The Corporate & Commercial Law Society Blog, HNLU

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

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

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

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

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

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

    KEY CHANGES

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

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

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

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

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

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

    Regulatory Rationale and Objective

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

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

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

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

      Legal and Compliance Implication

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

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

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

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

      Opportunities and Challenges for Stock Brokers

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

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

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

      Conclusion and Way Forward

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

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

    1. A New Chapter in India’s Insolvency Law: What the 2025 Amendments Mean for Stakeholders

      A New Chapter in India’s Insolvency Law: What the 2025 Amendments Mean for Stakeholders

      BY Suprava Sahu, Fourth-Year student at gnlu, Gandhinagar
      INTRODUCTION

      The Insolvency and Bankruptcy Code, 2016 (‘IBC’) marked a shift in India’s approach to the corporate resolution process. By changing a fragmented framework into a unified, creditor-centric process, IBC aimed to expedite the resolution of non-performing assets and enhance the ease of doing business. While studies have highlighted that IBC succeeded in improving recovery rates and reducing the timelines, structural issues began to surface as the code matured. Delays in the resolution, underutilization of viable assets, and limited investor participation called for reform.

      Recognizing this need, the Insolvency and Bankruptcy Board of India (‘IBBI’) introduced the IBBI ((Insolvency Resolution Process for Corporate Persons) Fourth Amendment Regulations 2025 which aim to address the inefficiencies and enhance the effectiveness of the Corporate Insolvency Resolution Process (‘CIRP’). Key features of this amendment include enabling part-wise resolution of corporate debtors, harmonizing payment timelines for dissenting creditors, and mandating the presentation of all resolution plans to the Committee of Creditors (‘CoC’).

      The piece unpacks whether the regulatory changes align with the IBC and its intended goals or are just a mere paper over the institutional cracks.

      DIAGNOSING THE IBC’S STRUCTURE

      IBC rests on three foundational pillars: maximizing the value of assets, ensuring a time-bound insolvency process, and balancing the interests of all stakeholders. These principles are affirmed as the foundational principle behind the IBC by cases like Essar Steel India Ltd. v. Satish Kumar Gupta.

      Yet these principles exist in tension. For example, despite the 190–270-day timeline for the CIRP, the IBBI’s quarterly report shows that  more than 60% of the CIRPs have exceeded the timelines, which leads to diminished asset value, deters strategic investors, and disrupts the objective of value maximization.

      The framework also gives substantial control to financial creditors via the CoC, with operational creditors having a very limited say. This structure offers swift decision making it has attracted criticism for privileging institutional lenders at the cost of small creditors. The introduction of staged payments for dissenting creditors and asset-specific resolution under the new regulations can be seen as a regulatory response to this imbalance.

      The IBC initially favoured a rigid process to instill discipline in resolution, but a one-size-fits-all model may stifle innovation. Scholars have argued that insolvency systems need to adapt to varied market structures and varied market structures especially in emerging economies. A key question remains: can a rigid, rule-bound structure effectively adapt to the complexities of a diverse insolvency system? The amendments must be understood not as isolated tweaks but as strategic interventions to reconcile the tensions inbuilt in the IBC’s design.

      DISSECTING THE KEY AMENDMENTS

      The amendment introduces four main changes each targeting to address long-standing inefficiencies and gaps in the stakeholder engagement.

      • Part-wise Resolution of Corporate Debtors

      The amended regulations now allow the Resolution Professionals (‘RPs’)to invite resolution plans for specific business segments of the corporate debtor in addition to the entire company. This creates a dual-track mechanism that offers unprecedented flexibility to the CoC and RPs. It is grounded on the fact that many insolvency cases involve heterogeneous assets, some of which are viable, some of which are distressed. Under the earlier regime, focusing on a holistic resolution often led to delayed proceedings and discouraged potential resolution applicants who were only interested in certain businesses. A similar model has been employed in jurisdictions like UK, where the pre-pack administrative sales and partial business transfers allow administrators to sell parts of their enterprise to recover the maximum value. Studies have advocated for asset-wise flexibility as a strategy to reduce liquidation rates and protect value.

      However, this reform risks of cherry picking, where bidders might try to choose profitable units while leaving liabilities and nonperforming divisions. This can potentially undermine the equitable treatment of creditors and complicate the valuation standard and fair assessment. This concern was evident in cases like Jet Airways where bidders sought profitable slots while avoiding liabilities. Jurisdictions like the UK mitigate this through independent scrutiny in pre-pack sales, a safeguard which India could adapt.

      • Harmonized Payment Timelines for Dissenting Creditors

      In cases like Jaypee Kensington and Essar Steel, the Supreme Court upheld that dissenting creditors must receive at least the liquidation value but left ambiguity on payment. Previously, the treatment of dissenting creditors lacked clarity, especially around the payment timelines. The amendment resolves this ambiguity by laying down a clear rule. . By ensuring that dissenters are not disadvantaged for opposing the majority, it reinforces a sense of procedural justice and also encourages more critical scrutiny of resolution plans within the CoC. It seeks to balance the majority rule with individual creditor rights, thereby enhancing the quality of proceedings.

      But, this provision could also complicate cash flow planning for resolution applicants and disincentivize performance-based payouts. Early, mandatory payouts to dissenters could affect plan viability and reduce the flexibility needed for restructuring. There is also a risk that dissenters may use their position to strategically extract early payments, leading to non-cooperation or tactical dissent – an issue which the amendment has left unaddressed.

      The balancing act between fairness and functionality can be seen as a reform which not just enhances inclusivity but also introduces a new operational pressures.  

      • Enhanced role for interim finance providers

      Another noteworthy intervention is that the CoC may now direct RPs to invite interim finance providers to attend CoC meetings as observers. These entities will not have voting rights but their presence is expected to improve the informational symmetry within the decision-making process. Finance providers have more risk when they are lending to distressed entities. Allowing them to observe deliberation offers more visibility into how their funds are being used and enhances lender confidence. From a stakeholder theory perspective, this inclusion marks a shift away from creditor dominance towards a more pluralist approach. This was also argued by Harvard Professor Robert Clark, who stated that insolvency regimes must recognize the varied capital interests involved in business rescue.

      While the introduction of interim finance providers promotes transparency and may increase lender confidence, the observer status needs to be carefully managed. Without clear boundaries, non-voting participants could still exert indirect influence on CoC deliberations or access sensitive information. To mitigate such risks, the IBBI could consider issuing guidelines to standardize observer conduct. This highlights a broader concern – expanding stakeholder involvement without proper guardrails, which may create issues in the already complex process.

      • Mandatory Presentation of All Resolution Plans to the CoC

      Earlier, RPs would filter out non-compliant plans and only present eligible ones to the CoC. The new amendment mandates all resolution plans to be submitted to the CoC along with the details of non-compliance. This reform shifts from RP discretion to CoC empowerment. It repositions the RP as a facilitator and reduces the risk of biased exclusion of potential plans.

      The amendment enhances transparency and aligns with the principles of creditor autonomy, which states that the legitimacy of the insolvency process depends not only on outcomes but on stakeholder confidence in the process. It also carries a risk of “decision fatigue” if the CoC is flooded with irrelevant non-viable proposals. The RP’s expert assessment should still carry some weight and structured formats for presenting non-compliant plans may be needed to make this reform operationally sound.

      Taken together, the amendments do not merely fix operational gaps they reflect a broader evolution of India’s insolvency framework from rigidity to responsiveness.

