The Corporate & Commercial Law Society Blog, HNLU

Tag: investing

  • Balancing Act: Sebi’s Angel Fund Reforms For Inclusive Startup Growth

    Balancing Act: Sebi’s Angel Fund Reforms For Inclusive Startup Growth

    BY AADIT SHARMA, SECOND – YEAR STUDENT AT DR. RAM MANOHAR LOHIYA NATIONAL LAW UNIVERSITY, LUCKNOW

    INTRODUCTION

    India’s startup ecosystem plays a crucial role in economic growth, with angel funds providing essential early-stage investment and mentorship bridging the gap between early seed financing and seed financing. angel investors typically commit between USD 10,000 which can go upto USD 1 million (₹10 lakh to ₹ 8 crore), with greater amounts often provided by syndicates. Despite tighter capital markets and cautious investor sentiment, there were 103 registered angel funds in India holding commitments totalling ₹10,138 crores by Q1 2025. Although early-stage investments declined to approximately $3 billion across 1,500 deals in H1 2025, this sector remains vital for economic development. Recognising this, SEBI introduced reforms via the Alternative Investment Funds (Second Amendment) Regulations and two other circulars in the month of September and October, focusing on revised regulations and relaxed compliance timelines. Key changes introduced include mandating accredited investors, flexible lock-in periods and broadening permissible investments. These reforms aim to modernise angel investing in India.

    However, questions remain whether they will enhance startup funding accessibility or create barriers, especially in underserved regions. This analysis explores the implications of the amendments on the domestic startup funding cycle, offers a comparative analysis with global practices and proposes strategies to improve investment accessibility in India.

    REFRAMING SEBI’S REGULATORY APPROACH TO ANGEL FUNDS

    The 2025 amendments to Securities Exchange Board of India (‘SEBI’)’s Alternative Investment Fund Regulations,2012, (‘AIF’) together with the accompanying circulars, represent a substantive development in the regulatory framework for early-stage investment in India. The regime moves decisively from a primarily prescriptive model to a hybrid approach combining mandatory requirements with enhanced outcome-based flexibility. A pivotal reform is the institution of mandatory investor accreditation  for angel funds, an accredited investor in India is an investor with annual income of Rs. 2 crore or net-worth of Rs. 7.5 crore with 3.5 crore in financial assets, replacing the previous system based solely on financial thresholds.

    This aligns the angel fund framework of India with global regulatory approaches with like that of US SEC Regulation D­ that limits participation on objective accreditation criteria, thereby limiting access to investors who meet specified financial and net-worth thresholds. These investors are presumed to be capable of independently assessing and bearing early-stage investment risk. The minimum investment per portfolio company has been lowered from ₹25 lakh to ₹10 lakh; minimum corpus and commitment thresholds have also been abolished easing fund formation. Notably, changes to the lock-in period will provide greater liquidity, permitting exits within six months in specific cases.

    Angel Funds must now onboard at least five accredited investors before their first close, a measure designed to streamline entry and strengthen fund discipline. The scope of eligible investments has expanded, including Limited Liability Partnerships (‘LLPs’), thereby supporting broader entrepreneurial participation.  Measures such as mandatory investor accreditation, lock-in periods, fund-level investment structures and strict compliance protocols are retained to guard against speculative behaviour. Enhanced transparency is mandated through allocation methodology disclosure in the Private Placement Memorandum (‘PPM’) with additional annual audit requirements for larger funds. The phased compliance timeline reflects SEBI’s intent to balance regulatory rigor with market adaptability. Collectively, these reforms embody SEBI’s model of ‘guided liberalisation’ aiming for a flexible yet robust capital formation environment anchored in transparency and governance.

    STRUCTURAL AND PRACTICAL CONCERNS IN SEBI’S ANGEL FUND REFORMS

    A careful reading of SEBI’s recent circulars indicates that while the reforms appear progressive, they also carry certain structural concerns. The introduction of mandatory accreditation for investors in angel funds, though intended to promote investor protection and align with global practices, may inadvertently restrict the flow of capital by excluding non-accredited investors such as traditional/ legacy angels. This change effectively shifts investment power towards  high-net-worth individuals and institutional syndicates that possess greater organisational structure, compliance capacity and financial depth. Such concentration of investment capacity could lead to capital elitism, gradually marginalising semi-professional angels who, despite lacking formal accreditation, often contribute crucial sectoral knowledge and mentorship to startups. The circular further restricts angel funds from offering units to more than 200 non-accredited investors until September 2026, thereby narrowing the investor pool available to early-stage business ventures and  discouraging investors. Additionally, SEBI’s mandate requiring at least five accredited investors before declaring the first close reverses the conventional practicein angel investing. Traditionally, fund managers identify promising startups first, then attract investors based on those opportunities. The circular imposes the opposite sequence, wherein investors must be secured before any startup is identified, which may slow fund launches, increase opportunity costs and discourage new fund managers. This requirement could also give rise to behavioural distortions where managers bring in passive backers merely to satisfy the regulatory threshold, making compliance formalistic rather than actual. Moreover, regional disparities may intensify as managers outside major hubs such as Bengaluru, Mumbai or Delhi may struggle to attract accredited investors, leading to capital concentration in established business ecosystems.

    Finally, while the reduction in the lock-in period enhances liquidity, it disproportionately benefits institutional syndicates with rapid fund rotation strategies. Thereby placing traditional angel networks whose investment model relies on longer holding periods and sustained founder engagement with the startup at a relative disadvantage as compared to institutional syndicates which are better positioned to benefit from accelerated exit timelines due to their portfolio-based and time bound strategies.

    INTERNATIONAL PARALLELS AND DIVERGENCES

    The statutory framework of the United States (‘U.S.’) and the United Kingdom (‘U.K.)’ have been chosen for comparison as they represent leading common-law jurisdictions with advanced angel investment frameworks that balance investor protection with capital access and whose regulatory models have guided international best practices in early-stage financing and angel investing.

