SEBI
Legislation UpdatesNotifications

On 22-09-2022, the Securities and Exchange Board of India has issued circulars stating that InvITs/REITs may issue listed commercial papers subject to the following conditions:

  1. InvITs and REIT shall abide by the guidelines prescribed by Reserve Bank of India for issuances of commercial papers.
  2. InvITs and REIT shall abide by the conditions of listing norms prescribed by SEBI under SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 and circulars issued thereunder.
  3. The issuance of listed CPs shall be within the overall debt limit permitted under SEBI (Infrastructure Investment Trusts) Regulations, 2014.

On 10-08-2022, the Reserve Bank of India issued Commercial Paper Directions providing InvITs and REIT having net worth of INR 100 Crore or higher are eligible to issue commercial paper.

SAT
Case BriefsTribunals/Commissions/Regulatory Bodies

Securities Appellate Tribunal, Mumbai (SAT): While quashing the appeal preferred by the appellants against the order dated 12-05-2022 passed by the Securities and Exchange Board of India (“SEBI”), the coram of Tarun Agarwala, J. (Presiding Officer), M.T. Joshi, J. (Judicial Member), Meera Swarup (Technical Member) held that the appellants not being an “aggrieved person” as they were not part of the Offer for Sale (‘OFS’) and therefore, cannot file appeals questioning the legality and veracity of SEBI’s order granting exemption to the Tamilnad Mercantile Bank Limited (‘Bank’) under Regulation 300 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (‘ICDR Regulations’).

Facts:

An instant appeal has been filed challenging the order of SEBI through which the appellants were restrained from participating in the recent Pre- Initial Public Offering (‘IPO’) of the Bank and sell their shares through OFS.

The appellants made a representation to SEBI being aggrieved by their non- inclusion to participate in OFS. On 4-09-2021, Bank issued Draft Red Herring Prospectus (‘DRHP’) for a mix of fresh issuance of equity shares and OFS by the existing shareholders. As a result of the limitations indicated in the DRHP, the appellants holding equity shares of the Bank which were disputed were not allowed to participate in the OFS and being aggrieved by such action of the Bank, the appellants filed a writ petition in the High Court of Bombay challenging the decision of the Bank.

During the pendency of the matter, the Bank filed representations dated 08-11-2021 and 15-12-2021 before SEBI contending that they should be allowed to modify its draft prospectus and remove OFS from it without filing a new prospectus. SEBI accorded the exemption to the Bank in exercise of power to relax strict enforcement of the regulations under Regulation 300 of the ICDR Regulations. The instant appeal was filed also challenging this exemption granted by the SEBI to the Bank on the ground that the company was bound to issue a fresh resolution upon changes in the prospectus as per Sections 61(1)(c) and 28 of the Companies Act, 2013.

Arguments:

The senior counsel for the appellant contended that the impugned order was passed without any application of mind and no satisfaction was recorded while granting the exemption under ICDR Regulations. He relied on Shanti Devi v. State of U.P., (1997) 8 SCC 22 wherein it was held that satisfaction is required to be recorded. The counsel further argued that once the OFS has been withdrawn a fresh resolution is required to be passed by the shareholders under the Companies Act, which was not done. Hence, the exemption under the ICDR Regulations could not be given. Further, the proceeding was initiated by the Directorate of Enforcement under Foreign Exchange Management Act (‘FEMA’) and there was no restraint order from any court of law or authority restraining the appellants from disposing of the shares in question.

The counsel for the Respondent’s contended that the exemption granted to the bank was provided from fresh filing of offer prospectus for removal of OFS from the public issue. Further, it was argued that appellants have no locus standi as they are not aggrieved and that their shares were not eligible for OFS and were rightly not included in the DRHP.

Observation and Analysis:

The Court opined that the writ petition is pending before Bombay High Court. Hence, it is not open to the appellants to file the present appeals questioning the DRHP and or its withdrawal by some of the appellants with regard to OFS.

The Court held that there is no legal right of the appellant that has been infringed and they have neither suffered any injury nor any legal wrong. Also, as they were not part of the OFS at the first place, the appellant is not an “aggrieved person”. Hence, the shareholders cannot file appeals questioning the legality and veracity of SEBI’s order.

The Court opined that SEBI follows a disclosure-based regime and does not regulate on merits or approve an offer document such as the DRHP but only mandates true and fair adequate disclosures.

The Court found the application of the Bank in accordance with the ICDR provisions with a view to ensuring that adequate disclosures in the DRHP are made to enable the investors to make an informed decision.

[Robert & Ardis James Company Ltd. v. SEBI, 2022 SCC OnLine SAT 210, decided on 02-09-2022]


Advocates who appeared in this case:

For the appellants:

Dr. Abhishek Manu Singhvi, Senior Advocate,

Mr. M.S. Krishnan, Senior Advocate,

Mr. Janak Dwarkadas, Senior Advocate,

Mr. Avishkar Singhvi, Ms. Ankita Singhania, Mr. Kunaal Shah, Ms. Shruti Rajan, Mr. Ashish Bhan, Mr. Mohit Rohatgi, Mr. Anirudh Kapoor, Mr. Anubhav Ghosh, Mr. Kartik Adlakha, Mr. Vivek Shah, Mr. Avirup Mandal, Ms. Aastha Kulshreshtha, Mr. Kaustub Narendran and Ms. Lisa Mishra, Advocates i/b Trilegal.

For the Respondents:

Mr. Akash Rebello, Advocate with Ms. Nidhi Singh, Ms. Deepti Mohan, Ms. Binjal Samani, Ms. Moksha Kothari and Mr. Niket Dalal, Advocates i/b Vidhii Partners. Mr. Somasekhar Sundaresan, Advocate with Mr. P. Prabhakaran, Advocate i/b Consulta Juris.

Mr. Pradeep Sancheti, Senior Advocate with Ms. Nidhi Singh, Ms. Deepti Mohan, Ms. Binjal Samani, Ms. Moksha Kothari and Mr. Niket Dalal, Advocates i/b Vidhii Partners. Mr. Somasekhar Sundaresan, Advocate with Mr. P. Prabhakaran, Advocate i/b Consulta Juris.

SEBI
Legislation UpdatesNotifications

   

On 02-09-2022, the Securities and Exchange Board of India (‘SEBI') issued a circular on performance/ return claimed by unregulated platforms offering algorithm strategies for trading to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.

SEBI noticed some unregulated platforms and some of the stock-brokers are offering algorithmic trading services to investors for automated execution of trades. These services are being marketed claiming high returns on investment. The investors are being lured by the “ratings” assigned to these services.

Key Points:

  1. To prevent this act of mis- selling, Stock-brokers can neither make any reference to the past or future return algorithm nor to associate with any platform doing so. In case, the brokers who are making such reference will have to remove it from their website and disassociate themselves from the platforms providing such reference by 09-09-2022.

  2. Stock-brokers are required to monitor the compliance of this circular and submit a compliance report to SEBI before 01-11-2022.

Case BriefsSupreme Court

Supreme Court: While adjudicating a case related to the Reliance Commercial Finance resolution, the 3-judges Bench comprising Dr. D Y Chandrachud*, Surya Kant, and A S Bopanna, JJ., was posed with a question as to whether the SEBI Standardisation of procedure Circular (13-10-2020) has retroactive application. The Court clarified,

“Many decisions of this Court define ‘retroactivity’ to mean laws that destroy or impair vested rights, in real terms, this is the definition of ‘retrospectivity’ or ‘true retroactivity’.”

