The Corporate & Commercial Law Society Blog, HNLU

Category: Securities Law

  • 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.

  • From Price Control to Market Discipline: Reading SEBI’s Base Expense Ratio Reform in Comparative Perspective

    From Price Control to Market Discipline: Reading SEBI’s Base Expense Ratio Reform in Comparative Perspective

    BY AADIT SHARMA, SECOND YEAR STUDENT AT RMLNLU, LUCKNOW

    INTRODUCTION

    India’s mutual fund industry has experienced accelerated growth with assets under management increasing from ₹72.2 lakh crores in May 2025 to ₹80.8 lakh crores by November 2025 with retail investors having a larger chunk in the market. It is in this context of rapid market expansion and retail involvement that the Securities and Exchange Board of India’s (‘SEBI’) circular dated 17 December 2025(‘Circular’) introducing the Base Expense Ratio (‘BER’) has been primarily discussed as a numerical or transparency-driven intervention. The earlier Total Expense Ratio (‘TER’) was a single, all-inclusive umbrella cap that bundled together the fund’s core management fees, distributor commissions and operating costs along with various statutory and regulatory levies (such as GST, STT, Stamp Duty and SEBI fees) into one consolidated percentage. The now introduced BER includes unbundling of costs. It states that the BER will only include the base core scheme-level expenses such as management fees, distribution costs and routine administration, while statutory and regulatory levies are excluded and charged separately on actuals. 

    This article argues that the BER framework reflects a measured shift by SEBI from merit-based price control towards disclosure-led market discipline, while consciously stopping short of full deregulation. When viewed in a comparative international context, the reform reflects a cautious alignment with global regulatory trends rather than a blind replication of foreign models.

    FROM BUNDLED CONTROL TO SELECTIVE TRANSPARENCY

    Prior to the circular, mutual fund expenses in India were regulated under a TER framework that bundled discretionary fund management fees with statutory and regulatory levies such as GST, Securities Transaction Tax, exchange fees, and SEBI charges. Although nominally framed as a disclosure-based ceiling, the TER regime functioned substantively as merit regulation because SEBI did not merely mandate disclosure of costs but prescribed binding ceilings on total expenses regulated under SEBI (Mutual Funds) Regulations, 1996. By prescribing category-wise caps on the aggregate chargeable expense, SEBI effectively determined what constituted a ‘reasonable’ cost structure for mutual funds, embedding its regulatory judgement directly into cost limits. Investor protection under this framework was achieved less through competitive pricing or informed choice and more through ex ante regulatory intervention. Even where SEBI permitted limited add-ons such as the additional allowance of up to 0.05 basis points in specified circumstances, including exit load–linked expenses, the underlying architecture remained one of bundled cost control, with statutory pass-through levies obscuring the true pricing of fund management services.

    The BER reform marks a deliberate reconfiguration of this approach. By separating core fund management costs from statutory and regulatory levies, now charged on actuals, SEBI has partially withdrawn from adjudicating the fairness of total expenses. Instead, it has enabled investors to evaluate the pricing of asset management services independently of compulsory charges. This shift represents a recalibration rather than an abandonment of regulatory control: while aggregate cost assessment is displaced in favor of transparency and comparability, SEBI has consciously retained category-wise caps on the base component. This reflects continued skepticism about the disciplining capacity of markets in a retail-dominated ecosystem. However, the reform is not without structural consequences. Although statutory levies are excluded for all funds under the BER framework, the practical benefits of this change are not evenly distributed. Large Asset Management Companies (AMCs)which typically operate close to the regulatory TER ceiling benefit from the removal of mandatory levies such as GST and transaction-related taxes from the capped expense head, as this reclassification restores usable pricing space and cushions margin pressure without requiring any adjustment to headline fees. Smaller AMCs, by contrast, generally price their schemes below regulatory caps and therefore derive limited incremental flexibility from the reform. While the BER framework advances transparency, but does not significantly change competitive conditions, as its practical benefits accrue mainly to AMCs constrained by existing expense ceilings. This outcome underscores the limits of disclosure-led governance in addressing distributive and competitive asymmetries that were previously moderated through aggregate cost controls.

    COMPARATIVE PERSPECTIVE: CONVERGENCE AND DELIBERATE DIVERGENCE

    A.    United States: Disclosure Without Price Ceilings

    In the United States (‘US’) mutual fund regulation is   administered by the Securities and Exchange Commission (‘SEC’) under the Investment Company Act of 1940. It is premised on a combination of disclosure, investor education and procedural safeguards rather than direct regulation of fee levels. The SEC does not impose ceilings on expense ratios; instead funds are required to disclose management fees, distribution expenses (including 12b-1 fees) and operating costs in standardized formats leaving pricing discipline to investor choice and competitive pressures. The SEC requires that mutual funds disclose the expense ratios in key documents such as the prospectus and shareholder reports enabling investors to compare costs across funds.

    By contrast SEBI’s BER framework reflects a more cautious regulatory stance. Although disclosure has been strengthened through cost unbundling, SEBI has retained category-wise caps on base expenses, signaling an institutional judgement that disclosure alone may be insufficient to discipline pricing in a predominantly retail market.

    B. European Union: Transparency with Behavioral Framing

    The European Union’s (‘EU’) regulatory framework particularly under the Packaged retail and insurance-based investment products (PRIIPs), places strong emphasis on cost transparency through mandatory Key Information Documents . The EU regulatory framework is premised on the view that disclosure is effective only when it can be readily understood by retail investors. Accordingly, the PRIIPs regime requires investment costs to be presented in standardized formats and in many instances to be expressed in monetary terms over defined holding periods rather than only as percentages. This approach reflects an explicit regulatory acknowledgement that purely numerical disclosures may not be sufficient to inform investors in decision-making.

    SEBI’s BER framework aligns with the EU’s approach in unbundling costs and enhancing comparability across schemes but differs in its method of disclosure. While the Indian framework improves numerical transparency by separating base expenses from statutory levies it does not mandate behavioral framing or investor-oriented presentation of costs.  The reform enhances visibility of pricing components  but stops short of shaping how investors interpret or process that information.

    Taken together, these comparisons indicate that SEBI’s reform represents hybrid regulatory design. It borrows transparency mechanisms from global best practices while retaining structural controls suited to domestic conditions. The result is neither full convergence with them nor resistance to them but selective adaptation.

     THE LIMITS OF DISCLOSURE AS INVESTOR PROTECTION

    Disclosure-based regulation rests on the assumption that investors are able to read, understand and meaningfully compare cost information across financial products. In practice, this assumption is unevenly satisfied in India’s predominantly  retail driven mutual fund market. Levels of  low financial literacy are entangled with perceived complexity and limited information on investors’ part. As a result, the investors rely on intermediaries, brand reputation or recent returns rather than cost metrics when making investment decisions. In this context, the BER framework may improve the visibility of expense components without necessarily altering investor behavior. While headline base expense figures are now easier to identify, investors may underappreciate the cumulative impact of statutory levies charged separately or may continue to prioritize short-term performance over cost efficiency. As a result, transparency may not translate into effective market discipline. This does not undermine the regulatory rationale of the BER reform, but it highlights an inherent limitation: disclosure can function as a meaningful tool of investor protection only where investors possess the capacity and incentives to use the information disclosed.

    CONCLUSION: MAKING TRANSPARENCY EFFECTIVE

    The introduction of the BER marks a recalibration of mutual fund regulation rather than a completed transition. By unbundling statutory levies from core scheme expenses SEBI has created the conditions for improved cost comparison but transparency alone will not ensure market discipline unless it is operationalized through complementary regulatory practices.