    In the United States early-stage investment is regulated by the US Securities and Exchange Commission,(‘US SEC**’**), particularly Regulation A, Regulation D and Regulation Crowdfunding (‘Reg. CF’). Rule 501 of Regulation D defines an accredited investor, determining eligibility for participation in early-stage investing. Rule 506(b) permits no limit on accredited investors and up to 35 sophisticated non-accredited investors, but prohibits general solicitation, while Rule 506(c) allows general solicitation solely for accredited investors with verified status. Rule 504 limits offerings at $10 million over twelve months and without general solicitation. Regulation A ‘Mini-IPO’ broadens access by allowing non-accredited investors who are subject to investment limits based on income or net worth.

    The 2012 JOBS Act significantly expanded access through Regulation Crowdfunding (‘Reg. CF’) enables startups to solicit investments from non-accredited individuals within statutory caps of a certain income threshold, thereby democratising angel investment and mitigating the concentration of opportunities among only high-net-worth and institutional investors. Reg. CF says that if an investor’s annual income or net worth is below USD107,000 they can invest only a small capped amount in crowd-funding each year. If both are above USD 107,000 they are allowed to invest more but still within a fixed annual limit.

    In the United Kingdom, angel investments fall under the Financial Conduct Authority (‘FCA’) framework, which requires investors to qualify as either high-net-worth or sophisticated investors. The UK distinguishes itself through strong fiscal incentives under the Seed Enterprise Investment Scheme (‘SEIS’) and Enterprise Investment Scheme (‘EIS’), offering income tax relief and loss offset mechanisms to mitigate early-stage risk in investment. Its private placement regime further supports AIFs under controlled conditions, balancing accessibility with investor protection. Viewed against the U.S. and U.K. frameworks, SEBI’s 2025 reforms represent a cautious convergence with global best practices, particularly in investor accreditation, disclosure and governance-led oversight. Similar to the U.S. Regulation D and the UK FCA’s sophisticated investor regime, India’s accreditation model embeds financial competence within regulatory prudence. However, unlike these jurisdictions, India’s approach remains comparatively cautious  lacking fiscal incentives such as the U.K. SEIS/EIS or the participatory openness promoted under the U.S. Reg. CF.

    At national level this cautious approach has been tried to partially offset by recent policy measures aimed at improving the investment climate. The union government announced in the Union Budget 2024 the abolition of  ‘angel tax’ for all classes of investors with effect from the financial year 2025-26, thereby reducing tax-related frictions for early-stage capital formation. In parallel, certain States have introduced sub-national incentives to encourage angel investment. For instance the state of Bihar’s startup policy provides for a ‘success fee’ payable to startups that successfully mobilise investment from registered angel investors. Other states have also adopted broader startup support frameworks through grants, seed funding, incubation support and reimbursement-based incentives, although few have explicitly linked such incentives to angel investment outcomes. These developments suggest that while SEBI’s regulatory architecture remains institutionally cautious, complementary fiscal and state-level interventions are gradually emerging to mitigate the exclusionary effects of accreditation-centric regulation.

    Recent data from the market suggests that the entry level barriers such as mandatory investor accreditation have led to contraction in the angel fund investing. In H2 2025, angel investment rounds dropped nearly 60% to 265 deals, compared with 671 deals a year earlier while funding fell 46% to USD 1.48 billion, from USD 2.73 billion.

    FORWARD OUTLOOK

    The angel funding regime in India comprises diverse investors, including traditional angels and institutional investors with traditional investors more prevalent and institutional ones being at a fast developing stage with a growth of 69% in the last two years, necessitating regulatory frameworks that accommodate their varied investment behaviours, risk tolerances and operational structures. SEBI’s 2025 reforms attempt to align the regime with international practices by enhancing investor protection, transparency and market discipline through mandatory accreditation and flexibility in investment terms. To further optimise these reforms, policy should focus on balancing investor accreditation with inclusivity, incorporating differentiated criteria for underrepresented regions to democratize access to angel funding beyond established business hubs.

    The sharp contraction in angel investment activity observed in H2 2025 highlights the need for dynamic regulatory calibration rather than static compliance thresholds. SEBI could consider a tiered accreditation framework that differentiates between institutional syndicates, experienced legacy angels and first-time investors based on experience, ticket size and risk exposure. In parallel, region-specific pilot relaxations, implemented in coordination with State startup agencies may help address capital access constraints beyond major metropolitan hubs. Periodic post-implementation impact assessments linked to deal flow and regional dispersion would further ensure that investor protection objectives do not inadvertently suppress early-stage capital formation.

    Strengthening capacity-building for emerging angel networks and instituting impact assessments will ensure adaptive and equitable regulation. Additionally introducing fiscal incentives in the tax regime similar to those in the U.K. could incentivize broader participation and retain traditional angels which are important to the startup ecosystem. Though the government scrapped the angel tax and also provides tax exemption under section 54GB of the Income Tax Act, to along with specific relaxations and incentives as introduced by the states, the investors through capital gain exemptions but these exemptions are moderate in nature and limited in scope.  Phased compliance combined with empirical monitoring of fund flows and startup outcomes will support regulatory refinement aligned with India’s diverse entrepreneurial landscape, fostering a resilient and accessible financing environment conducive to innovation a­nd economic growth.

  • Judicial Shift in Treaty Taxation: The Tiger Global Judgment

    Judicial Shift in Treaty Taxation: The Tiger Global Judgment

    BY CHEENAR SHAH, VANSHIKA BANSAL, THIRD- YEAR STUDENT AT GUJARAT NATIONAL LAW UNIVERSITY

    The Supreme Court (‘the Court’) on January 15, 2026, delivered a landmark judgment in the case of The Authority for Advance Rulings (Income Tax) and Others v. Tiger Global International II Holdings (‘Tiger Global case’). The Court determined that the General Anti-Avoidance Rule (‘GAAR’) can supersede treaty benefits and ‘grandfathered’ investments if the exit arrangement lacks any commercial substance. By ruling that a Tax Residency Certificate (‘TRC’) is no longer a conclusive proof of eligibility, the judgement breaks down the classic Mauritius Route and investors must now demonstrate real economic control and management to claim benefits under the India- Mauritius Double Taxation Avoidance Agreement (‘DTAA’).

