The Corporate & Commercial Law Society Blog, HNLU

Category: Securities Law

  • 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.

  • Examining the Flaws in SEBI’s Proposed AI & ML Regulations

    Examining the Flaws in SEBI’s Proposed AI & ML Regulations

    BY SACHIN DUBEY AND AJITESH SRIVASTAVA, THIRD-YEAR STUDENTS AT NLU, ODISHA AND LLOYD LAW COLLEGE

    INTRODUCTION

    Artificial Intelligence (‘AI’) has become an integral part of our daily lives, influencing everything from smart home technology to cutting-edge medical diagnostics. However, it’s most profound influence is perhaps in transforming the landscape of securities market. AI has advanced the efficiency of investor services and compliance operations. This integration empowers stakeholders to make well-informed decisions, playing a pivotal role in market analysis, stock selection, investment planning, and portfolio management for their chosen securities.

    However, despite the advantages, AI poses risks such as algorithmic bias from biased data, lack of transparency in models, cybersecurity threats, and ethical concerns like job displacement and misuse, highlighting the need for strong regulatory oversight. Therefore, Securities and Exchange Board of India (‘SEBI’) vide consultation paper dated 13thNovember, 2024 proposed amendments holding regulated entities (‘REs’) accountable for the use of AI and machine learning (‘ML’) tools.  

    These amendments enable SEBI to take action in the event of any shortcomings in the use of AI/ML systems. SEBI emphasises that these entities are required to safeguard data privacy, be accountable for actions derived from AI outputs, and fulfil their fiduciary responsibility towards investor data, while ensuring compliance with applicable laws.

    In this article, the author emphasises the necessity of the proposed amendments while simultaneously highlighting their potential drawbacks. 

    NEED OF THE PROPOSED AMENDMENTS

    The need for proposing amendments holding REs accountable for AI/ML usage has arisen due to various risks associated with its usage. 

    AI relies heavily on customer inputs and datasets fed into them for arriving at its output. The problem is that humans have found it very difficult to understand or explain how AI arrives at its output. This is widely referred to as “black box problem”. In designing machine learning algorithms, programmers set the goals the algorithm needs to achieve but do not prescribe the exact steps it should follow to solve the problem. Instead, the algorithm creates its own model by learning dynamically from the given data, analysing inputs, and integrating new information to address the problem. This opacity surrounding explainibility of AI outputs raises concerns about accountability for AI-generated outcomes within the legal field.

    Further, if just one element in a dataset changes, it can cause the AI to learn and process information differently, potentially leading to outcomes that deviate from the intended use case. Data may contain inherent biases that reinforce flawed decision-making or include inaccuracies that lead the algorithm to underestimate the probability of rare yet significant events. This may lead to jeopardising the interests of customers and promoting discriminatory user biases. 

    Additionally, relying on large datasets for AI functionality poses considerable risks to privacy and confidentiality. AI models may sometimes be trained on datasets containing customers’ private information or insider data. In such situations, it becomes crucial to establish accountability for breaches of privacy and confidentiality. 

    SHORTCOMINGS

    SEBI’s proposal to amend regulations and assign responsibility for the use of AI and machine learning by REs is well-intentioned. However, it could create challenges for both regulated entities and industry players, potentially slowing down the adoption of AI and stifling innovation.

    a. Firstly, SEBI’s proposal to assign responsibility for AI usage adopts a uniform, one-size-fits-all regulatory approach, which may ultimately hinder technological innovation. Effective AI regulation requires greater flexibility, favouring a risk-based framework. This approach classifies AI systems based on their risk levels and applies tailored regulatory measures according to the associated risks. A notable example is the European Union’s AI Act which adopts a proportionate, risk-based approach to AI regulation. This framework introduces a graduated system of requirements and obligations based on the level of risk an AI system poses to health, safety, and fundamental rights. The Act classifies risks into four distinct categories- unacceptable risks, high risks, limited risks and minimal risks. As per the classification, certain AI practices which come under the category of unacceptable risks are completely prohibited while others have been allowed to continue with obligations imposed upon them to ensure transparency.  

    b. Secondly, while SEBI’s regulatory oversight of AI usage by REs is crucial for protecting investor interests, it is equally important to establish an internal management body to oversee the adoption and implementation of AI within these entities. SEBI could draw insights from the International Organization of Securities Commission’s (‘IOSCO’) final report on AI and machine learning in market intermediaries and asset management. The report recommends that regulated entities designate senior management to oversee AI/ML development, deployment, monitoring, and controls. It also advocates for a documented governance framework with clear accountability and assigning a qualified senior individual or team to approve initial deployments and major updates, potentially aligning this role with existing technology or data oversight.

    c. Thirdly, SEBI has entirely placed the responsibility for AI and machine learning usage on REs, neglecting to define the accountability of external stakeholders or third-party providers. REs significantly rely on third parties for AI/ML technologies to ensure smooth operations. Hence, it is vital to clearly outline the responsibilities of these third parties within the AI value chain. 

    d. Fourthly, the Asia Securities Industry & Financial Markets Association (‘ASIFMA’) raised a concern that financial institutions should not be held responsible for client decisions based on AI-generated outputs. It contends that it would be unjustified to hold institutions liable when an AI tool provides precise information, but the client subsequently makes an independent decision. This viewpoint goes against SEBI’s proposed amendments which seemingly endorses broader institutional liability.  

    e. Lastly, SEBI’s proposed amendments and existing regulations remain silent on the standards or requirements for the data sets (input data) utilized by AI/ML systems to carry out their functions. While the amendments imply that REs must ensure AI models are trained using data sets that either do not require consent (e.g., publicly available data) or have obtained appropriate consent, particularly under the Digital Personal Data Protection Act, 2023 (DPDPA), SEBI could have more explicitly define the standards for high-quality data sets suitable for AI/ML functionality particularly crucial when the data protection rules have not seen the light of the day.

    CONCLUSION

    While it is commendable that SEBI, recognizing the growing use of AI/ML tools in the financial sector, proposed amendments to hold REs accountable for their usage, it should have given due consideration to the factors mentioned above. Because it is vital to ensure that any policy introduced is crafted carefully in a way that does not, in any way, discourage innovation and growth in the emerging fields of AI and ML technology. 

  • Centralised Fee Collection Mechanism: Sebi’s Move To Shield Investors

    Centralised Fee Collection Mechanism: Sebi’s Move To Shield Investors

    BY SUKRITI GUPTA, THIRD-YEAR STUDENT AT NLU, ODISHA

    INTRODUCTION

    The Securities and Exchange Board of India (“SEBI”), has recorded around 33,00 registered entities according to its recognised intermediaries data. Amongst these, SEBI has close to 955 registered Investment Advisors (“IA”) and 1381 Research Analysts (“RA”) as of September 2024. 

    In common parlance, an IA is an entity that provides investment advice to the investors and an unregistered IA is simply the one who provides such advisory without having registration from SEBI. Interestingly, around 35% of IA are unregistered in India which entails a violation of the SEBI (Investment Advisers) (Amendment) Regulations, 2020.

    Additionally, RA also plays a pivotal role in preparing research reports by conducting investigations, research, and evaluation of financial assets. They provide advisory to investors to assist them in making decisions regarding investing, buying, or selling off financial securities, and they are administered by the Securities and Exchange Board of India (Research Analysts) Regulations, 2014.

    It was observed by SEBI through several accusations and grievances reported by investors that there is an incremental rise in the misconduct of unregistered analysts who falsely portray themselves as registered IA and RA to facilitate investment services. These entities exploit investors by giving them fake and unrealistic securities advisories to encourage investments. 

    Thus, pursuant to this, SEBI issued a circular dated 13th September 2024 to set in motion a uniform system for fee collection by IA and RA, known as the “Centralised Fee Collection Mechanism”. This initiative, co-drafted by BSE Limited followed rigorous consultations from common people and feedback from several stakeholders.

    The author in this post delves into the significance and objectives of SEBI’s new mechanism by highlighting its broader implications. Furthermore, the author critically inspects the potential concerns and queries related to this initiative. 

    HOW DOES THE CENTRALISED FEE MECHANISM WORK?

    Under this mechanism, SEBI has established a supervisory platform for IA/RA to offer a uniform and centralised fee collection process. It provides a portal through which the investors can pay the fees to registered IA/RA which will be overseen by a recognised Administration and Supervisory Body (“ASB”). Every transaction will be initiated by assigning a virtual account number, with the availability of various modes of payment like UPI, net banking, NEFT etc. For using this facility, there is likely to be a system where IA/RA shall enroll themselves in this platform and provide fee-related details for their clients and the fee collected will then be transferred to these registered entities. It is made optional for both investors and IA and RA. 