    To realise the BER framework’s potential, post-implementation monitoring must assume central importance. SEBI should systematically track how expense structures evolve under the new regime and whether cost efficiencies are passed on to investors or absorbed within margins and distribution incentives. Periodic, category-wise publication of BER trends could strengthen competitive pressure without additional rulemaking.

    The impact of disclosure also depends on how intermediaries operate. In a market dominated by retail investors, transparency at the scheme level will have limited effect if distributors continue to shape investment decisions without regard to costs. Unless distributor incentives and point-of-sale disclosures reflect BER-related cost differences, investors are unlikely to use this information in practice. In addition, small improvements in how costs are presented such as showing base expenses alongside statutory levies can help investors better understand the total cost of investing, even without introducing formal behavioral mandates.

    Read this way the BER reform is best understood as a foundational step. Its success will depend less on arithmetic recalibration and more on whether transparency is translated into sustained pricing discipline through monitoring, intermediary oversight and usable disclosure.

  • 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.

  • Beyond Arbitrage: The High-Speed Scandal That Shook Dalal Street

    Beyond Arbitrage: The High-Speed Scandal That Shook Dalal Street

    PRIYANSHI JAIN, FOUTH-YEAR STUDENT AT INSTITUTE OF LAW, NIRMA UNIVERSITY

    INTRODUCTION

    India’s ₹4,844 crore Jane Street case was not just about fraudulent trading; it attacked the very credibility of India’s securities market. It is about whether the world’s largest derivatives market is built on a settlement system that can easily be manipulated.

    On July 2025, the Securities Exchange Board of India (‘SEBI’) passed an interim order against the Jane Street group, an American proprietary trading firm, for its alleged manipulation of the Bank Nifty index derivatives during expiry-day trading. The order seized nearly ₹4,844 crore and barred the firm from accessing Indian markets while proceedings continue. It was SEBI’s largest enforcement action of its kind and immediately drew attention across financial and legal circles.

    The case matters because it highlights the structural flaws in India’s market framework. Unlike the United States (‘US’) and European Union (‘EU’), which use closing auctions, or Singapore, which employs randomized settlement windows, India continues to rely on a 30-minute Volume-Weighted Average Price (‘VWAP’) to settle expiries. VWAP, an indicator derived from price and volume that represents the average price of a security, is increasingly outdated. Entity-level surveillance misses group strategies and doctrinal standards under the Prohibition of Fraudulent and Unfair Trade Practices Regulations, 2003 (‘PFUTP’), which remain unclear. SEBI’s order looks powerful in the headlines, but in reality, its durability before tribunals is far less certain.

    EXPIRY-DAY MECHANICS AND VULNERABILITIES

    To understand why SEBI’s order matters, it is necessary to see how expiry in India works. When Bank Nifty future options expire every Thursday, their final settlement value is not taken from the last traded price. Instead, it is computed using the VWAP of the index in the last half-an-hour before trading closes. The problem lies in VWAP as it can be influenced. Large, well-timed trades placed near the close can push the average up or down, even if only slightly. This practice is known as “marking the close”, and it can tilt the expiry settlement in a direction favourable to those who hold large options positions. In theory, these trades appear genuine; however, in reality, they are buy or sell orders, and their purpose is to manipulate the benchmark rather than reflect true supply and demand.

    The stakes are high as Bank Nifty is India’s most heavily-traded derivatives contract. As per SEBI’s own analysis, nearly 9/10 of retail derivatives traders lost money, with Bank Nifty options driving much of this activity. Even a slight change in VWAP can result in major retail losses. Unlike the US or EU, where expiry markets are dominated by institutions with hedging strategies, India’s market is retail-driven. This implies that structural fragilities like VWAP distortions inflict disproportionate harm on individuals who are least equipped to hedge risk. What looks like a technical flaw in design is a transfer of wealth from small investors to sophisticated firms.

    VWAP was chosen to avoid the distortions of last-trade settlement, but in practice, it creates a different vulnerability: it concentrates risk in a short window that sophisticated traders can target. The Jane Street episode illustrates that the vulnerability is not in one firm’s strategy but in the structure of the expiry system itself.

    LEGAL FRAMEWORK AND DOCTRINAL STANDARDS

    PFUTP Regulations, 2003

    SEBI’s case against Jane Street rests mainly on the Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) Regulations, 2003. Regulation 3 prohibits the use of fraudulent or deceptive devices, and Regulation 4(1) bans trading practices that create a false or misleading appearance of trading or manipulate prices.

    Indian tribunals have consistently required a high threshold for providing manipulation. In Ketan Parekh v. SEBI (2006), (‘Ketan Parekh’), the Securities Appellate Tribunal (‘SAT’) held that a case must show the creation of an artificial price backed by intent, not merely aggressive or opportunistic trading. In Nirma Bang Securities v. SEBI (2004), the SAT emphasised that trades must produce a false appearance; if the orders are real and executed transparently on an exchange, they may not qualify as fraud. In DSQ Software Ltd. v. SEBI (2002), (‘DSQ Software’), expiry-day manipulation was penalised, but the case turned on circular trades and matched orders, not exploitation of settlement mechanics.

    Under Ketan Parekh, influencing VWAP may not amount to an “artificial” price at all, since VWAP is the legally prescribed benchmark. Under the Nirmal Bang case, Jane Street’s trades were genuine, transparent, and on-exchange, which made it difficult to argue that they created a “misleading appearance”. And unlike DSQ Software, where sham trades propped up expiry values, here the trades were economically real, albeit timed strategically. SEBI must therefore stretch precedent to fit behaviour that exploits design flaws rather than violates market integrity in the conventional sense.

    SEBI ACT, 1992

    The SEBI Act, 1992, grants the regulator broad powers to act in the interest of investors. Section 11 establishes SEBI’s mandate, while Sections 11B and 11D allow it to issue interim directions, including barring firms from markets. Section 12A prohibits manipulative conduct, and Section 24 provides for criminal sanctions.

    Interim orders under these provisions are often passed ex-parte, which enables SEBI to act quickly. Yet their durability is fragile. On appeal before the SAT or the Supreme Court, regulators must present evidence that meets the strict doctrinal tests of “artificial price” or “misleading appearance”. As past jurisprudence shows, SEBI’s broad preventive powers are constrained by how tribunals interpret manipulation, and orders that appear stringent at first glance often face dilution when they are tested against precedent.

    FPI REGULATIONS, 2019

    SEBI also cited breaches of the Foreign Portfolio Investor Regulations, 2019 (‘FPIRegulations’). Regulation 20(4) restricts intraday netting of trades across affiliates. The logic is to prevent one entity from using multiple arms to take offsetting positions. However, India’s surveillance remains entity-based, not consolidated. If affiliates or sub-accounts operate in coordination, their trades may escape detection unless positions are aggregated at the group level.

    This creates a structural blind spot. SEBI can penalise one entity, but coordinated strategies across multiple offshore vehicles may remain invisible. The Jane Street episode underscores how global trading firms can exploit the limits of surveillance architecture rather than simply breaching the letter of the law.

