The Corporate & Commercial Law Society Blog, HNLU

Tag: stock-market

  • 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. Contractual ‘Non-Use’ Covenants: Plugging the Shadow-Trading Gap

          Contractual ‘Non-Use’ Covenants: Plugging the Shadow-Trading Gap

          Aditya Singh, THIRD- Year Student, Rajiv Gandhi National University of Law, Punjab

          INTRODUCTION

          The successful prosecution in Securities and Exchange Commission (SEC) v. Panuwat has introduced “shadow trading” as a novel enforcement concept for securities regulators. While India is yet to confront a concrete instance of shadow trading and its cognizance by Securities and Exchange Board of India (‘SEBI’), the U.S. experience highlights a potential lacuna in domestic regulations. Under SEBI’s current framework, insiders face civil liability only when trading in the stock of the very issuer, whose Unpublished Price-Sensitive Information (‘UPSI’) -they possess, and SEBI must prove both that the information “likely to materially affect” a particular security and that the insider used it with profit motive. The application of the shadow-trading principle domestically would therefore demand a framework which captures UPSI-driven trades beyond the issuer’s own stock, without becoming entangled in intricate economic-linkage or intent inquiries.

          This piece shows how India can strengthen its insider-trading regime by requiring all “designated persons” to pre-commit—via an expanded Code of Conduct—to refrain from using any UPSI for profit, and then empowering SEBI to invoke misappropriation principles against any breach. It begins by defining “shadow trading,” contrasts the classical and misappropriation theories, and then sets out the covenant-plus-notice proposal and its statutory foundation. The piece goes on to address proportionality and practical objections before concluding with implementation steps.


          THE SHADOW-TRADING PUZZLE

          Scholars have defined shadow trading as – when private information held by insiders can also be relevant for economically-linked firms and exploited to facilitate profitable trading in those firms. In SEC v. Panuwat, the U.S. District Court for Northern California confronted a novel fact pattern: Matthew Panuwat, a Senior Director at Medivation, received a confidential email revealing Pfizer’s imminent acquisition of Medivation. Rather than trading Medivation stock, he bought shares of Incyte—a competitor whose share price would rise on news of the Medivation deal.

          On the anvils of misappropriation theory, it was held that Panuwat’s breach of Medivation’s insider trading policy which expansively prohibited trading (while in possession of Medivation’s inside information) in not only Medivation’s securities, but arguably in any publicly traded securities in which Medivation’s inside information would give its insiders an investing edge. This fiduciary duty to Medivation—gave rise to insider-trading liability, even though he never traded Medivation securities. In rejecting Panuwat’s argument that liability requires trading in the issuer whose information is misused, the court emphasized that “misappropriation of confidential information for trading any economically linked security” falls within the scope of securities fraud under Rule 10b-5.

          The above discussion necessitates understanding 2 main principles behind insider trading. Under the classical model, insider-trading liability arises when an insider breaches a fiduciary duty by trading in the issuer’s own securities. By contrast, misappropriation theory treats any breach of duty to the source of confidential information as actionable; and India has consistently adhered to the classical approach.

          POSSIBLE IMPLEMENTATION IN INDIA THROUGH EXPANSIVE INTERPRETATION

          While the market-protection, investor-equity, and price-discovery rationales behind the prohibition of insider trading have been extensively examined by scholars, those same principles equally justify a similar regulatory approach to shadow trading, which is effectively an extension of insider trading itself.

          An interpretative reading of the SEBI (Prohibition of Insider Trading) Regulations, 2015 (‘PIT Regulations’), can be used for the domestic application of shadow trading . Regulation 2(1)(n) defines UPSI as any information “directly or indirectly” relating to a company’s securities that is “likely to materially affect” their price. The qualifier “indirectly” can thus for instance bring within UPSI material non-public information about Company A that predictably moves Company B’s shares due to their economic linkage. Indian tribunals have already endorsed expansive readings (see FCRPL v SEBI).  Likewise, the definition of “Insider” under Regulation 2(1)(g) encapsulates anyone who “has access to” UPSI. Once that information is used to trade Company B’s securities, the trader effectively becomes an “insider” of Company B.

          However, relying solely on this interpretative route raises a host of practical and doctrinal difficulties. The next section examines the key obstacles that would complicate SEBI’s attempt to enforce shadow‐trading liability under the existing PIT framework.

          CHALLENGES TO IMPLEMENTATION

          Key implementation challenges are as follows:

          No clear test for “indirect” links: Using “indirectly” as a qualifier posits the problem that no benchmark exists to determine how tenuous an economic link between two entities may be. Is a 5 % revenue dependence enough? Does a 1% index weight qualify? Without clear criteria, every “indirect” claim becomes a bespoke debate over company correlations in the market.

          Heavy proof of price impact: To show UPSI would “likely materially affect” a non-source instrument, SEBI and insiders can each hire economists/experts to argue over whether UPSI about Company A truly “likely materially affects” Company B’s price. Disputes over timeframes, statistical tests, and which market indicators to use would turn every shadow-trading case into an endless technical showdown.

          Uncertain Profit-Motive Standards: Courts already grapple with an implicit profit-motive requirement that the PIT Regulations do not explicitly mandate—a problem Girjesh Shukla and Aditi Dehal discuss at length in their paper—adding an ambiguous intent element and uncertain evidentiary burden. In shadow‐trading cases, where insiders can spread trades across stocks, bonds or derivatives, this uncertainty multiplies and is compounded by the undefined “indirect” linkage test and the need for complex price impact proofs as outlined above.

          THE CONTRACTUAL “NON-USE” COVENANT AND IMPORT OF MISAPPROPRIATION THEORY

          The author argues here that, despite there being many ways through legislative action to solve the problem, the quickest and most effective solution to this problem would be through an import of Misappropriation theory.