    BACKGROUND

    Tiger Global invested in Flipkart, Singapore, between October 2011 and April 2015. Flipkart generates a significant part of its revenue through assets in India. In 2018, Tiger Global sold its stake to Walmart Inc. as part of a bigger acquisition of a majority stake in Flipkart.  

    Tiger Global sought to obtain a capital gains tax exemption under Article 13(4) of the DTAA, as it held a valid TRC of Mauritius, and accordingly, filed an application under Section 197 of the Income Tax Act, 1961 (‘IT Act’) to issue a nil withholding tax certificate. However, the Indian tax authorities stated that the exemption cannot be claimed, as Tiger Global lacked independent decision-making control and management.   

    Aggrieved by the decision, the Appellant approached the Authority for Advance Rulings (‘AAR’), which ruled in favour of the Tax Authorities’ decision. However, the decision was overturned by the Delhi High Court on grounds of arbitrariness. The matter was thereafter challenged before the Supreme Court.  

    JUDICIAL PERSPECTIVE

    The Court determined on three major issues: firstly, whether the GAAR could supersede capital gains exemptions under the treaty despite grandfathering of investments made before 2017; secondly, whether the Limitation of Benefits (‘LOB’) provision of the DTAA precluded application of the GAAR; and thirdly, whether the possession of a TRC continued to be appropriate evidence of entitlement to claim relief under the treaty in the post-GAAR regime.  

    The Court deviated from the deferential approach and placed Indian tax adjudication under the post Base Erosion and Profit Shifting (‘BEPS’) international anti-abuse standards that emphasise on the economic substance of a treaty rather than the form. The advantages under the treaties were recharacterized as qualified privileges that depend on commercial presence and control rather than mere residence.

    ANALYSIS

    Why ‘Grandfathering’ is Not a Shield 

    The core of the legal dispute hinges on the interpretation of the GAAR, codified in Chapter XA of the IT Act. Tiger Global argued that their investments were protected by the ‘grandfathering’ provisions of Rule 10U(1)(d), which excludes income from the transfer of investments made before April 1, 2017. They contended that since their shares were acquired between 2011 and 2015, the gains were immune from GAAR scrutiny. Nevertheless, the Court took a more sophisticated mode of analysis and made a distinction between an investment and an arrangement. While the investment occurred prior to the cut-off date, the arrangement of the specific share-sale transaction took place in 2018. The result of Rule 10U (2) is that the provisions of GAAR will apply to an arrangement regardless of the date of its entering into, provided the tax benefit will be obtained on or after April 1, 2017. 

    This points to the fact that grandfathering is not an anti-tax avoidance license. In case the Revenue can show that an arrangement does not have commercial substance or the arrangement was entered into with a major purpose of receiving a tax benefit, then the age of the original investment will not rescue the arrangement as an impermissible avoidance arrangement. Over the years, international investment has been flowing into India, thinking that any old investments were not subject to modern anti-avoidance regimes through grandfathering. The Court, however, found that GAAR could be used in relation to exits that could be regarded as impermissible avoidance arrangements under Section 96 of the IT Act.  

    Such a jurisprudential change will presumably require the re-pricing of Indian assets, with investors now having to add a treaty risk premium to the assets to reflect latent capital gains liabilities. This shift also demonstrates that domestic anti-abuse provisions have become more prevalent than treaty concessions. Additionally, the ruling exposes prevailing offshore investments to the risk of long litigation. The onus of proof has changed, and when the Revenue proves a prima facie case that the investor is engaged in tax avoidance, it is incumbent upon the latter to prove that the motive was genuine. Tax neutrality in this new environment cannot be considered an unchanging part of an investment strategy. 

    The Coexistence of SAAR and GAAR 

    The DTAA 2016 Protocol added a LOB provision that specifically targets so-called shell or conduit companies. This clause provides a quantitative threshold where a company is not considered a shell if its total expenditure on operations in Mauritius is at least 1.5 million Mauritian Rupees. Tiger Global argued that because they satisfied these objective LOB criteria, the Revenue was precluded from invoking GAAR. 

    This either-or analysis was opposed by the Court, and it was held that Specific Anti-Abuse Rules (‘SAAR’), like the LOB clause, and GAAR can and do coexist. LOB clause is a transitional objective filter, but GAAR is a supervening subjective code that is meant to address aggressive tax planning. It may also be disqualified under GAAR, even when an entity meets the spending requirements of the LOB, the primary purpose of the arrangement being to claim a tax benefit. 

    This change has far-reaching consequences for international tax planning. Through its focus on the main purpose of the test, the Court has indicated that even transactions which technically meet all the requirements of SAAR may be disqualified in case their purpose is mainly tax-oriented. This causes a shift of emphasis from box-ticking compliance to the creation and documentation of an effective, authentic business point behind each tier of an investment structure. 

    Substance over Form and Piercing of the Corporate Veil 

    Further, the Court emphasised on the reality of the corporate structure under the tax system in India rather than the formal adherence to the treaty. The legislative effect of the Central Board of Direct Taxes (‘CBDT’) Circular No. 789 of 2000, which considered a TRC as adequate evidence of residence to claim benefits, was further emphasized in Union of India v. Azadi Bachao Andolan. However, the present case recalibrates on that jurisprudence in the light of the contemporary legislative framework and limits its application. The court affirmed that the circulars are binding on the tax authorities, but it is important to note that they are supposed to be applied within the legal environment in which they are issued. The amendments implemented by the Finance Act, 2012, Chapter X-A GAAR incorporation, and changes to Rule 10U have essentially changed this situation by mandating an evaluation of effective control and management. Therefore, the Court ruled that though a TRC is a requirement, it is not a conclusive requirement under Section 90(4) of the IT Act. 