    It aims to increase the participation of investors in the securities market by creating a transparent and riskless payment environment to curb the activities of unregistered IA/RA from taking dominance of investors under the guise of regulatory compliance.

    SAFEGUARDING INVESTORS INTERESTS: NEED FOR A CENTRALISED FEE COLLECTION MECHANISM

    By introducing a Centralised Fee Collection Mechanism, SEBI aims to mitigate all possible misleading and fraudulent activities of the unregistered IA/RA. To ensure that the investor’s money is in safe hands, it is imperative to save them from becoming a victim of illegitimate entities. Since many investors may not know how to inspect whether an entity is a registered one or not, therefore, it is the onus of SEBI, being a market regulator, to guard the interests of investors by introducing such an appropriate mechanism. 

    In the author’s view, by providing a centralised platform for payments, SEBI might ensure that the investor’s personal information and data remain fully confidential and safe since there will be a very minute chance of data leakage due to all the services being provided in one designated sphere. Secondly, through various digital payment modes being facilitated, there remains a minimal chance of disruption in the payment mechanism, ensuring a seamless and steady payment. It will also keep a check on the fees charged by these registered entities concerning  SEBI’s guidelines regarding the fees charged by IA, thereby helping to reduce exorbitant charges. Additionally, investors will not be charged any platform fee thus reducing unnecessary expenditure.

    Also, by operationalisation of this centralised payment system, investors will easily identify which entity is a registered entity. This will in turn be beneficial to IA and RA because they will get due recognition as they will be distinguished from unregistered ones. This will help them to attract genuine clients seeking their assistance. Furthermore, it will also help IA/RA who do not have any automated platforms of their own, thereby saving time and reducing burden

    CRITICAL EXAMINATION OF THE MECHANISM

    To delve deeper into the implications and analysis of the Centralised Fee Collection Mechanism, it is essential to ponder on three major points. Firstly, for what purpose the mechanism is kept optional, Secondly, whether such an initiative enhance investor’s vigilance when hailing services from unregistered entities? Lastly, how will this mechanism ensure the security and privacy of investor’s data?

    Discussing the first point, in the author’s view, it is essential to note that keeping the mechanism optional for users to pay and IA/RA to collect fees, is providing a flexible choice by giving them time to adapt and integrate into the new framework of the mechanism. By not mandating its use, SEBI is trying to ensure that they don’t feel that it is being involuntarily imposed upon them. Rather, they have the discretion to avail it. Additionally, potential shortcomings, challenges and doubts can also be identified for allowing further incorporation of necessary amendments and improvements based on the experience and feedback of the users and entities. 

    Therefore, the main idea behind keeping it optional is to grab the attention and trust of the investors and entities in this platform and make them familiar with the procedures for gradual adoption. This flexibility will enable a smoother transition and necessary adjustments. According to the author, SEBI might eventually make it compulsory in the near future. 

    Gauging on the second point, while this mechanism has significant potential to reduce the number of unregistered entities and heighten investor’s attentiveness, it is crucial to recognise that not all users may be aware of the reforms and regulations brought by the regulator. Thus, according to the author, to attain the full purpose of the mechanism, SEBI needs to prioritise its promotion through advertisements, webinars, awareness activities etc., via authorised channels. If the targeted audience becomes aware of such a facility, the likelihood of success of such an initiative would increase, eventually serving a larger segment of the investing public.

    One concern of IA/RA regarding this mechanism could be the reluctance of investors to provide their personal information while paying fees. Many of them may not be comfortable sharing their details on an online platform like such. To cater to this, SEBI must ensure transparency by rolling out certain procedures for safeguarding investor’s privacy and trust. One approach could be to give a unique identification number to each investor for aid in digital enlisting. E-receipts, payment tracking and reconciliation could also be enabled. SEBI can also launch a portal alongside, which will enable the investors to report any issue encountered by them during transactions. It may operate like a customer care center to deal with and sort out the grievances faced by them. 

    While it appears that this mechanism is viable to ensure adequate safety and privacy of the investors, yet, there is a need for vigorous regulation to fully reassure the investors of their privacy and trust in IA/RA. 

    CONCLUSION

    SEBI’s introduction of Centralised Fee Collection Mechanism is a double-edged sword, safeguarding both investors and entities. By offering a compliant and centralised system for fee collection, it is not only protecting investors from deceitful and unauthorised entities but also fortifying the credibility of registered IA and RA. It also marks a noteworthy step towards establishing a transparent, viable and secured space in security’s advisory sphere. However, for initiatives like this to become successful, it is crucial to focus on its continued promotion, awareness, investor education and robust privacy safeguard standards to entrust confidence in the platform. Eventually, this mechanism aims to build a safer, systematic and coherent environment that benefits both the investors and advisory entities alike. Let us see whether it will be welcomed or feared.  

  • Revamping Venture Capital: SEBI’s Progressive Amendments for Dynamic Fund Migration

    Revamping Venture Capital: SEBI’s Progressive Amendments for Dynamic Fund Migration

    BY SHRIYANSH SINGHAL, SECOND-YEAR STUDENT AT NLU, ODISA.

    Introduction

    On July 20, 2024 the Securities Exchange Board of India (‘SEBI’) amended SEBI (Alternative Investment Funds) Regulations, 2012 significantly. Subsequently, guidelines were released by SEBI to these amendments which are particularly concerning the VCFs which were earlier governed under SEBI (Venture Capital Funds) Regulations, 1996. The change to the Alternative Investment Funds (‘AIF’) Regulations is advantageous to Venture Capital Funds (‘VCF’) as it provides more freedom to the VCFs especially in regard to unliquidated investments at the end of the tenures. The changes are in consonance with SEBI’s intention to amend the legal provisions governing the venture capital funds to suit the current market conditions.

    SEBI has been advancing AIF as an ideal investment vehicle in India which has facilitated all forms of funds including venture capital funds, private equity funds and infrastructure funds. As more investors are investing their money in AIFs, SEBI has also upped its ante to make sure that such funds operate in the most transparent manner and for the benefit of the investors. These amendments are a doctrinal transformation of the existing legal framework, to enable VCFs transition to this new flexibility, which improves operational effectiveness and investors’ safeguards. This way, SEBI modernises the previous regulations, adapting them to the present conditions of the market and presents AIFs as a primary stimulator of innovation and investments in the Indian economy.

    Rationale Behind the New Guidelines

    The rationale for the development of these new guidelines is anchored on shifts that have taken place in the investment climate in India. The VCF Regulations were introduced in 1996 and at that time they were rather innovative. However, the changes in the venture capital industry continue and the regulations have become outdated. The introduction of the AIF Regulations in 2012 was a significant improvement as it offered a more complex and flexible framework for various structures of AIFs including VCFs. However, there were still many VCFs that have been registered under the old regulations but still operated under a structure that was not completely appropriate to the industry’s needs.

    The changes in the amendments are directed to the increase in the demand for the harmonization of the regulations and the flexibility. SEBI has provided these VCFs an opportunity to migrate to the AIF Regulations and therefore, avail the benefits of a relatively modern framework. This has included the improvement of the management of unliquidated investments which is crucial to funds that are in the final stages of their life cycle. Also, the amendments seek to bring all funds as one so as to enhance the protection of investors as it is easily regulated.

    Deciphering the Amendments
    • Migration of VCFs to AIF Regulations

    The essence of the amendments is in the possibility of the VCFs’ transition to the AIF Regulations. This migration is not compulsory but is very advantageous for anyone who decides to migrate. These changes are beneficial as they allow VCFs to operate through a modern, flexible framework, offering longer liquidation periods, better regulatory reporting and increased investor protection which will lead to improved handling of unliquidated investments and transparency overall. This flexibility is accompanied by the migration deadline of July 19, 2025, which provides VCFs with enough time to take decision about the transition.

    The amendments to the AIF Regulation in contiguity with VCF Regulations are expected to have significant effects on India’s venture capital industry. An increase in the regulatory cohesion by SEBI can be enforced by encouraging VCFs to migrate to the AIF framework which will lead to simplification in compliance maintenance by fund managers and clinch all funds under a unified set of regulations.

    • Additional Liquidation Period

    Another significant amendment is the provision for a one-time additional liquidation period. VCFs with schemes whose liquidation period has expired but have not yet wound up their operations can now apply for an additional year to complete the liquidation process. This extension, valid until July 19, 2025, provides much-needed breathing room for fund managers, allowing them to manage their exits more effectively and avoid fire sales that could harm investor returns.

