The four types of laws that all private equity lawyers must know

PrivateEquityLawyer_AngiraSinghviTo advise on private equity investments and their structure, lawyers need to be aware of the many laws that affect transactions. Let us look at the four major categories of laws that can regulate a private equity transaction.

1. Foreign investment laws

When investment flows in from countries located outside India for investment in some business activity and not merely stock or trading, the amount is treated as foreign direct investment (“FDI”) and the investment needs to comply with applicable regulations. Many private equity funds are based out of tax havens such as Mauritius and the British Virgin Islands and FDI is routed through such jurisdictions.

Every year, some time in the months of April or May, the Ministry of Commerce and Industry issues an FDI policy, governing areas such as the kind of instruments that may be issued, sectors in which investment may be freely made, and the procedure of issue. The policy is reviewed every year and changed if necessary.

Depending on factors such as the business sector, the nature of the instrument, and the intended percentage of shareholding, FDI can fall under the automatic route or the government route. Under the automatic route, the investor can directly invest into the target company without obtaining any prior approval from the government. Under the “government route” or the “approval route”, prior approval is required from the Foreign Investment Promotion Board. For example, prior government approval is necessary in mining, coal and lignite, and real estate unless some prescribed conditions are complied with.

The Foreign Investment Promotion Board is housed in the Department of Economic Affairs of the Ministry of Finance.

The Foreign Investment Promotion Board is housed in the Department of Economic Affairs of the Ministry of Finance.

Structure of the target: FDI investment into a company or a venture capital fund (not being a trust) is most straightforward because there are fewer restrictions and the investment is permitted through the automatic route. While investors may prefer investing in trusts and LLPs to take advantage of tax and operational benefits, additional structures are required for an FDI investment.

Types of instrument: Indian companies can issue equity shares; fully, compulsorily, and mandatorily convertible debentures; and fully, compulsorily, and mandatorily convertible preference shares under the automatic route subject to the pricing guidelines or the valuation norms prescribed by the regulations under the Foreign Exchange Management Act, 1999 (“FEMA”).

Convertible instruments get converted into equity after a specified period of time. A prescribed conversion formula determines the value of that instrument or the equity shares to be issued. Unless they are compulsorily convertible, they do not fall within the category of permitted instruments under the automatic route.

All other instruments (including optionally convertible instruments) are considered debt and require compliance with the Reserve Bank of India’s guidelines on external commercial borrowing.

The price or conversion formula at the time of conversion of a convertible capital instrument should be determined at the time of its issue according to any internationally accepted pricing methodologies and on arm’s length basis for unlisted companies. For listed companies, a valuation has to be made under the Securities and Exchange Board of India( Issue of Capital and Disclosure Requirements) Regulations.

In order to use the automatic route, the instruments need to be fully paid up and comply with the pricing norms, failing which, the government’s prior approval is required.

Reporting of the investment: The FDI policy requires that any amounts received by the target entity against capital should be reported to the Reserve Bank of India. An amount received against the transfer of existing shares should be reported by filing Form FC-TRS. An amount received against the issue of new shares should be reported by filing Form FC-GPR.

Business sector: FDI policy restricts the level of investment in certain sectors. In such sectors, investment above a certain percentage of the total shareholding requires the prior approval of the government. In some sectors, even indirect shareholding or control is not permitted. For example, in defence production, air transport services, ground handling services, asset reconstruction companies, private sector banking, broadcasting, commodity exchanges, credit information companies, insurance, print media, telecommunications, and satellites, no transfer is permitted that may result in ownership or control by foreign entities.

2. Laws governing listed companies

Acquisition of shares: Ordinarily, shares are freely transferrable in listed companies (unless there are agreements to the contrary). Some provisions of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (“Takeover Regulations”) however, can hinder the acquisition of shares in a company.

Any acquisition of shares or voting rights that will give the acquirer (or persons acting in concert with the acquirer) 25 per cent or more of the voting rights in the target company can only go forward after the acquirer makes a public announcement of an open offer to acquire at least 26 per cent of the voting shares from the public shareholders of the target.

The Takeover Regulations also lay down norms that apply to acquisitions where the acquirer already holds or controls a substantial amount of shareholding in the target company. Further, under Regulation 4 of the Takeover Regulations, irrespective of the acquirer’s shareholding or voting rights in the target company, it shall not acquire control over a target company without making an open offer for acquiring shares.