    Additionally, the doctrine of substance over form as applied in the case of McDowell and Co. Ltd. v. Commercial Tax Officer was referred to emphasize that colourable instruments that aim to evade tax cannot be justified as tax planning and that cross-border structure should be evaluated based on the actual economic nature of the arrangement and not the legal structure. 

    The Court affirmed the findings of the AAR and approved functional piercing of the corporate veil, observing that the real control and power of decision-making of Tiger Global was not in Mauritius, but in the United States. The use of the ‘Head and ‘Brain’ test,  along with the Place of Effective Management described the Mauritian entities as a see-through structure, which did not have an independent existence. This decision, therefore, confirms that real commercial substance is required of treaty benefits and tax authorities are permitted to ignore intervening corporate levels where control is evidently exercised in other areas. 

    CONCLUSION

    The case of Tiger Global is an important judgment that indicates India’s attitude towards how the advantages of the tax treaty can be construed concerning the cross-country corporate arrangements. The Court not only simplified confusion about the India- Mauritius DTAA but also suggested a gradual change in the attitude to rely only on the formal treaty residence to the tactical review of the investment and control structure of the corporate management. It demands a change in the box-ticking compliance to ex-ante accounting of the presence of a strong commercial justification. In addition, the Court has distinguished investments and arrangements, which means that the exit structuring will now be evaluated irrespective of the entry date; even the grandfathered investments made before April 2017 will be taxed according to GAAR when the exit arrangement is defined as a tax avoidance measure. Thus, PE/VC frameworks must clarify their geography of control and verify expenditure limitations as per the LOB provision.

  • Tick-Box to Truth – SEBI’s 2025 Clarifications and the Crisis of Director Autonomy

    Tick-Box to Truth – SEBI’s 2025 Clarifications and the Crisis of Director Autonomy

    BY HARSHITA DHINWA AND RAM SUNDAR SINGH AKELA, FOURTH- YEAR STUDENTS AT NUSRL, RANCHI

    INTRODUCTION

    The first six months of 2025 saw a historic culling of Independent Directors from Corporate boardrooms in India where more than 150 Independent directors voluntarily resigned from numerous listed companies, not in anticipation to join new ventures but as an ultimate defense against the unprecedented growth in regulatory scrutiny and personal liability. The prime mover in this instance is the Securities and Exchange Board of India’s (‘SEBI’) 2025 clarificatory note on “Material pecuniary relationship” with securities under Regulation 16(1)(b)(iv) of the Listing Obligations and Disclosure Requirements (‘LODR’) Regulations 2015. However, a deeper look into the high-profile cases such as InfoBeans Technologies 2025, Byju’s 2024-25, Paytm Payments Bank 2024, Dewan Housing Finance Corporation Limited 2021-23, and Punjab and Maharashtra Co-operative PMC Bank 2019 -20 show a systemic connection where in all of them, the directors identified promoter domination, limited information about the financial data, and the threat of retrospective legal action as the main drivers. The main motive is to strengthen such governance by rewiring what the concept of independence means, to go beyond formal financial bright-lines to examine the relative economic and social frameworks that CEOs and nominal IDs should be freed from.

    SEBI’S 2025 CLARIFICATIONS: A SHIFT IN STANDARD OF INDEPENDENCE

      SEBI’s informal guidance to InfoBeans Technologies on May 14. 2025, clarifying “material pecuniary relationship” under  Regulation 16(1)(b)(iv) of the LODR Regulations left a big shift in independent directorships as a mere formula compliance to its substantive decision-making by independent directors, which saw a significant shift from size and revenue-based materiality assessment.

      Historically, Section 149(6) of the Companies Act, 2013, defined independence with the help of a quantifiable limit where pecuniary transactions not exceeding 10% of a director’s total income over two preceding final years would be considered independent.  SEBI’s clarification introduced a more wholesome evaluation of ongoing relationship, indirect economic ties and potential biasness to judgment, without numerical limits. Through InfoBeans, SEBI evaluated an Independent Director’s (‘ID’) proposed consultancy with an overseas subsidiary, compensated with 10% of their income, noting that materiality under LODR lacks a fixed ceiling, urging boards and Nomination and Remuneration Committee (NRC’s) to prioritize substance over form in its assessment of independence.

      This aligns with the Ministry of Corporate Affairs’ (‘MCA’) General Circular No. 14/2014, which excluded sitting fees and reimbursement from assessment of pecuniary relationship while focusing on autonomy. Moreover, the J.J. Irani Committee Report (2005) recommended assessing materiality from the director’s or Recipient’s perspective, proposing a 10% income threshold for transactions, that is, the key consideration will be whether the scale of financial involvement is substantial enough to compromise the director’s involvement. According to ICAI’s “Technical Guide on the Provision of Independent Directors from Corporate Governance Perspective, 2021”, the method of fiscal compilation should be disregarded, while also citing MCA’s October MCA’s 2018 Offences Committee Report recommended a 20% cap (Excluding sitting fees) to curb the erosion of directors’ discretionary powers and to standardize the governance framework. Due Diligence Norms demand prime disclosures and retrospective inspections on “friendly” directors to prioritize independent directors’ bias-free judgements over formally induced compliance. This change challenges the board to rethink their appointment and oversight role, ensuring that IDs are free from any social and economic influence.

      THE MASS DEPARTURE: CRISIS DISGUISED AS COMPLIANCE

        SEBI’s clarification has nearly provoked a boardroom Exodus, with almost 549 IDs resigning in FY25, of which, 94% mid-term, most of which were serving on National Stock Exchange  comparable to 2019’s wave, where 1390+ IDs quit. Resignation is more seen in firms facing financial distress, regulatory sanction, or governance lapses, and where ID’s report promoter-driven opacity, restricted access to financial data and fear of personal liability is rampant. For instance, the IDs of Byju’s resigned stating promoter-controlled decision-making and lack of financial transparency, as reported in MCA filings. Paytm’s directors exited fearing personal liability when the Reserve bank of India imposed penalties for non-compliance, while PMC Bank’s directors were investigated for failing to detect loan irregularities. The IL&FS crisis, where IDs were liable for oversight failures despite limited access to information, sets a precedent. Further, a 2025 NSE report noted a 30% resignation spike post-clarification, showing a crisis masked as compliance. The InfoBeans guidance multiplied fears of retrospective liability, as SEBI’s overall scrutiny exposed IDs to risk for past decisions, even beyond what they have in control.

