The Corporate & Commercial Law Society Blog, HNLU

Category: Securities Law

  • 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 VWAP, an indicator derived from price and volume that represents the average price of a security, is increasingly outdated.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.

      1. Inside the SEBI Intervention: Anatomy of Jane Street’s Derivatives Manipulation

        Inside the SEBI Intervention: Anatomy of Jane Street’s Derivatives Manipulation

        BY HIMANSHU YADAV, THIRD-YEAR STUDENT AT MNLU, CS.

        INTRODUCTION

        India is the world’s largest derivatives market, accounting for nearly 60% of the 7.3 billion equity derivatives traded globally in April, according to the Futures Industry Association. Amid growing concerns over market integrity and transparency, the Securities Exchange Board of India (‘SEBI’) took decisive action to protect the interests of investors. On July 3, 2025, the SEBI banned Jane Street from Indian markets for manipulating indices. The US-based global proprietary trading firm, Jane Street Group, operating in 45 countries with over 2,600 employees, is banned from trading until further notice. The order marks a significant regulatory action against market manipulation. Jane Street reportedly earned ₹36,502 crore through aggressive trading strategies, facing ₹4,843 crore in impounded unlawful gains.

        In April 2024, based on prima facie evidence, SEBI initiated an investigation against entities of Jane Street for alleged market abuse. The firm’s activities were found to have violated SEBI’s Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market Regulations, 2003 (‘PFUTP’). The further investigation by SEBI led to findings that on the weekly index options expiry dates, the firm was holding extremely large positions in cash equivalents in the Future and Options (‘F&O’) market. Based on prima facie evidence, the SEBI issued a caution letter to Jane Street and its related entities.

        The activity of Jane Street, mostly done on expiry dates, allowed the firm to influence the settlement outcomes. On expiry day, the closing price of an index (like Nifty or Bank Nifty) determines the final settlement value of all outstanding options and futures contracts. Even a small change in the index’s closing value can lead to huge profits or losses, especially when large positions are involved. Due to the large position held by Jane Street, it allowed the firm to easily conceive the motive.

        SEBI held Jane Street accountable for the two-phase strategy on January 17, 2024 intensive morning buying of Bank Nifty stocks/futures and simultaneous bearish options positioning, followed by aggressive afternoon sell-off to push the index lower at close. These trades directly influenced Bank Nifty’s settlement value, disproportionately benefiting Jane Street’s option positions at the expense of others.

        HOW JANE STREET’S JANUARY 17, 2024 TRADES MANIPULATED THE BANK NIFTY INDEX ON EXPIRY DAY

        The SEBI analysed the top 30 profitable trades of Jane Street, out of which 17 days were shortlisted for detailed analysis concerning derivative expiry day trades. The critical analysis of these days resulted in 15 days with the same deployed strategy for manipulation of indexes, which can also be termed as “Intraday Index Manipulation Strategy”.

        The manipulation strategy was deployed in such a manner that JS Group held a large position. In Patch-I, the net purchases of JS group were INR 4,370.03 crore in cash and future markets. As the purchases in the Index stocks in the morning were executed, it raised the prices of Bank Nifty constituents and the index. The purchases were so high, it made the index move upward. Now that the index moved upward, the put option would become cheaper and the call option would become expensive. This sudden surge gives a misleading signal of bullish interest in Bank Nifty. Based on this delusion of a bullish trend, the JS group purchased the put positions at a cheaper rate quietly. In Patch-II, the JS group sells all the futures positions that were purchased in Patch-I, as the volume bought and sold was so large that it resulted in pushing the index downward. Now, the premium of put prices rises, and there is a drop in the value of call options. This sole movement by JS group entities misled the retail investors, resulting in a loss booked by the retailers, as they were the single largest net buyer across Bank Nifty during this patch. This price upward movement reflects that the Jane Street group was creating an upward pressure during Patch-I.

        EXTENDED MARKING THE CLOSE STRATEGY ADOPTED BY JANE STREET

        On July 10, 2024, the entity was again held liable for “Extended Marking the Close” manipulation. The tactic used under this strategy is to aggressively give a sell or purchase order in the last trading session, upon which the final closing price of a security or index is reflected.  On the last day of trading (called expiry day), the final value of an index like Bank Nifty is very important because all option contracts are settled based on that final number, known as the closing price. Jane Street had placed bets that the market would fall (these are called short options positions, like buying puts or selling calls). If the market closed lower, they would make more money. So, in the last hour of trading on July 10, 2024, Jane Street sold a lot of stocks and index futures very quickly. This sudden selling pushed the Bank Nifty index down, even if only slightly. Even a small drop in the index at the end of the day can increase the value of their bets and bring in huge profits. This tactic is called “marking the close” It means influencing the final price at which the market closes to benefit your trades.