The term ‘control’ is significant for private equity transactions because investors tend to insist that their active consent should be taken before any main action affecting the company is taken, such as any future financing, entering into any agreement above a certain value, appointment of directors, deciding upon agenda of board and shareholders’ meeting, restrictions on sales and company assets, and sale of shares to third parties. Even when they have a minority stake in the company, they insist upon such rights and often, this list is so wide that it may be interpreted as exercising control over the company.  According to the SEBI, an agreement that incorporates such a condition would give the private equity firm ‘control’ over the company even though its shareholding is not high enough to trigger the Takeover Regulations.

In addition to the requirement of having to make an open offer, the target company and its board of directors become subject to a few other obligations. For instance, during the offer period, no person representing the acquirer (or any person acting in concert with him) can be appointed as a director on the board of directors of the target company.

If the private equity investor decides to acquire the entire public shareholding resulting in the delisting of the company, even more regulations apply in the form of the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009 (“Delisting Regulations”). The company must be listed for a period of at least three years and the delisting cannot result from a buy-back or preferential allotment of shares by the company.

3. Insider trading regulations

It is an offence under the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 to ‘deal in securities’ while in possession of unpublished price-sensitive information, that is, any information that, if published, is likely to affect the price of the securities of a company. The Companies Act, 2013 has also introduced provisions on insider trading. Section 195 of the Act, which applies to unlisted companies also, lays down punishments of imprisionment and hefty fines for their contravention.

4. Other company law aspects

Since private equity investments are usually made in companies, a detailed understanding of the Companies Act, 2013 (“Act”) is necessary before advising on transactions. Some of the important provisions are discussed here.

Layered investment: Investments through more than two layers of investment companies, preffered by private equity investors because of their tax efficiency, are not permitted under the Act.

Restrictions on transfer of shares: Unlike its predecessor, the Act allows shareholders of ‘public’ companies to enforce restrictions on the transfer of securities. Private equity investors therefore, can freely stipulate conditions on the transfer of shares such as drag-along rights, tag-along rights, and right of first refusal (all of which will be explained in detail in a later post on transaction documents). The Act only protects these conditions as if they are a contract between private persons, and so, to bind the company, it may be advisable to incorporate these provisions into the articles of the company.

Differential voting rights: The Act also contains provisions relating to different classes of shares. Barring a few situations, private companies cannot issue preference shares with voting rights.

Representation on the board: In order to safeguard their investment, private equity investors usually nominate one director to the board of the target company. As their legal consultant, you should be able to advise the investors about the consequences of such an appointment. A director who becomes ‘aware’ of any contravention by way of his participation or receipt of information and does not object to such contravention can be subject to prescribed punishments. Such liability extends to non-executive directors as well.

Amendments to a company’s articles: The articles of a company are amended following a private equity investment to reflect the amended understanding amongst shareholders. You should verify whether the current articles of the company contain any provisions that may only be altered after following procedures that are more restrictive than those applicable in the case of a special resolution, and that these procedures are complied with at the time of the closing. Such provisions may also be inserted in the articles to protect the interests of the investor in its capacity as a minority shareholder.

Apart from these major laws that are essential to advice on private equity transactions, some other laws are important at the stage of conducting due diligence over the target. Let us look at those laws in a later post on conducting due diligence.

Angira Singhvi is a principal associate with Khaitan Sud and Partners and handles general corporate, joint ventures and private equity investments.


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Why SEBI has jurisdiction over GDRs that impact Indian securities markets

DeekshaSinghEarlier this month, the Supreme Court decided on the jurisdiction of the Securities and Exchange Board of India (“SEBI”) in relation to Global Depository Receipts (“GDRs”). Let us take a closer look at GDRs and the Court’s decision in Securities and Exchange Board of India v. Pan Asia Advisors Ltd.

What are GDRs?

GDRs are instruments created by a foreign depository outside India and authorised by a company making an issue of such depository receipts. A depository can be any company, bank, or institution that holds and facilitates the exchange of securities. Depositories issue receipts for the securities deposited with them, which then function as negotiable financial instruments that can be traded on a stock exchange.

Let us look at how this works. Each GDR represents a certain number of equity shares of an Indian company, which are listed on an Indian stock exchange. A local custodian in India holds the underlying equity shares on behalf of the depository. The depository issues these GDRs, which are then listed and traded on the foreign exchanges. The underlying equity shares are not traded on the Indian stock exchange until the GDR holder redeems the depository receipts. Until then, they are merely held by the local custodian.