      STAKEHOLDER IMPLICATIONS & CONCERNS

      The regulation significantly rebalances roles within the CIRP, with distinct implications for each stakeholder. For Financial Creditors, part-wise resolutions, allowing staged payments and overseeing finance participants through the CoC has deepened their influence. This aligns with the creditor-in-control model, which states that power demands fiduciary accountability. Dominant creditors could steer outcomes for selective benefit, risking intra-creditor conflicts previously flagged by IBBI.

      Dissenting creditors now gain recognition through statute in phased payouts, ensuring they receive pro rata payments before consenting creditors at each stage. However, operational creditors remain outside the decision-making process, raising concerns about continued marginalization. This concern was also highlighted by IBBI that insolvency regimes that overlook smaller creditors risk creating long-term trust deficits in the process. RPs must now present all resolution plans, including the non-compliant ones to the CoC. This not just curtails arbitrary filtering but also increases the administrative burden.. Beyond the RP’s procedural role, the reforms also alter the landscape for resolution applicants.  The amendment benefits RPs by offering flexibility to bid for specific parts of a debtor. This may attract specialized investors and increase participation. However, unless the procedural efficiencies are addressed alongside the increased discretion, both RPs and applicants may find themselves in navigating through a system which is transparent but increasingly complex.

      CONCLUSION AND WAY FORWARD

      The Fourth Amendment to the CIRP reflects a bold move that seeks to move from a procedural rigidity towards an adaptive resolution strategy. The reforms aim to align the IBC more closely with the global best practices which are mainly focused on value maximization and creditor democracy. Yet as numerous scholars have emphasized insolvency reform is as much about institutional capability and procedural discipline as it is about legal design. The real test would lie in implementation, how the CoCs exercise their enhanced discretion and how RPs manage rising procedural complexity. Equally important is ensuring that small creditors, operational stakeholders and dissenters are not left behind.

      Going forward, further reforms are needed which include standard guidelines for plan evaluation, better institutional support and capacity upgrades for the NCLTs. Without these, the system risks duplicating the old inefficiencies. Overall, the 2025 reform represents a necessary evolution, but whether it becomes a turning point or a missed opportunity will depend on how effectively the ecosystem responds.

    2. Addressing the Silence: Security for Costs in India’s Arbitration Landscape (Part II)

      Addressing the Silence: Security for Costs in India’s Arbitration Landscape (Part II)

      BY Pranav Gupta and Aashi Sharma Year, RGNUL, Punjab

      Having discussed the concept of Security for Costs and International Precedents of Investment Arbitration, this part will delve into precedents of Commercial Arbitration and potential solution for the security for cost puzzle.

      B. Commercial Arbitration Procedure:

      The UNCITRAL Model Law on International Commercial Arbitration, being a foundational framework, empowers the tribunal to order SfC under Article 17(2)(c), after being amended in 2006. The ambiguous drafting of the provision fell prey to a much-anticipated debate,[i] with critics arguing it fails to clearly address the issue of SfC. It led to a proposal[ii] for amending Article 17(2)(c) by adding words “or securing” after “assets” to signify security of some sort. Despite this, the Model Law continues to influence the rules of major arbitral institutions like the London Court for International Arbitration Rules (“LCIA Rules”) and the Singapore International Arbitration Centre Rules (“SIAC Rules”).

      Article 25.2 under the LCIA rules grants the arbitral tribunal power to order for SfC as mirrored by Article 38(3) of the English Arbitration Act, 1996 which is the governing law of arbitrations seated in England and Wales. In the cases of Fernhill Mining Ltd. and Re Unisoft Group (No. 2), the judges devised a three-pronged test for granting SfC: Firstly, there must be “reasons to believe” that the claimant will be unable to pay the defendant’s costs if unsuccessful in the claim. Secondly, there must be a balancing of the interest[iii] of the defendant and the claimant by protecting the defendant against impecunious claims while not preventing the claimant from proceeding with a meritorious claim. Thirdly, the conduct of the party[iv] seeking a SfC must not suggest an attempt to stifle a meritorious claim.

      Rule 48 of the SIAC Rules 2025 empowers the arbitral tribunal to order for SfC. Notably, both the LCIA and SIAC Rules distinguishes between SfC and ‘security for the amount in dispute’, with LCIA Article 25.1(i) and Article 25.2 addressing each separately, in the similar way as SIAC Rule 48 and 49 do.

      A Possible Solution to the Security for Costs Puzzle

      As the authors earlier observed that The Arbitration Act doesn’t possess any express provision for awarding SfC, leading courts to resort to section 9 of The Act, an approach later debunked by the Delhi High Court. However, this contentious issue gained prominence again with the landmark judgement of Tomorrow Sales Agency. The case remains landmark, being the first Indian case to expressly deal with the issue of SfC, with the earlier cases touching the issue only in civil or implied contexts. The case led to the conclusion that SfC couldn’t be ordered against a third-party funder, who is not impleaded as a party to the present arbitration, though the Single Judge Bench upholding the court’s power to grant such a relief under Section 9. However, the judgment leaves ambiguity regarding the particular sub-clause under which SfC may be granted, which the author tries to address by providing a two-prong solution.

      As an ad-hoc solution, the authors prescribe the usage of sub-clause (e) of section 9(1)(ii) of The Arbitration Act, which provides the power to grant any ‘other interim measure of protection as may appear to the court to be just and convenient’. The above usage would be consistent with firstly with the Tomorrow Sales Agency case as it implies the power to order such measure under section 9 of The Act and secondly with the modern interpretation of section 9, where courts emphasised its exercise ex debito justitiae to uphold the efficiency of arbitration.

      As a permanent solution, the authors suggest the addition of an express provision to The Arbitration Act. The same can be added by drawing inspiration from the LCIA Rules and the SIAC Rules’ separate provisions for ‘SfC’ and ‘securing the amount in dispute’, further building on the specifics of the concept laid down in Rule 53 of ICSID Rules, with particular emphasis on the above mentioned Indian precedents. An illustrative draft for the provision adopting the above considerations is provided below:

      • “Section XZ: Award of Security for Costs
      • Upon the request of a party, the Arbitral Tribunal may order any other party to provide Security for Costs to the other party.
      • In determining the Security for Costs award, the tribunal shall consider all the relevant circumstances, including:
      • that party’s ability or willingness to comply with an adverse decision on costs;
      • the effect that such an order may have on that party’s ability to pursue its claims or counterclaim;
      • the conduct of the parties;
      • any other consideration which the tribunal considers just and necessary.

      Provided that the tribunal while considering an application for Security for Costs must not prejudge the dispute on the merits.

      • The Tribunal shall consider all evidence adduced in relation to the circumstances in paragraph (2), including the existence of third-party funding.

      Provided that the mere existence of a third-party funding arrangement would not by itself lead to an order for Security for Costs.

      • The Tribunal may at any time modify or revoke its order on Security for Costs, on its own initiative or upon a party’s request.”

      Hence, in light of increasing reliance on mechanisms such as TPF, the absence of a dedicated provision for SfC remains a glaring procedural gap. While, the Indian courts have tried to bridge this void through the broad interpretations of section 9 of The Arbitration Act, a coherent solution requires both an ad interim interpretive approach, through the invocation of sub-clause (e) of Section 9(1)(ii) and a long-term legislative amendment explicitly incorporating SfC as a standalone provision. Such a provision must be drawn from international frameworks such as the ICSID, LCIA, and SIAC Rules, ensuring India’s credibility as an arbitration-friendly jurisdiction.

      [i] United Nations Commission on International Trade Law, Report of the Working Group on Arbitration and Conciliation on the work of its forty-seventh session (Vienna, 10-14 September, 2007).

      [ii] ibid.

      [iii] Wendy Miles and Duncan Speller, ‘Security for costs in international arbitration- emerging consensus or continuing difference?’ (The European Arbitration Review, 2007) <https://www.wilmerhale.com/-/media/e50de48e389d4f61b47e13f326e9c954.pdf > accessed 17 June 2025.