On one hand, SEBI argued that the circular will have a retroactive application, on the other, Reliance Commercial Finance Ltd., argued that applying the circular on the instant case would make its application retrospective. The Court held that the SEBI Circular has retroactive application by relying on the following definitions:

In Principles of Statutory Interpretation by Justice G.P. Singh (14th Edn., 2016 at p. 583), it is stated that the rule against retrospective construction is not applicable to a statute merely because “a part of the requisites for its action is drawn from a time antecedent to its passing.” If that were not so, every statute will be presumed to apply only to persons born and things which come into existence after its operation and the rule may well result in virtual nullification of most of the statutes.

Significant Precedents

In Vineeta Sharma v. Rakesh Sharma, 2020 (9) SCC 1, the Court described the nature of prospective, retrospective, and retroactive laws as follows:

“The prospective statute operates from the date of its enactment conferring new rights. The retrospective statute operates backwards and takes away or impairs vested rights acquired under existing laws. A retroactive statute is the one that does not operate retrospectively. It operates in futuro. However, its operation is based upon the character or status that arose earlier. Characteristic or event which happened in the past or requisites which had been drawn from antecedent events.”

Noticing that the terms “retrospective” and “retroactive” are often used interchangeably, though their meanings are distinct, the Court referred to State Bank’s Staff Union (Madras Circle) v. Union of India, (2005) 7 SCC 584, where this difference was succinctly appreciated in the following words:

“’Retroactivity’ is used to cover at least two distinct concepts. The first, which may be called ‘true retroactivity’, consists in the application of a new rule of law to an act or transaction which was completed before the rule was promulgated. The second concept, which will be referred to as ‘quasi-retroactivity’, occurs when a new rule of law is applied to an act or transaction in the process of completion…the foundation of these concepts is the distinction between completed and pending transactions….” (T.C. Hartley, The Foundations of European Community Law 129 (1981)

Conclusion

The Court clarified that though many decisions of the Court define “retroactivity” to mean laws that destroy or impair vested rights, in real terms, this is the definition of “retrospectivity” or “true retroactivity”. “Quasi-retroactivity” or simply “retroactivity” on the other hand is a law that is applicable to an act or transaction that is still underway. Such an act or transaction has not been completed and is in the process of completion. Retroactive laws also apply where the status or character of a thing or situation arose prior to the passage of the law.

[SEBI v. Rajkumar Nagpal, 2022 SCC OnLine SC 1119, decided on 30-08-2022]


*Judgment by: Justice Dr. D Y Chandrachud


Appearance:

For SEBI: N Venkataraman, Senior Counsel & Additional Solicitor General

For RCFL: Darius Khambata, Senior Counsel

For Bank of Baroda: KV Viswanathan, Senior Counsel

For Authum Investment and Infrastructure Ltd.: Dhruv Mehta, Senior Counsel


*Kamini Sharma, Editorial Assistant has put this report together.


Also Read

SC upholds applicability of SEBI Circular; but gives a green signal to Reliance Commercial Finance resolution to avoid “unscrambling of resolution process”

Case BriefsSupreme Court

Supreme Court: In the Reliance Commercial takeover dispute, the 3-judges Bench comprising Dr. D Y Chandrachud*, Surya Kant and A S Bopanna, JJ., gave a green signal to the voting process to implement the resolution plan. The Court, though upheld the applicability of SEBI circular, it opined that the different voting mechanism proposed under the SEBI Circular will further delay the resolution process and potentially disrupt the efforts undertaken by the stakeholders, including the retail debenture holders. The Court noted,  

“Such unscrambling of the resolution process will not only prove time-consuming, but may also adversely affect the agreed realized gains to the retail debenture holders, who have already consented to the negotiated settlement before the High Court.” 

Factual Matrix 

The instant case relates to takeover of Reliance Commercial Finance Ltd. (RCFL) by Authum Investment and Infrastructure Ltd.; where a dispute arose with regard to the applicability of two circulars issued by RBI and SEBI— Reserve Bank of India (Prudential Framework for the Resolution of Stressed Assets) Directions 2019 and SEBI Standardisation of procedure Circular (13-10-2020).   

RCFL had issued Non-Convertible Debentures to various persons and Vistra ITCL (India) Ltd. was the Debenture Trustee under three Debenture Trust Deeds. RCFL committed its first default under the Debenture Trust Deeds in March 2019. 

The dispute 

Seventeen debenture holders instituted a suit on the Original Side of the Bombay High Court for protection of their interests with respect to the amounts due to them by RCFL, alleging that certain funds available with the Bank of Baroda, were distributed amongst creditors without regard to their status as secured or unsecured creditors without their consent and that they had a first charge on the receivables of RCFL.  

The debenture holders further alleged that the RBI Circular permitted this illegal distribution of funds and hence they urged for setting aside of the RBI Circular as illegal and ultra vires. They also sought an injunction restraining RCFL, Bank of Baroda, and RBI from implementing the RBI Circular. 

Impugned Decision  

The Single Judge held that the SEBI Circular could not be permitted to operate retrospectively and did not govern the Debenture Trust Deeds.  However, opining that a mere reference to the SEBI Circular would not override the express terms of any of the Debenture Trust Deeds, the Single Judge allowed to proceed with the voting process for the takeover of RCFL according to Debenture Trust Deeds signed in compliance with the RBI circular. In appeal, the Division Bench affirmed the aforesaid order of the Single Judge. 

Issues  

Based on the submissions canvassed by the parties, the following issues arose for determination: 

  1. Whether the civil court had the jurisdiction to entertain the lis in this case; and 
  2. Whether the debenture holders and other parties in the present case were required to follow the procedure under the SEBI Circular. 

Issue 1: Jurisdiction  

On the first issue, the Court noted that Section 15Y of the SEBI Act imposes a bar on the civil court to entertain any suit in respect of any matter that an adjudicating officer appointed under the SEBI Act is empowered to determine; however, since the Adjudicating officer has no jurisdiction under the SEBI Act to grant the relief sought by the plaintiffs in the first instance, the bar in Section 15Y would not operate as against the suit in the instant case. 

Similarly, with regard to the bar under Section 430 of the Companies Act that no civil court shall have the jurisdiction to entertain any suit in respect of any matter which the National Company Law Tribunal or the National Company Law Appellate Tribunal is empowered to determine, the Court observed that since neither the NCLT nor the NCLAT has jurisdiction to adjudicate upon a challenge to the RBI Circular, the bar in Section 430 is not attracted in the case at hand. 

Therefore, the Court held that the Single Judge as well as the Division Bench of the Bombay High Court properly exercised jurisdiction over the subject matter of the suit. 

Issue 2: Applicability of the SEBI Circular  

The RBI Circular provided that certain lenders may opt for a resolution strategy available to them under the existing legal framework, including entering into a resolution plan or initiating legal proceedings for recovery or insolvency. If the lenders chose to implement a Resolution Plan, they were required to enter into an Inter-creditor Agreement (ICA). 