    SEBI’S INTERIM ORDER: STRENGTHS AND LIMITS

    SEBI’s interim order against Jane Street was notable for its speed and scale. Within days of the expiry, SEBI had impounded nearly ₹4,844 crore and imposed a trading ban. The sheer size of the disgorgement sent a deterrent signal not only to foreign portfolio investors but also to domestic proprietary desks that expiry-day strategies would be scrutinized closely. By framing the order around retail investor protection, SEBI strengthened its optics: Bank Nifty is retail-heavy, and positioning the case as a defence of small investors bolstered regulatory legitimacy. SEBI’s action is depicted as forceful yet legally fragile, because proving manipulation under PFUTP technically requires showing an artificial or misleading price, and Jane Street’s on-exchange, economically significant trades may be viewed as lawful VWAP exploitation unless regulators prove the trades lacked any legitimate economic purpose, a stance appellate bodies like the SAT have taken in narrowing “manipulation” in past cases. The order also highlights a surveillance gap: by focusing on entity-level positions, current systems may miss coordinated strategies run across affiliates or sub-accounts, implying that without group-level oversight enforcement can become piecemeal, penalizing one entity while broader structure remains unaddressed. The upshot is a recurring cycle where headline penalties signal resolve, but fragile legal footing leads to dilution or reversal on appeal unless settlement frameworks and surveillance architectures are overhauled to withstand scrutiny and capture cross-entity orchestration at scale.

    COMPARATIVE INSIGHTS AND REFORM DIRECTIONS

    India should pivot from a 30-minute VWAP expiry to transparent closing auctions or hybrid windows to curb benchmark tilts and concentrate integrity where liquidity is deepest. Sequencing pilots on F&O names and phasing towards auctions aligns with global practice and SEBI’s active consultations, while guarding liquidity optics. At the same time, regulators should mandate group-level disclosures and beneficial ownership look-through, operationalized via standardized, trigger-based reporting and a lead-regulator model. Cross-border Memorandum of Understandings with explicit timelines and data schemes should backstop enforcement against SPVs and secrecy regimes. Finally, the pair auction closes with AI-assisted surveillance under human oversight, restrained on labelled expiry datasets to manage false positives.

    CONCLUSION

    The Jane Street episode underlines that India’s episode underlines that India’s expiry framework itself is vulnerable. VWAP-based settlement concentrates risk in a narrow window, while entity-level surveillance misses coordinated strategies across affiliates. These are not flaws of one case but of the market’s design.

    Doctrinally, SEBI also faces hurdles. Under the PFUTP Regulations, tribunals have demanded proof of “artificial prices” or “misleading appearances”. Jane Street’s trades, though large and well-timed, were real and visible. This ambiguity may weaken SEBI’s case before appellate forums, showing how difficult it is to stretch the old standard to new trading strategies.

    The policy lesson is straightforward: in the absence of change, SEBI will continue to act reactively, making headlines by penalizing people after the fact while running the risk of legal reversals. Reliance on VWAP and fragmented oversight leaves India exposed in ways other major markets have already addressed through auctions, randomization, and consolidated monitoring.

    For the world’s largest derivatives market, with millions of retail traders, the demand is simple that India’s framework should be at least as robust as that of the US or EU. Anything less risks repeating the same cycle.

  • Sustainable Finance: Deconstructing SEBI’s Framework for ESG Debt Securities

    Sustainable Finance: Deconstructing SEBI’s Framework for ESG Debt Securities

    VIDUSHI AND AADARSH GAUTAM, FIFTH -YEAR STUDENTS AT NLUD, NEW DELHI

    INTRODUCTION

    On June 5, 2025, the Securities and Exchange Board of India (‘SEBI’), in its Circular titled “Framework for Environment, Social and Governance (ESG) Debt Securities (other than green debt securities)” (‘Circular’) has come out with an operational framework Circular for issuance of social bonds, sustainability bonds and sustainability-linked bonds, which together will be known as Environment, Social and Governance (“ESG”) debt securities. Before this amendment and the introduction of the ESG Framework, SEBI had formally recognised only green bonds. While the regulatory landscape in India was initially focused solely on green bonds, market practices had already begun embracing broader ESG categories. This Circular is significant as it will help issuers to raise money for more sustainable projects, assisting in closing the funding gap for the Sustainable Development Goals.

    The Circular is part of a larger regulatory trajectory that began with SEBI’s consultation paper released on August 16, 2024. The consultation paper had proposed to expand the scope of the sustainable finance framework in the Indian securities market, recognising the growing global demand for capital mobilization to achieve the 2030 Sustainable Development Goals (“SDGs”). It had set the stage for subsequent amendments to the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 through the SEBI (Issue and Listing of Non-Convertible Securities) (Third Amendment) Regulations, 2024, which formally introduced the definition of ESG Debt Securities under Regulation 2(1)(oa). This blog analyses how the Circular operationalises these regulatory intentions to create a structured ecosystem for the issuance and listing of a broader class of ESG debt instruments in India.

    UNDERSTANDING ESG DEBT SECURITIES

    ESG Debt Securities in their definition include green debt securities (“GDS”), social bonds, sustainability bonds, and sustainability-linked bonds. While GDS have already been defined under Regulation 2(1)(q) of NCS Regulations, with effect from date of release, SEBI’s new Circular governs the issuance and definition of ESG Debt Securities, excluding GDS. The definition is deliberately wide to encompass advancements in international standards encompassing the International Capital Market Association (ICMA) Principles, the Climate Bonds Standard, and the ASEAN Standards among others. This permit the incorporation of additional categories of ESG Debt Securities as designated internationally and by SEBI periodically. Thus, if any activity qualifies internationally to ESG Standards, it will be able to secure the tag in India, too. These international standards are also relevant for issuers for adherence to initial and continuous disclosures for issuance of ESG Debt Securities as will be discussed later in this blog.

    This Circular provides the definition of social bonds as a way for firms to gain finances for initiatives that positively benefit society. For example, governments may involve projects aimed at improving water supply, supplying necessities like medical care and education, ensuring food security, and improving fundamental infrastructure. Similarly, sustainability bonds are defined as made for the purpose of financing green and social projects. They acknowledge the convergence of environmental and social goals. For instance, in 2020, Alphabet Inc., Google’s parent organisation, made the prominent move of offering a USD 5.75 billion bond in support of sustainability. Part of these bonds went to finance green buildings and electric transport, demonstrating how sustainability bonds can be multipurpose.

    Besides, under this framework, sustainability-linked bonds (“SLBs”) are very different from bonds tied to the use of funds. They do not depend on a single project but are based on the issuer’s continuous ESG achievements. The issuers make forward-looking commitments to enhance their sustainability by using Key Performance Indicators (“KPIs”) and comparing their outcomes with their agreed-upon Sustainability Performance Targets (“SPTs”). Even though the proceeds from these bonds are flexible, the issuance process is only credible if the issuer is able to accomplish the set goals.

    As ESG bonds are distinct in their manner of use of investment obtained, separate obligations and requirements are laid down by the Circular for these bonds as will be explored next.

    THE PROPOSED REGULATORY FRAMEWORK

    At the outset, an issuer desirous of issuing these social bonds, sustainable bonds or SLBs have to comply with initial disclosure requirements, continuous disclosure obligations and appoint independent third-party certifiers as per the Circular. The issuance of social and sustainable bonds requires adherence to requirements as per Annexure A and for SLBs as per Annexure B. The primary aim behind the requirements remains transparency and investor protection. For instance, as per Annexure A, the initial disclosure regarding how the project benefits the public put an end to the raising of money for projects without adequate information and instil trust in investors. Significantly, the Circular provides for the qualification of a third-party reviewer by mandating independence, expertise and lack of any conflict of interest. It is to be highlighted that while the presence of third-party reviewers remains essential and a step forward in right direction, the regulations governing ESG credit rating agencies are still evolving to enhance clarity and transparency and are at a comparatively nascent stage. The ability of reviewers to provide accurate and tailored reviews rather than template ones remains untested and the Circular does not provide guidelines that could ensure it.