        THE LEGAL PERSPECTIVE ON THE STRATEGIES ADOPTED BY JS GROUP

        In trading, manipulating the market effectively creates and uses monopolistic power.  Order-Based Manipulation (‘OBM’) by high-frequency  traders have several negative effects, such as heightened price volatility in both frequency and size, unfair and monopolistic profit from manipulated investors’ losses and instability potential.

        The JS group and its entities are allegedly held liable for the Intra-day Index Manipulation strategy and Extended Marking the Close strategy. Regulations 3 and 4 of the SEBI PFUTP Regulations, 2003, prohibit any act that manipulates the price of securities or misleads investors. The JS Group was held liable under section 12A(a), (b) and(c) of the SEBI Act, 1992; regulations 3(a), (b), (c), (d), 4(1) and 4(2)(a) and (e) of the PFUTP Regulations, 2003.

        The SEBI, which acts as a market watchdog, is well within its jurisdiction to initiate criminal proceedings as well as impose penalties against entities of the JS group under Section 24 of the SEBI Act, 1992. Section 11 of the SEBI Act 1992 empowers SEBI “to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market.” Section 11B – Directions by SEBI gives SEBI quasi-judicial powers to issue directions “in the interest of investors or the securities market,” even in the absence of specific wrongdoing. It allows the regulator to: Restrain trading activities, modify operational practices, and Direct intermediaries and related entities to cease and desist from certain actions.

        Further, the defence of arbitrage cannot be validly exercised by Jane Street. The activity incurred by Jane Street cannot be termed as a traditional arbitrage practice, as arbitrage means taking advantage of existing price gaps naturally. Jane Street was not only finding pricing gaps and making fair profits rather Jane Street was also manipulating the pricing of some index options and futures to change the market in a way that isn’t normal arbitrage.

        Jane Street artificial price moves through high-frequency, manipulative trading to mislead the market.

        WAY FORWARD

        The Jane Street ‘Soft Close’ Strategy and SEBI’s delayed discovery of such transactions highlight the extent to which a system can lag in evaluating manipulative actions by traders at machine speed. It was actually in 2023, the U.S. Millennium, a prominent global hedge fund, filed a lawsuit against Jane Street after poaching its employees. These employees disclosed a previously covert Indian market strategy centred around artificially influencing expiry-day closing prices to benefit Jane Street’s derivatives positions, a tactic akin to a “soft close.” Only upon the filing of such a suit, the SEBI launched a full-fledged investigation, and the regulator analyzed the 3-year expiry trades of the JS Group. The SEBI’s long-term sustained efforts over the years to safeguard the retail investors from losing their money, at this juncture, a much more advanced regulatory scrutiny is required. Jane Street, being a high-frequency trader, the tactics deployed by such an entity shock the market and have a grave impact on the retail investors. High-frequency Trading (‘HFT’),  has the potential to bring the most worrisome instability to the market. The Flash Crash 2010, which was triggered by automated selling orders worsened by HFT, is one of the most severe events that disrupted market stability. Going forward, SEBI must adopt a more agile and tech-driven oversight model, capable of detecting unusual volumes, timing-based trade clusters, and order book imbalances in real time. It should also consider making a special HFT Surveillance Unit that works with AI-powered systems. This isn’t to replace human judgment, but to help with pattern recognition and rapidly identify anything that doesn’t seem right.

        CONCLUSION

        The regulator recently released statistics showing that the number of retail investors in the derivatives market is close to 10 million. They lost 1.05 trillion rupees ($11.6 billion, £8.6 billion) in FY25, compared to 750 billion rupees in FY24. Last year, the average loss for a retail investor was 110,069 rupees ($1,283; £958). Due to such manipulative trading activities, it is the retail derivative traders who face a tight corner situation and end up losing their money.  SEBI, in its report published on July 7, 2025, highlights that 91% of retail investors lose their money in the Equity Derivative Segment (‘EDS’) The regulatory check and stricter analysis on the trading session are the need of the hour. But on the contrary, cracking down on the practice of such a global level player is what SEBI should be praised for. More dedicated and faster technology should be adopted by SEBI to carry out such an investigation in a swifter manner. 