By issuing the SEBI Circular, SEBI subscribed to the overall framework of the RBI Circular and permitted debenture holders to participate in the process specified in the RBI Circular to enter into a Resolution Plan (RBI circular provides only lenders can participate). Under the RBI Circular, the Resolution Plan cannot come into existence without an ICA. The SEBI Circular does not disturb this position. Hence, both the RBI Circular and the SEBI Circular refer to one and the same ICA and Resolution Plan.  

Rejecting the RCFL’s argument that Clauses 22 and 23 of the Fifth Schedule to the Debenture Trust Deed(s) are not concerned with signing an ICA or with the subject matter of the SEBI Circular in general, the Court observed that RCFL’s suggestion that the ICA and the Resolution Plan are distinct and severable is an incorrect interpretation of the circulars in question. The ICA and the Resolution Plan are inextricably intertwined and the latter has its genesis in the former and flows from it. 

Hence, the Court held that any reference to an ICA in the SEBI Circular is also necessarily a reference to the Resolution Plan and vice versa. It is not open to debenture holders to participate in the implementation of the Resolution Plan without being involved in its genesis through the ICA. The Court remarked,  

“There is only one ―door, so to speak, through which debenture holders can gain entry into the Resolution Plan with the lenders and that is through the ICA. Therefore, while the SEBI Circular does not mandate the execution of an ICA as the only route to entering a compromise with the issuer company, it lays down a procedure in the event that debenture holders choose the route of implementing a Resolution Plan with the lenders. This procedure cannot be circumvented.” 

Upholding the applicability of the SEBI circular, the Court pointed out the following: 

  • The purpose of the SEBI Circular is multi-fold – not only does it protect the interests of debenture holders at large (Clause 7), but it also protects the interests of any dissenting debenture holders (Clause 6.6).  
  • In the absence of Clause 7, debenture trustees would likely be unable to exit the ICA or the Resolution Plan even if they were not ―in the interest of investors or if the Resolution Plan was not finalized within 180 days from the end of the review period.  
  • Significantly, the absence of Clause 6.6 could mean that dissenting debenture holders would be bound by decisions taken even by way of a simple majority.  
  • We agree that the language in Regulation 15(7) of the 1993 Regulations and the SEBI Circular is facilitative and not mandatory. This is in recognition of the fact that debenture holders may opt to exercise their rights through mechanisms other than the execution of a Resolution Plan.  
  • The language cannot be construed to be facilitative in the sense of providing debenture holders with the option of by-passing the modalities prescribed by the SEBI Circular while accepting a Resolution Plan. The ICA continues to be the foundation or mother document for the Resolution Plan. 

Retroactive Application of the SEBI Circular  

Though RCFL issued the debentures and defaulted on the payments to the debenture holders prior to the issuance of the SEBI Circular, the Court culled out the following points to uphold the retroactive applicability of the SEBI Circular: 

  • On 13-10-2020 (when the SEBI Circular came into force), a compromise or agreement on the restructuring of the debt owed by RCFL did not exist. The debenture holders were not vested with any rights with respect to the resolution of RCFL‘s debt.  
  • The existence of the debt and the subsequent default by RCFL was the status of events, which existed prior to 13 October 2020. Once it came into force, the SEBI Circular applied to the manner of resolution of debt, as specified therein. 
  • Even assuming that debenture holders were vested with the right to sanction a compromise or arrangement in terms of the special majority in Clause 23 to the Fifth Schedule of the Debenture Trust Deed, they were divested of such a right upon the issuance of the SEBI Circular.  
  • Clause 59 of the Debenture Trust Deed stipulates that any provision in the Debenture Trust Deed which is in conflict with the 1993 Regulations is null and void.  
  • A contractually vested right may be taken away by the operation of a statutory instrument. The SEBI Circular owes its existence to statutory powers conferred by special legislation.  

Can SEBI Circular Bind Dissenting Debenture Holders 

SEBI contended that the compromise arrived at in terms of the direction of the High Court will also bind all the other debenture holders, who were not a party to the original suit before the High Court which will prejudice the dissenting debenture holders as they have to settle for a lesser amount – 24.96% of the principal among with a further 5% of the principal outstanding.  

Agreeing with SEBI‘s submission that the compromise arrived at the Debenture Trust Deed level among the consenting debenture holders should not bind the dissenting debenture holders, the Court directed that the dissenting debenture holders should be provided an option to accept the terms of the Resolution Plan.  

Alternatively, the Court held that the dissenting debenture holders have a right to stand outside the proposed Resolution Plan framed under the lender‘s ICA and pursue other legal means to recover their entitled dues. Hence, the Court disapproved the High Court’s interpretation of SEBI circular.  

Findings and Conclusion  

Though the Court upheld the applicability of the SEBI circular, it refrained from applying the same due to following findings:  

  • Under the present scheme of the Resolution Plan, retail debenture holders having exposure of up to INR 10 lakhs would stand to realize 100% of their principal dues. The secured retail debenture holders having an exposure of more than INR 10 lakhs would realize 29.69%. 
  • In comparison, the secured ICA lenders would receive 24.96% of their principal amount, which is lower than the recovery made by the debenture holders. It is also important to highlight that none of the debenture holders have raised any grievance with regard to the proposed compromise.  
  • The different voting mechanism proposed under the SEBI Circular will further delay the resolution process and potentially disrupt the efforts undertaken by the stakeholders, including the retail debenture holders.  
  • Such unscrambling of the resolution process will not only prove time-consuming, but may also adversely affect the agreed realized gains to the retail debenture holders, who have already consented to the negotiated settlement before the High Court. 

The Court observed,  

“In such a situation, application of the SEBI Circular, though right in law, may lead to unjust outcomes for the retail debenture holders if this court were to reverse the entire course of action which has occurred in the present case.” 

Relying on State v. Kalyan Singh, (2017) 7 SCC 444, the Court opined that the jurisdiction under Article 142 can be used to relax the rigors of law depending upon the peculiar facts and circumstances. Hence, considering that the compromise presently arrived at, which is in the interests of all the parties, will be disturbed if a new process is directed to be commenced in accordance with the SEBI Circular at the present stage, the application of the SEBI Circular will lead to a scenario where a Resolution Plan validly agreed upon by the ICA lenders under the RBI Framework will have to be unscrambled.  

Hence, the Court extended the benefit under Article 142 to the retail debenture holders by allowing the Resolution Plan to pass muster. The appeal was partly allowed and the Authum was allowed to process the takeover of RCFL.  

[SEBI v. Rajkumar Nagpal, 2022 SCC OnLine SC 1119, decided on 30-08-2022] 


*Judgment by: Justice Dr. D Y Chandrachud 


Appearance:  

For SEBI: N Venkataraman, Senior Counsel & Additional Solicitor General  

For RCFL: Darius Khambata, Senior Counsel 

For Bank of Baroda: KV Viswanathan, Senior Counsel  

For Authum Investment and Infrastructure Ltd.: Dhruv Mehta, Senior Counsel 


*Kamini Sharma, Editorial Assistant has put this report together.  


SEBI
Legislation UpdatesNotifications

   

On 25-08-2022, the Securities and Exchange Board of India (‘SEBI') has issued a circular on Enhanced Disclosures by Credit Rating Agencies (‘CRA') and Norms on Rating Withdrawal amending the SEBI (Credit Rating Agencies) Regulations, 1999, to protect the interest of investors in securities and to promote the development of, and to regulate, the securities market by enhancing transparency.