    In addition to the above requirements, as per Annexure B, SLBs need to comply to certain unique requirements due to the forward-looking, performance-oriented characteristics of these instruments. During the issuance phase, issuers must furnish exhaustive information on chosen KPIs, encompassing definitions, calculation benchmarks, while elucidating the justification for picking such KPIs. Similar to the framework for social and sustainable bonds, an independent third-party need to be appointed to verify the credibility of the selected KPIs and SPTs. If there is any change in the method by which the company sets or measures KPIs or SPTs, this information has to be examined and notified. This strict structure guarantees that SLBs are both ambitious and transparent, providing investors with a reliable means to evaluate issuers’ ESG performance over the course of time.

    ACTION MEETS AMBITION: ELIMINATING PURPOSE-WASHING

    One of the significant change brought by the framework is to ensure that the instruments are “true to their labels”. The issuer is not allowed to use any misleading labels, hide any negative effects or choose to only highlight positive outcomes without informing negative aspects. Herein, to prevent purpose washing, that is misleadingly portraying of funds as impact investments, the regulator mandates that the funds and their utilisation to meet the agreed ESG objectives are continuously monitored. Any misuse of the allocated funds has to be immediately reported and the debenture holders’ have the right to early redemption.

    The mandatory nature of impact reporting by the issuer ensures to provide clear and transparent assessments of the outcomes of their ESG labelled initiatives. Such report shall include both qualitative (explaining narratives, approaches, case studies and contexts of social impact) and quantitative indicators (specific metrics and measurable data, such as carbon emissions reduced, of the social impact) and should be supplemented by third party verification. As a result, SEBI ensures to create a culture of responsibility that extends beyond initial issuance and to the complete lifecycle of the management. These mechanisms ensures a comprehensive framework of safeguards aimed at protecting investors and maintaining the integrity of India’s sustainable finance ecosystem.

    THE WAY FORWARD

    SEBI’s ESG Debt Securities Framework is a relevant and progressive regulatory advancement that broadens India’s sustainable finance repertoire beyond green bonds to encompass social, sustainability, and sustainability-linked bonds. The Circular enhances market integrity and connects India’s ESG debt landscape with global best practices by incorporating stringent disclosure standards, and protections against purpose-washing. The industry has welcomed Larsen & Toubro’s announcement of a Rs 500 crore ESG Bond issue, marking it as the first Indian corporation to undertake such an initiative under the newly established SEBI ESG and sustainability-linked bond framework. With the need to strengthen certain aspects including third-party reviews, as implementation progresses, strong enforcement, market awareness, and alignment with international standards will be essential to realising the framework’s full potential.

  • SEBI’s Closing Auction Session: Legal and Market Fault lines

    SEBI’s Closing Auction Session: Legal and Market Fault lines

    ANISHA AND DEV KUMAWAT, THIRD AND FOURTH- YEAR STUDENTS AT TNNLU, TIRUCHIRAPPALLI

    INTRODUCTION

    The Securities and Exchange Board of India (‘SEBI’) has released a consultation paper on 22 August, 2025, suggesting the commencement of Closing Auction Session (‘CAS’) in the equity share market or stock market. The new framework is not just a reform to the market structure for ameliorating the closing- price integrity rather it has far-reaching implications for Indian securities law and corporate governance. The proposed amendment related to CAS is far more than the statistical closing price for the trading day, as it has paramount implications for the legal and contractual matters, none the less from takeover regulations, delisting thresholds to mutual fund net asset valuations and the determination of settlement obligations. Through this, SEBI is not just affecting the economic framework of the market but also proposing a new regulatory and commercial frameworks by recalibrating on determination of prices.

    To address this issue, this article examines the legal and market issues that are raised by CAS ranging from takeover thresholds, delisting processes mutual fund valuations to its impact on insider trading enforcement and minority shareholder protection. Thus, a comparative analysis has been drawn focusing on its regulatory safeguards and highlighting the opportunities and risks of the proposed framework. Ultimately, it suggests a layered regulatory approach to harmonize SEBI’s twin objectives of accurate price discovery and investor protection through greater transparency, real-time surveillance and protective mechanisms.

    FROM VWAP TO CAS: A STRUCTURAL SHIFT IN PRICE DISCOVERY

    The proposed amendment sharply contrasts with the present method of calculating the price of the stocks for each company i.e. the closing price. Currently, the closing price is calculated from the Volume-Weighted Average Price (‘VWAP’), i.e. the weighted average price of trades that has been executed continuously during the last half an hour. But under the new framework, a dedicated twenty- minute CAS (3:15–3:35 p.m. IST) would be taken into account and the orders would be finalized as per the acceptance, matching and execution of stocks via buying and selling, through a call- auction mechanism. For the first instance, it has been initiated for derivatives eligible (Future & Option Stocks) the highly liquid securities crucial for index and derivatives settlement with possibility of later expansion to wider cash market. This framework is reasoned by SEBI in phased approach on two grounds: firstly, F&O stocks form the backbone of institutional portfolios and are most relevant for index benchmarking; secondly, manipulation risks could be mitigated because of their high liquidity rates.

    The practical effect can be elucidated by a short numeric contrast. Under the current VWAP approach, if a stock trades mostly between ₹100- ₹102 during the day and one among the last few trades transaction is of ₹108, the VWAP may lift modestly to about ₹103.5, thus slightly affecting the Net Asset Value (‘NAV’) and index weights. Now, under the newly introduced framework (CAS), if the 3:00- 3:15 VWAP is ₹101 with ±3% band, then the auction could clear  up to around ₹104. Should a cluster of institutional orders push the clearing price to that level, ₹104 would stand as the official close, determining NAVs, takeover thresholds, and derivative settlements. This change is not minimal as a shift of ₹3-₹4 per share across millions of shares put a lot of effect on wealth transfers between acquirers, minority shareholders and passive investors. This shows how VWAP dilutes the impact of any single trade across an extended period, while on the other hand, CAS magnifies the influence by compressing decisive price formation into a narrow, highly visible window, thus creating  a natural choke point for significant players.

    CLOSING PRICE AS A LEGAL AND MARKET BENCHMARK

    The shift is not just a mere technicality as the closing price acts as the standardized benchmark in securities regulation. For instance, under Regulation 3 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, open offer which has the mandate of 25% shareholding threshold is calculated with reference to the closing price.  Through this, it protects the minority shareholders in control transactions. Additionally,  Regulation 8 of the SEBI (Delisting of Equity Shares) Regulations, 2021 set the floor for exit consideration in delisting exercises through closing price. Moreover, even mutual fund valuations under Regulation 47 of the SEBI (Mutual Funds) Regulations, 1996  determine the NAV  available to investors through the same. In this sense, the closing price performs a quasi- legal function, extending beyond market mechanics to structure substantive entitlements and liabilities. Any change in the methodology of its discovery, therefore, extends beyond technical microstructure reform like price fluctuations and engages fundamental questions of investor protection and regulatory design. Heavy order flows during the auction period can unduly influence the closing price. This makes it difficult for the small shareholders to counter the influence of large institutional trades.

    One of the most analytical difficulty lies in balancing SEBI’s dual objectives: one being enhancing price accuracy and other being preventing regulatory arbitrage or market distortions. The consultation paper has acknowledged that the closing prices are often subject to marking the close, a practice where traders execute small-volume traders just before the market closes to nudge prices in the desired direction. It has been globally recognized by courts and regulators as a form of market manipulation. The fact has been reinstated in India by the Securities Appellate Tribunal through Regulation 3 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 which prohibits manipulative and deceptive devices. While the newly introduced framework of CAS by concentrating liquidity into a single call auction, may diminish the efficacy of last- minute trades, it also creates a new issue related to concentration of large orders to influence the equilibrium price by large players.