      2. From Approval To Autonomy: SEBI’s New Framework For Stock Brokers In GIFT-IFSC

        From Approval To Autonomy: SEBI’s New Framework For Stock Brokers In GIFT-IFSC

        BY Vishvajeet Rastogi, SECOND-YEAR STUDENT AT CNLU, PATNA
        INTRODUCTION

        The Gujarat International Finance Tec-City – International Financial Services Centre (‘GIFT-IFSC’) is India’s ambitious bid to develop a globally competitive financial centre catering to international markets and investors. A major regulator of securities markets in India, the Securities and Exchange Board of India (‘SEBI’) has inducted significant regulatory reform to ease the operational environment for stock brokers who seek to operate in GIFT-IFSC.

        On May 2, 2025, SEBI released a circular titled “Measure for Ease of Doing Business – Facilitation to SEBI registered Stock Brokers to undertake securities market related activities in Gujarat International Finance Tech-city – International Financial Services Centre (GIFT-IFSC) under a Separate Business Unit” (‘SEBI Circular’) abolishing pre-approval for stock brokers for conducting securities market activities in GIFT-IFSC and enabling them to conduct such activities through a Separate Business Unit (‘SBU’) of their existing structure. This transition from a strict approval regime approach to an autonomous regime is likely to promote ease of doing business and support the internationalization of India’s financial services.

        This article assesses the salient provisions of the SEBI Circular, discusses its regulatory and legal implications, and reviews the opportunities and issues it throws for stock brokers’ foray into the GIFT-IFSC.

        KEY CHANGES

        The SEBI Circular brings in major reforms in order to ease the functioning of stock brokers in the GIFT-IFSC. It does away with the mandatory condition under which stock brokers have to take SEBI’s advance approval for starting securities market activities in GIFT-IFSC. The reform eases the entrance process and enables brokers to get started sooner with less procedural complexity.

        `In place of the previous approval mechanism, stockbrokers can now conduct activities through an SBU within their existing organizational structure. An SBU can be created in the form of an exclusive branch or division, providing more flexibility in organizing the business of brokers. Although the SEBI Circular encourages the utilization of SBUs, it also leaves the choice for stockbrokers to carry on through subsidiaries or through joint ventures if desired. Similarly, brokers who have already established subsidiaries or joint ventures in the GIFT-IFSC can choose to wind them down and bring their activities under an SBU if it aligns with their business strategy.

        The SEBI Circular also defines regulatory contours by bringing the operations of the SBU under the ambit of the International Financial Services Centres Authority (‘IFSCA’). That is to say that policy issues, risk management, grievance redressal, and enforcement in relation to the SBU will be regulated by IFSCA rules, not SEBI. SEBI’s jurisdiction will continue to extend only to Indian securities market activities. For the purposes of clear demarcation between the two activities, the SEBI Circular requires activities of the SBU to be segregated from the stockbrokers’ domestic activities at arm’s length. This requires maintaining separate accounts and operational autonomy to prevent regulatory overlap.

        Financial segregation has also come with the condition that the net worth of the SBU must be held separate from the stock broking entity dealing in the Indian market. The net worth of the stockbroker for Indian operations will be computed excluding the finances of the SBU, and the SBU itself will have to fulfil capital adequacy norms as per IFSCA’s regulatory guidelines.

        Finally, the SEBI Circular makes it clear that the investors dealing with the SBU will not be subject to SEBI’s grievance redressal platforms like the SEBI’s Complaints Redress System (‘SCORES’) or the Investor Protection Fund operated by the stock exchanges. Their protections and redressal of grievances will instead come under the framework of the regulation of IFSCA, strengthening the operational autonomy of the unit in the GIFT-IFSC.

        Together, these amendments constitute a policy shift towards regulatory clarity and increased operational autonomy with well-codified governance norms to allow stock brokers to successfully increase their presence in international financial services.

        Regulatory Rationale and Objective

          This SEBI Circular outlines the new strategy to promote operational efficiency and regulatory clarity for the stock brokers in the GIFT-IFSC. Removal of the requirement of prior approval from SEBI enhances the regulatory ease of doing business by reducing barriers to entry for brokers to conduct cross-border securities activities. This reform aligns with the larger vision of transforming the GIFT-IFSC into an internationally competitive financial centre at the global stage with international capital and global-level market players.