It will be applicable to credit ratings of securities that are listed, or proposed to be listed, on a recognized stock exchange.

Key Points:

Methodology for Computation of Sharp Rating Action (‘SRA'):

Date of applicability: FY 2022-2023

  1. Vide Circular dated 13-11-2018, SEBI mandated CRAs to furnish data on SRA in investment grade rating category to Stock Exchanges and Depositories for disclosure on website on half yearly basis.

  2. To standardize the methodology of computation and disclosure of SRA, the CRAs have to compare 2 consecutive rating actions. To do the same, CRA has to check if the difference in credit rating between 2 consecutive press releases is more than or equal to 3 notches downward then it has to be included in the disclosure on SRAs.

  3. SRP on non-cooperative issuers should also be disclosed separately by CRAs.

Issuers Not Cooperating (‘INC') and information required for rating:

Date of applicability: 31-03-2023

  1. In continuation to the Circular dated 01-11-2022 that prescribes norms regarding policy in respect of non- co-operation by the issuer and guidelines on what constitutes non-cooperation, the CRAs will also have to provide a detailed policy of:

    • Non- submission of material information of:

      1. Quarterly financial results/ performance results/ audited financial results

      2. Current and past operational details- including capex plans

      3. Debt obligations and repayment details

      4. Any other issue felt appropriate by CRA as per internal assessment or as laid down by CRA in its internal policy/ manual

  2. A uniform practice of 3 consecutive months of non- submission of No-default Statement has to be followed by CRA, as ground for considering migrating the ratings to INC and tag such ratings as ‘INC' within a period of 7 days.

Rating Withdrawal:

Date of applicability: ratings withdrawn after 30-09-022

While withdrawing any credit rating, a CRA in its press release has to assign a credit rating to such security excluding the cases where there are no outstanding obligations or the company has been wound up or merged or amalgamated with another company.

Rating Withdrawal of Perpetual Debt Securities:

Date of applicability: ratings withdrawn after 30-09-022

  1. To facilitate withdrawal of ratings of perpetual debt securities that are listed or proposed to be listed on a recognized stock exchange the CRA has to revise withdrawal norms of ratings of such securities.

  2. The CRA has to withdraw ratings of perpetual debt securities if the CRA has:

    • Rated such security continuously for 5 years

    • Received an undertaking from the Issuer that a rating is available on such security

    • Received an undertaking from other CRA that a rating is available on such security

Disclosure of Average Rating Transition Rates for Long -Term Credit Ratings:

Date of applicability: Disclosures for FY 2022-2023

  1. Vide circular dated 13-11-2018, SEBI mandated CRAs to disclose a rating transition matrix, where the static pool has been defined to exclude ratings that have been withdrawn or ratings of non-cooperative issuers during the financial year.

  2. In addition to the current disclosure of rating transitions, 2 additional and separate rating transition matrices have to be disclosed by CRAs, one shall exclude ratings that have been withdrawn or ratings of non-cooperative issuers during the financial year and the other one shall include the same.

Enhanced Disclosure by CRAs:

Date of applicability: Website Disclosures made after 31-03-2023

  1. CRAs, on their websites should provide:

    • disclosures in excel/ machine readable formats and

    • archive of disclosures for at least 10 years, including the ratings press releases.

  2. In addition to the current disclosure on Cumulative Default Rates (‘CDR'), 2 other CDRs are to be disclosed, one where ratings of non-cooperative issuers shall be included in the cohort under the rating category in which the instrument is currently being rated and the other one where it has to be excluded.

SEBI
Legislation UpdatesNotifications

   

On 18-08-2022, SEBI has issued a circular on making the facility of block mechanism mandatory for all Early Pay – In transactions by making amendments in  circular no. CIR/HO/MIRSD/DOP/P/CIR/2021/595 dated July 16, 2021.

Earlier, Clause 5 of the circular provided that the proposed facility of block mechanism is on optional basis and Early Pay-in mechanism shall also continue.

SEBI
Legislation UpdatesNotifications

On 04-08-2022, the Securities and Exchange Board of India (‘SEBI’) issued enhanced guidelines for debenture trustees and listed issuer companies on security creation and initial due diligence to protect the interest of investors in securities and to promote the development of and to regulate the securities market.

This circular is applicable to the issuers who have listed and/or propose to list Non- Convertible Securities, Securitized Debt Instruments, Security Receipts, Municipal Debt Securities or Commercial Paper, recognized Stock Exchanges, depositors, Debenture Trustees (‘DT’) registered with SEBI; Credit Rating Agencies registered with SEBI.

Guidelines:

  1. A DT and listed entity should enter into an amended debenture trust agreement before initializing due diligence to incorporate the obligations prescribed in:

    • SEBI circular dated 03-11-2020, in para 4 to 7;

    • SEBI circular dated 12-11-2020;

    • SEBI circular dated 19-05-2022.

  2. According to para 4 to 7 of Circular dated 03-11-2020, the DT should issue a No-Objection Certificate (‘NOC’) to the issuer company for going ahead with proposed change in the structure of security. The DT should carry out due diligence for change/ creation/ addition in security.

  3. The issuer company then needs to create the proposed security and charge it in favour of the DT and then get it registered with the sub- registrar, Registrar of Companies, Central Registry of Securitization Asset Reconstruction and Security Interest of India (‘CERSAI’), Depository, within 30 days of creation of charge.

  4. After execution of amended debenture trust deed, the issuer company has to submit the following to the Depositories and Stock Exchanges:

    • NOC by DT for change in security or creation of security;

    • Executed amended debenture trust deed;

    • An undertaking from the DT- stating that the security has been created and registered.

    • Other documents/ consent required as per Regulation 59 of SEBI Listing Obligations and Disclosure Requirements (‘LODR’)

  5. The Depository then should assign a new ISIN of debt securities and also share the same with the recognized Stock Exchanges.

    1. Due Diligence Certificate in case of Shelf Prospectus/ Memorandum:

      DT should undertake due diligence when the security details have not been finalized at the time of filling out the draft prospectus by:

      • Furnish a certificate, confirming that due diligence has been carried out for the clauses other than that related to security creation prescribed in Regulations 40(a) and 44(3) of the SEBI (Issue and Listing of Non- Convertible Securities Regulations) (‘NCS’), 2021

      • DT, at the time of the issuance of the tranche memorandum, where the issue structure including terms related to security had been determined and finalized, should issue a due diligence certificate covering aspects of Regulations 40(a) and 44(3) of the NCS Regulations.

    2. Empanelment of External Agencies by DTs:

      DTs can also impanel external agencies for carrying out due diligence according to the SEBI circular dated 03-11-2020 on the creation of security in the issuance of listed debt securities and due diligence by debenture trustees and according to the SEBI circular dated 12-11-2020 on monitoring and disclosures by DTs. DTs should:

      1. Adopt criteria as approved by their Board of Directors and also disclose the same on their website.

      2. Formulate a policy on mitigating conflict of interest and shall disclose the same on their website.

SAT
Case BriefsTribunals/Commissions/Regulatory Bodies

   

Securities Appellate Tribunal, Mumbai (SAT): While dealing with the appeal preferred by the appellants against the order dated 08-06-2021 of the Whole Time Member (‘WTM'), the Coram of Tarun Agarwala, J. (Presiding Officer), M.T. Joshi, J. (Judicial Member), Meera Swarup (Technical Member) held that the directions of debarment and the penalty given by the WTM were harsh and excessive. Therefore, the Court, while partly allowing the appeal, reduced the penalty.