    In the context of takeovers, the person holding 25% of company’s shares has to make an open offer to other stakeholders and that price is linked to past closing prices. So, under the new framework, the closing price could be fluctuated either up or down, depending on how big investors place their orders in that short auction window. This advantages the buyer, who is willing to take the risk of bidding aggressively in the CAS. In delisting too, price is influenced by CAS. When such a scenario persists, then prices become more volatile or controlled by the hands of a few large orders, thus leading to unfair exit value of minority shareholders. In the case of SEBI v. Cabot International Capital Corp. (2004), it was held that the main aim of securities law is to protect the investors. It means any change in reduction of fairness for investors in exit processes goes against the principal of investor protection.

    CONCENTRATED ORDERS, MANIPULATION, AND INSIDER RISKS

    Moreover, insider trading regulation is also affected by CAS. Under the SEBI (Prohibition of Insider Trading) Regulations, 2015, material events are reflected in stock prices with the closing price serving as a reference for detecting suspicious trading activities. When the auction price can be influenced by a dominating group of participants, then the casual link between non-public information and price movement becomes harder to establish. This results in weakening of evidentiary foundation of enforcement i.e. without adequate surveillance. If left unchecked, it could undermine the deterrent value of insider trading provisions. For minority investors, the risk is especially acute, as concentrated orders during the auction could distort prices to their disadvantage, undermining the very protections securities law aims to guarantee.

    Comparative jurisprudence like European Union’s Euronext market shows that closing auctions are typically safeguarded by protective mechanism like volatility extensions, real-time extensive prices, and order imbalance disclosures. Even though, the same has been acknowledged by the SEBI’s consultation process but it does not properly consider the operability in India’s context. It is characterized by substantial retail participation, high algorithmic trading activity, and resource- constrained market surveillance. If these safeguards are not incorporated, CAS may unintentionally tilt the market towards institutional investors, thus weakening the legal and fiduciary protections afforded to minority shareholders under the Takeover Code and Delisting Regulations.

    A layered approach is required to address these risks posed by CAS like requiring disclosure of large orders at the time of auction could enhance transparency and would supply regulators with empirical data to monitory systematic risks. Additionally, practices like layering, spoofing and order clustering could be incorporated in the system to protect both market integrity and equitable access as real- time surveillance system. Through the lens of economics, these measures could help reduce price imbalance, thus ensuring minority shareholders rights.

    CONCLUSION

    The proposed CAS marks a structural reorientation in India’s price- discovery framework, with implications that extended far beyond a technical refinement. By concentrating the price formation into a narrow window, potential choke points could be found where the dominant investors get disproportionate influence, raising questions over fairness and investor protection, especially for minority shareholders. SEBI must therefore approach CAS with strong rigorous safeguards, empirical oversight and a commitment to equitable governance, to ensure a balance between the statutory and fiduciary protections that underpins the Indian securities law.

  • SEBI’s AI Liability Regulation: Accountability and Auditability Concerns

    SEBI’s AI Liability Regulation: Accountability and Auditability Concerns

    AYUSH RAJ AND TANMAY YADAV, FOURTH AND THIRD-YEAR STUDENTS AT GUJARAT NATIONAL LAW UNIVERSITY, GANDHINAGAR

    INTRODUCTION

    Securities and Exchange Board of India’s (‘SEBI’) February 2025 amendments (Intermediaries (Amendment) Regulations, 2025) inserted Regulation 16C, making any SEBI-regulated entity solely liable for AI/ML tools it uses, whether developed in-house or procured externally. This “sole responsibility” covers data privacy/security, the integrity of artificial intelligence (‘AI’) outputs, and compliance with laws. While this shift rightfully places clear duties on intermediaries, it leaves unaddressed how AI vendors themselves are held to account and how opaque AI systems are audited. In other words, SEBI’s framework robustly binds intermediaries, but contains potential gaps in vendor accountability and system auditability. This critique explores those gaps in light of international standards and practice.

    SCOPE OF REGULATION 16C AND ITS LEGAL FRAMEWORK

    Regulation 16C was notified on Feb 10, 2025 with immediate effect. In substance, it mirrors SEBI’s November 2024 consultation paper: “every person regulated by SEBI that uses AI…shall be solely responsible” for (a) investor data privacy/security, (b) any output from the AI it relies on, and (c) compliance with applicable laws. The rule applies “irrespective of the scale” of AI adoption, meaning even small or third‑party use triggers full liability. SEBI may enforce sanctions under its general powers for any violation.

    This framework operates within SEBI’s established enforcement ecosystem. Violations can trigger the regulator’s full spectrum of penalties under the Securities and Exchange Board of India Act, 1992, ranging from monetary sanctions and cease-and-desist orders to suspension of operations. The regulation thus creates a direct enforcement pathway: any AI-related breach of investor protection, data security, or regulatory compliance automatically becomes a SEBI violation with corresponding penalties.

    The legal significance lies in how this shifts risk allocation in the securities ecosystem. Previously, AI-related harms might fall into regulatory grey areas or involve complex questions of vendor versus user responsibility. Regulation 16C eliminates such ambiguity by making intermediaries the single point of accountability, and liability, for all AI deployments in their operations.

    VENDOR-ACCOUNTABILITY GAP

    In practice intermediaries often rely on third-party models or data, but the regulation places all onus on the intermediary, with no parallel duties imposed on the AI vendor. If a supplier’s model has a hidden flaw or violates data norms, SEBI has no direct rulemaking or enforcement channel against that vendor. Instead, the intermediary must shoulder penalties and investor fallout. This one-sided design could dilute accountability: vendors might disclaim liability in contracts, knowing enforcement power lies with SEBI, not with the provider. As a result, there is a regulatory blind spot whenever AI harms stem from vendor error.

    Moreover, industry and global reports warn that relying on a few AI suppliers can create systemic risks. The Bank for International Settlements (BIS) Financial Stability Institute notes that “increased use of third-party services (data providers, AI model providers) could lead to dependency, disruption of critical services and lack of control,” exacerbated by vendor lock-in and market concentration. In other words, heavy dependence on external AI technologies can amplify risk: if one vendor fails, many intermediaries suffer concurrently. The US Treasury likewise highlighted the so‑called “vendor lock-in” problem in financial AI, urging regulators to require vendors to enable easy transitions between competing systems. SEBI’s framework currently lacks any mechanism to counteract lock‑in, such as mandated data or model portability requirements that would allow intermediaries to switch between AI providers without losing critical functionality.

    The recognition of these risks inherently places a responsibility on intermediaries to secure strong contractual controls with AI suppliers. This requires regulated entities to perform thorough due diligence and establish back-to-back arrangements with AI vendors to mitigate risk. Such agreements must include provisions like audit rights, data access, and vendor warranties. However, because explicit legal requirements are absent, the onus falls entirely on intermediaries to negotiate these terms. A failure to do so means SEBI’s liability framework itself provides no enforcement of vendor-side transparency.

    In practice, this gap means an intermediary could satisfy SEBI’s rule on paper (having liability assigned), yet still face failures or disputes with no legal recourse beyond its own contract. The regulator’s approach is asymmetrical: intermediaries have all the incentives to comply, while vendors have none. SEBI’s choice to rely on intermediaries may have been pragmatic, but it is a potential weakness if vendors operate without accountability.

    Consider an AI-driven trading recommendation system supplied by Vendor X. If X’s model generates a flawed recommendation that causes losses, Regulation 16C makes the brokerage (user) fully liable. Yet Vendor X could escape sanction if it sold the software “as is.” Under OECD principles, both the user and the supplier are expected to manage risk cooperatively, but SEBI’s text does not reflect that partnership.