          The setting up of SBUs in existing stock-broking establishments brings about an objective definitional and regulatory distinction between transactions in domestic business and activities under the jurisdiction of GIFT-IFSC. Segregation does away with regulatory overlap, demarcates the areas of oversight between SEBI and the IFSCA, and protects against conflict of interest.

          Segregation requirements for finances as well as separate net worth requirements and accounting methods further specify that risk and obligation are properly segmented. These requirements increase transparency and the integrity of domestic and foreign market segments.

          In addition to this, the SEBI Circular specifically defines the extent of investor protection and vests grievance redressal and resolution of disputes in the jurisdiction of IFSCA and thereby strengthens jurisdictional certainty.

          Legal and Compliance Implication

          This SEBI Circular represents an important jurisdiction shift for stock brokers who are present in the GIFT-IFSC from SEBI to the IFSCA for business transacted through SBUs. This requires strict adherence to the dual regime of regulation where domestic business continues to be under SEBI’s jurisdiction while SBUs in the GIFT-IFSC operate in terms of IFSCA’s separate regulatory regime.

          The keystone of such a structure is the rigorous ring-fencing requirement with financial, operational, and legal separation between domestic and GIFT-IFSC activities of the stock broker. Financial ring-fencing implies separate accounts maintained by the SBU and separate net worth standards as governed by IFSCA to have clear delineation of assets and liabilities. Operationally, the SEBI Circular stipulates separation of SBUs through arm’s-length management to avoid inappropriately influencing control and mixing of resources. Legally too, separation enforces jurisdiction-related divisions, reduces regulatory arbitrage, and limits system risk.

          This regulatory framework replicates international best practices in influential global financial hubs like the Dubai International Financial Centre (‘DIFC’) and Singapore Monetary Authority-regulated centres. These jurisdictions all prioritize unambiguous jurisdictional demarcation, independence in operations of international financial institutions as well as strong investor protection systems, which support integrity in the marketplace and investor confidence.

          Emulating such principles, SEBI’s SEBI Circular establishes GIFT-IFSC as a compliant and competitive global hub, weighing deregulation against essential safeguards to preserve financial stability and regulatory oversight.

          Opportunities and Challenges for Stock Brokers

          These new guidelines offer stock brokers some strategic options. Most significant among them is greater operational independence, enabling brokers to carry out international securities activities in the GIFT-IFSC with the help of SBUs without obtaining SEBI approval in advance. This independence allows for quicker entry into the market, where brokers can leverage new opportunities in the international markets more easily. Also, carrying out business in the GIFT-IFSC exposes brokers to more international customers and varied financial products, largely opening them up to an extended marketplace and new revenue streams.

          But these advantages carry built-in difficulties. Dual regulatory compliances present a nuanced challenge in that stock brokers have to manage the regulatory conditions of SEBI for their Indian operations as well as IFSCA for their activities in the GIFT-IFSC. This duplicity requires evolved compliance structures and internal controls for maintaining conformity with separate law regimes. In addition, the investor dealing with SBUs will not be able to enjoy SEBI’s prescribed grievance redressals like SCORES, which can potentially create investor protection and redress concerns.

          Internally, stock brokers also need to have strict ring-fencing of resources and finances to have clean separation of both domestic and international operations. Proper management of the segregation is important in order not to have operational overlaps, to protect financial integrity, and to guard against commingling of assets and liabilities. While the SEBI Circular paves the way for internationalization and growth, it also necessitates enhancing the risk management capacities and the regulatory infrastructure of the stock brokers.

          Conclusion and Way Forward

          The SEBI Circular is a forward-looking step towards increasing the regulatory independence of stock brokers in GIFT-IFSC by doing away with previous approval systems and permitting activities in terms of SBUs. The reform not just makes it easier to enter the market but also strengthens India’s vision of promoting GIFT-IFSC as an international financial centre powered by well-defined regulatory lines between SEBI and IFSCA.

          While it introduces new opportunities, it also poses issues like managing the dual regulatory compliances and lack of SEBI’s grievance redressals for investors transacting with SBUs. The author suggests that the stock brokers need to pre-emptively enhance their systems of compliance and risk management in order to be able to manage such complexity. In addition, having closer collaboration between SEBI and IFSCA on regulatory harmonization, particularly investor protection, would increase the confidence of the markets. Proper communication to the investor about the grievance mechanism applicable under IFSCA is also needed to inculcate trust and transparency in the new ecosystem. Using these steps, stock brokers can reap the maximum advantage of this regulatory change and promote sustained development and international integration of India’s financial markets.