An instant appeal had been filed challenging the order of WTM through which the appellants were restrained from accessing the securities market for a period of 1 year and a penalty was also imposed.

Facts:

The appellant is a trading company dealing in investment in infrastructure development, investment in shares/ securities and also renders consultancy and advisory services on financial products.

On 09-06-2017, Ministry of Corporate Affairs issued a letter vide which 331 shell companies were listed against whom SEBI was directed to take appropriate action. On 07-08-2017, SEBI placed trading restrictions on the appellant company and its directors, which was challenged by the appellants through an appeal that was disposed of. On further investigation, an interim order was passed by SEBI on 09-11-2017 which included a direction to conduct a Forensic Audit.

Based on the Audit Report show cause notice was issued for violating provisions of SEBI (Listing Obligations and Disclosure Requirements) Regulations, (‘LODR') 2015, non- furnishing of information to the forensic auditor, violation of other provisions of LODR Regulations and violation of Prohibition of Fraudulent and Unfair Trade Practice relating to Securities Market (‘PFUTP') Regulations,2003.

The WTM found that the appellant violated provisions of LODR Regulations and violated Section 11(2)(I) of the SEBI Act by not furnishing information to the Forensic Auditor. But WTM did not find any violation of SEBI PFUTP Regulations, 2003 as there was no misappropriation of the funds nor had the Company or its Directors caused a fraud upon the investors. No unfair advantage was taken nor was any loss incurred by the investors. The WTM accordingly debarred the appellants from accessing the securities market for a period of one year and imposed different amounts of penalties.

Arguments:

The counsel for the appellants accepted that the Company has made certain lapses and failed to comply with LODR Regulations, but the lapse was not intentional and happened on account of procedural and technical issues. He contended that the entire enquiry was initiated with regard to the allegations that the company was a shell company which was false. He also brought to the notice of the Court that the WTM gave a clear chit of non-violation of the PFUTP Regulations., 2003

The counsel for the respondent contended that the directions and penalties imposed by the WTM were just and proper.

Observation and Analysis:

The Court observed that there was no misappropriation of the funds, and no fraud was done by the company or directors to its investors.

Further, it was observed that the company or the directors gained anything by violating LODR Regulations, 2015.

According to the Court's opinion, the directions of debarment and the penalty given by the WTM were harsh and excessive. It was observed that the period of debarment has already been undergone by the appellants, hence no orders were passed in that regard.

Further, the Court said that the penalty should be reduced. Therefore, a penalty of 25% of the penalty imposed by the WTM would be just and proper.

[V.B. Industries Limited v. SEBI, Appeal No. 750 of 2021, decided on 29-07-2022]


Advocates who appeared in this case :

Mr. Vinay Chauhan, Advocate with Mr. K.C. Jacob, Mr. Harish Khedekar and Ms. Dhvani Asher, Advocates i/b Vis Legis Law Practice, Advocates, for the Appellants;

Mr. Gaurav Joshi, Senior Advocate with Mr. Chirag Shah and Ms. Daksha Kasekar, Advocates i/b Mansukhlal Hiralal & Co., Advocates, for the Respondent.

SAT
Case BriefsTribunals/Commissions/Regulatory Bodies

Securities Appellant Tribunal, Mumbai: The Bench of Tarun Agarwala, J., Presiding Officer, and Meera Swarup, Technical Member, while allowing the appeals held that the shareholders of the company by passing a Special Resolution can ratify the Director’s Breach of Duty.

Background of the case

The Appellant, Terrascope Ventures Ltd., previously known as Moryo Industries Ltd., made a preferential issue of 63,50,000 shares for Rs. 25/- per share to 42 persons in a Special Resolution passed under Section 81(1A) of the Companies Act, 1956 on 01-10-2012. On the same date, an Extra Ordinary General Meeting (hereinafter as EOGM) was held and the shareholders were informed that the proceeds from the preferential issues would be utilised for the following uses-

  • capital expenditure including the acquisition of companies/business

  • funding long-term working capital requirements

  • Marketing

  • setting up offices abroad and

  • for other approved corporate purposes.

The proceeds collected were used for purchasing shares and extending loans and advances to other companies. On 29-09-2017, in the Annual General Meeting, the shareholders ratified the acts of the directors for not utilising the proceeds for their original objectives.

Securities Exchange Board of India (hereinafter SEBI) conducted the investigation and held that the variance of the utilization of the proceeds from the preferential issue cannot be legitimized by subsequent ratification passed by the shareholders in the Special Resolution and such ratification violates Regulation 3 and 4 of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 and Clause 43 of the Listing Agreement.

Analysis and Decision

In the light of the above-mentioned facts, the Bench relied upon the judgment of the Supreme Court in National Institute of Technology v. Pannalal Choudhury, (2015) 11 SCC 669, wherein, the expression “ratification” was explained as-

“29. The expression “ratification” means “the making valid of an act already done”. This principle is derived from the Latin maxim “ratihabitio mandato aequiparatur” meaning thereby “a subsequent ratification of an act is equivalent to a prior authority to perform such act”. It is for this reason that the ratification assumes an invalid act which is retrospectively validated.

30. The expression “ratification” was succinctly defined by the English Court in one old
case, Hartman v. Hornsby as under: “Ratification” is the approval by act, word, or conduct, of that which was attempted (of accomplishment), but which was improperly or unauthorisedly performed in the first instance.”

Therefore, the Bench opined that once the company ratifies the utilization of the proceeds, the acts, and deeds done by the directors on behalf of the company become valid. Hence by allowing the appeal the Bench held that since the utilization of the proceeds had been ratified, there was no variance in the utilization of the proceeds and consequently there was no violation of Clause 43 of the Listing Agreement.

[Terrascope Ventures Ltd v. SEBI, 2022 SCC OnLine SAT 179, decided on 02-06-2022]


Advocates who appeared in this case :

Deepak Dhane, Advocate with Shantibhushan Nirmal, and Sneha Ramnathan, Advocates i/b. Profess Law Associates, Advocates, for the Appellant.

Suraj Chaudhary, Advocate with Nidhi Singh, Binjal Samani, Aditi Palnitkar, and Moksha Kothari, Advocates i/b. Vidhii Partner, Advocates, for the Respondent.

SEBI
Legislation UpdatesRules & Regulations

The Securities and Exchange Board of India has made SEBI (Mutual Funds) (Second Amendment) Regulations, 2022 to further amend the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996. They shall come into force on the thirtieth day from the date of their publication in the Official Gazette.


In the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996,
after sub-clause (iii) of clause (c) of Regulation 2 providing definition of ‘Associate’, the following proviso has been inserted:

 

“Provided that the above definition of associate shall not be applicable to such sponsors, which invest in various companies on behalf of the beneficiaries of insurance policies or such other schemes as may be specified by the Board from time to time.”

 

Insider Trading
Op EdsOP. ED.