    The foregoing points suggest that SEBI may need to clarify how vendor risks are handled. Potential solutions could include: explicitly requiring intermediaries to contractually compel vendor compliance and audit access, or even extending regulatory standards to cover AI vendors serving Indian markets.

    AUDABILITY AND TRANSPARENCY OF AI SYSTEMS

    A related issue is auditability. Even if intermediaries are liable, regulators must be able to verify how AI systems operate. However, modern AI, especially complex Machine Learning (ML) and generative models, can be “black boxes.” If SEBI cannot inspect the model’s logic or data flows, apportioning entire liability to an intermediary could be problematic.

    Regulators worldwide emphasize that AI systems must be transparent and traceable. The OECD’s AI Principles state that actors should ensure “traceability … of datasets, processes and decisions made during the AI system lifecycle, to enable analysis of the AI system’s outputs and responses to inquiry”. Similarly, a UK financial‑services review emphasizes that auditability “refers to the ability of an AI system to be evaluated and assessed, an AI system should not be a ‘black box’”. In practical terms, auditability means maintaining logs of data inputs, model versions, decision rationales, and changes to algorithms, so that an independent reviewer can reconstruct how a given outcome was reached.

    SEBI’s 16C does not itself mandate audit trails or explain ability measures. It only requires the intermediary to take responsibility for the output. There is no explicit requirement for intermediaries (or their vendors) to preserve model logs or allow regulator inspection. Without such provisions, enforcement of output accuracy or compliance with laws is hampered. For example, if an AI-generated trade signal caused a regulatory breach, SEBI (or a forensic auditor) needs access to the system’s internals to determine why.

    Industry guidance suggests that firms should make auditability a contractual requirement when procuring AI. This could involve specifications on data retention, explainability reports, and independent testing. In the SEBI context, best practice would be for intermediaries to demand from AI providers any data necessary for SEBI audits.

    In essence, two main concerns arise that are closely interconnected. BIS notes that “limits to the explainability of certain complex AI models can result in risk management challenges, as well as lesser … supervisory insight into the build-up of systemic risks“. If AI outcomes cannot be easily audited, SEBI risks being unable to verify compliance, and lacking explicit audit provisions, regulators and investors may lack confidence in the system’s integrity. Additionally, without mandated audit provisions, firms may neglect this in vendor agreements, though the operational reality for firms should be to include audit clauses and perform due diligence. SEBI should consider guidance or rules requiring regulated entities to ensure audit rights over AI models, just as banks must under banking third-party rules.

    CONCLUSION

    SEBI’s insertion of Regulation 16C is a welcome and necessary move: it recognises that AI is now mission-critical in securities markets and rightly puts regulated entities on notice that AI outputs and data practices are not outside regulatory reach. Yet the regulation, as drafted, addresses only one side of a multi-party governance problem. Making intermediaries the default legal backstop without parallel obligations on vendors or explicit auditability requirements risks creating enforcement illusions, liability on paper that is difficult to verify or remediate in practice.

    To make the policy effective, SEBI should close the symmetry gap between users and suppliers and make AI systems practically observable. At a minimum this means clarifying the standard of liability, requiring intermediaries to retain model and data audit trails, and mandating contractual safeguards (audit rights, model-version logs, notification of material model changes, and portability requirements). If SEBI couples its clear allocation of responsibility with enforceable transparency and vendor-accountability mechanisms, it will have moved beyond a paper rule to a practical framework that preserves market integrity while enabling safe AI adoption.

  • Contractual ‘Non-Use’ Covenants: Plugging the Shadow-Trading Gap

    Contractual ‘Non-Use’ Covenants: Plugging the Shadow-Trading Gap

    Aditya Singh, THIRD- Year Student, Rajiv Gandhi National University of Law, Punjab

    INTRODUCTION

    The successful prosecution in Securities and Exchange Commission (SEC) v. Panuwat has introduced “shadow trading” as a novel enforcement concept for securities regulators. While India is yet to confront a concrete instance of shadow trading and its cognizance by Securities and Exchange Board of India (‘SEBI’), the U.S. experience highlights a potential lacuna in domestic regulations. Under SEBI’s current framework, insiders face civil liability only when trading in the stock of the very issuer, whose Unpublished Price-Sensitive Information (‘UPSI’) -they possess, and SEBI must prove both that the information “likely to materially affect” a particular security and that the insider used it with profit motive. The application of the shadow-trading principle domestically would therefore demand a framework which captures UPSI-driven trades beyond the issuer’s own stock, without becoming entangled in intricate economic-linkage or intent inquiries.

    This piece shows how India can strengthen its insider-trading regime by requiring all “designated persons” to pre-commit—via an expanded Code of Conduct—to refrain from using any UPSI for profit, and then empowering SEBI to invoke misappropriation principles against any breach. It begins by defining “shadow trading,” contrasts the classical and misappropriation theories, and then sets out the covenant-plus-notice proposal and its statutory foundation. The piece goes on to address proportionality and practical objections before concluding with implementation steps.


    THE SHADOW-TRADING PUZZLE

    Scholars have defined shadow trading as – when private information held by insiders can also be relevant for economically-linked firms and exploited to facilitate profitable trading in those firms. In SEC v. Panuwat, the U.S. District Court for Northern California confronted a novel fact pattern: Matthew Panuwat, a Senior Director at Medivation, received a confidential email revealing Pfizer’s imminent acquisition of Medivation. Rather than trading Medivation stock, he bought shares of Incyte—a competitor whose share price would rise on news of the Medivation deal.

    On the anvils of misappropriation theory, it was held that Panuwat’s breach of Medivation’s insider trading policy which expansively prohibited trading (while in possession of Medivation’s inside information) in not only Medivation’s securities, but arguably in any publicly traded securities in which Medivation’s inside information would give its insiders an investing edge. This fiduciary duty to Medivation—gave rise to insider-trading liability, even though he never traded Medivation securities. In rejecting Panuwat’s argument that liability requires trading in the issuer whose information is misused, the court emphasized that “misappropriation of confidential information for trading any economically linked security” falls within the scope of securities fraud under Rule 10b-5.

    The above discussion necessitates understanding 2 main principles behind insider trading. Under the classical model, insider-trading liability arises when an insider breaches a fiduciary duty by trading in the issuer’s own securities. By contrast, misappropriation theory treats any breach of duty to the source of confidential information as actionable; and India has consistently adhered to the classical approach.

    POSSIBLE IMPLEMENTATION IN INDIA THROUGH EXPANSIVE INTERPRETATION

    While the market-protection, investor-equity, and price-discovery rationales behind the prohibition of insider trading have been extensively examined by scholars, those same principles equally justify a similar regulatory approach to shadow trading, which is effectively an extension of insider trading itself.

    An interpretative reading of the SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘PIT Regulations’), can be used for the domestic application of shadow trading . Regulation 2(1)(n) defines UPSI as any information “directly or indirectly” relating to a company’s securities that is “likely to materially affect” their price. The qualifier “indirectly” can thus for instance bring within UPSI material non-public information about Company A that predictably moves Company B’s shares due to their economic linkage. Indian tribunals have already endorsed expansive readings (see FCRPL v SEBI).  Likewise, the definition of “Insider” under Regulation 2(1)(g) encapsulates anyone who “has access to” UPSI. Once that information is used to trade Company B’s securities, the trader effectively becomes an “insider” of Company B.

    However, relying solely on this interpretative route raises a host of practical and doctrinal difficulties. The next section examines the key obstacles that would complicate SEBI’s attempt to enforce shadow‐trading liability under the existing PIT framework.