        1. Navigating RBI’s Revised Framework for Downstream Investments by FOCCs

          Navigating RBI’s Revised Framework for Downstream Investments by FOCCs

          BY PURNIMA RATHI, FOURTH-YEAR STUDENT AT SYBIOSIS LAW SCHOOL, PUNE

          On January 20, 2025, the Reserve Bank of India (‘RBI’) released a comprehensive revision of the Master Direction on Foreign Investment in India (‘Master Direction’). The update represents a landmark regulatory revision, particularly for Foreign Owned and/or Controlled Companies (‘FOCCs’) pursuing downstream investments. The updated Master Direction has attempted to resolve a number of ambiguities, align regulatory treatment with the Consolidated Foreign Direct Investment (‘FDI’) Policy, 2020 and the Foreign Exchange (Non- Debt_ Instruments) Rules, 2019 (‘NDI Rules’) and thus, stream lining the compliance requirements for both investors and companies.

          The blog shall analyse key regulatory changes made through the Master Direction and its effects on downstream investments made by FOCCs. This analysis is made by comparing the recent update to the earlier versions of the Master Direction.

          WHAT ARE FOCCs AND DOWNSTREAM INVESTMENTS ?

          To understand the significance of the Master Direction, it is first necessary to understand the meaning and the context in which FOCCs and downstream investments operate. A FOCC is defined in the Foreign Exchange Management Act, 1999 (‘FEMA’) and the NDI Rules as an Indian entity that is:

          •  Owned by non-resident entities (more than 50% shareholding); or

          •  Controlled by non-residents (in the sense of a non-resident entity or person is empowered to appoint a majority of directors or is empowered to influence decisions which are deemed to be strategic business decisions).

          Downstream investment is defined collectively, in this context, as an investment in capital instruments (equity shares, compulsorily convertible preference shares, etc.) made by said FOCC in another Indian entity. It is essentially an investment made by a company already partly or wholly owned by foreign investors, into another Indian entity.

          Analysis of Key Changes

          The updated Master Direction has important amendments which are aimed at reducing compliance complexities, providing legal clarity, and allowing flexibility with transaction structures. Analysed below are the key revisions from the Master Direction:

          1. Consistency with General FDI Norms

          The most important change is the explicit consistency of downstream investments by FOCCs with general FDI norms. Downstream investments are treated as a different investment category and require separate compliance obligations.  However, now it requires that FOCCs must comply with the same entry routes (automatic or government), sectoral restrictions, price restrictions, and reporting requirements as any direct foreign investment investor. The guiding principle of “what cannot be done directly, shall not be done indirectly” has the intention to place downstream investments on an equal level with FDI.

          This is particularly advantageous in sectors where the automatic route is available and removes unnecessary bureaucratic hurdles. For example, if a FOCC is investing in an Indian startup that provides services to the technology sector, they may now invest and treat it the same as a direct foreign investment provided that the sector cap and conditions are adhered to.

          2. Share Swaps Approved

          Another important change is the recognition of share swap transactions by FOCCs. Before the recent change, it was unclear whether share swaps were permitted for FOCCs at all, and companies tended to either seek informal clarifications or err on the side of caution.

          The updated direction explicitly provides that FOCCs can issue or acquire shares in lieu of shares of another company (either Indian or foreign) subject to pricing guidelines and sectoral limitations. This is an important facilitative measure for cross-border mergers, joint ventures, and acquisition deals where share swaps are the predominant form of consideration.

          This reform enhances transactional flexibility, encourages capital growth and will reduce friction in structuring deals between Indian FOCCs and foreign entities, thereby promoting greater integration with global capital market. 

          3. Permissibility of Deferred Consideration

          The RBI now formally recognizes deferred consideration structures such as milestone-triggered payments, escrows, or holdbacks. However, they are still governed by the ’18-25 Rule’, which allows 25% of total consideration to be deferred, which must be paid within 18 months of execution of the agreement. This represents a pragmatic acceptance of the commercial acknowledgment that not all transactions are settled upon completion.

          RBI shall have to give additional clarifications as the Master Direction still does not specify the extent to which provisions are applicable to downstream investments in comparison to the FDIs.