      [iv] Sumeet Kachwaha, ‘Interim Relief – Comments on the UNCITRAL Amendments and the Indian Perspective’ (2013) 3 YB on Int’l Arb 155 <https://heinonline-org.rgnul.remotexs.in/HOL/P?h=hein.journals/ybinar3&i=163> accessed 5 June 2025.  

    3. Addressing the Silence: Security for Costs in India’s Arbitration Landscape (Part I)

      Addressing the Silence: Security for Costs in India’s Arbitration Landscape (Part I)

      BY PRANAV GUPTA AND AASHI SHARMA, SECOND- YEAR STUDENT AT RGNUL, PUNJAB

      Introduction

      The recent cases of Lava International Ltd. and Tomorrow Sales Agency have reignited the confusions regarding the concept of Security for Costs (‘SfC’) in India.Gary B. Born[i] defines SfC as “an interim measure designed to protect a respondent against the risk of non-payment of a future costs award, particularly where there is reason to doubt the claimant’s ability or willingness to comply with such an award.”

      The authors in this manuscript shall wade through the confusions raised in the above cases. For that, firstly, we try to conceptually understand the concept of SfC by distinguishing it from the other situated similar concepts, while also emphasizing on the legal provisions governing them. Secondly, we analyze the concept of SfC in light of the leading international investment and commercial arbitration practices. Lastly, the authors propose a two-tier solution to the problem of SfC in India building on the international practices with certain domestic modifications.

      Security for Costs: Concept and Law
      1. Understanding Security for Costs:

      The concept of SfC is fundamentally different from that of ‘securing the amount in dispute’, as the latter is a measure to ensure the enforceability of the arbitral award by securing the party with whole or some part of the amount claimed or granted. section 9(1)(ii)(b) and section 17(1)(ii)(b) of The Arbitration and Conciliation Act, 1996 (‘The Arbitration Act’) regulates the regime for ‘securing the amount in dispute’ as an interim measure. The Hon’ble Supreme Court in the cases of Arcelor Mittal and Nimbus Communications clarified that section 9 permits securing the ‘amount in dispute’ on a case by case basis. Further, SfC is also distinct from ‘Recovery of Costs’, as ‘costs’ are recovered post the declaration of award and is addressed by section 31A of The Arbitration Act. 

      B. Security for Costs and Section 9: A Legal Void:

      While, The Arbitration Act deals with the similarly situated aspects of SfC as shown above, it remains silent on a provision for SfC, a gap that remains unaddressed even by the 2015 Amendment and The Draft Arbitration and Conciliation (Amendment) Bill, 2024. A landmark ruling with respect to SfC was delivered in the J.S. Ocean Liner case, by ordering to deposit USD 47,952 as an amount for recovery of legal costs. The court relied on section 12(6) of the English Arbitration Act 1950, akin to section 9(1)(ii)(b) of The Arbitration Act, to award SfC as an interim measure in this case. However, this harmonious interpretation was later rejected in the cases of Intertoll Co. and Thar Camps, by observing that under sub-clause (b) of section 9(1)(ii), only ‘amount in dispute’ can be secured and not the SfC. Hence, The Arbitration Act needs a reform with respect to the provision concerning SfC.

      International Precedents concerning Security for Costs
      1. Investment Arbitration Insights:

      The International Centre for Settlement of Investment Disputes (‘ICSID’) Tribunal (‘The Tribunal’), being the world’s primary institution, administers the majority of all the international investment cases. Till the 2022 Amendment to The ICSID Arbitration Rules (‘ICSID Rules’), even ICSID Rules were silent on this concept of SfC, however now Rule 53 of the same Rules contains the express provision for awarding SfC by The Tribunal. As the newly introduced Rule 53 is in its nascent stage with no extensive judicial precedents[ii] on it yet, the authors analyze the cases prior to the 2022 Amendment to understand the mechanism for granting SfC.

      Prior to the 2022 Amendment, SfC was granted as a provisional measure[iii] under Article 47 of The ICSID Convention and Rule 39 of The ICSID Rules as observed in the cases of RSM v. Grenada[iv] and Riverside Coffee.[v] However, in the Ipek[vi] case, the Tribunal permitted the granting of SfC only in ‘exceptional circumstances’.[vii] The high threshold[viii] was reaffirmed in Eskosol v. Italy[ix], where even the bankruptcy didn’t sustain an order for SfC. Further, in EuroGas[x] case, financial difficulty and Third-Party Funding (’TPF’) arrangement were considered as common practices, unable to meet the threshold of ‘exceptional circumstances’.

      Finally, in the RSM v. Saint Lucia[xi] case, the high threshold[xii] was met as the Claimant was ordered to pay US$ 750,000 as SfC on account of its proven history of non-compliance along with the financial constraints, and TPF involvement. In the same case, The Tribunal established a three-prong test[xiii] for awarding SfC emphasizing on the principles of ‘Exceptional Circumstances, Necessity, and Urgency’,[xiv] with the same being followed in the further cases of Dirk Herzig[xv] and Garcia Armas.[xvi] Further, The Tribunal added a fourth criterion of ‘Proportionality’[xvii] to the above three-prong test in the landmark case of Kazmin v. Latvia.[xviii]

      The Permanent Court of Arbitration (“PCA”) is another prominent institution, with nearly half its cases involving Investment-State arbitrations. The PCA resorts to Article 26 of the UNCITRAL Arbitration Rules to award SfC as seen in the Nord Stream 2 case.[xix] In Tennant Energy v. Canada[xx] and South American Silver,[xxi] the PCA applied the same test, devised in the Armas case to grant SfC.[xxii] Similar approaches have been adopted by the local tribunals, including Swiss Federal Tribunal and Lebanese Arbitration Center.[xxiii]

      [i] Gary B. Born, International Commercial Arbitration (3rd edn, Kluwer Law International 2021); See also Maria Clara Ayres Hernandes, ‘Security for Costs in The ICSID System: The Schrödinger’s Cat of Investment Treaty Arbitration’ (Uppsala Universitet, 2019) <https://uu.diva-portal.org/smash/get/diva2:1321675/FULLTEXT01.pdf&gt; accessed 17 June 2025.

      [ii] International Centre for Settlement of Investment Disputes, The First Year of Practice Under the ICSID 2022 Rules (30 June 2023).

      [iii] Lighthouse Corporation Pty Ltd and Lighthouse Corporation Ltd, IBC v. Democratic Republic of Timor-Leste, ICSID Case No. ARB/15/2, Procedural Order No. 2 (Decision on Respondent’s Application for Provisional Measures) (13 February 2016) para 53.

      [iv] Rachel S. Grynberg, Stephen M. Grynberg, Miriam Z. Grynberg and RSM Production Corporation v. Grenada, ICSID Case No. ARB/10/6, Tribunal’s Decision on Respondent’s Application for Security for Costs (14 October 2010) para 5.16.

      [v] Riverside Coffee, LLC v. Republic of Nicaragua, ICSID Case No. ARB/21/16, Procedural Order No. 7 (Decision on the Respondent’s Application for Security for Costs) (20 December 2023) para 63.

      [vi] Ipek Investment Limited v. Republic of Turkey, ICSID Case No. ARB/18/18, Procedural Order No. 7 (Respondent’s Application for Security for Costs) (14 October 2019) para 8.

      [vii] BSG Resources Limited (in administration), BSG Resources (Guinea) Limited and BSG Resources (Guinea) SÀRL v. Republic of Guinea (I),ICSID Case No. ARB/14/22, Procedural Order No. 3 (Respondent’s Request for Provisional Measures) (25 November 2015) para 46.

