The Corporate & Commercial Law Society Blog, HNLU

Tag: investing

  • 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.

  • 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.

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

                Navigating RBI’s Revised Framework for Downstream Investments by FOCCs

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

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

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

                WHAT ARE FOCCs AND DOWNSTREAM INVESTMENTS ?

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

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

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

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

                Analysis of Key Changes

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

                1. Consistency with General FDI Norms

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

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

                2. Share Swaps Approved

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

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

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

                3. Permissibility of Deferred Consideration

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

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

                4. Limitations on the Utilisation of Domestic Borrowings

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

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

                5. Modified Pricing Guidelines for Transactions

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

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

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

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

                6. Reporting and Compliance via Form DI

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

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

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

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

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

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

                8. Classification of FOCCs based on Share Movement

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

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

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

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

                Conclusion

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

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

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

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

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

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

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

                Evolution of ETPs in India

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

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

                More Flexibility in Trading

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

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

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

                Setting up and Authorisation of ETPs

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

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

                Offshore ETPs: Opening Doors for Cross-Border Trading

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

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

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

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

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

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

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

                The Domestic Game

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

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

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

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

                Way Forward

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

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

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

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

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

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

                INTRODUCTION

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

                REGULATORY FOUNDATIONS AND LEGISLATIVE DEVELOPMENTS

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

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

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

                LEGAL ANALYSIS

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

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

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

                PRACTICAL IMPLICATIONS

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

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

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

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

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

                CONCLUDING REMARKS

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

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

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

                BY TANMAY DONERIA, FOURTH YEAR STUDENT AT RGNUL, PATIALA

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

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

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

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

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

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

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

                –       Compulsory Conversion

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

                –       Optional Conversion

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

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

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

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

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

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

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

                III. Conclusion

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

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