        This “regulated retreat” arises from an inherent imbalance in structure where IDs face fiduciary and criminal liability under Section 149(8) of the Companies Act and SEBI’s review of regulatory provisions related to independent directors, but lack veto power, access to audit reports, or whistleblower protections. Unlike the system governing the U.S., where the Business Judgment Rule shields diligent directors, India’s framework leaves IDs in a much vulnerable position. It has been seen that IDs were penalized in  SAHARA India v. SEBI for promoter-driven judgments despite restricted authority. The legality was defeated in Chanda Kochhar V. SEBI, where IDs were examined for endorsing inequitable loans exposed under Section 149 as parental predominance over promoters. ID Nusli Wadia, who was revealed in the Tata-Mistry saga, also exposed parental superiority. This appears in the MCA’s 2018 Offences Committee Report, pointing ID liability concerns as one of the motives for quitting, which requests increased safeguarding of Section 149. The absence of being able to manage this risk without authority is what, in fact, leads good directors to quit high-risk companies, which in turn triggers the need for our IDs to be upgraded seamlessly, plus for the governance to re-establish its integrity

        THE PAPER-THIN PROMISE OF INDEPENDENCE

          Section 149(6) of the Companies Act, 2013, and Regulation 16 of LODR, create a mirage of independence by prioritizing formal disqualifications such as past financial ties, shareholding, or employment over functional autonomy.  In promoter-dominated firms, constituting 60% of listed entities, IDs are often selected by promoters, undermining their primary role as stakeholder guardians. The Kotak Committee Report (2017) criticized NRCs for acting as rubber stamps, failing to rigorously vet independence as evidenced in Dish TV India Ltd. (2021 BSE Filing), where minority shareholders challenged ID appointments for lacking autonomy and exposing promoter overreach. Similarly, in N. Narayan v. SEBI, IDs were penalized for governance lapses without direct involvement, highlighting judicial overreach that generally disregards Section 149(12)’s liability limits.

          The absence of the safe harbor Doctrine and the Delaware–style “entire fairness” test, which protects directors by scrutinizing conflicted transactions, worsens the ID exodus. Originally a creature of U.S. corporate law, the Safe Harbor Doctrine protects directors from liability arising out of decisions made in good faith, with due care and in the best interests of its company, even though outcomes can come out adverse. In the state of Delaware, the theory is codified in the “Business Judgment rule” which presumes director are diligent unless proven otherwise. This sharply contrasts with Section 149(12), which limits ID liability to act with knowledge or consent, but is inconsistently enforced as seen in the Narayan v. SEBI case.

          In addition, the U.K.’s Stewardship Code, issued by the Financial Reporting Council, mandates BODs and institutional investors to prioritize long-term value, transparency, and stakeholder interests, and requires annual disclosure of voting policies and dissent. Principle 7 emphasizes board independence, urging directors to challenge management constructively. In Royal Dutch Shell plc, the Code’s application compelled directors to disclose climate-related governance decisions, thereby enhancing accountability. India’s Regulation 25 mandates separate ID meetings, but these lack the Code’s rigor, as seen in the case study of Yes Bankfiasco , where IDs failed to curb risky lending due to promoter dominance and limited collective action.

          REIMAGINING INDEPENDENCE – A BLUEPRINT FOR REFORMS

          Halting the departure and regaining trust requires the implementation of reforms in India’s corporate governance. Firstly, since promoter dominance affects 60% of listed companies, it must be controlled by mandating independent third-party nomination panels as proposed per CII . These Panels will compromise minority shareholders, institutional investors and industry experts ensuring that ID appointments are based on expertise and autonomy. Secondly, in addition to the self-declaration under Section 149, promoters should explicitly state whether they have any prior economic, social, or historical relationships with ID candidates, either professionally or financially. This will be supported financially by NRCs and audited by external auditors, thus maintaining transparency and individual choice, preventing such promoter-led appointments. Thirdly, the implementation of the safe harbor doctrine for IDs who are on-record documents of dissent in board minutes. SEBI has recommended this in its consultation paper on directors’ protections, reducing the threat of multiple resignations due to IDS fearing punishment for not protecting the company.

           Fourth, flexibility and competitiveness in remuneration: SEBI in 2019 proposed capped stock options needing both shareholder and minority approval. Here, remuneration is competitive with attracting high-caliber talent but that does not compromise their independence. By the 2018 Report for MCA unlike high fees, which consider sitting fees insufficient, this alignment’s alternative ID incentives with the businessman’s interests; therefore, they should be retained. Fifthly, regular training on finance, risk, and compliance should be guaranteed and Formal evaluations of ID performance should be conducted. Sixthly, using Regulation 25 separate ID meetings to arrange red flags and Section 150’s databank and expertise tests for experienced IDs should be streamlined; these reforms would make ids empowered overseers, not ornamental figures.

          CONCLUSION

          Independence now feels like  escape, not strength. What was obtained to construct what SEBI 2025 will build has instead exposed the unwillingness of our setup to deny real power but equally demand responsibility. The interpretation of “material pecuniary relationship” under Section 149(6) (c) of the Companies Act and Regulation 16(1)(b)(iv) of SEBI’s LODR Regulations, certainly post-SEBI’s InfoBeans guidance, shows a stark shift from tick-the-box to substance. Independence can be assessed not just on paper but equally in spirit, making it free from past ties, undue influence or hidden loyalties. Independence must be both real and visible for effective governance.