      [viii] Lao Holdings N.V. v. Lao People’s Democratic Republic (I), ICSID Case No. ARB(AF)/12/6, Award (6 August 2019) para 78.

      [ix] Eskosol S.p.A. in liquidazione v. Italian Republic, ICSID Case No. ARB/15/50, Procedural Order No. 3 Decision on Respondent’s Request for Provisional Measures (12 April 2017) para 23.

      [x] EuroGas Inc. and Belmont Resources Inc. v. Slovak Republic, ICSID Case No. ARB/14/14, Procedural Order No. 3 (Decision on the Parties’ Request for Provisional Measures) (23 June 2015) para 123.

      [xi] RSM Production Corporation v. Saint Lucia, ICSID Case No. ARB/12/10, Decision on Saint Lucia’s Request for Security for Costs (13 August 2014) para 75.

      [xii] Transglobal Green Energy, LLC and Transglobal Green Panama, S.A. v. Republic of Panama, ICSID Case No. ARB/13/28, Decision on the Respondent’s Request for Provisional Measures Relating to Security for Costs (21 January 2016) para 7.

      [xiii] Libananco Holdings Co. Limited v. Republic of Turkey, ICSID Case No. ARB/06/8, Decision on Applicant’s Request for Provisional Measures (7 May 2012) para 13.

      [xiv] BSG Resources Limited (n vii) para 21.

      [xv] Dirk Herzig as Insolvency Administrator over the Assets of Unionmatex Industrieanlagen GmbH v. Turkmenistan, ICSID Case No. ARB/18/35, Decision on the Respondent’s Request for Security for Costs and the Claimant’s Request for Security for Claim (27 January 2020) para 20.

      [xvi] Domingo García Armas, Manuel García Armas, Pedro García Armas and others v. Bolivarian Republic of Venezuela, PCA Case No. 2016-08, Procedural Order No. 9 Decision on the Respondent’s Request for Provisional Measures (20 June 2018) para 27.

      [xvii] Transglobal Green Energy (n xii) para 29.

      [xviii] Eugene Kazmin v. Republic of Latvia, ICSID Case No. ARB/17/5, Procedural Order No. 6 (Decision on the Respondent’s Application for Security for Costs) (13 August 2020) para 24.

      [xix] Nord Stream 2 AG v. European Union, PCA Case No. 2020-07, Procedural Order No. 11 (14 July 2023) para 91.

      [xx] Tennant Energy, LLC v. Government of Canada, PCA Case No. 2018-54, Procedural Order No. 4 (Interim Measures) (27 February 2020) para 58.

      [xxi] South American Silver Limited v. The Plurinational State of Bolivia, PCA Case No. 2013-15, Procedural Order No. 10 (Security for Costs) (11 January 2016) para 59.

      [xxii] Domingo García Armas (n xvi).

      [xxiii] Claimant(s) v. Respondent(s) ICC Case No. 15218 of 2008.

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

      Navigating RBI’s Revised Framework for Downstream Investments by FOCCs

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

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

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

      WHAT ARE FOCCs AND DOWNSTREAM INVESTMENTS ?

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

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

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

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

      Analysis of Key Changes

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

      1. Consistency with General FDI Norms

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

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

      2. Share Swaps Approved

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

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

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

      3. Permissibility of Deferred Consideration

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

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

      4. Limitations on the Utilisation of Domestic Borrowings

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

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

      5. Modified Pricing Guidelines for Transactions

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

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

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

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

      6. Reporting and Compliance via Form DI

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

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

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

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

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

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

      8. Classification of FOCCs based on Share Movement

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

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

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

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

      Conclusion

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

    5. RBI’s Electronic Trading Platforms: a Bittersweet Take on Trading

      RBI’s Electronic Trading Platforms: a Bittersweet Take on Trading

      BY ABHISHEK KAJAL, FOURTH YEAR STUDENT AT IIM, ROHTAK
      Introduction

      The Reserve Bank of India (RBI) introduced the 2024 framework on Electronic Trading Platforms (“ETPs”) in April 2024 (“2024 Draft Framework”), superseding the earlier 2018 Direction (“2018 Framework”) with some key changes.

      As defined by the RBI, an ETP means any electronic system, other than a recognised stock exchange, on which transactions in eligible instruments are contracted.It is a platform that allows trading in eligible instruments as notified by the Reserve Bank of India. The main instruments include Government Securities (“G-Sec”), Money instruments, and Foreign Exchange instruments.

      No individual or organisation, whether local or foreign, is permitted to run an ETP without first securing authorisation or registration from the RBI. A resident person under the Foreign Exchange Management Act, 1999 (“FEMA”) is allowed to do online forex transactions only on authorised ETPs by the RBI. The purpose of this blog is to analyze the Indian ETP framework by tracing its evolution, examining key regulatory changes in the 2024 draft, highlighting challenges faced by domestic platforms, and suggesting practical solutions to strengthen the framework.

      Evolution of ETPs in India

      After the global financial crisis, trading on electronic platforms was being encouraged in several jurisdictions, driven primarily by regulatory initiatives to reform Over-the-Counter (“OTC”) derivative markets through a technology-driven approach. 

      Therefore, to have more market access, increased competition, and reduced dependency on traditional trading methods, the RBI, in 2017, issued a Statement on Developmental and Regulatory Policies as a part of its fourth bi-monthly Monetary Policy Statement 2017-18, where it highlighted its intention, for the first time, to regulate the money markets instruments under their purview through ETPs.  They recommended a framework to be put in place for ETPs that will deter market abuse and unfair trading practices, leading to better price discovery and improved market liquidity. Following this, the ETP Direction was first introduced in 2018.

      More Flexibility in Trading

      Under the 2018 framework, only banks were excluded from the framework’s applicability given that they allowed trading of eligible market instruments only with their customers on a bilateral basis and did not trade with market makers, including authorised dealers under FEMA.

      However, under the 2024 framework, the RBI has expanded the relaxation of this framework. Now, scheduled commercial banks (“SCB(s)”) and standalone primary dealers are also excluded from the framework for trading in eligible instruments. They can operate ETP platforms and trade in eligible instruments even without the authorization of the RBI, given that the SCB or primary dealer is the sole provider of price/quote and is a party to all the transactions of the platform.

      Certain reporting requirements have been provided for the SCBs or primary dealers, where they have to report any data or information whenever asked by RBI, and further, to avoid any misuse, the RBI can require such ETPs to comply with the ETP Direction. This change by the RBI reflects a balance between promoting ease of doing business and ensuring market protection in the ETP market.

      Setting up and Authorisation of ETPs

      To establish itself, an ETP must meet specific eligibility criteria for authorization from the RBI. The criteria are dynamic, beginning with the basic requirement that the ETP must be a company incorporated in India. Then, the ETP must comply with all applicable laws and regulations, including those of FEMA.

      The ETP or its Key Managerial Personnel (“KMP”) must have at least three years of experience in managing trading infrastructure within financial markets. This requirement serves as a preventive measure against potential market collapses. The ETP must have a minimum net worth of ₹5 crores at the outset and must maintain this net worth at all times. The ETP must have a robust technology infrastructure that is secure and reliable for systems, data, and network operations. All the trade-related information must be disseminated on a real-time or near real-time basis. Once an ETP meets the eligibility criteria, it must submit an application to the RBI in the prescribed format to obtain authorization.

      Offshore ETPs: Opening Doors for Cross-Border Trading

      The background of offshore ETPs is closely linked to the rising incidents of unauthorized forex transactions in India. In response, the RBI has periodically issued warnings against unauthorized platforms engaged in misleading forex trading practices and has maintained an Alert List of 75 such entities.