The GDR holder may redeem the GDRs and obtain the underlying equity shares. The terms of the redemption will depend on the terms of the deposit agreement between the issuer, the GDR holder, and depository issuing the GDRs. The GDR holder however, should be eligible to hold the underlying equity shares according to the foreign exchange laws in India, namely, the Foreign Exchange Management Act, 1999 and the regulations made under it, in order to redeem the GDRs and obtain the underlying equity shares.

In India, the Ministry of Company Affairs has issued the Companies (Issue of Global Depository Receipts) Rules, 2014 (“GDR Rules”) to govern the issue of GDRs. The GDR Rules provide that any GDR issue must comply with the GDR Rules and the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993, which was notified by the Ministry of Finance.

SEBI v. Pan Asia Advisors Ltd. – the facts

In this case, issued GDRs were all converted into the underlying equity shares of the issuing companies, which were then sold in large deals to several buyers, such as stock brokers. The stock brokers would in turn sell the shares to other investors.

After investigation, the SEBI found that the issuing companies, the lead manager to the GDRs, the foreign institutional investors (“FIIs”), and the stock brokers were all acting as a group. They were able to maintain the share price of the company through these transactions. No information was communicated to outside investors who may have paid a high price based on the issuance of GDRs by the companies and large holdings maintained in them by FIIs.

SEBI held that this was an instance of market manipulation and exercising its quasi-judicial function, passed an order restraining the parties from participating in the capital markets.

The Securities Appellate Tribunal (“SAT”) overturned the SEBI’s ruling on the ground that SEBI does not possess jurisdiction to regulate GDRs. SEBI appealed the matter. The issue was whether the SEBI has the jurisdiction to initiate action against the lead managers to the GDRs issued outside India.

The Supreme Court’s decision

The Supreme Court of India

The Supreme Court of India

The Supreme Court looked at the process involved in a GDR issuance. It recognised that while the deposit of the ordinary shares with the custodian takes place in India, the actual issue and trading of the GDRs takes place outside India.

Since the GDR does not come into existence unless the underlying shares are issued, Indian law does apply. This also leads to the conclusion that GDRs would fall within the definition of “securities” under section 2(h) of the Securities Contracts (Regulation) Act, 1956 (“SCRA”).

The Supreme Court then looked at the powers of the SEBI under the Securities and Exchange Board of India Act, 1992 (“SEBI Act”) and the SEBI (Prohibition of Fraudulent and Unfair Trade Practice Relating to Securities Market) Regulations, 2003. After finding that the SEBI has extensive powers to protect the interests of investors in the securities markets, the Supreme Court noted that the alleged actions of the parties involved in the transactions adversely affected the Indian securities markets. It observed that “… the violation complained of by the appellant is with reference to such of those provisions contained in SEBI Act, 1992 vis-`-vis the underlying shares of GDRs. Therefore, we are unable to see any violation of exercise of its jurisdiction since the underlying shares of GDR were created and dealt with as well as traded in the stock market of Indian Territory.

It further relied on the case of GVK Industries Limited v. Income Tax Officer and stated that in order to proceed “in exercise of any extra territorial aspect, which has got a cause and something in India or related to India and Indians in terms of impact, effect or consequence would be a mixed matter of facts and of law, then the Courts have to enforce such a requirement in the operation of law as a matter of law itself.

So with regard to the limited question of jurisdiction, the Supreme Court concluded that the SEBI has jurisdiction over GDR issues that impact the Indian securities markets. It sent the matter back to SAT for a decision on the merits of the case.

The specific facts of the case could have affected the Supreme Court’s decision. This transaction in question was not just a GDR issue. A series of allied transactions allegedly caused adverse consequences for Indian investors. The scope of this judgment may therefore be somewhat limited. However, it serves to clarify that just because a GDR issue is carried out entirely outside India does not mean that it is outside the SEBI’s territorial jurisdiction.

Deeksha Singh is part of the faculty at


Securities regulators in India and US move to ease capital access for startups

SuryaKumarGedaThe lack of sufficient funding has been cited as an important reason for the failure of many Indian startups. The case of is a classic example of the high handedness of venture capitalists (“VCs”) that have traditionally been the main source of funding. All this may change soon because of regulatory developments in the United States and in India aimed at making it easier for startups to access capital from the securities markets.

Last week, the Securities Exchange Commission of the United States (“SEC”) released Regulation A+ to implement Title IV of the Jumpstart Our Business Startups Act, 2012 (“JOBS Act”) and SEBI released a discussion paper proposing an alternate platform for raising capital for startups. Though there are many parallels between the two frameworks, Regulation A+ is the SEC’s second attempt to meet the funding requirements of startups. For India, the question is whether the SEBI will get it right in its first attempt.