    As for the VCFs with the schemes which have not yet achieved the end of the liquidation period, the migration enables such funds to remain active within the framework of the AIF Regulations. Also, it is important to note that if a fund’s scheme had a defined tenure under the old regulations, such tenure remains frozen on migration. But if no tenure was previously fixed, the fund has to fix a residual tenure with the concurrence of at least three-fourth of the investors. This provision helps to protect the investors and also helps the fund to operate in a very transparent manner.

    • Enhanced Regulatory Reporting in case of non-migration

    In case VCFs do not migrate, SEBI has come up with improved regulatory reporting standards. These funds will be more regulated and if they continue to exist beyond the liquidation period they will face regulatory actions. This aspect of the amendments acts as a form of threat that will compel VCFs which are no longer actively investing to either join the AIF framework or wind up their operations.

    The amendments also specify circumstances under which migration is not possible. VCFs which have no more active investments or have wound up all their schemes are expected to surrender their registration by 31st March 2025. Otherwise, SEBI will proceed to cancel their registration as the latter failed to meet the requirements provided by the former. This provision helps in avoiding the creation of a bureaucratic burden on the regulatory framework by funds that are inactive or dormant, thereby enabling SEBI target active participants in the market.

    The potential of increased fund activity with the option to migrate to a relatively modern regulatory framework, may incentivize VCFs to launch newer schemes or extend the life on present ones. Hence, benefiting both investors and the broader economy by increased activity in the venture capital space. The stipulation for inactive VCFs to surrender their registration will streamline the regulatory landscape. Consequently, ensuring that only active and compliant funds are registered and as a result, reducing administrative burdens and allowing SEBI to focus on more significant regulatory issues.

    • Strict Compliance and Accountability

    Lastly, the amendments impose a great deal of obligation to the managers, trustees, and other personnel of both VCFs and Migrated VCFs. These people are responsible for compliance to the new regulations and they will have to fill and submit the Compliance Test Report to SEBI. This report which is a compliance to the SEBI Master Circular for AIFs is an important mechanism of ensuring that the industry is accountable to the public.

    There can be an enhancement in the investor protection steps taken by SEBI to assure investors that their interests are being safeguarded within a robust regulatory framework. This can be done by necessitating investor approval in ascertaining the tenure of migrated schemes and the insistence on compliance reporting.

    Forging new Horizons

    The modifications carried out to the SEBI (Alternative Investment Funds) Regulations, 2012 are a welcome change for the enhancement of the venture capital funds in India. In the future, SEBI should focus at giving the required assistance to those VCFs that wish to opt for the AIF structure by issuing appropriate instructions and keeping the concerned parties informed. This will assist VCFs to address the operational and compliance challenges of the migration process appropriately. SEBI could also contemplate on the need to carry out regular audits of the framework with a view of making changes that could help to address some of the problems that may arise after migration as well as to ensure that the regulations are up to par with the best practices in the international markets. Moreover, enhancing the investor awareness and increasing the transparency of the mechanisms will help to increase the confidence in AIFs and therefore the capital will flow into the venture capital more freely. Therefore, SEBI can contribute to the formation of the startup market and the non- traditional type of financial instruments in India due to the formation of a more integrated and adaptable system of regulation.

    Conclusion

    The proposed amendments to the SEBI (Alternative Investment Funds) Regulations, 2012 are huge in the growth of venture capital industry in India. Thus, SEBI is ensuring that the regulations are relevant and comprehensive by providing VCFs a chance to move from the VCF Regulations to the AIF Regulations. The emphasis on flexibility, investor protection and compliance are very much seen in the SEBI’s attempt to make the investment environment healthy and active. To the fund managers, investors and the market in general, these amendments introduce a new dimension of understanding and certainty which would help foster the future growth and development of the industry. In the long run, the value of the integrated and updated regulation of the industry will be seen as it adapts to the changes that have been identified.

  • From Hearsay to Hard Facts – SEBI’s Crackdown on Rumour Verification

    From Hearsay to Hard Facts – SEBI’s Crackdown on Rumour Verification

    BY RITUNJAY SINGH AND SEJAL SINGH, FIFTH-YEAR STUDENTS AT RMLNLU, LUCKNOW

    Introduction

    On May 17, 2024, the Securities Exchange Board of India (‘SEBI’) announced a pivotal change by notifying the SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2024 (‘2024 Amendment’). The amendment brings notable updates to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘LODR Regulations’) by mandating Market Rumour Verification (‘MRV’) by listed companies, particularly those that lead to material price movement (‘MPM’).

    Understanding the Regulation and its Evolution

    The 2023 Amendment focused on triggering rumour verification upon a ‘material event’ occurrence but failed to define ‘material event’, leading to unclear compliance requirements. Consequently, SEBI proposed the formation of an Industry Standards Forum (‘ISF’) by industry associations in July 2023. By August 2023, the ISF, a collaboration between the Associated Chambers of Commerce, the Confederation of Indian Industry, and the Federation of Indian Chambers of Commerce and Industry, was established to formulate standards for implementing specific circulars and regulations. This collaboration resulted in a Consultation Paper released in December 2023, which laid the groundwork for the 2024 Amendment.

    The 2024 Amendment builds on this foundation, which initially mandated MRV but delayed its enforcement. The new regulations mandate rumour verification for the top 100 listed entities from June 1, 2024, and aim to extend it to the top 250 listed entities from December 1, 2024. The entity must verify specific market rumours reported in mainstream media that lead to MPM, usually within 24 hours from the trigger of MPM. General or vague rumours do not necessitate a response. It shall be specific to the industry consisting of unpublished information. 

    Mainstream media includes Indian newspapers with substantial circulation and readership, their digital versions, designated online news sources, and select international newspapers and news channels. It excludes news sources behind paywalls, news aggregators, and social media platforms, except for verified accounts of recognised news sources. Such focused delineation may presumably provide entities with a manageable scope to monitor. However, excluding social media platforms may leave gaps in differentiating facts from fiction, as seen in the Sadhna Broadcast pump-and-dump controversy, where rumours on social media and YouTube videos artificially inflated stock prices, causing investors losses once the stock inevitably crashed. A similar scenario occurred in the infamous Reddit-fuelled GameStop frenzy, where a coordinated effort by retail investors caused an unexpected stock surge, defying traditional market expectations and forcing hedge funds into massive losses. Furthermore, SEBI’s recent efforts to caution the public against dealing with unregulated entities and clamping down on the association between regulated entities and ‘finfluencers’, SEBI acknowledges this pervasive influence. Excluding such platforms from rumour verification leaves a blind spot in the regulatory framework.

    Having mentioned price volatility, it is crucial to understand MPM. The Bombay Stock Exchange (‘BSE’) and the National Stock Exchange (‘NSE’) introduced the MPM Framework to standardise its assessment, providing clear criteria for its calculation. It considers the cut-off percentage to price variation in share price between the closing price of the previous trading day and the next trading day’s opening price, excluding the benchmark index’s impact (e.g., NSE’s NIFTY 50 and BSE’s SENSEX). Additionally, intraday price movements are analysed, focusing on volatility throughout the trading day rather than just the opening versus closing prices. This responsibility of identifying the MPM rests with the listed entity, which may delegate this role to a designated officer. Owing to the constant fluctuation in stock prices, notifying the listed entity regarding the MPM necessitates a sophisticated technology-based solution. Going forward, service providers will likely offer these alert systems to companies. The lookback period i.e. the timeframe within which companies must retrospectively examine previous market rumours that might have induced an MPM is not specified, allowing companies to tailor their verification procedures flexibly to ensure a thorough and context-appropriate assessment.

    On May 21 2024, SEBI released another circular regarding the “framework for considering the unaffected price for transactions upon confirmation of market rumour.” This framework calculates the unaffected price by excluding the effect of MPM and rumour confirmation on equity share prices. In mergers and acquisitions, if parties’ names are non-disclosable due to confidentiality, the unaffected price is valid for 180 days from rumour confirmation; if names are disclosable, it’s valid for 60 days post-confirmation (Paragraph 5.2.2). If the price variation due to rumour confirmation hits the price band on the next trading day, subsequent trading days’ price variation is included for adjustment until it no longer hits the price band. For example, if ‘A’ trades at Rs. 100 per share and a rumour about acquiring ‘B’ causes the stock price to rise to Rs. 400 per share, later proving untrue and falling to Rs. 50 per share, the rumour period causing the fluctuation is determined. The average stock price of ‘B’ prior to the rumour, over a fixed period (e.g., six months), is analysed. If this average is Rs. 100 per share and market trends align, the unaffected price is Rs. 100 per share. This benefit only applies if the rumour is confirmed within 24 hours of MPM.