      The reason for such unauthorized practices lies in the previous 2018 framework, where a significant barrier for offshore ETPs was the requirement to incorporate in India within one year of receiving RBI authorization. This regulation proved challenging for foreign operators, leading to their non-compliance. Under the 2024 draft framework, foreign operators are now allowed to operate from their respective jurisdictions, however, they need authorisation from the RBI.

      The authorization process involves adhering to a comprehensive set of criteria aimed at ensuring regulatory compliance and market integrity. To qualify, the offshore ETP operator must follow some conditions, which include incorporating it in a country that is a member of the Financial Action Task Force (“FATF”). This will enhance the transparency and integrity of Indian Markets. It ensures adherence to global standards in combating money laundering and terrorist financing. This can enhance the overall credibility of India’s financial markets, making them more attractive to global investors.

      Then, the operator must be regulated by the financial market regulator of its home country. This regulator must be a member of either the Committee on Payments and Market Infrastructures (CPMI) or the International Organization of Securities Commissions (IOSCO), both of which are key international bodies that promote robust financial market practices and infrastructure. Once an offshore ETP operator meets these criteria, they must then follow the standard ETP application process for registration with the RBI.

      While analyzing this decision of the RBI, it is a promising initiative. The reason is that it does serve the purpose for which it was intended to be implemented, i.e., preventing unauthorized forex trading. The fundamental issue of unauthorized forex trading was about mandatory incorporation or registration in India, which has been done away with.

      Further, the framework specifies that transactions on these offshore ETPs can only involve eligible instruments that include the Indian rupee or rupee interest rates, and these transactions must strictly be between Indian residents and non-residents.

      Transactions between residents are not permitted under this framework, which indicates that the offshore ETP serves a cross-border trading function rather than facilitating domestic transactions. This is the right step in increasing Foreign Portfolio Investment in India and ensuring risk mitigation that may arise by allowing offshore ETPs to allow transactions among Indian residents.

      The Domestic Game

      However, when it comes to domestic ETPs, the 2024 draft framework is not very effective, the reason being that they do not incentivize domestic operators to apply for authorization. To date, over a span of six years, the RBI has authorized a total of only five ETP operators, one of which is the Clearing Corporation of India and four other private players.

      The reason for such slow adoption is that the operators are ineligible to apply for authorization due to stringent eligibility criteria (Regulatory Restriction). For example, the general authorization criteria for an ETP require that the applying entity or its Key Managerial Personnel must have at least three years of experience in operating trading infrastructure in financial markets. The issue here is that the requirement focuses solely on prior experience in operating trading infrastructure. This effectively limits eligibility to entities already active in this space, leaving little to no opportunity for new entrants to participate and innovate in the ETP market.

      This missed opportunity to foster domestic competition and innovation could limit the full potential of ETPs in India. Therefore, the RBI should take a liberalized approach towards domestic ETPs and ensure that the domestic ETP climate is conducive. To address this, the RBI should broaden the eligibility criteria to allow entities from other financial sectors, not just those with experience in trading infrastructure, to apply for ETP authorization. To ensure market safety, this relaxation can be balanced by imposing stricter disclosure requirements on such entities.

      A phased approach could also be taken by RBI where it could require new players with insufficient experience to first test their platform in the regulatory sandbox operated by RBI and then after rigorous testing, the same could be granted authorization. This will allow more domestic players to participate and will lead to enhanced forex trading in India which will potentially increase FDI investment in India.

      Way Forward

      Another potential change to increase the adoption rate of domestic ETPs might include examining and changing the eligibility requirements. Tax exemptions or lower net worth (less than 5 cr.) entry with certain restrictions could be considered to attract more participants, improving the entire market environment and addressing the low adoption rate found under the existing framework.

      The inclusion of offshore ETPs to register and operate in India has been the most favorable move towards facilitating foreign investment in India. The sturdy registration process ensures that only serious firms join the Indian market, which sets the pace for a market overhaul. The exclusion of scheduled commercial banks and standalone primary dealers is also a significant step forward in simplifying banking operations and increasing FPI.

      Finally, the 2024 Draft ETP Framework may be favorable to foreign ETPs, but the game is not worth the candle for domestic ones. With continued advancements and strategic enhancements, as suggested, India’s ETP framework has the potential to drive significant economic growth and elevate its position in the global financial landscape.

    6. Section 12A of Commercial Courts Act : Resolving Territorial Ambiguity in Pre-litigation Mediation

      Section 12A of Commercial Courts Act : Resolving Territorial Ambiguity in Pre-litigation Mediation

      BY ARNAV ROY, THIRD YEAR STUDENT AT Nlu, DELHI
      INTRODUCTION

      The Commercial Courts Act, 2015 was enacted to expedite the resolution of commercial disputes and establish India as an investor-friendly jurisdiction. Among its significant provisions is section 12A, which mandates compulsory pre-institution mediation for commercial disputes unless urgent interim relief is sought. However, section 12A presents an ambiguity regarding territorial jurisdiction, specifically whether mediation must occur within the territorial limits where the subsequent suit is filed. This paper aims firstly to explore the statutory interpretation of section 12A, secondly to discuss judicial clarifications on territorial jurisdiction with specific reference to Ganga Taro Vazirani v. Deepak Rahej, and finally to critically analyse whether substantial compliance suffices to resolve territorial ambiguities.

      UNDERSTANDING SECTION 12A OF THE COMMERCIAL COURTS ACT

      Section 12A requires plaintiffs to exhaust pre-institution mediation, except in urgent interim relief cases. The legislative intent is to promote amicable settlement, reducing judicial burden and enhancing procedural efficiency.

      However, the absence of explicit territorial jurisdiction provisions under section 12A creates ambiguity. Unlike the Civil Procedure Code, 1908, which clearly defines territorial jurisdiction[i], section 12A of the Commercial Courts Act remains silent on this aspect, raising procedural uncertainties.

      MANDATORY NATURE OF PRE-LITIGATION MEDIATION

      Indian courts have reaffirmed the mandatory nature of pre-institution mediation. In Patil Automation (P) Ltd v. Rakheja Engineers, the Supreme Court categorically established the procedural mandatory character of section 12A. Likewise, in Ganga Taro Vazirani v. Deepak Raheja, the Bombay High Court emphasized the necessity for efficient dispute resolution and judicial backlog reduction, underlining the importance of pre-litigation mediation.

      CLARIFYING TERRITORIAL AMBIGUITY: GANGA TARO VAZIRANI JUDGMENT

      The Bombay High Court’s decision in Ganga Taro Vazirani v Deepak Raheja provides crucial guidance on the territorial scope of section 12A’s pre-litigation mediation requirement. In that case, a commercial suit was filed without any urgent relief, raising the question of whether mediation had to occur within the same jurisdiction as the suit. A single judge of the High Court treated section 12A as a procedural provision subject to the doctrine of substantial compliance, rather than an inflexible jurisdictional mandate.

      The court noted that when parties had already made genuine attempts to resolve their dispute, it would be “futile to compel the parties to engage in pre-institution mediation again, merely to satisfy territorial compliance. Such an interpretation would defeat the very purpose for which the Commercial Courts Act, 2015 was brought into force.”  This purposive reading underscored that the objective of section 12A – expeditious settlement of disputes – should not be thwarted by rigid insistence on where the mediation is conducted.

      Substantial compliance over technicality: The High Court emphasized that conducting pre-suit mediation in good faith, even if outside the territorial limits of the court where the suit is later filed, could constitute substantial compliance with section 12A’s mandate. In other words, a bona fide mediation attempt (for example, in a different city or through a private mediator) satisfies the law’s intent, so long as the effort to settle was genuine. This approach prioritizes substantive justice over procedural form – minor deviations in the location or forum of mediation should not invalidate the proceedings, provided the core requirement (attempting amicable resolution) is met.