          To stem the prevalent exodus of IDs and reinstate confidence in corporate governance, Section 149(6), (12) of the Companies Act, and Regulations 16 and 25 of LODR should be amended to include a safe harbour doctrine for the protection of dissenting IDs, a guarantee for full access to audit data & whistleblower protection, and independent nomination panels without influence of promoters. Remuneration should be fixed with independence safeguards to balance autonomy and talent attraction in the industry, and a materiality threshold should be codified to ascertain pecuniary relationships.  These amendments will ensure independence, substantive rather than symbolic, and they will strengthen integrity in corporate governance.

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

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

          BY AADIT SHARMA, SECOND YEAR STUDENT AT RMLNLU, LUCKNOW

          INTRODUCTION

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

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

          FROM BUNDLED CONTROL TO SELECTIVE TRANSPARENCY

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

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

          COMPARATIVE PERSPECTIVE: CONVERGENCE AND DELIBERATE DIVERGENCE

          A.    United States: Disclosure Without Price Ceilings

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

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

          B. European Union: Transparency with Behavioral Framing

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

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

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

           THE LIMITS OF DISCLOSURE AS INVESTOR PROTECTION

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

          CONCLUSION: MAKING TRANSPARENCY EFFECTIVE

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

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

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

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

        2. Expanding The Meaning of Sufficient Cause under Section 58 (1)

          Expanding The Meaning of Sufficient Cause under Section 58 (1)

          BY PRIYAM MITRA, THIRD- YEAR STUDENT AT NLSIU, BANGALORE

          INTRODUCTION

          Through judicial pronouncements and legislative clarifications, the seemingly unbridled power of free transferability of public companies is constrained by two clauses: one stating that any contract between two or more persons would be enforceable as a contract (proviso to Section 58(2)) and; secondly, the public company may refuse to register this transfer of shares by showing sufficient cause (Section 58(4)).

          There is considerable literature on why employee stock option schemes are introduced in various different ways. Specifically in firms where there are capital constraints, which is often the case in unlisted public companies, these strategies are often deployed for the purposes of “employee retention and sorting”. It is also well established that after the lock-in period of these schemes, these shares are to be treated in the same way as other equity shares; this means that for public companies this would lead to principles of free transferability being applicable thereon upon such shares given to employees.

          It is the argument of the paper that in this context, the meaning given to the term “sufficient cause” under section 58(4) must be read in an expansive manner so as to cover instances where allowing further transfer of these allotted shares would be perverse to the interests of the company. To do this, the NCLAT judgement of Synthite Industries Limited v. M/s Plant Lipids Ltd. (2018), which emphasises directors’ duties under Section 166(2) would be relied on.

          FOUNDATIONS OF EMPLOYEE STOCK OPTION PROGRAMS AND POSSIBLE ROADBLOCKS

          A. Reasons for ESOP Schemes

          As mentioned before, there has been a growing trend in industries where rather than providing incentives to employees to work, ESOPs are used for sorting and selection of those who are optimistic about the future of the company. This is why it makes sense for even public companies to get the benefit of ESOPs even though traditionally there should have been no restrictions on the transferability of public company shares. However, what is often overlooked in analysis is then how do those who receive these options exercise them and whether these transactions can be restricted in view of other important consideration as out lined later (namely whether there is sufficient cause to believe that the transfer would result in harming the interest of all shareholders).

          B. Nominee Directors

          Before the enactment of the Company Act 2013, there had been academic concerns expressed with respect to independent directors receiving stock options. The reason for this was rooted in the fact that independent directors, by the nature of their role, had to be independent of any pecuniary interest in order to perform their function. Stock options in this context would dampen this independence and rightfully, Indian law averted this error through the SEBI (Share Based Employee Benefits) Regulations, 2014. The rules define “employees” as explicitly not including “independent directors” (Rule 2(1)(f)(ii)).

          However, inadvertently, the category of nominee directors has been categorically excluded from the category of independent directors under Section 149(6) of the Companies Act, 2013, and this means that they are covered under the definition of employee for the purpose of stock option schemes. To understand why this is a possible roadblock to achieving the purpose of stock option schemes, the peculiar role of nominee directors has to be analysed.

          Nominee directors have become a regular part in corporate structures in India. Due to them owing their duty to the nominator but sitting on the board of directors. There is always a speckle of concerns related to conflict of interest. Indeed, it has been observed in decisions that in a situation where these two interests are at conflict, they would be placed in an “impossible position”. Coming back to why this is an issue in the context of ESOPs, it must be understood that while the ESOPs cannot be transferred to any third party (the option to buy (Rule 9)), the shares issued to nominee directors pursuant to ESOPs, however, may be transferred to the nominating institutions. This conspicuously places the nominee directors in such a position where the nominating institutions may meddle in the functioning of these directors pushing for transfer of these lucrative shares.

          There could be an argument that there is a solution already implicit in the rules. That is, the companies may choose any period as the lock-in period (the period during which these shares cannot be transferred). However, unlike the provisions on sweat equity (3 years), there is no such minimum lock-in period prescribed. It is difficult for companies to deploy one single lock-in period for all kinds of employee and having such a strict period would be prejudicial to the employees’ interests. Therefore, it is argued, in exceptional circumstances Section 58(4) must be used to restrict transactions on a case-to-case basis.

          SUFFICIENT CAUSE UNDER 58(4)

          To solve the issues identified in the previous section, this paper proposes an expansive reading of sufficient cause under Section 58(4) as a possible solution. To understand the contemporary legal position, analysis must start from before the introduction of the Companies Act in 2013. Section 58(4) of the 2013 Act clarifies the position established by Section 111A of the Companies Act, 1956. Section 111A (3) provided an exhaustive list of instances (contravention of and law in India) wherein such refusal would be upheld. It was consistently held by the Courts that sufficient cause had to be read in this narrow manner.