    CHALLENGES TO IMPLEMENTATION

    Key implementation challenges are as follows:

    No clear test for “indirect” links: Using “indirectly” as a qualifier posits the problem that no benchmark exists to determine how tenuous an economic link between two entities may be. Is a 5 % revenue dependence enough? Does a 1% index weight qualify? Without clear criteria, every “indirect” claim becomes a bespoke debate over company correlations in the market.

    Heavy proof of price impact: To show UPSI would “likely materially affect” a non-source instrument, SEBI and insiders can each hire economists/experts to argue over whether UPSI about Company A truly “likely materially affects” Company B’s price. Disputes over timeframes, statistical tests, and which market indicators to use would turn every shadow-trading case into an endless technical showdown.

    Uncertain Profit-Motive Standards: Courts already grapple with an implicit profit-motive requirement that the PIT Regulations do not explicitly mandate—a problem Girjesh Shukla and Aditi Dehal discuss at length in their paper—adding an ambiguous intent element and uncertain evidentiary burden. In shadow‐trading cases, where insiders can spread trades across stocks, bonds or derivatives, this uncertainty multiplies and is compounded by the undefined “indirect” linkage test and the need for complex price impact proofs as outlined above.

    THE CONTRACTUAL “NON-USE” COVENANT AND IMPORT OF MISAPPROPRIATION THEORY

    The author argues here that, despite there being many ways through legislative action to solve the problem, the quickest and most effective solution to this problem would be through an import of Misappropriation theory.

    This can be done by leveraging SEBI’s existing requirement for written insider-trading codes. Regulation 9(1) of the PIT Regulations mandates that every listed company adopt a Code of Conduct for its “designated persons,” incorporating the minimum standards of Schedule B, with a designated Compliance Officer to administer it under Regulation 9(3).

    Building on this foundation, SEBI could introduce a requirement to each Code to include a “Non-Use of UPSI for Profit” covenant, under which every insider expressly agrees to (a) abstain from trading in any security or financial instrument while in possession of UPSI, except where a safe-harbour expressly applies, (b) accept that a formal “UPSI Notice” serves as conclusive proof of materiality, obviating the need for SEBI—or any adjudicator—to conduct fresh event studies or call expert testimony on price impact and (c) Safe-harbour provision: extent to which trades can be made, to be determined/formulated by SEBI from time to time. Section 30 of the SEBI Act, 1992 authorises the Board to make regulations to carry out the purposes of this Act, thereby making the addition procedurally valid as well. It is important to note here that this covenant works alongside SEBI’s trading-window rules under PIT Regulations: insiders must honour the temporary ban on trading whenever they hold UPSI.

    Time-bound blackouts are already standard: EU MAR Article 19 enforces a 30-day pre-results trading freeze, and India’s PIT Regulations enforces trade freeze during trading window closures. This covenant simply extends that familiar blackout to cover any UPSI capable of moving related securities to adapt to evolving loopholes in information asymmetry enforcement.

    Under this covenant structure, SEBI’s enforcement simplifies to three unambiguous steps:

    1. UPSI Certification: The company’s board or its designated UPSI Committee issues a written “UPSI Notice,” categorising the information under pre-defined, per se material events (financial results, M&A approvals, rating actions, major contracts, etc.).
    2. Duty Evidence: The insider’s signed covenant confirms a clear contractual duty not to trade on UPSI and to treat the Board’s certification as definitive.
    3. Trade Verification: Any trade in a covered instrument executed after the UPSI Notice automatically constitutes a breach of duty under misappropriation theory—SEBI needs only to show the notice, the covenant and the subsequent transaction.

    To avoid unduly rigid freezes, the covenant would operate as a rebuttable presumption: any trade executed after a UPSI Notice is prima facie violative unless the insider demonstrates (i) a bona-fide, UPSI-independent rationale or; (ii) eligibility under a defined safe-harbour.

    The import of the misappropriation theory will help execute this solution, that is to say, as soon as this covenant is breached it would be a breach of duty to the information’s source, triggering the insider trading regulation through the misappropriation principle.

    The misappropriation theory can be embedded in the PIT regulations through an amendment to the Regulation 4 by SEBI to read, in effect:

    4(1A). “No Insider shall misappropriate UPSI in breach of a contractual or fiduciary duty of confidentiality (including under any Company Code of Conduct) and trade on that information in any security or financial instrument.”

    The blanket restraint on trading engages Article 19(1)(g) of the Constitution but survives the four-part proportionality test articulated in Modern Dental College & Research Centre v State of MP and applied to financial regulation in Internet & Mobile Association of India v RBI.

    WHY NOT A FACTOR-BASED TEST?

    An alternative approach,  advocates for a similar factor based test to determine “abuse of dominant position” by antitrust regulators to be adopted to the PIT regulations to determine cognizable economic linkage. Under this model, SEBI would assess a mix of metrics to decide when Company A’s UPSI is “economically linked” enough to Company B’s securities to trigger liability.

    However, the author argues that the covenant-based approach would be more effective. Unlike a factor-based linkage regime, which demands constant recalibration of revenue shares, index weights and supply-chain ties; fuels expert-driven litigation over chosen metrics and look-back windows; produces unpredictable, case-by-case outcomes; imposes heavy database and pre-clearance burdens; and leaves insiders free to game the latest matrices—the covenant-plus-misappropriation model skips the entire exercise as relies on one clear rule: no trading on UPSI. SEBI’s job becomes simply to confirm three things: the insider signed the promise, the information was certified as UPSI, and a trade took place afterward. This single-step check delivers legal certainty, slashes compliance burdens, and sharply boosts deterrence without ever reopening the question of how “indirectly” two companies are linked.

    CONCLUSION

    The covenant-plus-misappropriation framework streamlines enforcement, preserves SEBI’s materiality standard, and leverages existing Code-of-Conduct machinery—allowing rapid roll-out without new legislation. However, its success depends on corporate buy-in and consistent compliance-monitoring: companies must integrate covenant execution into their governance processes, and SEBI will still need robust surveillance to detect breaches. Therefore, SEBI should publish a consultation paper and pilot the covenant with select large-cap companies
    to identify practical challenges before a market-wide rollout.

  • SEBI’s Rights Issue Amendments 2025: Streamlined Issues or Regulatory Labyrinth?

    SEBI’s Rights Issue Amendments 2025: Streamlined Issues or Regulatory Labyrinth?

    BY Devashish Bhattacharyya and Sadhika Gupta, FOURth- Year STUDENT AT Amity Law School, Noida
    Introduction

    A Rights Issue enables companies to offer existing shareholders the opportunity to purchase additional shares directly from the company at a price lower than the prevailing market rate. According to the Securities and Exchange Board of India (‘SEBI’) Annual Report, the number of companies that raised funds through rights issues declined from 73 in 2022–23 to over 67 in 2023–24. It was observed that numerous companies opted for alternative fundraising methods, as the existing Rights Issue process was considered protracted.

    SEBI, in exercise of the powers conferred under Section 11 and Section 11A of the SEBI Act, 1992, read with Regulation 299 of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 (‘SEBI ICDR Regulations’), notified amendments under the framework of Rights Issue on 8 March 2025. The purpose of these Amendments was to improve the efficacy of capital raising by companies, as outlined in the Consultation Paper published by SEBI on 20 August 2024.

    Key Amendments in Rights Issue

    I. No more fast track distinction

    Pursuant to the Rights Issue Amendment 2025, regulations for Rights Issue now apply to all issuers regardless of their size. There is no longer a distinction in the documentation required for Rights Issue as SEBI has removed fast track eligibility requirements.