          4. Limitations on the Utilisation of Domestic Borrowings

          In an effort to safeguard the integrity of foreign investment channels and to deter round-tripping, or indirect foreign investment through Indian funds, the RBI continues to restrict FOCCs from utilising domestic borrowings for downstream investment. This implies that FOCCs can only downstream invest with foreign funds introduced through equity investments or through internal accruals. The restriction aims that downstream investments are made through genuine foreign capital introduced in the country through abroad, rather than through domestic borrowings.

          Practically this means that if the FOCC receives a USD 5 million injection from the parent organization abroad, then they can utilize such funds for downstream investment, but not if they were to borrow the same amount in INR through a loan from an Indian financial institution. This maintains investor confidence and enhances transparency in capital flows.

          5. Modified Pricing Guidelines for Transactions

          The revised framework reiterated pricing guidelines in accordance with the different types of company:

          •  For listed companies: The pricing must comply with the Securities and Exchange Board of India (‘SEBI’) guidelines,

          •  By unlisted companies: The price cannot be lower than the fair market value determined by internationally accepted pricing methodologies.

          Additionally, in all rights issues involving non-residents, if the allotment is greater than the investor’s allotted entitlement, price has to comply with these guidelines. In this case, the rights issue would protect minority shareholders and mitigate the dilution that would occur by no listings from unlisted companies.

          6. Reporting and Compliance via Form DI

          An excellent innovation is the new compliance requirement of filing on Form DI within 30 days of the date an Indian company becomes a FOCC or makes a downstream investment. This will assist the RBI in maintaining regulatory visibility and better tracking of foreign investment in India. Companies will have to implement stricter internal compliance mechanisms and timely reporting as failure to do so could result in penalties under FEMA. The RBI’s emphasis on transparency reflects a continuing trend toward digitization and live reporting of capital flows by Indian regulators.

          7. Clearer Application of the Reporting Forms (FC-GPR, FC-TRS, DI)

          In addition, the RBI has further clarified the documents to use the following forms:

          • Form FC-GPR: is for reporting the issuance of shares by an Indian entity to a FOCC. • Form FC-TRS: is for any transfer of shares involving FOCC as the non-resident and between residents and non-residents.

          • Form DI: is for downstream investments made by FOCC into any other Indian entity.

          This clarity will help eliminate confusion around these procedures and synchronize the reporting regime of the RBI with the reporting systems of the Ministry of Corporate Affairs (‘MCA’) and SEBI. FOCC should implement strong internal controls to monitor and track when these filings will become due.

          8. Classification of FOCCs based on Share Movement

          The new regulations will also provide clarity on how the status of a FOCC will influence a regulatory classification. Specifically:

          •  if a FOCC receives shares from an Indian entity, it will be treated as a ‘Person Resident Outside India’; and

          •  if it transfers shares to an Indian entity, it will be deemed to be domestic in nature but needs to comply with the repatriation norms.

          These classifications have an important bearing on the route and pricing of transactions especially in exits or complex internal restructuring transactions. Through these classifications, RBI intends to clarify the confusion from mischaracterizing transactions and reducing risk for the investors in the event of any enforcement action.

          Conclusion

          The amendments to the Master Direction represent a measured and thoughtful change in the foreign investment regulatory framework in India. The RBI has set the tone in favour of enabling policy predictability and investor confidence by clarifying FOCC structures’ downstream investment norms to be consistent with FDI, allowing for more sophisticated structures like share-swap transactions and deferred consideration, and imposing effective operational compliance requirements. Going forward, these refinements have set the foundation for deeper capital integration and increased investor trust in India’s FDI regime.

        2. Bridging Borders: SCRR Amendment 2024 and India’s Gateway to Global Capital

          Bridging Borders: SCRR Amendment 2024 and India’s Gateway to Global Capital

          BY MANAV PAMNANI AND SHOURYA SHARMA, THIRD-YEAR STUDENTS AT NALSAR HYDERABAD AND JINDAL GLOBAL LAW SCHOOL, SONIPAT

          INTRODUCTION

          The Department of Economic Affairs, Ministry of Finance (‘MoF’), has recently amended the Securities Contracts Regulation Rules, 1957 (‘SCRR’). This Amendment attempts to make it easier for Indian public companies to list their equity shares within International Financial Service Centres (‘IFSCs’) such as the Gujarat International Finance Tec-City (‘GIFT City’), under the framework of Direct Listing of Equity Shares Scheme and the Companies (Listing of Equity Shares in Permissible Jurisdictions) Rules, 2024. One of the significant changes under the Amendment is the reduction of minimum public shareholding thresholds from 25% to 10% for listing made in IFSCs, making international listings more accessible, especially for start-ups and technology-driven enterprises. This move mirrors the government’s broader commitment towards placing India among the world’s competitive investment-friendly destinations and financial hives. This article attempts to analyse the legal framework of this Amendment, alongside exploring its practical implications for the Indian financial landscape.