    Bridging the Gaps: A Vision for the Future

    The 24-hour timeframe provided under Regulation 30(11) not only seems insufficient to locate the exact source of the rumour in order to effectively address it, given the vast trenches of media requiring navigation; but also, proves to be a very small window to provide the public with the necessary documents that support its confirmation or denial. Something similar took place in the short-selling saga of the Adani-Hindenburg case, wherein even after their quick response within 24 hours, Adani’s stocks continued to tread downwards. Moreover, such a stringent timeline could attract regulatory scrutiny under the PFUTP Regulations in the accidental case of a hasty and, incorrect disclosure. Conversely, the NYSE Manual allows the confirmation of a rumour without the ticking 24-hour time clock, alleviating any pressure and allowing the company to make an accurate statement that verifies the accuracy of a rumour without the risk of any regulatory repercussions for incorrect disclosures.

    Furthermore, in the event of a merger and acquisition, a Non-Disclosure Agreement, which more often than not governs these negotiations, may act as a significant impediment to the Regulation, restricting the information that can be publicly shared. A premature confirmation or outright denial may attract a weaker negotiating position for the entity. While an argument can be made that a rumour may be surfacing owing to an already existing breach, that is not an argument strong enough for intentionally breaching confidentiality agreements. Henceforth, if a company were to deny a rumoured merger and later go through with it, investor trust could still very well be damaged. Some countries, like the United Kingdom (‘UK’), have a standstill period of 6 months under section 2(6) of the UK Takeover Code, in case a company does not verify a rumoured merger within 28 days. However, while this prioritises investor clarity and market stability, it is done at the expense of corporate flexibility and strategic planning. Companies might be forced into premature decisions that misalign with their timelines or negotiation strategies. A premature confirmation could also lead to a failed negotiation and wasted resources in case the deal does not go through.  Nevertheless, missing the 28-day verification window would result in being barred from making any such offers within the next six months, potentially missing out on opportunities.

    A balance can be restored by allowing the company to delay disclosures if an immediate clarification poses potential harm. This postponement ensures that an entity can manage sensitive information without being forced into a premature disclosure that could disrupt ongoing negotiations. The same is ensured by Chapter 3 of the European Union Market Abuse Regulation. However, this ability to delay does not come without oversight. Entities choosing to delay shall have to provide regulators with an explanation for the same, demonstrating how exactly it aligns with their legitimate interests, thereby preventing the misuse of the provision for any unfair competitive advantage. Similarly, vis-a-vis leaving room for corporate flexibility, SEBI can also take note of Part III of Appendix 7A of the Corporate Disclosure Policy of Singapore that carves out exceptions to disclosure due to market rumours: (a) The information to be disclosed doesn’t breach any law (Rule 703(2)); (b) The issuer can temporarily refrain from publicly disclosing particular information if a reasonable person would not expect it to be disclosed, and the information is kept confidential (Rule 703(3)). This comes with the caveat of maintaining the strictest confidentiality to prevent leaks.

    Conclusion

    SEBI’s attempts to balance transparency and accountability are evident, even addressing possible concerns via its Guidance Note, including handling speculations regarding a Managing Director/Chief Executive Officer’s health. Yet, as noted earlier, the indeterminate lookback period tips the scales slightly against corporations. By adopting a more structured approach akin to international practices, Indian entities could be better equipped to safeguard their legitimate interests while maintaining investor confidence. Such regulatory evolution could demystify market speculations, enhance stability, and bring India’s disclosure standards into closer alignment with international standards, safeguarding the truth in trading.

  • Navigating SEBI’s Upstreaming Clients’ Funds Framework

    Navigating SEBI’s Upstreaming Clients’ Funds Framework

    BY AISHANA AND NIKITA SINGH, THIRD-YEAR STUDENTS AT GNLU, GUJARAT

    Introduction 

    In the past few years, The Securities and Exchange Board of India (SEBI) has taken several steps to safeguard investors’ securities and funds, but a significant amount of investor funds may still be vulnerable to the risk of potential misuse. To mitigate the same, in a recent regulatory move, it has released a circular that lays out a crucial framework for stock brokers (SBs) and clearing members (CMs) to upstream their clients’ funds to clearing corporations (CCs). The circular is a strategic step to protect customers’ money and guarantee its prudent use, with important ramifications for investors and the securities market alike.

    The SEBI circular mandates the upstreaming of all client funds received by SBs and CMs to CCs in the form of cash, lien on fixed deposit receipts (FDRs), or pledge of units of mutual fund overnight schemes (MFOS). Specific conditions are outlined for creating FDRs, including the requirement that FDRs should be pre-terminable on demand and lien-marked to one of the clearing corporations (CCs) at all times. Guidelines for pledging MFOS units are introduced to ensure minimal risk transformation of client funds and exposure to risk-free government securities. The circular also emphasizes measures to improve operational efficiency and reduce transaction costs, along with compliance and monitoring mechanisms for stock exchanges and CCs. 

    In this article, the authors will explain the conditions outlined for creating FDRs including the guidelines introduced for pledging MFOS units, aiming to mitigate risk transformation and limit exposure to risk-free government securities, which will be examined in detail. Moreover, the article also encompass the circular’s overarching goals of improving operational efficiency, reducing transaction costs, and establishing robust compliance and monitoring mechanisms for both stock exchanges and CCs. 

    The Purpose and Rationale of the Framework

    The principle behind the framework for upstreaming of clients’ funds by SBs and CMs to CCs is that no clients’ funds should be retained by SBs and CMs on end of the day basis. This means that all the clear credit balances of the clients, i.e., the funds that are not required for meeting the margin or settlement obligations of the clients, should be transferred to the CCs every day. The CCs are the entities that facilitate the clearing and settlement of trades in the securities market. They act as the central counterparties and guarantee the settlement of trades, thereby reducing the counterparty risk and enhancing the market integrity. The sole purpose of the framework is to protect client funds from abuse or misappropriation on the part of SBs and CMs. Additionally, it seeks to guarantee that the clients’ money is placed in low-risk or risk-free products, like government bonds, and that it is accessible to fulfil their obligations as needed. By including procedures for collateral utilisation and margin adjustment, the framework also aims to lower transaction costs and increase operational efficiency for market players. In addition, it also aims to improve upstreaming process compliance and oversight by requiring reporting and audits from stock exchanges, CMs, CCs, and SBs.

    The Forms and Conditions of Upstreaming

    The framework allows three forms of upstreaming of clients’ funds to CCs: cash, lien on Fixed Deposit Receipts, or pledge of units of MFOS. It also specifies certain conditions for creating FDRs out of clients’ funds such as FDRs must be pre-terminable on demand, allowing redemption without any penalty or loss of interest. Secondly, it should be consistently lien-marked to one of the CCs, serving as collateral and necessitating CCs’ consent for withdrawal or transfer by SBs or CMs. Thirdly, It also must be issued by scheduled commercial banks with a minimum A1+ credit rating, excluding co-operative and regional rural banks and should be in the name of the SB or CM, explicitly mentioning “client funds.” Furthermore, these FDRs should exist in dematerialized form within a depository, with daily reports sent to CCs by the depository, ensuring transparent oversight and compliance with the SEBI circular. These stringent conditions underline SEBI’s commitment to meticulous risk management and client fund protection within the securities market. 

    Moreover, the guidelines are also laid down for the pledging of Mutual Fund Overnight Scheme (MFOS) units derived from clients’ funds. To ensure transparency and effective oversight, these MFOS units must exclusively exist in dematerialized form within a depository, with daily reports dispatched to CCs by the depository. Pledging procedures involve the units being pledged in favour of CCs through the depository system, with the pledge remaining valid until released by the CCs. Valuation of the MFOS units is pegged at the previous day’s net asset value , and the application of a haircut by CCs is capped at 10% of the unit’s value, exemplifying a cautious approach to risk management. Crucially, upon the release of the pledge by CCs, the redemption of MFOS units must occur on the same day, with the proceeds seamlessly credited to the client nodal bank account of the SB or  CMs. These guidelines underscore SEBI’s commitment to meticulous risk mitigation, transparency, and ensuring the seamless utilization of clients’ funds within the regulatory framework of the securities market.