      Avoidance of redundancy and waiver: By privileging substantial compliance, the High Court avoided redundant procedural cycles. It would serve no purpose to force parties to re-mediate in the court’s locale if they had already mediated elsewhere with no success. Indeed, the judgment warned that insisting on a second mediation solely for territorial alignment would simply cause delay – an outcome contrary to the Act’s intent of swift dispute resolution2. In Ganga Taro, the plaintiff’s initiation of mediation (albeit not in the suit forum) combined with the defendant’s stance meant the court was satisfied that the spirit of section 12A had been honored. This pragmatic stance ensured that procedural rules serve as a means to justice rather than a trap.

      COMPARATIVE ANALYSIS: INTERNATIONAL APPROACHES TO MANDATORY PRE-LITIGATION ADR AND TERRITORIAL SCOPE

      Jurisdictions worldwide have adopted varied stances on mandatory pre-filing alternative dispute resolution (ADR), with differing implications for territorial jurisdiction. A brief survey of select jurisdictions illustrates how the balance between procedural mandate and territorial constraints is struck elsewhere:

      United Kingdom: In England and Wales, there is no equivalent statutory mandate requiring mediation before a civil commercial suit. Instead, the Civil Procedure Rules (CPR) and court practice encourage ADR through pre-action protocols and cost sanctions. The leading case of Halsey v Milton Keynes General NHS Trust established that courts cannot compel unwilling parties to mediate. Still, unreasonable refusal to even attempt mediation can result in adverse cost consequences. This policy has effectively made ADR a de facto expected step in the litigation process. Notably, because mediation in the UK remains voluntary rather than jurisdictionally required, there is no rigid territorial prescription for where it must occur. Parties are free to choose mediation forums anywhere, or even mediate online, as long as it is reasonable and accessible. Recent developments signal a cautious shift toward targeted mandatory mediation , but these initiatives define the process in a way integrated with the court’s system. In all cases, the emphasis is on the fact of engaging in settlement efforts rather than the physical location. Thus, English practice sidesteps territorial disputes by focusing on compliance in substance – if the parties have reasonably engaged with mediation or other ADR, the courts are satisfied, regardless of where or how the mediation took place. This flexible approach aligns with a broader common-law trend of encouraging mediation through incentives and case management, rather than imposing hard territorial rules.

      United States: In the U.S., the approach to pre-litigation mediation varies widely depending on the jurisdiction and subject matter. There’s no blanket federal rule requiring commercial litigants to mediate before filing a lawsuit. However, many states have their own rules mandating ADR in specific contexts. For example, Florida requires pre-suit mediation for certain disputes involving homeowners’ associations. Under Chapter 720 of the Florida Statutes, an aggrieved party must serve a “Statutory Offer to Participate in Pre-suit Mediation” and go through the process as per court rules. Skipping this step can lead to dismissal or a stay of the case.

      Because these requirements are grounded in state law, the mediation is typically localized—it must happen within the state, often with court-approved mediators. A party can’t simply mediate elsewhere or ignore the process; compliance with state-specific procedures is mandatory, much like India’s section 12A requirement for commercial suits. That said, U.S. courts sometimes show flexibility. If the parties have genuinely attempted an ADR process outlined in their contract, courts may still allow the case to proceed, even if the exact statutory steps weren’t followed.

      At the federal level, while there’s no pre-filing mediation rule, many district courts require mediation or settlement conferences after the suit is filed, usually through local rules tied to Federal Rule of Civil Procedure 16. Overall, the U.S. model is decentralized: mandatory pre-litigation mediation exists in certain pockets, usually tied to state jurisdiction or specific areas of law, and when it does apply, parties must follow the local process to move forward in that state’s courts.

      Singapore: Singapore encourages mediation but does not mandate it before filing commercial suits. Instead, court rules like the Rules of Court 2021 require parties to consider ADR and report efforts to the court. Unreasonable refusal to mediate may lead to cost penalties.

      Being a single-jurisdiction city-state, mediation typically takes place locally, often through the Singapore Mediation Centre or court-linked programs. For cross-border disputes, the Singapore International Commercial Court allows cases to pause for mediation under the Litigation Mediation Litigation protocol, though this is voluntary.

      Mandatory pre-litigation mediation exists in community disputes. Under the 2015 Community Dispute Resolution Act, neighbors must mediate before filing claims, or risk dismissal and penalties. While not compulsory for commercial matters, Singapore’s legal framework supports mediation, reinforced by its adoption of the 2019 Singapore Convention on Mediation.

      Comparative Insight: Internationally, the handling of territorial jurisdiction in mandatory pre-filing mediation regimes tends to follow the underlying nature of the mandate. In jurisdictions like the UK, where mediation is encouraged but not explicitly compelled, territorial jurisdiction questions scarcely arise since parties have the freedom to mediate wherever it makes sense. By contrast, in jurisdictions with formal mandatory mediation requirements, the law usually designates or implies a forum or procedure tied to the court’s territory. The Ganga Taro principle of substantial compliance finds echoes in these systems as well, as courts internationally are inclined to excuse technical lapses if the claimant can demonstrate a sincere attempt at pre-litigation ADR. Ultimately, the comparative lesson is that mandatory pre-litigation mediation, as a growing global trend, must be implemented with an eye on practicality. This may be through flexible interpretation, as seen in India, cost-shifting incentives in the UK, or clear but reasonable procedural preconditions in the US and Singapore. Each model seeks to balance the promotion of settlement with the parties’ right of access to courts, navigating territorial concerns by either formalizing the required forum or, conversely, remaining silent on the forum to allow flexibility.

      CONCLUSION: BALANCING EFFICIENCY AND PROCEDURAL COMPLIANCE

      The judgment in Ganga Taro Vazirani clarifies section 12A’s territorial ambiguity effectively. While promoting efficiency, the ruling balances procedural compliance with practical objectives.

      While section 12A requires pre-litigation mediation, judicial interpretation, notably in Ganga Taro Vazirani v. Deepak Raheja, affirms that mediation conducted outside territorial jurisdiction constitutes substantial compliance. Nevertheless, substantial compliance does not supersede explicit jurisdictional requirements under procedural laws such as the CPC. Mediation outside territorial limits is sufficient for compliance provided it does not conflict with jurisdictional rules. A purposive interpretation balancing procedural adherence with practical efficiency ensures that the legislative intent of expedient dispute resolution is maintained without undermining jurisdictional integrity.

      Requiring repeated mediation merely for territorial compliance would defeat the very purpose of the Commercial Courts Act, which aims to ensure the swift resolution of commercial disputes. As the Bombay High Court rightly observed, procedural provisions should facilitate justice rather than obstruct it.

      Therefore, if mediation has already taken place outside the jurisdiction where the action is pending, it should be deemed proper compliance with section 12A. Insisting on strict territorial compliance would only cause unnecessary delays and frustrate the objectives of the Act.

      Thus, the law must balance procedural compliance with practical efficiency. A purposive interpretation of section 12A aligns with legislative intent, ensuring that commercial disputes are resolved swiftly without being entangled in unnecessary technicalities.

      [i] Civil Procedure Code 1908, ss 15-20.