The Supreme Court of India in Balram Garg v. SEBI,1 had the occasion to consider the burden of proof that the Securities and Exchange Board of India (SEBI) should discharge to establish a charge of insider trading. The substance of SEBI’s case is that three close relatives (hereinafter “relatives”) of the Chairman and the Managing Director of a listed company traded the shares of the company based on some unpublished price sensitive information (UPSI) they received from the Chairman and the Managing Director. According to SEBI, the Chairman and the Managing Director communicated the UPSI violating the prohibition in the SEBI Act and SEBI (Prohibition of Insider Trading) Regulations, 20152. Similarly, their relatives violated the Act and Regulations by trading while in possession of that information.

Insider trading the legal framework

The SEBI Act, Section 12-A(e)3 and the SEBI (Prohibition of Insider Trading) Regulations, 2015 prohibit an insider from dealing with securities while they are in possession of material non-public price-sensitive information/unpublished price sensitive information (UPSI).4 Nor shall an insider in possession of such information communicate that information to anyone else.5 A person becomes an insider in two ways. Firstly, if a person is a connected person,6 he is an insider. A connected person is one who is associated with the company in a manner that allows him to access UPSI. Secondly, a person in possession of or having access to UPSI is also an insider.7 The distinction between the two, relevant for our discussion is that connected persons are presumed to be in possession of the UPSI; but in the case of others, SEBI has to prove that such persons were in possession of the UPSI.

The Chairman and the Managing Director are clearly connected persons to the company and hence they are insiders. They are presumed to be in possession of UPSI. They can neither trade based on UPSI nor disclose UPSI to others. The allegation is that the Chairman and the Managing Director communicated the UPSI to their close relatives violating the Prohibition of Insider Trading Regulations. As far as the relatives are concerned one has to determine whether they are immediate relatives within the meaning of the Regulations. A connected person’s spouse, parents, siblings, and children are also treated as immediate relatives if they are financially dependent on or consult connected persons for trading in securities.8 Immediate relatives are treated as connected persons.9 Therefore, immediate relatives are also presumed to possess UPSI. Secondly, a relative becomes an insider (like anyone else) if they are in possession of UPSI, even when they do not qualify as immediate relatives.

What did the Court hold?

In the backdrop of the provisions described above, SEBI had to prove against the Chairman and the Managing Director that they communicated UPSI to their relatives. As far as the relatives are concerned, SEBI had to prove either that the relatives were immediate relatives or that they traded while in possession of the UPSI. In other words, even if there was no evidence that the relatives had received any UPSI, SEBI could still succeed against the relatives if SEBI could show that they were immediate relatives of the connected persons. On the other hand, the Chairman and the Managing Director would try to demonstrate that they did not communicate any UPSI to the relatives. Similarly, the relatives would try to demonstrate that they were not immediate relatives and there was no evidence to show that they were in possession of UPSI.

In this case, two pieces of information qualify to be UPSI. The first one is the company’s decision to buy back its shares. The second UPSI is the withdrawal of the buy-back offer on account of the non-receipt of the no-objection certificate from the lead bank. The allegation was that the relatives or their associates traded in the share of the company while they were in possession of UPSI. The allegations were based on the trading pattern and time of the relatives. One of the relatives had been selling the company’s shares before the announcement of the buy-back at a lower price. But she stopped selling the shares before the announcement of the buy-back offer and avoided losses. She again sold her shares before the withdrawal of the buy-back offer and avoided loss. Further, a company that is fully owned by two of the relatives took a short position with respect to the shares of the company immediately before the withdrawal of the buy-back offer to gain from the fall in share price after the withdrawal. But apart from these circumstances, SEBI did not have any letters, e-mails, or witnesses to prove that the connected persons communicated UPSI to their relatives.

The Court held that the above circumstances fall short of proving the allegations. The burden of proof was on SEBI to show that the Chairman and the Managing Director communicated frequently with the relatives and that the relatives were in actual possession of the UPSI. Mere circumstantial evidence such as the trading pattern and timing was not sufficient to hold them guilty. It was necessary for SEBI to establish the communication and possession of UPSI through cogent evidence like letters, e-mails, or witnesses. As far as the relatives in question are concerned, they do not qualify as immediate relatives. The Court found that the Chairman and the Managing Director, and the relatives were estranged. Moreover, the relatives had resigned from the positions they held in the company. The relatives were financially independent and did not consult the Chairman and the Managing Director to make their decisions. For these reasons, relatives do not qualify as immediate relatives (and hence they themselves are not connected persons). Hence, they cannot be presumed to be in possession of the UPSI. The SEBI must have established through cogent evidence that they had been in possession of UPSI when they traded.

Going forward what does the judgment mean?

A recent blog post argued that this case marks the evolution of a “new standard of proof” in insider trading matters.10 It is not wholly unreasonable for the court to expect that mere circumstances are not sufficient to hold one guilty of insider trading. The decision will have no application to the standard of proof applicable in the case of immediate relatives. They will be treated on par with connected persons and will be presumed to be in possession of UPSI. But as far as others are concerned mere trading patterns and timing are not sufficient proof of possession of UPSI. The charge of communicating UPSI against the connected persons will not be sustained unless there is evidence to show the actual communication of the UPSI.

But the question is if not the circumstantial evidence of trade timing and pattern, what other material could SEBI find out in an insider trading? If the court is looking for material evidence such as written communication or witnesses directly proving communication of UPSI, it will not be hard for the violators to ensure that there is no such material or witness. When the tipper and tippee are intimate, it would be even more challenging to find such material evidence to prove the actual communication of UPSI.11 The doubt that remains is whether SEBI has the wherewithal and power to gather the kind of evidence required.


† Manager (Law) at Indian Oil Corporation Limited. Author can be reached at <varghesegthekkel@gmail.com >.

1. 2022 SCC Online SC 472.

2. SEBI (Prohibition of Insider Trading) Regulations, 2015.

3. Securities and Exchange Board of India Act, 1992, S. 12-A.

4. SEBI (Prohibition of Insider Trading) Regulations, 2015, Regn. 4(1).

5. SEBI (Prohibition of Insider Trading) Regulations, 2015, Regn. 3(1).

6. SEBI (Prohibition of Insider Trading) Regulations, 2015, Regn. 2(1)(d)(i).

7. SEBI (Prohibition of Insider Trading) Regulations, 2015, Regn. 2(1)(g).

8. SEBI (Prohibition of Insider Trading) Regulations, 2015, Regn. 2(1)(f).

9. SEBI (Prohibition of Insider Trading) Regulations, 2015, Regn. 2(1)(d)(ii)(a).

10. See Shruti Rajan, “Insider Trading: Evolving a New Standard of Proof”, IndiaCorpLaw, <https://indiacorplaw.in/2022/05/insider-trading-evolving-a-new-standard-of-proof.html>.

11. It is to avoid SEBI having to prove actual possession of UPSI in the case of close family members that the immediate relatives of connected persons are also treated as the connected persons. But the Court in the case concluded that they are not immediate relatives.

SEBI
Legislation UpdatesNotifications

   

On 29-07-2022, the Securities and Exchange Board of India(‘SEBI') issued an operational circular for listing obligations and disclosure requirements or Non- convertible Securities, Securitized Debt Instruments, and/or Commercial Paper for effective regulation of the corporate bond market and to enable the issuers and other market stakeholders to get access to all the applicable circulars at one place. The provisions of this circular shall come into force with effect from 01-08-2022.

SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 prescribes the continuous disclosure requirements for issuers of listed Non- convertible Securities, Securitized Debt Instruments and Commercial Paper.

Key Points:

  1. The operational circular has superseded the following circulars:

    • Circular dated 27-11-2015 on Format for statements/ reports to be submitted to Stock Exchange by listed entity which has listed its securitized debt instruments.

    • Circular dated 26-05-2017 on Listing of Non- Convertible Redeemable Preference Shares/ Non- Convertible Debentures through a Scheme of Arrangement.

    • Circular dated 17-01-2020 on Format for Statement indicating Deviation or Variation in the use of proceeds of issue of listed non-convertible debt securities or listed non- convertible redeemable preference shares.

    • Circular dated 05-10-2021 on Revised Format for filing financial information.

    • Circular dated 14-10-2021 on Revised Formats for Limited Review/ Audit Report for issuers of non-convertible securities.

    • Circular dated 29-12-2021 on Non-compliance with provisions related to continuous disclosures.

    • Circular dated 07-01-2022 on Disclosure obligations of listed entities in relation to Related Party Transactions.

  2. The Circular contains following Chapters:

    1. Chapter I contains formats for filing financial information that should contain the items mentioned in the Statement of Profit and Loss and the extent and nature of security created and maintained in case of secured non-convertible debt securities.

    2. Chapter II contains formats for audit report for quarterly standalone financial results for entities other than Banks and NBFCs is placed in Annex- II-C and Audit Report for quarterly standalone financial results for Banks and NBFCs is placed in Annex- II-D

    3. Chapter III discloses the impact of Audit Qualifications by Listed Entities where these entities should disseminate the cumulative impact of all the audit qualifications in a separate format with the annual audited financial results to the Stock Exchange. For audit reports with modified opinion, a statement showing impact of audit qualifications shall be filed with the Stock Exchange in a format as specified in Annex – III-A

    4. Chapter IV contains format for submission of statement indicating the utilization of issue proceeds of listed Non-convertible Securities to the Stock Exchange, by the listed entities. The Audit committee will review the statement indicating deviation/ variation on quarterly basis and submit the reports to the Stock Exchange. ‘Board of Directors' will replace Audit Committee where a listed entity, under the provisions of Listing Regulations or the Companies Act, 2013, is not required to have an Audit Committee. The Format for statement indicating the utilization of issue proceeds and the Format for statement indicating deviation/ variation is placed in Annex-IV-A to this Chapter.

    5. Chapter V contains Disclosures by listed entities of defaults on payment of interest/ repayment of principal amount on loans from banks/ financial institutions and unlisted debt securities shall be made to the Stock Exchange. In case of any default, disclosure to be made not later than 24 hours from the 30th day of such default.

    6. Chapter VI contains the Schemes of Arrangement involving Non-Convertible Debentures and Non- Convertible Redeemable Preference Shares issued in lieu of specified securities.

    7. Chapter VII contains the Formats specifying disclosure of Corporate Governance by ‘high value debt listed entities' in Part C of Schedule V of the Listing Regulations.

    8. Chapter VIII contains the Disclosure obligations of listed entities in relation to its Related Party Transactions, its manner of dealing, approval by Audit Committee, disclosure of the same to the Stock Exchange and publication on the entity's website.

    9. Chapter IX specifies the conditions when the issuers do not comply with the uniform structure prescribed for levying of fines and the actions by the Stock Exchange.

    10. Chapter X contains provisions applicable to issue of Securitized Debt Instruments under the SEBI (Issue and Listing of Securitized Debt Instruments and Security Receipts) Regulations, 2008.

    11. Chapter XI has been inserted containing format for review of rating obtained by the listed entity with respect to its non-convertible securities from Credit Rating Agency registered with SEBI.

SEBI
Legislation UpdatesNotifications

   

On 29-07-2022, the Securities and Exchange Board of India (‘SEBI') has extended the timeline for Nomination for Mutual Fund (‘MF') Unit Holders till October 01, 2022 in order to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.

Key points:

1. Investors, who are subscribing to mutual fund units from October 1 will have the choice of providing nomination or opting out nomination.

2. Asset Management Companies (AMCs) will have to provide an option to the unit holder to submit either the nomination form or the declaration form for opting out of nomination in physical or online mode as per the choice of the unit holder.

3. AMCs shall validate the forms using e-Sign facility recognized under Information Technology Act, 2000 or through two factor authentication (2FA) in which one of the factorshall be a One-Time Password sent to the unit holder at his/her email/ phone number registered with the AMC.

SEBI
Case BriefsTribunals/Commissions/Regulatory Bodies

   

Securities and Exchange Board of India (SEBI), Special Court, Maharashtra: In the instant case dealing with unregistered brokerage, Vishal Sadashivrao Gaike, J. deliberated over the issue that whether a delay in filing a complaint against unregistered sub-brokers, can be condoned or not. It was held that, in view of the facts of such cases and seriousness of such allegations (as they are in the instant case), it is in the interest of justice that such a delay be condoned.

Facts:

On 19-06-2001, SEBI received a complaint from a person named J. P. Mittal stating that the accused, Balaji and Co., were dealing in Securities as a sub-broker without obtaining a registration certificate from SEBI and thereby duping its clients by providing fake shares. Consequently, via a letter dated 11-09-2001, the accused was informed about the said complaint and they were directed to seek registration immediately. It was also informed that their failure to do so would result in further violation of the SEBI Act and would subsequently attract penal action. Since there was no reply from the accused,therefore, SEBI filed the present matter under Section 24(1) of the SEBI Act, 1992 against the accused for violation of Section 12 of the SEBI Act. The instant case had been in the pipeline for about 20 years, however owing to the nature of the complaint, SEBI filed the instant application on behalf of the complainant for condonation of delay under Section 473, CrPC.

The accused opposed the present application with two contentions:

(1) There had been a delay of three months and fourteen days i.e., 106 days in filing the complaint.

(2) The schedule of the Economic Offences (Inapplicability of Limitation) Act, 1974 (‘the 1974 Act') does not include the SEBI Act, 1992, hence, the legislative intent to exclude the same is clear. The accused claimed that after cognizance has been taken by the Court, a delay cannot be subsequently condoned. It is also mandatory that before taking cognizance of the offence, the Court has to satisfy itself of the grounds for the extension of time which was not done in the present case. Therefore, the present complaint itself is not maintainable along with the present application which has been filed twenty years after cognizance has been taken.

Analysis and Findings:

The Court heard both sides and placed reliance on a case presented by the complainant, i.e., Sukhdev Raj v. State of Punjab, 1994 Supp (2) SCC 398, In this case, the issue before the Supreme Court was whether the delay in filing the charge sheet can be condoned prior to the conclusion of the trial and particularly before the judgment was delivered. The Supreme Courtheld that, “Section 473, CrPC does not in any clear terms lay down that the application should be filed at the time of filing challan itself. The words ‘so to do in the interest of justice' are wide enough”.

