The Corporate & Commercial Law Society Blog, HNLU

Tag: finance

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

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

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

    INTRODUCTION

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

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

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

    LOST IN LEGISLATION: WHY THE MICROFINANCE BILL FAILED

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

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

    A SHIELD WITH HOLES: SARFAESIs INCOMPLETE PROTECTION FOR MFIs

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

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

    .

    THE IBC GAP: WHERE SMALL NBFCs FALL THROUGH THE CRACKS

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

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

    BRIDGING THE GAP: REGULATORY PROBLEMS AND THE WAY FORWARD

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

    For the recovery of secured loans

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

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

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

    For the recovery of unsecured loans

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

    CONCLUSION

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

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

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

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

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

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

    Key Amendments in Rights Issue

    I. No more fast track distinction

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

    II. SEBI Drops DLoF Requirement

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

    III. Disclosure Requirements under LoF

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

    IV. Removal of Lead Managers

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

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

    V. Allotment to Specific Investors

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

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

    VI. Revised timeline for Rights Issues

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

    The new timeline has been explained below:

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

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

    Rights Issue Amendments 2025: What SEBI Forgot to Fix?

    I. Erosion of Shareholder Democracy

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

    II. Circumventing Takeover Code Intent

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

    III. Unmasking Preferential Allotment under the Veil of Rights Issue

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

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

      IV. Mandatory Lock-in Period for Specific Investors

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

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

        Conclusion

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

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

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

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

        INTRODUCTION

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

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

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

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

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

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

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

        EXTENDED MARKING THE CLOSE STRATEGY ADOPTED BY JANE STREET

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

        THE LEGAL PERSPECTIVE ON THE STRATEGIES ADOPTED BY JS GROUP

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

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

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

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

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

        WAY FORWARD

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

        CONCLUSION

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

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

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

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

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

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

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

        KEY CHANGES

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

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

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

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

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

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

        Regulatory Rationale and Objective

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

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

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

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

          Legal and Compliance Implication

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

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

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

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

          Opportunities and Challenges for Stock Brokers

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

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

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

          Conclusion and Way Forward

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

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

        1. 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. 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.

        3. 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.

        4. 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.

        5. 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.

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

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

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

          INTRODUCTION

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

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

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

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

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

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

          HOW DOES THE CENTRALISED FEE MECHANISM WORK?

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

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

          SAFEGUARDING INVESTORS INTERESTS: NEED FOR A CENTRALISED FEE COLLECTION MECHANISM

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

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

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

          CRITICAL EXAMINATION OF THE MECHANISM

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

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

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

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

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

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

          CONCLUSION

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