    7. Evaluating the Impact of the RBI’s Draft Prudential Framework on Project Financing

      Evaluating the Impact of the RBI’s Draft Prudential Framework on Project Financing

      BY ARYAN SHARMA, THIRD-YEAR STUDENT AT MAHARASHTRA NATIONAL LAW UNIVERSITY, MUMBAI

      INTRODUCTION

      Project financing serves as a cornerstone for infrastructure development, by facilitating the construction of essential assets such as roads, power plants, and urban facilities. In May 2024, the Reserve Bank of India released the draft ‘Prudential Framework for Income Recognition, Asset Classification, and Provisioning pertaining to Advances—Projects Under Implementation, Directions 2024’. The draft was aimed at strengthening the regulatory environment that governs project finance. This circular created quite a stir in the financial sector.

      This article aims to examine the implications of these regulatory changes for lenders, borrowers, and the broader infrastructure sector. It explores whether the RBI’s cautious approach strikes the right balance between financial prudence and India’s ambitious infrastructure goals, and it analyzes potential market reactions and policy adjustments that may emerge in response to these new norms.

      UNDERSTANDING PROJECT FINANCE

      A discourse on the implications of the draft prudential norms requires an insight into project financing. Project finance refers to the method of financing infrastructure and other long-gestating capital-intensive projects like power plants, ports, and roads involving huge financial outlays. The typical project involves a high-risk profile, long gestation periods, and uncertain cash flows, all of which characterize the infrastructure sector.

      Unlike a regular loan sanction, which would depend on the character, capital, and capacity of the borrower, the loan structure of project financing predominantly depends on the project’s cash flow for repayment. The project’s assets, rights, and interests form part of the collateral. Additionally, the lender assesses the project sponsors and their experience in handling and commissioning the project. Project funding could be through a consortium of several lending institutions or include loan syndication. It could have any sort of funding proposition. A project has three distinct phases: design, construction, and operation.

      Banks and lending institutions primarily become involved during the construction and operational phases, where money is lent, and out standings appear in the books of accounts. After this, the extant prudential framework of income recognition, asset classification, and provisioning comes into effect.

      The draft prudential framework recently released by the RBI pertains to loans and advances for projects. The regulator has proposed stricter regulations for project financing, which makes it more expensive for lenders to provide loans for infrastructure and industrial projects like roads, ports, and power. The main question is: what has changed and why?

      WHY HAVE THESE CHANGES BEEN PROPOSED?

      During the infrastructure lending boom of 2008 to 2015, banks whitewashed their books of bad loans and defaults, which forced RBI to launch an asset quality review. This led to the unearthing of thousands of crores of hidden bad loans, causing investors to lose money. NPAs in banks shot up to an all-time high of ₹6.11 lakh crores, and the government had to invest more than ₹3 lakh crores in capital to bring banks back into shape.

      Furthermore, facts show that most project loans have been categorized as standard assets, even though there were some projects delayed beyond the planned schedule and were not yielding cash flows. This gave rise to the necessity for more stringent lending standards with extra provisions, which were directed towards avoidance of accounting shocks that might adversely affect the balance sheets of such entities. These actions are cautious from a risk management point of view, based on the regulator’s experience in the last credit cycle. Experience, after all, is a good teacher.

      WHAT ARE THESE NEW REGULATIONS?

      Under the new norms, there will be a broad provisioning of 5% of the funded outstanding on all existing and new exposures at a portfolio level. The new norms also demand a 1% provision even post-completion of the project, well over double the current requirement.

      The central bank has created a provisioning timeline of: “2% by March 31, 2025 (spread over four quarters of 2024-25); 3.50% by March 31, 2026 (spread over four quarters of 2025-26); 5.00% by March 31, 2027 (spread over four quarters of 2026-27)”

      Further, the allowable deferment periods for date of commencement of commercial operations (“DCCO”) are: “Up to 1 year for exogenous risks (including CRE projects); Up to 2 years for infrastructure projects with endogenous risks; Up to 1 year for non-infrastructure projects with endogenous risks; Up to 1 year for litigation cases”.

      Perhaps the RBI’s proposal to impose a 5% provision requirement on project loans has been triggered by the Expected Credit Loss (“ECL”) norms, which require banks to make provisions based on past default experiences.

      The ECL approach provides for the recognition of losses on loans as soon as they are anticipated, even if the borrower has not defaulted. These are prudential standards in accordance with international best practices. Every time the ECL norms are notified, banks will be required to reserve provisions for defaults accordingly.

      HOW WILL THIS IMPACT LENDERS?

      These new norms will significantly increase the provisioning requirements for banks and NBFCs, particularly those involved in large-scale infrastructure lending. Since the 5% provisioning mandate applies uniformly across all infrastructure projects, regardless of their inherent risk profiles, it may create a deterrent effect for lower-risk projects. Lenders could become more cautious in financing even relatively safer infrastructure ventures, as the increased provisioning costs may reduce the overall attractiveness of such exposures. This one-size-fits-all approach could inadvertently constrain credit flow to viable projects.

      The higher provisioning during the construction phase will directly impact the profitability of lenders, as a substantial portion of their capital will be locked in provisions rather than being available for lending.

      For lenders heavily engaged in project financing, such as PFC, REC, and IIFCL, this could mean a reduction in their lending appetite, thereby slowing down infrastructure development in the country.

      IMPACT ON BORROWERS AND PROJECT DEVELOPERS

      Project developers, especially in sectors like power, roads, ports, and renewable energy, will face tighter credit conditions. The cost of borrowing is likely to increase as banks and NBFCs factor in the higher provisioning costs into their lending rates. This could lead to:

      • Higher interest rates on project loans
      • More stringent lending criteria, making it harder for some projects to secure funding
      • Potential project delays, as financing becomes more expensive and risk-averse

      While these measures may enhance financial stability and prevent a repeat of the bad loan crisis of the past decade, they could also create bottlenecks in infrastructure development.

      POSSIBLE MARKET REACTIONS AND POLICY ADJUSTMENTS

      The sharp decline in banking and financial sector stocks following the release of this draft indicates that the market anticipates lower profitability and slower loan growth in the sector. Industry feedback is likely to request risk-weighted provisioning (lower rates for low-risk projects), extended implementation timelines, and carve-outs for strategic sectors like renewables. Developers may also seek clearer DCCO extension guidelines for projects delayed by regulatory hurdles.

      Objections from banks, NBFCs, and infrastructure developers may include requests for tiered provisioning rates based on project risk (e.g., sectors with historically low defaults). There may also be appeals to adjust quarterly provisioning targets to ease short-term liquidity pressures. Additionally, there could be demands for exemptions in renewable energy or other priority sectors to align with national development goals.

      However, the RBI may recalibrate its stance after engaging with industry stakeholders. Potential adjustments could include phased implementation of the 5% norm, reduced rates for priority infrastructure projects, or dynamic provisioning linked to project milestones. Maintaining financial stability remains paramount, but such refinements could ease credit flow to viable projects and mitigate short-term market shocks.

      Given India’s ambitious infrastructure goals under initiatives like Gati Shakti and the National Infrastructure Pipeline, a balance must be struck between financial prudence and the need to maintain momentum in project execution.

      CONCLUSION

      The RBI’s draft prudential framework is definitely a step in the right direction to strengthen financial stability and prevent systemic risks in project financing. However, it also raises concerns about credit availability, borrowing costs, and infrastructure development. It is true that the primary focus remains on the increased provisioning requirements, but the norms also raise broader concerns about their potential impact on credit availability and infrastructure growth, which may have cascading effects. By necessitating higher capital buffers, the norms risk reducing credit availability and increasing borrowing costs, which are unintended consequences that could slow infrastructure development despite their prudential benefits. If implemented as proposed, these norms will fundamentally alter the project financing landscape, making lending more conservative and expensive.    

      Albeit the proposed norms will likely make lending more conservative and expensive, they also offer important benefits, such as improved risk management, better asset quality for lenders, and long-term sustainability of infrastructure financing. The framework could potentially reduce NPAs in the banking system.

