streamlined customs procedures to address structural disparity that involves small exporters. Further, the Economic Survey 2024-25 data also clearly indicates that the SME sector continues to be excessively burdened with regulatory compliance, thereby calling for deregulation to enable SME’s to compete on a more level playing field.

    In addition to this imbalance, the financial strain of non-compliance, which results in long pending disputes or imposition of penalties and interests, further aggravates the problems of the bona fide taxpayers. The operational dislocations caused by such issues compel the businesses to allocate their resources in resolving such disputes, thereby affecting their capability to contribute to the economy. Further, problems such as erosion of investors’ trust, delay in clearance of goods or shipments, also significantly affect a company’s ability to maximise profit and generate revenue. This discrepancy not only weakens the taxpayer’s trust on the tax system but also hinders the growth of a country’s economy.

    It is pertinent to mention that in the case of M/s. Aska Equipment’s Ltd. v. Commissioner of Customs (Import), the Hon’ble Delhi Bench of Customs, Excise and Service Tax Tribunal (‘CESTAT’), recognised that penalising companies acting in good faith merely on account of a difference of opinion regarding the classification of goods would deter genuine trade practices. A similar judicial approach was adopted by the Hon’ble Delhi Bench of CESTAT in the case of Sarvatra International Vs Commissioner of Customs (ICD).

    Undoubtedly, the outcome of the Skoda case is likely to set a judicial precedent, providing the much-needed clarity on issues that extend beyond just the misclassification claim. Hence, the answer to the questions raised in this case will not only determine the fate of the company but also the future of customs enforcement in India.

    Roadmap

    It is very evident from the challenges being faced by the taxpayers owing to the current HSN classification framework that reform is the need of the hour. Policies must be formulated in a way that not only shields the bona fide taxpayers and businesses from unjust hardships but also ensures compliance on their part. One of the most essential reforms is the implementation of clear and consistent guidelines pertaining to HSN classification. Further, leveraging the use of technology such as Artificial Intelligence-regulated systems can highly minimise the likelihood of errors. Additionally, simplifying the dispute resolution process through digital case tracking and conducting training programmes for both customs officials and Importers can increase compliance and bridge the knowledge gaps that currently exist. Such reforms would guarantee that the system remains approachable in the long run, eventually contributing to a just and equitable economy.

    CONCLUSION

    The controversial discussion surrounding the misclassification issue points towards the need for a balanced tax compliance approach. While the Act aims to create an integrated and streamlined tax system, its current framework unjustly penalises and burdens honest taxpayers. By plugging systemic loopholes and ensuring equitable treatment for compliant enterprises, the government can preserve the very purpose of the tax system and gain public trust in the tax administration. Legal reforms, supported by firm enforcement mechanisms, are needed to achieve this balance.

  • Microfinance In India: The Bad Loan Crisis And The Regulatory Conundrum

    Microfinance In India: The Bad Loan Crisis And The Regulatory Conundrum

    BY Kshitij Kashyap and Yash Vineesh Bhatia FOURTH- Year
    STUDENT AT DSNLU, Visakhapatnam

    INTRODUCTION

    Microfinance offers financial services to low-income people generally overlooked by conventional banking systems, facilitating small businesses and propelling the growth of the economy. India is a country where nearly every second household relies on microcredit, therefore, it is often the only bridge between aspiration and destitution. While the sector empowers millions, it is increasingly burdened by bad loans, also known as Non-Performing Assets (‘NPA’).

    In India, microfinance is regulated by the Reserve Bank of India (‘RBI’). Although the Indian microfinance sector has shown promising growth, it has had its share of challenges. During COVID-19, Micro Finance Institutions (‘MFIs’) experienced an unprecedented rise in NPAs, followed by a sharp recovery. The recovery appears promising, but a closer look reveals deeper structural vulnerabilities in the sector, owing to its fragmented regulatory framework.

     This piece analyses the statutory framework of India’s microfinance sector, reviewing past and present legislations, and exploring potential reforms for the future, allaying the existing challenges. While doing so, it does not touch upon The Recovery of Debt and Bankruptcy Act, 1993 (‘Act’) since Non-Banking Financial Companies (‘NBFCs’) do not fall within the ambit of a “bank”, “banking company” or a “financial institution” as defined by the Act in Sections 2(d), 2(e) and 2(h) respectively.

    LOST IN LEGISLATION: WHY THE MICROFINANCE BILL FAILED

    In 2012, the Government of India introduced The Micro Finance Institutions (Development & Regulation) Bill (‘Bill’), intending to organise microfinance under one umbrella. However, in 2014, the Bill was rejected by the Standing Committee on Finance (‘Yashwant Sinha Committee’), chaired by Mr. Yashwant Sinha. Glaring loopholes were identified, with a lack of groundwork and a progressive outlook.

    In its report, the Yashwant Sinha Committee advocated for an independent regulator instead of the RBI. It highlighted that the Bill missed out on client protection issues like multiple lending, over-indebtedness and coercive recollection. Additionally, it did not define important terms such as “poor households”, “Financial Inclusion” or “Microfinance”. Such ambiguity could potentially have created hurdles in judicial interpretation of the Bill since several fundamental questions were left unanswered. 

    A SHIELD WITH HOLES: SARFAESIs INCOMPLETE PROTECTION FOR MFIs

    The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (‘SARFAESI’) Act, 2002, is a core legal statute when it comes to credit recovery in India. It allows banks and other financial institutions to seize and auction property to recover debt. Its primary objective involves allowing banks to recover their NPAs without needing to approach the courts, making the process time and cost-efficient.