          The recent line of cases starting from Mackintosh Burns v. Sarkar and Chowdhury Enterprises, recognise the wider ambit of sufficient cause under the Companies Act 2013. Mackintosh’s reasoning was based on simple facts of a competitor trying to buy shares in a company, a simple case of conflict of interest, hence, the Supreme Court concluded that at least in such cases, sufficient cause would entail something more than mere contravention of law. Synthite goes further and provides more robust reasoning even though the fact scenario here was very similar to Mackintosh. The court accepts the appellants arguments and holds the wisdom of the Board of Directors in high regard by forming a link between their fiduciary duty (Section 166(2)) to act in a bonafide manner and advance the company’s interests, to their refusal of registration of transfer (under Section 58(4)) (paras [10],[16],[22]). This effectively means that their refusal to register shares in this case was deemed reasonable because the board acted in a bonafide manner to advance the interests of the shareholders.

          In fact, a recent case heard by the Delhi High Court in Phenil Sugars Ltd. v Laxmi Gupta, was decided in a similar vein as that of Synthite (though the NCLT decision is not cited) wherein the Court held that registration of shares can be restricted where:

          “[27]There is an apprehension that the transfer is not in the best interest of the company and all its stakeholders including the shareholders;

          ii. The said apprehension is reasonable and there is material on record to support the apprehension.”

          The case is a monumental step forward. Till now, the cases primarily dealt with the transfer being done to a competing company, however, in this case, the court considered the refusal to be reasonable as the transferees had a history of meddling in the corporate affairs of the company through constant complaints. On the twin test laid down, the High Court considered the cause to be sufficient.                                                                                           

          CONCLUSION: RESTRICTING TRANSFER OF ESOP SHARES THROUGH SECTION 58(4)

          Realising the purpose behind ESOPs, that is, rewarding and more importantly retaining employees and shares within the company, leads to the conclusion that the board must be given the power to refuse registration of transfer. This is solidified by the emerging jurisprudence in India with respect to the ambit of sufficient cause under Section 58. It is argued that this determination would vary greatly with the unique facts and circumstances of each case.

          In case of nominee directors transferring the shares to their nominating institutions, one must look at the standard put forth by Synthite (invoking the directors’ fiduciary duty in making this decision)and the courts should not be constrained by the restrictive interpretation that sufficient cause would exist only when shares are transferred to competing companies (Phenil Sugars). It must be accepted that “deferring to the Board’s wisdom” would surely encompass such situations where a transfer would defeat the purpose of ESOPs and indirectly derogate the interests of all stakeholders. If nominee directors transfer shares to their nominating company, then they would be put in a precarious situation caught in between conflicts on interests.

          However, this does not mean that all ESOP receivers would be estopped from transferring their shares, this determination has to be made considering all the terms of the ESOP and the relationship that the company shares with the employee. What this paper has argued is that sufficient clause has to be interpreted in a wide way so as to restrict any transaction that would be prejudicial to the interests of all shareholders. Transfer of ESOP shares (usually) at a lower price needs to be maintained within the company and its employees, specifically when it is at a nascent stage; this should surely constitute sufficient cause.

        3. India’s Social Stock Exchange: How Compliance Strains Impact NPOs and Social Impact Assessors?

          India’s Social Stock Exchange: How Compliance Strains Impact NPOs and Social Impact Assessors?

          BY DHARSHAN GOVINTH R AND SIDDHARTH VERMA, FOURTH- YEAR AT GNLU, GANDHINAGAR

          INTRODUCTION

          India’s Social Stock Exchange (‘SSE’) is a trend-setting initiative introduced by the Securities and Exchange Board of India (‘SEBI’) in 2022, which by aiming to align capital markets and philanthropic purposes intended to give a fund-raising ground for non-profit organizations (‘NPO’) and other social entities. But this initiative is displaying some strains especially after the SEBI circular issued in late September 2025 which made some modifications in SSE’s compliance framework bringing forth the credibility-capacity paradox, which would be examined in this research work.

          This article explores this paradox of credibility and capacity, by first outlining the recent modification brought out by SEBI. Secondly it is followed by a thorough analysis of the modified compliance architecture is done to assess as to what makes this framework problematic. Thirdly, an analysis of SSEs in different countries is done to highlight upon potential modifications which can be done in India.  Finally, it gives some ideas of reform to balance the rigor and inclusivity in the present framework.

          THE MODIFIED FRAMEWORK AND ITS FAULTLINES

            The circular of SEBI has established a compliance framework, where the modifications as follows are of significance. The circular mandates 31st October of each year as the deadline to submit a duly verified Annual Impact Report (‘AIR’) by all fundraising non-profits. It also mandates those non-profits which have been registered on SSE but haven’t listed their securities to submit a self-reported AIR covering 67% of the program expenditure. Then, there is a mandate that all the above AIRs need to be assessed by Social Impact Assessors (‘SIA’).

            Although initially these modifications may show that there is a sense of strengthened transparency, three problems emerge upon implementation. Firstly, the dual-track approach—which creates unequal degrees of credibility by having separate compliance requirements for two types of NPOs. Secondly, there is a problem of supply-demand as the limited supply of SIAs (approximately 1,000 nationwide) is insufficient to meet demand as hundreds of NPOs enter the SSE. Finally, smaller NGOs with tighter finances are disproportionately affected by compliance expenses, such as audit fees and data gathering. These concerns need to be analyzed further inorder to determine whether the SSE can provide both accountability and inclusivity.

            HOW THE PRESENT COMPLIANCE ARCHITECTURE LEADS TO CREDIBILITY-CAPACITY PARADOX?

              The present modification of the compliance framework by SEBI has in its core, the aim to grow the trust of the investors by means of mandating independent verifications. Nevertheless, this framework exhibits inconsistencies which need to be undone. The first gap that is visible is the problem of credibility. This modification proposes a dual-track SEBI’s modification institutes a dual-track compliance: NPOs that raise funds must file an auditor-verified AIR, whereas SSE-registered entities that have not listed securities (mostly smaller NPOs) may submit a self-verified AIR. This distinction creates a clear credibility gap where investors and donors will reasonably rely on audited AIRs, effectively privileging well-resourced organisations and marginalising smaller, self-reporting grassroots NPOs that lack access to auditors or the capacity to procure independent verification. Another issue is the mandatory coverage of 67% of the program expense in the AIR by the non-listed NPOs , which on one hand may lead to extensive coverage of the financials of those NPOs, but on the other hand pose a heavy operational burden on these NPOs which manages diverse programmes.  The expenses of fulfilling this duty may be unaffordable for NPOs without baseline data or technological resources.