          This can be done by leveraging SEBI’s existing requirement for written insider-trading codes. Regulation 9(1) of the PIT Regulations mandates that every listed company adopt a Code of Conduct for its “designated persons,” incorporating the minimum standards of Schedule B, with a designated Compliance Officer to administer it under Regulation 9(3).

          Building on this foundation, SEBI could introduce a requirement to each Code to include a “Non-Use of UPSI for Profit” covenant, under which every insider expressly agrees to (a) abstain from trading in any security or financial instrument while in possession of UPSI, except where a safe-harbour expressly applies, (b) accept that a formal “UPSI Notice” serves as conclusive proof of materiality, obviating the need for SEBI—or any adjudicator—to conduct fresh event studies or call expert testimony on price impact and (c) Safe-harbour provision: extent to which trades can be made, to be determined/formulated by SEBI from time to time. Section 30 of the SEBI Act, 1992 authorises the Board to make regulations to carry out the purposes of this Act, thereby making the addition procedurally valid as well. It is important to note here that this covenant works alongside SEBI’s trading-window rules under PIT Regulations: insiders must honour the temporary ban on trading whenever they hold UPSI.

          Time-bound blackouts are already standard: EU MAR Article 19 enforces a 30-day pre-results trading freeze, and India’s PIT Regulations enforces trade freeze during trading window closures. This covenant simply extends that familiar blackout to cover any UPSI capable of moving related securities to adapt to evolving loopholes in information asymmetry enforcement.

          Under this covenant structure, SEBI’s enforcement simplifies to three unambiguous steps:

          1. UPSI Certification: The company’s board or its designated UPSI Committee issues a written “UPSI Notice,” categorising the information under pre-defined, per se material events (financial results, M&A approvals, rating actions, major contracts, etc.).
          2. Duty Evidence: The insider’s signed covenant confirms a clear contractual duty not to trade on UPSI and to treat the Board’s certification as definitive.
          3. Trade Verification: Any trade in a covered instrument executed after the UPSI Notice automatically constitutes a breach of duty under misappropriation theory—SEBI needs only to show the notice, the covenant and the subsequent transaction.

          To avoid unduly rigid freezes, the covenant would operate as a rebuttable presumption: any trade executed after a UPSI Notice is prima facie violative unless the insider demonstrates (i) a bona-fide, UPSI-independent rationale or; (ii) eligibility under a defined safe-harbour.

          The import of the misappropriation theory will help execute this solution, that is to say, as soon as this covenant is breached it would be a breach of duty to the information’s source, triggering the insider trading regulation through the misappropriation principle.

          The misappropriation theory can be embedded in the PIT regulations through an amendment to the Regulation 4 by SEBI to read, in effect:

          4(1A). “No Insider shall misappropriate UPSI in breach of a contractual or fiduciary duty of confidentiality (including under any Company Code of Conduct) and trade on that information in any security or financial instrument.”

          The blanket restraint on trading engages Article 19(1)(g) of the Constitution but survives the four-part proportionality test articulated in Modern Dental College & Research Centre v State of MP and applied to financial regulation in Internet & Mobile Association of India v RBI.

          WHY NOT A FACTOR-BASED TEST?

          An alternative approach,  advocates for a similar factor based test to determine “abuse of dominant position” by antitrust regulators to be adopted to the PIT regulations to determine cognizable economic linkage. Under this model, SEBI would assess a mix of metrics to decide when Company A’s UPSI is “economically linked” enough to Company B’s securities to trigger liability.

          However, the author argues that the covenant-based approach would be more effective. Unlike a factor-based linkage regime, which demands constant recalibration of revenue shares, index weights and supply-chain ties; fuels expert-driven litigation over chosen metrics and look-back windows; produces unpredictable, case-by-case outcomes; imposes heavy database and pre-clearance burdens; and leaves insiders free to game the latest matrices—the covenant-plus-misappropriation model skips the entire exercise as relies on one clear rule: no trading on UPSI. SEBI’s job becomes simply to confirm three things: the insider signed the promise, the information was certified as UPSI, and a trade took place afterward. This single-step check delivers legal certainty, slashes compliance burdens, and sharply boosts deterrence without ever reopening the question of how “indirectly” two companies are linked.

          CONCLUSION

          The covenant-plus-misappropriation framework streamlines enforcement, preserves SEBI’s materiality standard, and leverages existing Code-of-Conduct machinery—allowing rapid roll-out without new legislation. However, its success depends on corporate buy-in and consistent compliance-monitoring: companies must integrate covenant execution into their governance processes, and SEBI will still need robust surveillance to detect breaches. Therefore, SEBI should publish a consultation paper and pilot the covenant with select large-cap companies
          to identify practical challenges before a market-wide rollout.

        2. 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. 

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

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

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

            INTRODUCTION

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

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

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

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

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

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

            HOW DOES THE CENTRALISED FEE MECHANISM WORK?

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

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

            SAFEGUARDING INVESTORS INTERESTS: NEED FOR A CENTRALISED FEE COLLECTION MECHANISM

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

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

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

            CRITICAL EXAMINATION OF THE MECHANISM

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

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

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

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

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

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

            CONCLUSION

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

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

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

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

            Introduction

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

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

            Rationale Behind the New Guidelines

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

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

            Deciphering the Amendments
            • Migration of VCFs to AIF Regulations

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

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

            • Additional Liquidation Period

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

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

            • Enhanced Regulatory Reporting in case of non-migration

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

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

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

            • Strict Compliance and Accountability

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

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

            Forging new Horizons

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

            Conclusion

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

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

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

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

            Introduction

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

            Understanding the Regulation and its Evolution

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

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

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

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

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

            Bridging the Gaps: A Vision for the Future

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

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

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

            Conclusion

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