    While SARFAESI empowered banks and financial institutions, originally, NBFCs and MFIs were excluded from its purview. This was changed in the 2016 amendment, which extended its provisions to include NBFCs with an asset size of ₹500 crore and above. This threshold was further reduced via a notification of the government of India dated 24 February, 2020, which incorporated smaller NBFCs with an asset size of ₹100 crore and above within the ambit of this Act. However, its impact is extremely limited when it comes to MFIs as they do not meet the financial requirements

    .

    THE IBC GAP: WHERE SMALL NBFCs FALL THROUGH THE CRACKS

    The Insolvency and Bankruptcy Code, 2016 (‘IBC’), is another statute aimed at rehabilitating and restructuring stressed assets in India. Like the SARFESI Act, this too originally excluded NBFCs from its purview. The IBC recovers debt through Corporate Insolvency Resolution Process (‘CIRP’), wherein the debtor’s assets are restructured to recover the debt. In 2019, the applicability of  IBC was extended to NBFCs with an asset size of ₹500 crore and above.

    The IBC, however, has certain pitfalls, which have kept it away from the finish line when it comes to debt recovery. Some of these pitfalls were enumerated in the thirty-second report of the Standing Committee on Finance 2020-2021 (‘Jayant Sinha Committee’), chaired by Mr. Jayant Sinha. The Jayant Sinha Committee observed that low recovery rates and delays in the resolution process point towards a deviation from the objectives of this Code. Further, under the existing paradigm, Micro, Small and Medium Enterprises (‘MSMEs’), which somewhat rely on microfinance, are considered as operational creditors, whose claims are addressed after secured creditors.

    BRIDGING THE GAP: REGULATORY PROBLEMS AND THE WAY FORWARD

    Fundamentally, three problems are to be dealt with. The first one is a regulatory overlap between the SARFAESI Act and the IBC. While the SARFAESI Act caters to NBFCs with an asset size of ₹100 crore and above, the IBC caters to those with an asset size of ₹500 crore and above. Secondly, there is a major regulatory gap despite there being two statutes addressing debt recovery by NBFCs. The two statutes taken collectively, fix the minimum threshold for debt recovery at ₹100 crore. Despite this, they continue to miss out on the NBFCs falling below the threshold of ₹100 crore. Lastly, the problem of the recovery of unsecured loans, which constitute a majority of the loans in the microfinance sector and are the popular option among low to middle income groups, also needs redressal since unsecured loans have largely been overlooked by debt recovery mechanisms.

    For the recovery of secured loans

    Singapore’s Simplified Insolvency Programme (‘SIP’), may provide a cogent solution to these regulatory problems. First introduced in 2021 as a temporary measure, it was designed to assist Micro and Small Companies (‘MSCs’) facing financial difficulties during COVID-19. This operates via two channels; Simplified Debt Restructuring Programme (‘SDRP’) and Simplified Winding Up Programme (‘SWUP’). SDRP deals with viable businesses, facilitating debt restructuring and recovery process, while on the other hand, SWUP deals with non-viable businesses, such as businesses nearing bankruptcy, by providing a structured process for winding up. The SIP shortened the time required for winding up and debt restructuring. Winding-up a company typically takes three to four years, which was significantly reduced by the SWUP to an average of nine months. Similarly, the SDRP expedited debt restructuring, with one case completed in under six months, pointing towards an exceptionally swift resolution.

    In 2024, this was extended to non-MSCs, making it permanent. The application process was made simpler compared to its 2021 version. Additionally, if a company initiates SDRP and the debt restructuring plan is not approved, the process may automatically transition into alternative liquidation mechanisms, facilitating the efficient dissolution of non-viable entities. This marked a departure from the erstwhile SDRP framework, wherein a company was required to exit the process after 30 days or upon the lapse of an extension period. This, essentially, is an amalgamation of the approaches adopted by the SARFAESI Act and the IBC.

    Replicating this model in India, with minor tweaks, through a reimagined version of the 2012 Bill, now comprehensive and inclusive, may finally provide the backbone this sector needs. Like the SIP, this Bill should divide the debt recovery process into two channels; one for restructuring, like the IBC, and the other for asset liquidation, like SARFAESI. A more debtor-centric approach should be taken, wherein, based on the viability of the debt, it will either be sent for restructuring or asset liquidation. If the restructuring plan is not approved, after giving the debtor a fair hearing, it shall be allowed to transition into direct asset liquidation and vice versa. The classification based on asset size of the NBFCs should be done away with, since in Singapore, the SIP was implemented for both MSCs and non-MSCs. These changes could make the debt recovery process in India much simpler and could fix the regulatory overlap and gap between SARFAESI and the IBC.

    For the recovery of unsecured loans

    For the recovery of unsecured loans, the Grameen Bank of Bangladesh, the pioneer of microfinancing, can serve as an inspiration. It offers collateral free loans with an impressive recovery rate of over 95%. Its success is attributed to its flexible practices, such as allowing the borrowers to negotiate the terms of repayment, and group lending, wherein two members of a five-person group are given a loan initially. If repaid on time, the initial loans are followed four to six weeks later by loan to other two members. After another four to six weeks, the loan is given to the last person, subject to repayment by the previous borrowers. This pattern is known as 2:2:1 staggering. This significantly reduced the costs of screening and monitoring the loans and the costs of enforcing debt repayments. Group lending practically uses peer pressure as a method to monitor and enforce the repayment of loans. Tapping basic human behaviour has proven effective in loan recovery by the Grameen Bank. The statute should similarly mandate unsecured microcredit lenders to adopt such practices, improving recovery rates while cutting operational costs.

    CONCLUSION

    Microfinance has driven financial inclusion in India but faces regulatory hurdles and weak recovery systems. Existing systems offer limited protection for unsecured lending. A unified legal framework, inspired by the models like Grameen Bank and Singapore’s SIP can fill these gaps and ensure sustainable growth for the sector.