          REGULATORY FOUNDATIONS AND LEGISLATIVE DEVELOPMENTS

          The SCRR was notified by the Central Government to help achieve the objectives of the Securities Contracts (Regulation) Act, 1956 (‘SCRA’) effectively. The preamble clause of the SCRA states that the objective of the statute is to regulate undesirable transactions in securities by overseeing the dealing in securities and monitoring other ancillary business activities. The Amendment aligns the SCRR with this overarching objective. The legal foundation of this Amendment lies in section 30(h)(A) of the SCRA, which gives the Central Government the power to introduce rules stipulating the specific requirements that companies have to follow to get their securities listed on any stock exchange. The word “any” here has to be given a wide interpretation to align with the framers’ intention which was to bestow supervisory and regulatory authority upon the Government to foster the maintenance of a reliable and efficient securities business framework. Therefore, the regulation of listing of securities on IFSCs squarely falls within the competence and authority of the Government.

          Earlier in 2024, the MoF, through a notification amending the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (‘NDI Rules’), explicitly enabled the listing of securities of public Indian companies on international exchanges recognized in Schedule XI of NDI Rules. This, termed as the Direct Listing Scheme, governed several intricacies such as permissible investors, compliance with sectoral caps, regulations regarding prohibited sectors, and pricing guidelines. Simultaneously, the Ministry of Corporate Affairs (‘MCA’) had also introduced the Companies (Listing of Equity Shares in Permissible Jurisdictions) Rules, 2024 by virtue of its power under section 23(3) r/w section 469 of the Companies Act, 2013 to regulate the entities that can list and jurisdictions where the listing can take place.

          However, both these enactments, along with the Companies (Amendment) Act, 2020 which prescribed certain similar requirements pertaining to listing in international exchanges, served as mere regulatory tools rather than efficient operational guidelines. They prescribed an overarching framework that has to be adhered to during such listing and discussed the eligibility criteria but failed to provide or clarify points regarding specific thresholds and other operational mechanisms specified under the SCRR.

          LEGAL ANALYSIS

          The recent Amendment fills the void identified above by introducing a few but impactful changes in the securities listing regime, thus reflecting its commitment to fostering a globally competitive and investor-friendly framework while aligning domestic practices with international standards. These international standards include the minimum public float thresholds in jurisdictions like Singapore, the International Organisation of Securities Commissions’ principles of efficiency, transparency and fairness in cross-border listings, the securities regime in the Dubai International Financial Centre, the Financial Action Task Force’s Anti-Money Laundering /Combating the Financing of Terrorism recommendations, and the pricing mechanisms and sectoral compliance thresholds present in the European Union Capital Markets Union and the United States Securities and Exchange Commission Regulations.

          The widespread benefits accruing to investors and other stakeholders through the effectuation of this Amendment not only covers the inflow of higher foreign capital and a more efficient and dynamic securities framework but also extends to direct tax advantages. section 10(4D) of the Income Tax Act, 1961 provides a significant tax exemption on income arising from transactions conducted on recognized stock exchanges within IFSCs, including GIFT-IFSC. This incentivizes participation, reduces transactional costs for investors, and creates a persuasive financial rationale for businesses contemplating listing on foreign exchanges. It is also in line with the numerous Double Taxation Avoidance Agreements (‘DTAAs’) entered into by India to prevent non-resident Indians from being taxed twice, in both, India and their country of residence, thus significantly alleviating their tax burden. Additionally, the Securities and Exchange Board of India (‘SEBI’) has considerable control over listing and transactions in the IFSC, as is evident from the scheme of the SEBI (International Financial Services Centres) Guidelines, 2015. This reiterates the commitment of SEBI to safeguard the interests of investors and other stakeholders, alongside maintaining an effective securities landscape.