      Looking ahead, if implemented as proposed, we may see a short-term slowdown in infrastructure lending followed by more sustainable, risk-adjusted growth. A phased implementation approach could help mitigate transitional challenges, which would allow lenders and developers time to adapt. The framework could be complemented with sector-specific risk weights and credit enhancement mechanisms for priority infrastructure projects.

      The final framework, once confirmed, will be crucial in determining the future trajectory of infrastructure lending in India. Whether the market’s initial reaction is justified or premature remains to be seen, but one thing is clear, i.e., the era of easy project finance is over, and a more cautious, risk-averse approach is here to stay.

    8. 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.

    9. The Legal Conundrum: Is A New Mandatory Offer Possible During An Existing One? – II

      The Legal Conundrum: Is A New Mandatory Offer Possible During An Existing One? – II

      BY TANMAY DONERIA, FOURTH YEAR STUDENT AT RGNUL, PATIALA

      This article is published in two parts, this is the Part II of the article.

      Having discussed the key provisions under the Takeover Regulations and the conundrum arising therefrom, the following part delves into the interplay of Regulation 3, Regulation 20 and Regulation 26 of the Takeover Regulations while exploring the possible situations that might arise during such a transaction and suggest recourses available to the third party.

      II. Possible situations arising out of the interplay between regulation 20 and 26. 

      As highlighted earlier, we have two possible situations to examine with respect to the issue at hand. Firstly, when the conversion occurs during the period of 15 days and secondly, when the conversion occurs after the period of 15 days but before the completion of the offer period. Let us analyse these two situations in detail.

      –       When the Conversion Occurs During the Period of 15 Days i.e., 12.10.2024

      We shall assume a situation where the conversion of securities held by XYZ Ltd. occurred on 12.10.2024 i.e., during the 15 days provided for competing offers. If we were to undertake a hyper-technical interpretation of Regulation 20(5), we find that it only creates a bar on the announcement of an open offer after the expiry of 15 days provided for competing offers till the completion of the offer period. It does not take into account a situation wherein the obligation to make an open offer arises during the abovementioned 15 days period. But because the intent behind the provision is to prevent overlapping or simultaneous offers, we find that even in situations where the obligation to make an open offer arises during the 15 day period this restriction would be applicable. Hence, we are arriving at the same question, what should the third party do in such a scenario?

      At this juncture, it is important to appreciate the definition of ‘convertible securities’ under Regulation 2(1)(f) of the Takeover Regulations, which provides that the conversion may occur “with or without the option of the holder”. This is extremely relevant to understand as it will help us in determining whether the third party has breached the threshold under Regulation 3(1) willingly or not. This would further result in two different situations i.e., when the conversion happens without the option of the holder (compulsory conversion) and when the conversion happens with the option of the holder (optional conversion). 

      –       Compulsory Conversion

      • Compulsory conversion may occur in the case of mandatory convertible bonds, compulsorily convertible debentures (‘CCDs’), or preference shares (‘CCPS’). These types of securities get converted at a predetermined time without the option of the holder of such securities. This would mean that the third party had not voluntarily triggered the requirement to make a mandatory open offer under Regulation 3(1).
      • In such a situation, it would be appropriate to allow the third party to fulfil its obligation under Regulation 3(1) without engaging in involuntary competition with the original acquirer regarding offer size and offer price. Such an interpretation would be business-friendly and promote ease of doing business. 
      • In this context, it is suggested that the third party should be given a deference or relaxation and be allowed to make a mandatory open offer after the completion of the offer period. Such relaxation can be given to the third party within the ambit of Regulation 11 of the Takeover Regulations, which provides SEBI with the discretionary authority to exempt or provide relaxation from procedural requirements in the interest of the securities market. Regulation 11(2) specifically allows SEBI to “grant a relaxation from strict compliance with any procedural requirement under Chapter III and Chapter IV” upon the receipt of an application from the third party in terms of Regulation 11(3). Since Regulation 13under Chapter III dictates the time when the announcement for the open offer is to be made for Regulation 3, it is possible to grant such relaxation. The same is evident from the TRAC report which states that “SEBI would also continue to have the discretion to give relaxation from strict compliance with procedural requirements”. 
      • For example, in our situation, if XYZ Ltd. acquires shares on account of compulsory conversion and breaches the threshold limit under Regulation 3(1) it shall make an application under Regulation 11(3) to seek appropriate relaxation under Regulation 11(2).

      –       Optional Conversion

      Optional conversion may occur in the case of optionally convertible debentures (‘OCDs’) or optionally convertible debt instruments and other similar types of securities. These types of securities get converted voluntarily at the option of the holder in pursuance of their express choice and not at any predetermined time. Optional conversion is indicative of the holder’s willingness to trigger the provisions under Regulation 3(1).

      In such a situation, it would be appropriate that the third party who has voluntarily triggered the provisions of a mandatory open offer should be obligated to engage in raising a competing offer and conditions with respect to offer size and offer price should apply accordingly. In other words, the requirement of making a mandatory open offer should be complied with by making a competing offer and conditions concerning offer size and offer price as applicable on a competing offer should also apply to the third party.

      This raises another legal question, whether a mandatory open offer can be considered as a competing offer. In this regard, it is pertinent to note that Regulation 20(3) creates a legal fiction that a voluntary open offer made within the 15 day period should be considered a competing offer. The substance of the provision dictates that if an open offer by whatever name it may be called is made voluntarily/willingly within 15 days it should be treated as a competing offer. In furtherance of the same, it is possible to argue that if the requirements of the mandatory open offer are being triggered voluntarily/willingly by the third party on account of optional conversion, the same can be considered within the scope of Regulation 20(3), rendering the mandatory open offer as a competing offer. It is to be noted that in order to accommodate this interpretation appropriate amendments to the Takeover Regulations will be required. 

      Hence, in this context, if XYZ Ltd. acquires shares and breaches the threshold limit under Regulation 3(1) on account of optional conversion, it can be said that XYZ Ltd. had willingly breached the threshold hence, the spirit of the law would dictate that XYZ Ltd. should make a competing offer and conditions with respect to offer size and price shall apply to them accordingly. 

      –       When the conversion occurs after the period of 15 days i.e., 18.10.2024

      If the conversion, whether option or mandatory, occurs after the expiry of 15 days and the obligation to make a mandatory open offer is triggered, the third party who had acquired shares on account of convertible securities cannot make a public announcement for an open offer due to the statutory bar imposed by Regulation 20(5). 

      In such a situation, the third party may take recourse under Regulation 11 as mentioned earlier and make an application to SEBI in accordance with Regulation 11(3) to seek appropriate relaxation and deference in terms of Regulation 11(2) to make the mandatory open offer and comply with Regulation 3 after the completion of the offer period. This will ensure that the third party does not contravene the Takeover Regulations and fulfil their obligation imposed by Regulation 3(1). The same will be consistent with the intent of the provision as it will prevent any overlapping or simultaneous open offers and avoid any unnecessary troubles for the shareholders as well.

      III. Conclusion

      In light of the aforementioned discussion, it can be said that our legal conundrum cannot be expressly solved by simply applying the provisions contained in the Takeover Regulations. But, we can state that the conundrum arising out of the interplay between Regulation 3(1), Regulation 20(5) and Regulation 26(2)(c)(i) can be solved by understanding the underlying intent of the provisions, and applying the rule of contextual interpretation and harmonious construction.

      The interpretation as advanced in the previous sections will accommodate better investor protection, provide exit opportunities to the shareholder and promote ease of doing business in the country by protecting the interests of the acquirer. Currently, such a situation is purely academic in nature but it is not improbable for such a situation to emerge in real-world transactions.