    The Applicability and Monitoring Mechanisms of the Circular

    The framework applies to all SBs and CMs in all segments of the securities market but also holds some noteworthy exceptions include Bank-CMs, encompassing clearing members that are banks providing clearing and settlement services, and the proprietary funds of SBs and CMs, specifically reserved for their individual trading pursuits. Augmenting the effectiveness of this framework are various monitoring mechanisms outlined within the circular. To ensure meticulous implementation, stock exchanges and CCs are tasked with creating systems capturing daily details of clients’ funds received and upstreamed by SBs and CMs, with reconciliation against reports from depositories and banks. Periodic inspections and audits of SBs and CMs, conducted by stock exchanges and CCs, serve as a means to verify compliance, with a commitment to take appropriate action against any defaulters. Additionally, these regulatory bodies are obligated to submit quarterly reports to SEBI, offering insights into the circular’s implementation status, any deviations encountered, and the corresponding corrective measures taken. Simultaneously, SBs and CMs are entrusted with maintaining meticulous records of clients’ funds, readily providing them to stock exchanges, CCs, and SEBI upon request. With an effective date set for July 01, 2023, this framework reflects SEBI’s proactive stance in fostering transparency, accountability, and adherence to regulatory norms within India’s dynamic securities market.

    The Impact and Implications of the Circular

    The framework also necessitates the compliance of SBs and Clearing Members (CMs) in upstreaming all clients’ funds to CCs on a daily basis, following prescribed forms and conditions. This requirement curtails the flexibility and discretion of SBs and CMs in managing clients’ funds, potentially impacting their liquidity and profitability. They are also burdened with the operational costs and risks associated with the upstreaming process, including charges for creating FDRs or pledging MFOS units, and the risk of default or delay in the redemption of these instruments. Furthermore, they must adhere to the reporting and audit requirements imposed by the circular, facing consequences for non-compliance.

    On the other hand, CCs stand to benefit from an increased inflow of funds from SBs and CMs in the form of cash, FDRs, or MFOS units, thereby expanding their collateral pool and enhancing their risk management capabilities. However, they are tasked with building mechanisms for collateral utilization and margin adjustment to facilitate the upstreaming process and reduce transaction costs for market participants. Additionally, they are responsible for monitoring the compliance of SBs and CMs with the circular and reporting the same to the Securities and Exchange Board of India (SEBI).

    From the clients’ perspective, the framework offers several advantages. Their funds are safeguarded from misuse or misappropriation by SBs and CMs and are invested in risk-free or low-risk instruments. The pre-terminable nature of FDRs and MFOS units ensures that clients have access to their funds whenever required, with the possibility of same-day redemption. Moreover, the oversight of stock exchanges, CCs, and SEBI over the upstreaming process ensures greater transparency and accountability in the management of their funds. Thus, while the framework imposes certain constraints on SBs and CMs, it ultimately serves to protect the interests of clients and enhance the robustness of the financial system.

    Concluding thoughts 

    It can be concluded that the implementation of the circular’s guidelines will require concerted efforts from all stakeholders in the securities market. SBs and CMs must ensure strict adherence to the conditions for creating FDRs and pledging MFOS units. Stock exchanges and CCs, on the other hand, must bolster their compliance and monitoring mechanisms to ensure the effective implementation of these guidelines. Moreover, continuous dialogue and feedback mechanisms should be established to address any challenges that may arise during the implementation phase. This will not only ensure the smooth execution of the circular’s mandates but also contribute to the overarching goal of safeguarding investors’ securities and funds. The circular represents a significant step towards a more secure and efficient securities market. By ensuring the prudent use of customers’ money and reducing potential misuse, it paves the way for a more robust and investor-friendly securities market in India.

  • Mandatory Dematerialisation of Securities: Unveiling the new MCA Amendment

    Mandatory Dematerialisation of Securities: Unveiling the new MCA Amendment

    BY TARUN THAKUR, A SECOND-YEAR STUDENT AT NLUO, CUTTACK

    Introduction

    In an interesting move recently, the Ministry of Corporate Affairs (MCA) vide notification on 27 October 2023 introduced the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023. Now, this amendment has inserted Rule 9B which stipulates that securities issued by private companies must be in a dematerialised form, and further mandates that both issue and facilitation of its existing securities should necessarily be in dematerialised form. This is a major leap as now securities can now only be in dematerialised form. After this amendment, with effect from 30 September 2024, a private company has to comply with the new rules.

    This amendment does not come as a huge surprise to the private companies as there were already discussions in the market from a long time that soon it will become mandatory that securities must be held in dematerialised form. Securities and Exchange Board of India (SEBI) in its report titled – Report of the Group on Reduction of Demat Charges that was released in early 2004 highlighted the risks involved when dealing with physical shares and SEBI also stated that it is playing an important role in in nurturing the growth of dematerialisation of securities in the country. So, from the report it is very coherent that even SEBI was in favour of dematerialisation at that time and was also working to achieve it. Moreover, the CLC working committee report was released last year in March 2022 which also hinted towards the new amendment that has been done to the Companies (Prospectus and Allotment of Securities) Rules, 2014 (PAS rules), as it noted the advantages of dematerialisation and also proposed that the Companies Act, 2013 (CA) should be amended and issue, transfer and facilitation of securities should be done only in dematerialised form.

    Tracing the origins of dematerialization

    Now before moving forward with the intricacies and challenges that this amendment poses it is crucial to know about dematerialisation and its inception. The term “dematerialisation” simply means converting physical shares and securities into electronic form and it was first introduced in the Depository Act, 1996 (DA 1996), as section 9(1) of the Act states that all securities pertaining to a depository shall be dematerialised.

    This was the inception point when securities facilitation and storage started in dematerialised form.  It is also noteworthy that Section- 29 of the CA broadened the scope of dematerilization as it mandates that the issuance of securities should only be in dematerialized form, thus complimenting the DA.  

     Understanding the rationale behind mandatory dematerilisation

    The main contention revolves around the rationale behind making dematerilisation mandatory for the private companies  Earlier in 2018, MCA amended the PAS Rules (2018 Amendment) which inserted Rule 9A and made it mandatory for the public companies to issue and facilitate existing securities in dematerialised form. The same Rules have been applied to the private companies via the new amendment with minor differences.

    Dematerialization combats back-dated transactions and improves transparency of the system. Backdating is the practice of changing a document’s date to an earlier one but when the documents pertaining to shares will be in an electronic form than backdating cannot be done, hence transparency will get bolstered.  Furthermore, dematerialization assists in real-time monitoring of any non-compliance of rules that has been done by any company due to its electronic nature and strict regulatory oversight.

    Challenges Ahead: Examining the Transition to Dematerialisation

    The current amendment exempts only small and government companies from mandatory dematerilisation in contrast to its previous 2018 Amendment, which in addition to small and government companies, also exempted Nidhi companies and wholly owned subsidiaries from mandatory dematerilisation. The reason cited for this was that these type of companies have limited number of shareholders. This gives rise to a pertinent question – why is there a diversion from the previous 2018 amendment, and what is the rationale behind not exempting Nidhi companies and wholly owned subsidiaries in the current amendment?

    One justification for non-exemption might be to fill in the gaps that existed in the 2018 amendment. An additional and more convincing rationale could be that the government is rapidly approaching dematerialization and any exemption granted to any company will eventually run its course. As a result, soon there will be no company that will be exempted from dematerialization. To maintain a cohesive framework, MCA must address the concerns of the stakeholders.

    Further, while extension of the dematerialized realm to private companies seems like a bold move, the compliance timeline given to the private companies is only 18 months i.e. till 30 September 2024, after which issuance and transfer of securities can only happen in demat form.  In India, there are 24,61,937 private companies that are currently registered. . All of these companies will be filing applications in the NSDL and CSDL for the conversion of securities. Consequently, the main concern is whether both these systems have the requisite digital infrastructure and technology to not only facilitate this conversion of securities, but also facilitate them in a fast and smoother way as massive amount of applications may pose operational challenges to both of them.

    Another  obstacle is that a private subsidiary company cannot qualify as a small company.  In case of subsidiaries of private foreign companies, they will also need to adhere to the new rules that have been notified. This will be cumbersome for both, the government and private foreign companies, as they will need to open a demat account with SEBI which requires them to complete a comprehensive Know Your Customer (KYC) process and also obtain a permanent account number (PAN).  This will be taxing for the government as there will be an influx of foreign entities trying to obtain PAN. Moreover, the private foreign companies will also face a challenge as even after obtaining PAN after a comprehensive process, they will have to incur a recurring cost to maintain their demat account.

    Course of Action for Private companies

    In order to comply with the new regulations, private enterprises will need to take a few steps as a result of this amendment. Initially, in order to facilitate the dematerialisation of securities, a private company must get the International Securities Identification Number (ISIN) for each security. Subsequently, the company must notify its shareholders of this information. A private company’s securities should only be issued and transferred in dematerialised form once its share capital has been dematerialised. Additionally, the dematerialisation of the securities held by the company’s directors and promoters should be required. The amendment does not provide for any penal sanctions for non-compliance but on non-compliance a private company will not be able to facilitate transfer of securities and if a there is any grievance a security holder has then it will be resolved by the Investor Education and Protection Fund Authority (IEPFA).