High compliance costs under Regulation A

Under a previous avatar known as Regulation A, small and medium sized companies in the United States could raise upto USD 5 million in a year without registering with the SEC. Companies however, still had to file prospectus with the SEC and comply with the registration requirements of the applicable state securities laws, known as “blue sky laws”. The USD 5 million limit on the size of the offering, along with the cost of compliance, made the offers unattractive. Regulation A+ has now increased the offer size to USD 50 million and with the JOBS Act authorising the SEC to preempt blue sky laws by framing new regulations, reduced the cost of compliance.

IPOs on the ITP

Both the Securities and Exchanges Commission and the SEBI have moved recently to ease access to capital for startups.

Both the Securities and Exchanges Commission and the SEBI have moved recently to ease access to capital for startups.

In October, 2013, SEBI launched the Institutional Trading Platform (“ITP”) where small and medium-size enterprises and startups could list their securities without bringing an IPO and by complying with Regulation 106Y of the Issue of Capital and Disclosure Regulations, 2009. Till now, companies listed on the ITP could raise funds only through private placements and rights issues of their securities. Now, SEBI has proposed a new route through which professionally managed startups having innovative business models and belonging to the knowledge-based technology sector can bring an IPO for listing on the ITP.

Interests of retail investors

Capital markets regulators are sentinels for the interests of retail investors and they need to be sensitive to the risks associated with the high rate of failure associated with the startups.

Regulation A+ envisages two tiers. In the first, companies can raise in a year, up to USD 20 million and in the second, USD 50 million. The first tier requires SEC qualification along with state approval. The second requires only SEC approval. Unaccredited investors can invest in Tier 2 offerings up to ten percent of their annual income or net worth, whichever is greater. They will need to provide representations and warranties about their income or net worth to ensure compliance with these limits, thereby freeing issuers from extensive documentation reviews and verification procedures. There is no such limitation on the investment of unaccredited investors under Tier 1. Since Tier 1 is subject to blue sky laws, unaccredited investors are protected by the respective state laws. Companies can raise funds on the basis of reviewed financial statements under Tier 1, but Tier 2 requires audited financial statements.

SEBI’s proposed framework bars retail individual investors from investing in the offers for listing on the ITP. Only qualified institutional buyers (“QIBs”) and non-institutional investors (“NIIs”) would be eligible. The minimum application size for the offers has been proposed at 10 lakh rupees. These provisions ensure that only high net-worth individuals can participate.

Eligible issuers

Only professionally managed startups with innovative business models and belonging to the knowledge-based technology sector will be eligible issuers under the SEBI proposal. Only startups in which no person (individually or collectively) holds 25 per cent or more of the pre-issue share capital will be considered professionally managed. Often, after many rounds of funding, the holding of promoters in startups falls below 25 per cent.

Regulation A+, on the other hand, does not restrict the issuers only to the knowledge-based technology sector. All development stage companies with a specific plan or purpose are eligible.

Lock-in requirements

Lock-in requirements intertwine the fortunes of the promoters with the success of the company. Under the ICDR Regulations, 20 per cent of post-issue capital should be locked in for three years. Lock-in requirements do not ordinarily apply to venture capital investors in regular IPOs. Under the new framework, SEBI has proposed that the entire pre-issue share capital should be locked in for six months. This requirement will apply uniformly to all shareholders. This proposal bars venture capitalists from selling their stake at the time of the offer. They will only be able to sell their stake after the cooling off period of six months, which is enough time to settle the frenzy surrounding the offer.

Under Regulation A+, existing shareholders can sell securities worth not more than USD 6 million under Tier 1, and not more than USD 15 million under Tier 2 during the first and second years (See, pages 34 and 35). However, in second year, the limitation applies only on affiliates shareholders.

While SEBI has ensured that the proceedings from an offer should only result in capital for the startup companies by locking-in the entire pre-issue share capital for six months, the SEC has allowed existing shareholders to make secondary sales of securities during a Regulation A+ offering. The SEC also has ensured that promoters remain invested for at least two years.

Disclosure requirements

SEBI has also proposed that the prospectus should be in compliance with the various ICDR Regulations subject to exemptions that align with the the needs of startups and to ensure that prospective investors make informed decisions. Startups do not need to outline the objects of the issue in greater detail as required in a regular IPO. Rather, they can indicate general corporate purposes. The proposed framework gives greater autonomy to startups in pricing their issue, except that there cannot be any forward looking statement while disclosing the basis of the pricing.