    II. SEBI Drops DLoF Requirement

    Draft Letter of Offer (‘DLoF’) and Letter of Offer (‘LoF’) must contain material disclosures to allow applicants to make a well-informed decision.  Since the issuer is listed, much of the DLoF/LoF information is already public, causing unnecessary duplication. Examining the aforesaid concerns, SEBI, through its recent amendments discontinued the requirement of filing DLoF with SEBI for the issuance of its observation.

    III. Disclosure Requirements under LoF

    Pursuant to the Recent Rights Issue Amendments 2025 , now an issuer undertaking a Rights Issue is required to comply with the updated Part-B of Schedule VI of the SEBI ICDR Regulations, eliminating the differentiation of Part B and Part B-1 of Schedule VI.

    IV. Removal of Lead Managers

    SEBI has lifted the necessity for the appointment of Lead Managers, i.e., Merchant Bankers (‘MBs’), in a Rights Issue process under the Recent ICDR Amendments 2025. The SEBI ICDR Regulations fail to define timelines for the completion of the due diligence and filing of DLoF/ LoF resulting in a prolonged duration.

    These ancillary activities that MBs perform are generic in nature and can be performed by the Issuer, Market Infrastructure Institutions, and Registrar and Transfer Agents. Therefore, the elimination of MBs will have a significant impact in expediting the issue process.

    V. Allotment to Specific Investors

    SEBI has promoted the allocation of securities through the renouncement of Rights Entitlements (‘Res’) to specific investors outside the promoters and promoter group under the Rights Issue Amendments 2025.

    A promoter must renounce REs within the promoter group. The Rights Issue Amendment 2025 eases these restrictions on the renunciation of REs to promoters and promoter group, allowing issuers to onboard specific investors as shareholders by inserting Regulation 77B.

    VI. Revised timeline for Rights Issues

    SEBI published a circular on 11 March 2025 requiring the completion of a Rights Issue within 23 days. This revised timeline is specified vide Regulation 85.

    The new timeline has been explained below:

    ActivityTimelines
    1st board meeting for approval of rights issueT
    Notice for 2nd board meeting to fix record date, price, entitlement ratio, etc.T* (Subject to Board’s/ shareholders’ approval)
    Application by the issuer for seeking in-principle approval along with filing of DLoF with stock exchangesT+1
    Receipt of in-principle approval from Stock ExchangesT+3
    2nd Board meeting for fixing record date, price, entitlement ratio etc.T+4
    Filing of LoF with Stock Exchanges and SEBIT+5–T+7
    Record DateT+8
    Receipt of BENPOS on Record date (at the end of the day)T+8
    Credit of REsT+9
    Dispatch/Communication to the shareholders of LoFT+10
    Publication of advertisement for completion of dispatchT+11
    Publication of advertisement for disclosing details of specific investor(s)T+11
    Issue opening and commencement of trading in REs (Issue to be kept open for minimum 7 days as per Companies Act, 2013)T+14
    Validation of BidsT+14–T+20
    Closure of REs trading (3 working days prior to issue closure date)T+17
    Closure of off-market transfer of REsT+19
    Issue closureT+20

    *If the Issuer is making a rights issue of convertible debt instruments, the notice for the 2nd board meeting to fix record date, price, entitlement ratio, etc. will be issued on the approval date of the shareholders, with the timeline adjusted accordingly.

    Rights Issue Amendments 2025: What SEBI Forgot to Fix?

    I. Erosion of Shareholder Democracy

    A listed company shall uphold a minimum public shareholding (‘MPS’) of 25% under Rule 19A of the Securities Contracts (Regulation) Rules, 1957. Prior to the Rights Issue Amendments, promoters and promoter group had restrictions to renounce rights within the promoter group, except for adherence to MPS requirements. The recent amendments have lifted this restriction. The promoters may renounce their rights in both manners without restrictions to related parties, friendly investors, strategic allies, etc. Such a specific investor may seem to be a public shareholder on paper, yet they effectively align their voting and acts with the interests of promoters. This creates a grey zone indirectly enhancing the control of promoters without formally increasing their share ownership. Since, SEBI has relaxed restrictions on the renunciation of REs; it shall consider introducing a cap limit on promoter renunciations in favour of specific investors. This would help prevent over-concentration of control, thereby safeguarding the interests and voice of public shareholders.

    II. Circumventing Takeover Code Intent

    Promoters are permitted to renounce their REs in favour of specific investors and allow issuers to allot unsubscribed shares to them, as per the Rights Issue Amendments 2025. This creates a vulnerability in which a specific investor can acquire a substantial stake, potentially exceeding 25%, without triggering an open offer under Regulation 3(1) of the SEBI Takeover Regulations. The exemption, which typically pertains to Rights Issues, is not applicable in this instance due to the following reasons: the acquisition is not pro-rata, it is the result of renunciation by another party, and it is not equally accessible to all shareholders. Consequently, the spirit of the SEBI Takeover Regulations may be violated if control is transferred stealthily without providing public shareholders with an exit opportunity. The Rights Issue Amendments 2025 facilitate backdoor takeovers and undermine investor protection unless SEBI clarifies that such selective acquisitions elicit open offer obligations. SEBI may consider introducing  a ceiling for acquisitions through rights issue renunciations (for e.g., 5% maximum through RE-based allotment unless open offer is made). This would prevent backdoor takeover route.

    III. Unmasking Preferential Allotment under the Veil of Rights Issue

      Under the SEBI Rights Issue Amendments 2025, companies conducting a rights issue can allocate the REs to specific investors rather than existing shareholders, provided that their identities are disclosed at least two working days prior to the opening of the issue, thereby contravening Regulation 90(2) of the SEBI ICDR Regulations. Under the veil of a rights issue, issuers can circumvent the more stringent and transparent process of preferential issue under Chapter V of SEBI ICDR Regulations by directing REs to specific investors. Further, the SEBI ICDR Regulations lack a framework that mandates issuers to justify why such specific investors were chosen.

      Pricing formula and lock-in restrictions applicable to preferential issue under Regulations 164 and 167 of the SEBI ICDR Regulations, respectively, should be applied to all discretionary allotments of REs. Any such allotment exceeding a defined threshold should require prior approval through a special resolution as specified under Section 62(1)(c) of the Companies Act, 2013. In addition, the SEBI ICDR Regulations should set a framework obligating issuers to disclose the rationale for selecting any specific investor.

      IV. Mandatory Lock-in Period for Specific Investors

        While the SEBI’s proposed framework on allotment of specific investors allows promoters to renounce their REs in favour of specific investors, and issuers to allot unsubscribed portions of the rights issue to such investors, it fails to mandate a lock-in period for the shares so allotted. Short-term arbitrageurs or entities allied with insiders may exploit this lacuna by acquiring shares at a discount and subsequently selling them in the secondary market to realise quick profits without a long-term obligation to the issuer.

        To prevent speculative arbitrage and ensure regulatory parity with preferential allotment norms, it is suggested that SEBI implement a mandatory 6-12 months lock-in on equity shares allotted to selective investors through promoter renunciation or unsubscribed portions in rights issues.

        Conclusion

        The Rights Issue Amendments 2025 mark a progressive shift in streamlining the Rights Issue process, which ameliorates procedural challenges and compliance requirements. However, the amendments also open a Pandora’s box of regulatory blind spots. What was once a pro-rata, democratic mechanism of capital raising now runs the risk of becoming a “Preferential Allotment in Disguise.” The unrestricted renunciation of REs to specific investors, the absence of a mandatory lock-in, and the circumvention of the Takeover Code’s spirit collectively enable promoters to strengthen their control, potentially sidelining public shareholders and eroding market fairness. While SEBI has turbocharged the rights issue vehicle, it needs to make sure no one drives it off-road so that it remains equitable and transparent.