    Concluding thoughts

    This amendment though has some issues but this is a major transformation from the conventional system where the transfer and issuance of securities was done in physical form. Dematerialization shall help in  bringing more efficiency and transparency into the system. Further, from the regulators point of view, this will help them in tackling and mitigating benami transactions and theft by incorporating this new technology driven digital system. It is still debatable whether there is adequate infrastructure to sustain this paradigm shift. The government has to ensure that intact systems are placed so as to regulate and facilitate changes that this new amendment will bring.

    Electronic form of securities also helps in tracking real time market movements and see if there is any suspicious activity which cannot be done in the case of physical securities. While a company has to bear printing expense in case of physical securities, a much lower cost is involved in managing electronic securities. Also, the stringent KYC norms posed by this amendment give an overriding benefit to the government as it will help them to maintain a comprehensive database which would further help in bringing more transparency in the system and make it more robust.

    In the end, it can be stated that this is a major progressive reform but there are some concerns that needs to be addressed by the MCA.

  • Regulating Through Litigating: Quandary of SEBI

    Regulating Through Litigating: Quandary of SEBI

    BY ANSH CHAURASIA, A THIRD-YEAR AT RMLNLU, LUCKNOW

    Introduction

    Recently, the securities market regulator Securities and Exchange Board of India (‘SEBI’), equipped with broad powers, had difficulty defending its quasi-judicial orders. For instance, the Supreme Court (‘SC’) rejected SEBI’s appeal against the order of the Securities Appellate Tribunal (‘SAT’) in the matter of Apollo Tyres. SEBI was reprimanded by the SC for imposing a penalty for violation of SEBI (Buy Back of Securities) Regulations, 1998, but only after the show cause notice was issued to the respondent after more than a decade in 2014 for a cause of action that arose way back in 2003. SEBI passed the order imposing the maximum penalty in 2016, which was set aside by the SAT on grounds that it was not justified in imposing the maximum penalty. Subsequently, the revised penalty was quashed by SAT, against which SEBI approached the apex court. The SC affirmed the decision of SAT on the grounds of inordinate delay, a point of law entirely overlooked by the SEBI during the whole proceedings, right from the commencement of the investigation in 2014 to its appeal before the court on 4 December 2023. Although the SEBI Act has no limitation period per se for the issuance of show cause notice or the completion of the adjudication proceedings, the court’s earlier decision settled the position that such exercise of power must be done within a reasonable time.

    The aforementioned failure of SEBI in appealing before SC is part of a larger trend. At the heart of this regulatory struggle lies the legally untenable orders of SEBI and consequential litigation before SAT and SC. The redundancy of SEBI’s regulatory role resulting from such orders being litigated and decided against affects its credibility and has far-reaching implications for the key market regulator.

    The detrimental litigation

    The legislative history and precedent of the SC lucidly point to the cases appropriate for the appeal. The unamended Section 15Z, the appellate remedy to the High Court, was provided on any question of law or fact. After the amendment in 2002, the appellate court was changed from the High Court to the Supreme Court, and the grounds for appeal were limited to only questions of law, making it the current position. The SC interpreted the phrase ‘question of law’ in the backdrop of Section 15Z to arise when there is either erroneous construction or interpretation of the legal provisions of the statute or the general principles of law. The court also held that the power under Section 15Z has to be exercised while keeping in mind the sectorial laws and policy evolved by the tribunal acting under Section 15T through its interpretation of the Acts, Rules and Regulations. Therefore, the scope of the appeal and criteria of the cases appropriate for appeal are settled propositions of law.

    In its attempt to enforce its order, SEBI has appealed multiple times to the apex court despite a clear scope. In WhatsApp leaks case, SEBI imposed a penalty upon noticees for forwarding messages containing information about financial results. However, the order lacked any finding with respect to the originator of the message. SEBI’s order completely overlooked the fact that noticees merely forwarded the messages with sensitive information, which resulted in SAT overturning the order and vindicating SAT’s finding by the SC.

    In Tata Steel case, SEBI appealed to SC after its order to impose a penalty was set aside by SAT. SC refused to interfere because the order of SAT clearly established that the show-cause notice did not impute any charge upon the noticees. Consequently, the penalty was set aside. SC also remarked whether SEBI appealed only because their ‘ego was hurt’.

    In NSE Dark fibre case, SEBI appealed to SC after a setback from SAT when the disgorgement order for Rs 625 crore with interest was quashed due to a lack of nexus between the disgorgement order and the wrongdoing as required under Section 11B. Another order of fine was set aside by SAT in this case due to inadequate reasons to impose a maximum fine under Section 15J. Consequently, SAT reduced the quantum of the penalty. The move of SEBI demanding a stay on SAT’s order delineates an approach centred on recourses to enforce its orders rather than introspecting on its quasi-judicial adjudication process. Frequent dismissals in appeals whose fate could have been easily determined pinpoints the obdurate nature of the regulator.

    The ramifications of SEBI donning a litigator’s mantle

    The inefficiency of the adjudicatory process becomes apparent when shortcomings in SEBI’s order are pointed out by SAT and vindicated by SC. This directly dents the investor confidence that SC regards to be directly dependent upon the effectiveness of the regulatory mechanism. In SEC v Zandford, investor confidence was held to be the key objective behind the introduction of the Securities Exchange Act. Investors should not perceive the market as a system stacked against them. The Sisyphean undertones in SEBI’s approach to taking the case to the apex court, which has now been frequently falling to the ground, negate the fundamental credibility that the legislature intended to imbibe in the eyes of the investors.

    The SC interpreted the statutory right of appeal incorporated under Section 15T as scrutiny of SEBI’s broad power and emphasised the crucial role of the tribunal in the structural and consistent evolution of sectorial laws. Overlooking the shortcomings pinpointed by the order of SAT or requesting a ‘stay’ on its order before the apex court erodes the parliamentary intent and development of sectorial law.

    Against this backdrop, the problem of complying with basic technicalities is also a glaring issue. A lackadaisical approach in passing orders without providing adequate and sound reasons and bypassing the jurisprudence enunciated by SAT decisions is concerning.

    However, at the outset, SEBI incurs a financial burden every time it decides to go against an order of SAT, and the imposition of a similar burden on the opposite party is problematic. Justice Madan B. Lokur lamented this approach of government agencies litigating for the sake of litigating in a 2018 judgment. SEBI itself passed a proposal in 2019 mandating the appellants before SAT to deposit 10 per cent of the penalty so it could curb the appeals solely aimed at delaying the execution of its order. Therefore, SEBI does acknowledge the hardened mindset to resort to appeal, if not within itself yet among the parties aggrieved by its order, and it rightly points to the consequences of such an approach.

    The ripple impact of this approach is now perceptible as affecting institutional integrity. The SC reprimanded SEBI in the Suzlon case, asking the regulator to ‘regulate rather than litigate’. Although the SC granted the relief to SEBI, clarifying that the contested order would not be treated as precedent, it proceeded to remark. In Apollo Tyres case, SEBI was criticised for appealing against every order that went against them and directed to submit an affidavit of appeals they have filed.

    Conclusion

    The SEBI is a unique statutory body that has the role of regulating, investigating, adjudicating, and deterring the offender. We see an amalgamation of executive, legislative, and quasi-judicial functions within the SEBI. The broad powers conferred upon it have to be exercised to protect the interest of the investors and inspire confidence among the public. SEBI ought to weigh the above considerations before moving to the apex court. SEBI brought itself into this position where it has been reprimanded multiple times for ascertaining the cases only to meet the on-paper requirements. However, the situation requires adherence in spirit. This obstinacy on the part of SEBI is a Faustian bargain where it is giving up institutional credibility for no change in consequences and further losing an opportunity to look into regulatory mechanisms. Any decision to appeal must pass the muster of the requirements of appeal irrespective of the fact that SEBI has been aggrieved at the hands of the SAT.

    The striking similarity in all cases challenged before SC and quashed before SAT is SEBI’s failure to substantiate its allegations and insistence on enforcing its order. Changes in its regulatory and investigatory mechanism can lower the recurrence of these defects. Recently, the SC expert committee constituted to investigate the Adani-Hindenburg made significant suggestions for the prudent and effective exercise of the broad power at SEBI’s disposal. It suggested an ‘effective enforcement policy’ to lay down criteria by which SEBI must decide whether to initiate the proceeding either to impose a monetary penalty, to take a remedial action, or to take a punitive action. Such criteria should be clear and non-arbitrary. Laying down criteria would delineate an objective requirement of specific conditions to initiate proceedings, consequently leading to a proportionate exercise of regulatory powers.