          An important caveat to consider with respect to this Amendment is that the reduction of thresholds from 25% to 10% extends only to listings made in the IFSC. This implies that as per domestic subscription requirements, the extent of public shareholding is still fixed at the previous 25%. This distinction creates a dual regulatory framework, potentially leading to compliance complexities for companies seeking listings in both domestic and IFSC exchanges. This may limit the seamless integration of domestic and international listing strategies, requiring companies to carefully navigate the differing regulatory requirements to maximize benefits and avoid potential conflicts. Although the text of the Amendment alters Rule 19(2)(b) of SCRR, which covers domestic listings, the primary intention of the legislature was to effect changes in the IFSC listing framework. This ambiguity necessitates a clarification, which will most likely uphold uniformity by stating that the reduction also extends to listings made on domestic stock exchanges by companies wishing to obtain listing on permitted international exchanges. The importance of such uniformity and standardization is also evident from the two definitions (IFSC and International Financial Services Centre Authority (‘IFSCA’) that have been introduced which do not impose their own requirements but simply suggest an alignment with the definitions incorporated in existing legislations. The Amendment while defining these terms states that an IFSC means an IFSC as defined under section 3(1)(g) of the IFSCA Act, 2019 and an IFSCA means the Authority established under section 4(1) of the IFSCA Act. This significantly reduces complexity and fosters consistency and clarity in the navigation of relevant legalities pertaining to share listing and other compliance requirements.

          PRACTICAL IMPLICATIONS

          This Amendment marks a shift in India’s financial regulatory regime by redefining the entry of companies into global capital markets. In its amplitude, it is not an ordinary technical change but a strategic recalibration of structures of investment. The reduction of public shareholding thresholds from 25% to 10% for foreign listings creates an easier route for start-ups, emerging businesses, and small, mid and large capitalisation companies to access global capital, a phenomenon that is already experiencing an upward trajectory. For example, the gross foreign portfolio investment (‘FPI’) in India was massively estimated at around US$ 41.6 billion in the year 2023-24, which is bound to increase manifold due to this Amendment. The business insights from  companies like Reliance Industries Limited and HDFC Bank Limited, among others, reflect clear examples of corporations successfully accessing large amounts of global capital due to international financial listing. This consequentially places Indian business enterprises in a robust position as reduction in public shareholding compliance requirements is an attractive proposition for investors.

          Interestingly, the lowering of the barriers to international capital access also provides the same growth opportunities to a wider spectrum of sector-specific enterprises, including deep technology, renewable energy and biotechnology. These are crucial sectors requiring large investments. Furthermore, this change may even decentralise India’s economic hubs by allowing international capital to penetrate smaller companies located in tier-2 and tier-3 cities. As an offshoot, regions other than the economically prospering metro cities would witness increased industrialisation and employment generation since more local companies would gain access to foreign investments.

          A research conducted by the International Monetary Fund on emerging markets provides a broader context in which this Amendment fits into a global trend, towards more accessible and flexible capital markets. It represents the benefits of India’s strategic approach to positioning itself as an attractive destination for global investors. Indian firms may be better positioned to raise capital in foreign currencies with a more straightforward pathway to listing abroad while hedge-protecting firms reliant on imports for raw materials or technology from the capricious market exchange rate.

          Contrary to the apprehensions of capital outflow, this Amendment may benefit India’s domestic markets since an international listing enhances reputation of a company, provides international exposure, and encourages investor confidence. Companies will attract a larger pool of sophisticated retail and institutional investors, leading to increased credibility and brand value through such listings. This will enhance liquidity, valuation, expertise, innovation and overall market efficiency.

          However, the opportunity comes with nuanced challenges, particularly for companies that aim to be listed on both domestic and international exchanges. In a dual-listed company structure, the requirement for multi-jurisdictional shareholder and board approvals introduces complexities to decision-making and company operations. This substantially increases audit and compliance costs, necessitating detailed planning and high investments in financial and legal advisory services.

          CONCLUDING REMARKS

          This Amendment is more than a routine regulatory change because it aims to manifest India as a global financial hub by significantly relaxing listing requirements in the IFSC. It serves as a forward-looking measure with the objective of modernising the Indian securities law landscape and aligning it with international best practices by furthering a more inclusive access to global capital markets. With the introduction of this Amendment, the legislature has taken a significant step in the right direction and it will be interesting to observe the future course this Amendment adopts, particularly concerning its effective implementation.