              Moving from the issue of credibility, the challenge of capacity—stemming from the scarcity of SIAs—presents a more significant concern. The industry faces a supply-demand mismatch as there are only around 1,000 qualified assessors across India in self-regulatory organizations (‘SRO’) like ICAI, ICSI, ICMAI, etc., who are selected through qualification examinations conducted by National Institute of Securities Market. The problem is that compliance becomes contingent not on the diligence of NPOs but on the availability of auditors.

              Financial strain completes the triad of challenges. Impact audits are resource-intensive, requiring field verification, outcome measurement, and translation of qualitative change into quantifiable indicators. These tasks incur substantial fees, particularly in rural or remote contexts. Unlike corporations conducting corporate social responsibility activities (‘CSR’), which under Section 135 of Companies Act 2013 caps impact assessment costs at 2% of project outlay or ₹50 lakh, SSE-listed NPOs do not enjoy any such relief. The absence of stronger fiscal offsets weakens the fundraising advantage of SSE listing, making the cost-benefit calculus unfavorable for many small organizations.

              These dynamics create what may be described as a credibility–capacity paradox. The SSE rightly seeks to establish credibility through rigour, but the costs of compliance risk exclude the very grassroots non-profit organizations it was designed to support. Larger, urban, and professionalized NPOs may adapt, but smaller entities operating at the community level may find participation infeasible. Nevertheless, it would be reductive to see the SSE’s framework as wholly burdensome. Its emphasis on independent audits is a landmark reform that aligns India with global best practices in social finance. The challenge is to recalibrate the balance so that transparency does not come at the expense of inclusivity.

              LEARNING FROM GLOBAL SSES: AVOIDING EXCLUSIONS, BUILDING INCLUSION

                India’s SSE is not the first of its kind. Looking at examples of abroad helps us see what works and what doesn’t. For instance, Brazil’s SSE, established in 2003 raised funds for about 188 projects but mostly attracted larger NPOs, leaving smaller groups behind. In the same way, the SSE of UK, established in 2013 favored professional entities as it operated more as a directory than a true exchange, raising €400 million. Both examples show how heavy compliance rules can narrow participation leaving small NPOs and eventually these SSEs failed to be in the operation in due time.

                The SSEs of Canada and Singapore, both established in 2013 also set strict listing criteria but unlike the above, paired them with direct NPO support, including capacity-building and fundraising assistance, especially for small scale NPOs. This made compliance more manageable. India can learn that it can prevent these exclusions of certain non-profits and create an SSE that is both legitimate and inclusive by combining strict audit regulations with phased requirements and financial support.

                BRIDGING GAPS THROUGH REFORM: MAKING INDIA’S SSE MORE EQUITABLE

                A multi-pronged reform agenda can address these tensions. Firstly, SEBI could ease compliance costs for small NGOs by creating a centralized digital platform with standardized reporting templates and promoting shared auditor networks to spread expenses. Further, in order to breakdown entry barriers to smaller NPOs, a phased-tier system of compliance could be implemented to the requirements for audits in the initial years. This phased tier system can be achieved for instance by first mandating 40-50% of coverage of expenditures in the audit in the initial years and then gradually rising the threshold to the 67% requirement as per the recent modification to ease compliance.

                Secondly, the creation of a SSE Capacity Fund, which could be funded by CSR allocations would be a viable step for reducing the burden of compliance and to preserve the resources of NPOs which are already limited. These subsidies and grants through these funds could maintain both financial stability and accountability of NPOs.

                Third, SROs have to develop professional capacities in a short time, which could be done by the increase in accelerated certification programmes among people who have pertinent experience. In addition, in order to protect credibility, the SROs must require the auditors to undergo rotation and then make sure that the advisory and auditory functions are never combined. Lastly, expenditure on digital infrastructure will help diminish compliance costs greatly. This could be done for instance by establishing a common platform of data collection and impact reporting which might allow small NPOs to be prepared to comply effectively. These systems could assist in bridging the gap between the professional audit requirements and the small capacity of smaller NPOs.

                CONCLUSION

                India’s SSE has undoubtedly increased the credibility of the social sector by instituting mandatory audits and transparent reporting for listed social enterprises, thereby strengthening the confidence of investors and donors. This is a significant achievement in formalizing social finance. However, this audit-driven transparency also illustrates a “credibility–capacity paradox”: rigorous accountability measures, while necessary, impose high compliance burdens on smaller grassroots nonprofits with limited resources. If there is no support or mitigation mechanisms, the SSE may inadvertently narrow the field of participants and undermine its inclusive mission. In contrast, international peers show more balanced regulatory models, thereby showing a way forward for India as well. For instance, Canada’s SSE combines stringent vetting with tailored capacity-building programs, and Singapore’s SSE employs a social-impact framework and supportive ecosystem to enforce accountability while nurturing small social enterprises. Ultimately, a mature SSE should balance oversight with inclusivity and support. If India implements this balance, which it lacks, its SSE could be an equitable, inclusive, digitally integrated and resource-efficient platform in the coming decade. Such an SSE would leverage digital reporting to cut costs and uphold rigorous transparency standards, while genuinely empowering grassroots impact.

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

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

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

                INTRODUCTION

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

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

                UNDERSTANDING ESG DEBT SECURITIES

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

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

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

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

                THE PROPOSED REGULATORY FRAMEWORK

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

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

                ACTION MEETS AMBITION: ELIMINATING PURPOSE-WASHING

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

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

                THE WAY FORWARD

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

              2. 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.