  • SEBI’s Instantaneous Trade Settlement: Evaluating the Implications on Foreign Investors

    SEBI’s Instantaneous Trade Settlement: Evaluating the Implications on Foreign Investors

    BY PARV JAIN, A THIRD-YEAR STUDENT AT INSTITUTE OF LAW, NIRMA UNIVERSITY, GUJARAT

    Introduction

    According to SEBI’s annual report, the year 2022–23 faced a foreign portfolio investors (“FPIs”) outflow of Rs 40,936 crore. This was the third highest sell-off by FPIs during a financial year. This FPI pull-out could be driven by the opening of China post-lockdown, the Russia-Ukraine crisis, and a series of rate hikes due to inflationary pressures. But now, it is the need of the hour to ensure not to give offshore investors any reason to pull out of India, given the huge contemporary capital requirements.

    In September 2023, Securities and Exchange Board of India (“SEBI”) announced the plan for the implementation of instantaneous trade settlements, which has caused a plethora of debate regarding the future implications of such a move. SEBI Chairperson Madhabi Buch had expressed her enthusiasm for instant trade settlement, which will become a game-changer for the Indian stock market and will benefit investors greatly by making trading faster, safer, and cheaper. According to her, it will also enhance India’s position as a leading financial market in the world. This implies that the instant trade settlement plan might roll out very soon, but it is still unclear whether the regulator would resolve the potential challenges for foreign investors from such a change beforehand or not. SEBI now aims to achieve a same-day i.e. T+0 settlement system by March 2024, and then aspires to move towards a method of instantaneous settlement of trades.

    As the discussions increase, people are anticipating a withdrawal of offshore investors from the market, who fear that the settlement of equity market trade on the same day will eventually fragment the liquidity of the market. In this regard, I discuss how the instant trade settlement affects foreign investors. I argue that the demerits of such a change could outweigh its merits. Lastly, I propose certain additions and changes in the framework to ensure the inflow of foreign investment. 

    Addressing the Lacunae

    From a practical standpoint, achieving instant trade settlement might be impossible within the current financial framework.  In 2020, the Asia Securities Industry and Financial Markets Association (ASIFMA) also highlighted the difficulties for foreign investors if the settlement cycle is reduced, as this may result in inefficiencies for trade matching and end of day reconciliations. This is because the settlement of securities transactions requires a multi-faceted procedure, demanding seamless coordination and communication among a diverse array of stakeholders. Adequate time must be allocated post agreement on a trade for the underlying securities to undergo the necessary transfers and for the corresponding funds to be transferred. At the core of the settlement process, time must be allowed to guarantee legitimacy, accuracy, and adherence to regulatory standards. 

    These conceptual issues might be solved through technological alterations and mutual agreements, but the core issue would lie in the fact that such a move would require an alteration of the whole financial system. This includes the configuration of the Indian payment system as well as the framework governing pivotal banking functions, such as the facilitation of deposit accounts and the extension of credit. To achieve instant trade settlement, a substantial restructuring of the current clearing, payment, and settlement infrastructure within the Indian market would be required.

    Demystifying the Implications on Foreign Investors

    Currently, there is a set procedure followed by foreign investors to deal in the Indian stock market. For instance, if a Germany-based foreign investor wants to buy shares in India, he has to first send euros to the custodians, who will then book the forex, convert the euros into Indian rupees, and deposit the funds into the FPI’s cash account in India. By the time settlement occurs, the funds are deposited with the custodians. Currently, there is a set window of time for transferring the funds and converting them to Indian rupees, subject to market fluctuations which almost occur within a day. But the instantaneous trade settlement will reduce this time, which means foreign exchange transactions will have to be expedited as well to fast track the conversion of currency into Indian rupees. The foreign investors will have to face a lot of challenges, and this might cause a lot of unexplored issues.

    The core issue with instantaneous trade settlement arises from the time difference between Indian and foreign jurisdictions. As a result, foreign investors would need to predict the entry price of a stock in advance, and the price may also fluctuate before they make a purchase. To mitigate this, offshore investors would be compelled to prefund the transaction. Consequently, in the case of SEBI’s instant settlement plan, the law of diminishing returns applies, as the shortened time frame introduces more risk without generating additional benefits for widespread adoption across the market. This could potentially lead to a situation where capital is underinvested, making the delivery of securities more complex, fraught with increased risk and escalation of costs. Thus, the implementation of this measure could make the Indian financial markets less appealing to global investors. 

    The Way Ahead

    Ms. Madhabi Buch has said that FPI would not face any problems as they would be given the choice to opt out of instantaneous settlement if they prefer not to use it. She ensured that SEBI had ascertained the data that shows which trades are matched with each other. Based on this data, they believe that choosing not to opt for instantaneous settlement will not create any issues or problems for anyone involved. In essence, they are reassuring that the traditional settlement process will still be accommodated and will not cause any difficulties for those who prefer it. However, this optimistic model would fail when the foreign investors would be left with no option but to opt for instant trade settlement if a large share of retail volume does so. This is because, with two distinct trade settlement cycles, the liquidity could be divided in the two-way transaction. Most of the domestic investors are likely to prefer instant trade settlement creating a risk of fragmentation of liquidity and an increased likelihood of failed trades. To prevent this, SEBI should take certain measure like trade limit for a specific settlement cycle to ensure that the liquidity is sufficient, if not equal in both the trade settlement cycles.

    To bypass this hurdle, SEBI will have to formulate a mechanism similar to the one implemented in China. China, at the time of introduction of the T+0 settlement cycle for Stock Connect, was facing several challenges as it increased the operational burden for foreign investors and market participants to complete the settlement obligations. Also, when China A-shares got listed on global indexes such as Morgan Stanley Capital International and Financial Times Stock Exchange, foreign interest in the Chinese onshore equity market skyrocketed. It became very crucial to make an A-share investment channel to entice foreign investment. Thus, in partnership with Depository Trust and Clearing Corporation, Hong Kong Exchanges and Clearing Limited (“HKEX”) launched HKEX Synapse, a revolutionary settlement platform specialized to Northbound Stock Connect. 

    Synapse works as a standardized and centralized platform that efficiently transmits settlement instructions to all relevant parties concurrently. This simultaneous processing ensures full transparency in the trade processing status. After obtaining consensus and approvals, Synapse transmits settlement instructions to the Central Clearing and Settlement System (“CCASS”) for final settlement. Real-time integration with CCASS allows Synapse to provide prompt status updates to all involved parties after a matching or settlement batch run. This results in comprehensive transparency, improved control, and increased efficiency for investors and their counterparts throughout the settlement process.

    In India, if instant trade settlement has to be introduced despite having several loopholes, a platform similar to HKEX Synapse is necessary to ensure that international investors gain immediate access to the real-time status of their trade settlements. This would provide a measure of relief from the constraints imposed by the narrow settlement window. Also, this will standardize and simplify post-trade procedures and empower investors to optimize connectivity and operational efficiencies within a framework that is both transparent and secure. Custodians will be equipped with comprehensive insights regarding the parties that have endorsed and sanctioned specific trades, thereby furnishing them with the essential data needed to promptly address and rectify any trade anomalies prior to the designated cut-off time. 

    Apart from this, SEBI can also give brokers the responsibility of guaranteeing payments on behalf of foreign investors, effectively extending them credit for the interim two-day period until the transactions are duly finalized. For instance, Indian stockbrokers can vouch for foreign investors and settle their trades in instant trade settlement, and later, these investors can repay money to the brokers within two days. While the brokers would take some risks, in the long term they would benefit from the new inflows. 

    Concluding Remarks

    India has at various instances, taken the lead in terms of technological innovation by changing the digital infrastructure with platforms like CoWIN and Unified Payments Interface. Instant trade settlement might put India at the forefront of the globe in terms of trade settlement if it is proven to be the fastest and most efficient in the world. 

    However, it is crucial to recognize the complexities and potential disruptions it may introduce to the existing financial framework. Foreign investors, in particular, will face significant hurdles with the proposed instantaneous settlement. This may necessitate prefunding transactions, introducing added complexity and risk to the process. Additionally, the implementation of this measure may lead to increased operational costs for foreign investors, potentially making the Indian financial markets less attractive on a global scale. SEBI’s assurance that traditional settlement processes will still be accommodated is a positive step, but it may not entirely alleviate concerns, especially if a significant portion of retail volume opts for instantaneous trade settlement.