The Court also held that the contention of SEBI, that the SEBI Act 1992 replaced the Capital Issues (Control) Act, 1947, hence the Economic Offences (Inapplicability of Limitation) Act, 1974 applies to the SEBI Act, is unacceptable because the Schedule in the 1974 Act does mention SEBI Act, 1992. When the said Schedule has not been amended by the legislature after the repeal of the Capital Issues Control Act, 1947, then the Courts have no power to read the name of the SEBI Act, 1992 in the same. Thus, a delay has occurred in the filing of the complaint for which SEBI should seek condonation.

The Court observed that the complainant had provided the explanation that SEBI is an autonomous body entrusted with the task of regulating the Securities Market. Before any prosecution is launched, approval of the competent authority is required, and only after the satisfaction of the said authority can a prosecution be launched. The Court noted that the complainant in its application had rightly pointed out that the SEBI Act is a social welfare legislation, and the legislative intent was to promote orderly and healthy growth of the Securities Market and to protect the interest of investors. It has also been observed that while interpreting provisions of a social welfare legislation, the paramount duty of the Court is to adopt such an interpretation so as to further the purpose of law and if possible, eschew the one which frustrates it. Subsequently, the Court accepted the complainant's explanation for the delay in filing the complaint.

Conclusively, the Court held that the delay has been properly explained, and since there are serious allegations against the accused, in the interest of justice it is necessary to condone the delay in filing the present complaint.

[Securities and Exchange Board of India v. Balaji & Co., CNR No. MHCCO2-000792-2015, decided on 02-07-2022]


Advocates who appeared in this case :

Anubha Rastogi, Spl.P.P, Advocate, for the Complainant/ SEBI;

Prashant Trivedi, Advocate, for the Accused.


*Sucheta Sarkar, Editorial Assistant has reported this brief.

SEBI
Legislation UpdatesRules & Regulations

   

On 25-07-2022, the Securities Exchange Board of India(‘SEBI') has issued SEBI (Alternative Investment Funds) (Third Amendment) Regulations, 2022 to amend the SEBI (Alternative Investment Fund) Regulations, 2012

The amendment:

  • Insertion of definitions:

1. “Social impact fund” means an Alternative Investment Fund which invests primarily in securities, units or partnership interest of social ventures or securities of social enterprises and which satisfies the social performance norms laid down by the fund.

2. “Social units” means units issued by a social impact fund or schemes of a social impact fund to investors who have agreed to receive only social returns or benefits and no financial returns against their contribution.

3. “Not for profit organization” shall have the same meaning as assigned to it in clause (e) of regulation 292A of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.

“Not for profit organization” means a Social Enterprise which is any of the following entities:

(i) a charitable trust registered under the Indian Trusts Act, 1882 (2 of 1882);

(ii) a charitable trust registered under the public trust statute of the relevant state;

(iii) a charitable society registered under the Societies Registration Act, 1860 (21 of 1860);

(iv) a company incorporated under section 8 of the Companies Act, 2013 (18 of 2013);

(v) any other entity as may be specified by the Board;

4. “Social enterprise” shall have the same meaning as assigned to it in clause (h) of regulation 292A of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.

“Social Enterprise” means either a Not for Profit Organization or a For Profit Social Enterprise that meets the eligibility criteria specified in this Chapter.

5. “Social stock exchange” shall have the same meaning as assigned to it in clause (i) of regulation 292A of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.

“Social Stock Exchange” means a separate segment of a recognized stock exchange having nationwide trading terminals permitted to register Not for Profit Organizations and / or list the securities issued by Not for Profit Organizations in accordance with provisions of these regulations.

  • Regulation 16 sub-regulation (4):

Clause

SEBI AIF Regulations, 2022

SEBI AIF Regulations, 2012

(a) condition to social venture funds Subs.

75% of the investible fund to be invested in unlisted securities or partnership interest social ventures or in units of social ventures or in securities of social enterprises.

Provided that an existing social impact fund may invest the remaining investable funds in securities of not-for-profit organizations registered or listed on a social stock exchange with the prior consent of atleast 75% of the investors by value of their investment.

75% of the investible fund to be invested in unlisted securities or partnership interest social ventures.

(b) proviso Subs.

The amount of grant that may be accepted by the fund from any person should not be less than Rs.10 lakh

The amount of grant that may be accepted by the fund from any person should not be less than Rs.25 lakh

(ba) Ins.

Notwithstanding the provisions of clauses (a) and (b), a social impact fund or schemes of a social impact fund launched exclusively for a not-for-profit organization registered or listed on a social stock exchange, shall be permitted to deploy or invest hundred percent of the investable funds in the securities of not-for-profit organizations registered or listed on a social stock exchange.

 
SEBI
Legislation UpdatesRules & Regulations

   

On 25-07-2022, the Securities and Exchange Board of India has issued SEBI (Listing Obligations and Disclosure Requirements) (Fifth Amendment) Regulations, 2022 to amend the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015. The amendment inserts Chapter IX-A dealing with Obligations of Social Enterprises.

Key Points:

  1. Applicability:

    • For Profit Social Enterprise whose designated securities are listed on the applicable segment of the Stock Exchange;

    • a Not-for-Profit Organization that is registered on the Social Stock Exchange (‘SSE').

  2. A Not for Profit Social Enterprise whose designated securities are listed on the Stock Exchange has to comply with the disclosure requirements contained in these regulations with respect to issuers whose specified securities are listed on the Main Board or the SME Exchange or the Innovators Growth Platform.

  3. Other features covered under this chapter are:

    • Disclosures by a For Profit Social Enterprise.

    • Disclosures by a Not-for-Profit Organization.

    • Intimations and disclosures by Social Enterprise of events or information to Social Stock Exchange or Stock Exchange.

    • Disclosures by a Social Enterprise in respect of social impact.

    • Statement of utilisation of funds.

SEBI
Legislation UpdatesRules & Regulations

On 25-07-2022, the Securities and Exchange Board of India has issued SEBI (Issue of Capital and Disclosure Requirements) Third Amendment) Regulations, 2022 to amend the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.

The amendment inserts a Chapter X-A dealing with Social Stock Exchange (‘SSE’).

Key Points:

  1. Applicablilty:
    • to a Not-for-profit Organization seeking to get registered and raise funds through a SSE.
    • To a Not-for-profit Organization seeking to get registered and raise funds through a SSE.
    • a For Profit Social Enterprise seeking to be identified as a Social Enterprise under the provisions of this Chapter.
  2. SSE will be accessible only to institutional investors and non-institutional investors.
  3. Every SSE will constitute a Social Stock Exchange Governing Council to have an oversight on its functioning.
  4. This chapter also covers the eligibility conditions for being identified as a Social Enterprise.
  5. A Not-for-Profit Organization must mandatorily seek registration with a SSE before it raises funds through a SSE.
  6. Other features covered under this chapter are:
    • Fund raising by social enterprise;
    • Ineligibility for raising of funds;
    • Issuance of Zero Coupon Zero Principal Instruments;
    • Eligibility for issuance of Zero Coupon Zero Principal Instruments;
    • Procedure for public issuance of Zero Coupon Zero Principal Instruments by a Not-for-Profit Organization;
    • Procedure for private issuance of Zero Coupon Zero Principal Instruments by a Not-for-Profit Organization;
    • Contents of the fund-raising document;
    • Deemed compliance with Securities Contracts (Regulation) Rules, 1957;
    • Termination of listing of Zero Coupon Zero Principal Instruments from the Social Stock Exchange.