Offers under Regulation A+ need to file Form 1-A with the SEC for its approval. This form contains itemised information similar to Form S-1 for registered IPOs, but is scaled back. It has three parts: notification, offering circular, and exhibits. Companies cannot use an offering circular without the SEC’s approval.

Surya Kumar Geda is a student in his final year at the Faculty of Law, New Delhi.


What does insider trading mean in 2015?

DeekshaSinghThe legal framework for insider trading has recently been overhauled. Provisions relating to insider trading were introduced in the Companies Act, 2013 (“Companies Act”) and the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 (“Old Regulations”) were replaced by the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 (“Insider Trading Regulations”).

The prohibitions

Under Regulation 3 of the Insider Trading Regulations, no insider should “communicate, provide, or allow access to any unpublished price sensitive information, relating to a company or securities listed or proposed to be listed, to any person including other insiders”. However, it specifically excludes communications for legitimate purposes, the performance of duties, or the discharge of legal obligations.

The Insider Trading Regulations also apply to people in general. It prohibits them from procuring unpublished price sensitive information from an insider, or causing an insider to communicate such information. Again, this does not include communications for legitimate purposes, performance of duties, or discharge of legal obligations.

Regulation 4 of the Insider Trading Regulations contains the prohibition on trading in listed securities or securities that are proposed to be listed. This prohibition applies to insiders in possession of unpublished price sensitive information.

Who is an insider?

To understanding these prohibitions, it is fundamental to understand who an insider is. According to Regulation 2(g) of the Insider Trading Regulations, an ‘insider’ means any connected person or a person in possession of or having access to unpublished price sensitive information in respect of the securities of a company.

The term ‘connected person’ refers to any person who is, or has during a period of six months prior to the act of insider trading been, associated with a company, directly or indirectly, in any capacity. This association can be because of frequent communication with the company’s officers or from being in any contractual, fiduciary, or employment relationship with the company.

It can also be as a result of being a director, officer, or an employee of the company or as a result of holding any position including a professional or business relationship between the person and the company (whether temporary or permanent), which allows the person, directly or indirectly, access to unpublished price sensitive information or is reasonably expected to allow such access. Regulation 2(d)(ii) provides a list of persons who are deemed to be ‘connected persons’.

What is unpublished price sensitive information?

first_image_newUnpublished price sensitive information has been defined under Regulation 2(n) of the Insider Trading Regulations to include “any information, relating to a company or its securities, directly or indirectly, that is not generally available which upon becoming generally available, is likely to materially affect the price of the securities…” A similar definition for price sensitive information has also been stated in sub-clause (b) of the Explanation to Section 195 of the Companies Act.

Regulation 2(n) also provides the following illustrative list matters information about which can be considered as unpublished price sensitive information:

– financial results;

– dividends;

– change in capital structure;

– mergers, de-mergers, acquisitions, delistings, disposals, expansions of business, and such other transactions;

– changes in key managerial personnel; and

– material events in accordance with the listing agreement.

In order to be considered price sensitive, the information should be likely to materially affect the price of securities of the company in the market. This requirement is inherent in the concept of price sensitivity.

Exception for due diligence

Rajat Kumar Gupta, an Indian-American businessman and philanthropist, is currently serving a two-year term in a U.S. federal prison for insider trading. Published under a CC BY-SA 2.0 licence.

Rajat Kumar Gupta, an Indian-American businessman and philanthropist, is currently serving a two-year term in a U.S. federal prison for insider trading. Published under a CC BY-SA 2.0 licence.

The Insider Trading Regulations recognise some practical reality of commercial transactions. Prospective investors could often require non-public information about a company in order to assess the merits of a particular transaction. In these situations, investors look to obtain unpublished price sensitive information not for insider trading but for due diligence on a company’s finances and business. Taking these factors into account, Regulation 3(3) of the Insider Trading Regulations allows for firms to communicate unpublished price sensitive information in connection with a contemplated transaction subject to certain conditions:

– for transactions that would entail an obligation to make an open offer under the takeover regulations laid down by the Securities and Exchange Board of India (“SEBI”), only if the board of directors of the company is of the informed opinion that the proposed transaction is in the best interests of the company; or

– for transactions that would not attract the obligation to make an open offer under the takeover regulations, if the board of directors of the company is of the informed opinion that the proposed transaction is in the best interests of the company and the information that constitutes unpublished price sensitive information (and is to be communicated to proposed investors) is made generally available at least two trading days prior to the proposed transaction being effected.