    Therefore, careful consideration and strategic measures are essential to mitigate potential risks and ensure a seamless transition. By adopting proven mechanisms and addressing the concerns of foreign investors, India can pave the way for a more dynamic and resilient financial ecosystem in the years ahead.

  • Interplay Between SEBI Regulations and Liability of Financial Influencers (FinFluencers)

    Interplay Between SEBI Regulations and Liability of Financial Influencers (FinFluencers)

    By VARUN MATLANI and Vaibhav Gupta, THIRD-year students at GNLU, GANDHINAGAR

    Introduction

    The massive growth of social media influencers coupled with high internet penetration for a country with the world’s youngest population, particularly in the earning age bracket has given birth to the rise of a new segment of financial influencers or popularly known as ‘FinFluencers’. These FinFluencers claim to advise and teach people about making quick bucks through stock markets. This article examines the legal liability of their advice, to what extent they should be bound by relevant Securities and Exchanges Board of India (‘SEBI’) regulations and what accountability they have for their content to their followers who rely on them and are frequently their source of income from commercials, stock broker affiliate marketing, and the sale of their courses. Further, the article compares the newly evolving jurisprudence internationally especially in Netherlands and Germany by comparing their regulations and guidelines for FinFluencers with that of SEBI in India.

    Are FinFluencers bound by SEBI?

    The majority of FinFluencers operate outside of SEBI’s purview and prima facie do not adhere to its regulations, operating in a grey space or on a thin line of difference of definition as research analysts. SEBI, staying committed to its tagline “strength of every investor” has voluminous regulations binding those giving investment advices in order to protect the gullible and first-time investors from falling into dubious schemes. The author contends that these FinFluencers would fall within the ambit of definition of ‘Research Analyst’ under Regulation 2(u) of SEBI (Research Analysts) Regulation, 2014 making them accountable for their content as per the relevant regulations.

    The definition holds a person to be considered as Research Analyst if they prepare or publish content of research report or provide research report or offer an opinion with regards to a public offer or give price targets also.     These regulations also require them to be technically qualified and pass National Institute of Securities Market (‘NISM’) exams, providing a safety net for investors and fulfilling the fundamental purpose of  SEBI.

    Interestingly, the word ‘Research Report’ under Regulation 2(w) includes any kind of electronic communications and generally exempts opinion on overall market trends or generalised opinions. Therefore, the videos and posts of these FinFluencers does not escape the definition of report.

    In light of these regulations, one may scrutinize the “top FinFluencers” (in terms of their follower base on social media platforms), and can broadly ascertain a pattern of content that is posted by them, i.e., giving analysis on IPOs, fundamental analysis of stocks, recommending stocks for long term or short term. A major problem that arises here is that till the time the end user watches the video, the information can be converted into misinformation due to time variation gaps (for instance, an Instagram reel being uploaded today and end user considering it relevant when it reaches him/her, but the substantial time has elapsed for the user to act correctly) and information asymmetry causing heavy losses to the viewers. SEBI Regulations provide for regulation(s) for publication of report public media whereby the said regulations are directly applicable in literal manner. Electronic communication which is perceived through various social media with a massive reach to the audience may also be categorised similar to appearance before public media whereby too, as per Regulation 21, there exists a requirement for disclosure and assurance of reasonableness and fairness in creation of such report.

    Liability if FinFluencers are made to register as Research Analyst

    Many of the “top FinFluencers” would not qualify under technical requirements (for example, possessing the 5-year experience, professional qualification, or postgraduate degree) for education under the regulation. Further, NISM exam mandate would ensure not anyone with access to the internet can start giving opinions on the internet.

    Once considered as Research Analyst, Regulations 16 and 18 shall restrict these FinFluencers from trading into scrips.

    The contents of the research report would need more precision in terms of rating and time horizon benchmarking (i.e., the validity of such advice) along with a disclaimer and persuasive liability on publishers to ensure reliable facts and information forming part of their research as per Regulation 20.

    Regulation 24 makes research analysts responsible for maintaining an arms-length distance from taking up promotional activities and ensuring that the members involved in publishing of such content are complying with Regulation 7 (with regards to technical qualifications).

    Regulation 25 would require keeping a record of all their research along with the rationale of providing so, thereby preventing any escape by any deletion of such reports and also subjecting these records for inspection.    

    International Comparative Analysis of Existing Regulatory Frameworks for Social Media Influencers Pertaining to Financial Information

    In this segment, the regulatory frameworks of Germany’s German Federal Financial Supervisory Authority (also known as BaFin) and Netherland’s Authority for Financial Markets (Autoriteit Financiële Markten – AFM) – the SEBI’s counterparts of their respective countries, are analysed with respect to their regulations and evolving legal framework with administrative actions for FinFluencers.

    • Netherlands

    The Dutch authority, AFM, conducted exploratory study to understand the legal landscape of FinFluencers and has even adopted the term FinFluencers for referring to those giving financial advice on social media platforms. The study found that FinFluencers lack neutrality and transparency, promoting risky products, and thereby keeping their own interests first. AFM also flagged the risk of non-compliance of regulations in Dutch that require influencers/finfluencers/third-party advertisers for license (s)/registration with AFM which can be drawn parallel to SEBI’s regulations in India.

    There is a Dutch ban on third-party inducements, which further prohibits FinFluencers from charging referral fees or advertisement fees. It was also noted that merely posting a disclaimer does not allow an escape route from regulations if they provide such services de facto. In the recent case of Grinta Invest, AFM issued notices to the company as well as FinFluencers for not holding appropriate licenses and promoting highly risky instruments such as foreign exchange and CFDs.

    • Germany

    The German authority ‘BaFin’ too requires FinFluencers to comply with the ‘Unfair Competition Act’ in terms of advertising products within the ambit of competition law and secondly, to comply with Market Abuse Regulation along with specific requirements from Delegated Regulations on the Market Abuse Regulations which directs any person recommending investment or investment strategy and presents himself as financial experts to comply with transparency, disclosures, fairness and other relevant provisions of Market Abuse Regulations.     Non-compliance with these regulations can lead to fine and other punishment within the ambit of German Securities      Trading Act. Unfair practices with regards to these regulations can also make the financial companies directing FinFluencers liable.

    Evolving Jurisprudence in India

    SEBI has taken note of the the impact of social media influence on stock markets, price discovery, and losses of the gullible new investors falling for “tips” or recommendations. Lately Telegram groups, which were the biggest direct contributor to these factors have been cracked down upon. In Re: Stock Recommendations using Social Media Channel (Telegram) (SEBI) it was held that those running the channel were not registered as Research Analysts or Investment Advisors and had unfairly charged fees. The number of members and quantum of tips/recommendations did have an impact though for a short time since there was a spike in trading of a particular scrip which also involved Prevention of Unfair Trade Practices regulations. This has been a leading step against social media influence on Indian traders and stock markets. But, deliberation on indirect harm to the new/gullible investor community by FinFluencers needs to be done at the earliest.

    Conclusive Analysis with Indian Regulations

    In light of international regulatory framework, the authors opine that SEBI must draw inspiration from international bodies in terms of conducting research and identifying the impact of these FinFluencers on Indian markets and the stakeholders. The SEBI regulations already in place are an example of an effective and well thought rule of law, but its implementation intertwined with the rapidly growing social media needs to be closely examined. It must be also noted that SEBI, to a great extent, has been successful in introducing changes with regards to telegram tips and trades, but cognisance of these FinFluencers and their growing popularity must be taken.

    Interestingly, in the Telegram case, SEBI took note of how a huge subscriber base can lead to manipulation of stock prices and has been actively taking steps (like imposing a ban on Telegram channels, issuing show-cause notices to offenders, etc. to prevent practices promoting unhealthy and unfair trade practices.      In contrast, the US markets have lately faced a lot of such manipulations which went uncontrolled by the Securities Exchange Commission (SEC) in cases such as Reddit’s WallStreetBets’ pump and dump of particular scrips, which is an appreciative comparison of the effective management of SEBI to keep up with the objective of securing Indian investors.

    Further, though cryptocurrency hasn’t been a domain of SEBI, the dark reality of FinFluencers can be quantitatively examined. For example approximately Rs. 5 Lakhs almost all the famous Indian Finfluencers promoted Crypto-FD, a highly risky product of Vauld, which lately stopped all withdrawal activities, a close look into the functioning would have made it evident, that the product they promote has fundamental flaws, especially in uncertain crypto markets.

    More often than not their target audience is the first-time investor, who can lose faith in markets forever with one such instance, and these are usually those who themselves have a little safety net of earnings. This example must be boldly noted to examine the ill impact that FinFluencers have the power to bring about.