This clause has been included to ensure that in an open offer, all the information necessary to enable an informed divestment or retention decision by public shareholders is made available to all shareholders in the letter of offer under the takeover regulations.

The second point ensures that where the proposed transaction is for the benefit of the company (even though its not a regulatory mandate), the board of directors ensures that there is no information asymmetry in the market.


Note that insiders can prove their innocence by demonstrating the following circumstances:

– If the insider is an individual: That the transaction is an off-market transfer between promoters who were in possession of the same unpublished price sensitive information without being in breach of Regulation 3 and that both parties had made a conscious and informed trade decision;

– If the insider is not an individual: That-

(1) the individuals in possession of the unpublished price sensitive information were different from the individuals taking trading decisions and that the decision-making individuals were not in possession of the unpublished price sensitive information when they took the decision to trade; and

(2) appropriate and adequate arrangements were in place to ensure that the Insider Trading Regulations are not violated and that no unpublished price sensitive information was communicated by the individuals possessing the information to the individuals taking trading decisions and there is no evidence of such arrangements having been breached.

Note that connected persons bear the onus of proving that they were not in possession of unpublished price sensitive information. In case of all other persons accused of insider trading however, the onus of proving that they possessed the unpublished price sensitive information is on SEBI.

Penalty for violation

We should note that the Insider Trading Regulations do not specify a specific penalty for violation of the prohibition contained therein. However, Regulation 10 gives the SEBI the power to deal with any violation in accordance with the Securities and Exchange Board of India Act, 1992 (“SEBI Act”).

Section 15G of the SEBI Act prescribes a penalty of not less than Rupees Ten lakh, extending up to Rupees Twenty-five crore or three times the profit made from the insider trading activity, whichever is higher.

Deeksha Singh is part of the faculty on


The Securities Ordinance: At round three, some notable variations

DeekshaSinghThe past year has seen some key developments in the further evolution of the SEBI’s powers, with the promulgation of the Securities Laws (Amendment) Ordinance, 2013 (“the 2013 Ordinance”). We have discussed the implications of the 2013 Ordinance and its lapse here, here, and here.

The Securities and Exchange Board of India (“SEBI”), which was established in 1988, received statutory powers from April 12, 1992 with the enactment of the Securities and Exchange Board of India Act, 1992 (“SEBI Act”). Now, the Securities Laws (Amendment) Ordinance, 2014 (“the 2014 Ordinance”) has been notified with effect from March 28, 2014. It makes effective, the additional powers granted by the 2013 Ordinance. This provides much-needed continuity for the SEBI’s regulatory actions.

However, the 2014 Ordinance contains some notable variations.

Power to supersede orders

The 2014 Ordinance introduces a new provision — Section 15-I (c) — to the SEBI Act. It allows the SEBI to supersede an order issued by an adjudicating officer, if it feels that the order is erroneous. The term “erroneous” is linked to whether the order is in the interest of the securities market. The provision also contains the following limitations to the exercise of this power:

– The SEBI can exercise this power only within three months of the adjudicating officer’s order, or the disposal of an appeal from that order by the Securities Appellate Tribunal; and

– The purpose of such an inquiry can only be the enhancement of the penalty imposed by the adjudicating officer.

So, this new provision adds a new layer to the appellate hierarchy for the orders of adjudicating officers under Section 15T of the SEBI Act.

The reasons for introducing this new provision are hard to determine. The current provisions in the SEBI Act and the corresponding rules are aimed at providing independence to the adjudicating officer, particularly where the penalty is concerned. Since the investigating arm of the SEBI presents the case before the adjudicating officer, it seems odd that the SEBI itself can then call the penalty imposed into question.

No search and seizure without recorded reasons

SecuritiesThe 2014 Ordinance has an additional requirement in the provision amending Section 11C of the SEBI Act. Now, the Chairman can only conduct search and seizure operations “after recording the reasons thereof in writing”. This additional clause provides a check against the misuse of search and seizure powers and emphasises the Chairman’s responsibility to ensure that such invasive measures are authorised only in necessary circumstances.

Assistance from the police

With the introduction of Section 8A in the SEBI Act, an authorised officer (that is, the investigating officer) can “requisition the services of any police officer or Central Government officer or both” to assist in search and seizure operations.

These additional provisions in the 2014 Ordinance may not remain when new securities laws are finally enacted by the Parliament. The use of these powers by the SEBI in the interim could possibly determine their final form.

(Deeksha Singh is part of the faculty on