India: Corporate & Commercial Monthly Newsletter | December 2023

SEBI | Consultation Paper on changes in Special Situation Funds regulatory framework

ecurities Exchange Board of India (SEBI) in its meeting dated December 28, 2021 had approved the proposal to introduce Special Situation Funds (SSFs) as a new sub-category of Category I Alternative Investment Funds (AIFs), which shall invest in special situation assets including stressed loans. Approved proposal has been notified by SEBI via amendments in the SEBI (AIFs) Regulations, 2012 (AIF Regulations). SSF may acquire stressed loan in terms of Clause 58 of Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021 (RBI Master Directions), upon inclusion of SSF in the Annex of RBI Master Directions. Thus, in order to enable SSFs to acquire stressed loans, it is essential that SSFs are included in the Annex of RBI Master Directions by RBI. Accordingly, the aforementioned framework for SSFs was referred by SEBI to RBI for their concurrence/comments for notifying SSFs in Annex of RBI Master Directions. Thereafter, RBI communicated the following requirements in the framework for SSFs to enable RBI to include SSF in the Annex of RBI Master Directions:

• Definition of 'special situation assets'
• Eligibility of investors in SSFs in terms of Section 29A of Insolvency and Bankruptcy Code, 2016 (IBC)
• Restrictions with regard to investment in connected entities
• Minimum holding period and subsequent transfer of loans
• Monitoring of SSFs
• Supervision of SSFs

Considering the above-mentioned requirements by RBI, SEBI has issued a Consultation Paper on November 28, 2023 to further amend the AIF Regulations and make changes in the regulatory framework to facilitate SSFs to acquire stressed loans in terms of RBI Master Directions.

Key aspects:

• Definition of 'Special Situation Asset': As per Regulation 19I of AIF Regulations, 'Special Situation Assets', inter alia, includes securities of investee companies, whose stressed loans are available for acquisition in terms of Clause 58 of the RBI Master Direction. It has been proposed that the term 'available for acquisition' may be substituted by the term 'are acquired'. Additionally, SSFs having prior investment in securities of stressed companies would not be disqualified/barred from acquiring stressed loans of the said companies
• Eligibility of investors in SSFs in terms of Section 29A of the IBC: RBI Master Directions state that a transferee to whom the economic interest in a loan exposure is transferred should not be a person disqualified in terms of Section 29A of IBC and the responsibility for verifying and establishing the same shall be with the transferor. It has been proposed that, AIF Regulations may be appropriately amended to specify that SSFs shall refrain from investing in or acquire a special situation asset if any of its investors is disqualified in terms of Section 29A of IBC concerning such a special situation asset
• Restrictions with regard to investment in connected entities: Regulation 19M(1) of AIF Regulations state that SSF shall not invest in its associates. It has been proposed that, Regulation 19M(1) of AIF Regulations may be suitably amended to specify that SSFs shall not invest in their related parties, wherein related party shall hold the same meaning as provided under the Companies Act, 2013
• Minimum holding period and subsequent transfer of loans: In terms of the SEBI Circular dated January 27, 2023, stressed loans acquired by SSF in terms of Clause 58 of the RBI Master Directions shall be subject to a minimum lock-in period of 6 months. It has been proposed that AIF Regulations may be suitably amended to specify that SSFs shall transfer/sell stressed loans acquired in terms of Clause 58 of RBI Master Directions, only to the entities enlisted in the Annex of RBI Master Directions
• Monitoring of SSFs: As per RBI Master Directions, it has been stipulated that all RBI regulated transferors shall report each loan transfer transaction undertaken under the said directions to a trade reporting platform as notified by the RBI. It has been proposed that upon issuing units to investors, SSF shall share the details of such issuances, including the details of investors, as well as any subsequent change in unit holdings, resolution strategies implemented, recoveries effected, etc. to the RBI-designated reporting platform. Additionally, SSFs shall also submit to RBI any information as may be required by it
• Supervision of SSFs: Given that SSFs deal in stressed loans, a dedicated supervisory framework for SSFs may be stipulated in AIF Regulations. It has been proposed that, AIF Regulations may be suitably amended to specify that SSFs who have acquired stressed loans in terms of Clause 58 of RBI Master Directions shall be subject to a dedicated supervisory framework specified by SEBI, in consultation with RBI, from time to time

SEBI | Stockbrokers directed to adopt Most Important Terms and Conditions

Securities and Exchange Board of India (SEBI) vide a Circular dated November 13, 2023 (Circular) gave directions to the stockbrokers for adoption of a standard Most Important Terms and Conditions (MITC) which needs to be acknowledged by the client at the time of opening a trading account.

Key aspects:

• SEBI has, as per Clause 20 of the Master Circular for Stockbrokers dated May 17, 2023 (Master Circular), prescribed uniform documents for formalizing the brokerclient relation:
  • Account opening form
  • Rights and obligations
  • Risk disclosure documents
  • Guidance note
  • Policies and procedures - Tariffs sheets

• These set of documents which the stockbroker needs to provide to the client in terms of Clause 20 of the Master Circular are voluminous and the clients may lose focus on critical aspects of the relationship with the In order to alleviate this concern and for the ease of understanding of the client, SEBI vide the Circular has given directions to stockbrokers for the implementation of a standard MITC.
• The form, nature of communication, documentation and detailed standards for implementation of MITC shall be published on or before January 1, 2024, by the Brokers' Industry Standard Forum (BISF) in consultation with
• Under the Circular, certain amendments are proposed to the Master Direction taking into view the implementation of MITC by the stockbroker pursuant to the publication of the detailed standards for implementation of MITC. The proposed amendment are as follows:
  • Insertion of a new Clause 1.6 in the Master Circular under the head Most Important Terms and Conditions
  • Addition of the statement '... in the The client would also be required to give acknowledgement of Most Important Terms and Conditions (MITC)' in Clause 20.4.

• In case of onboarding new clients, the date of implementation and compliance by the market participants shall be April 1, 2024, and for the existing clients MITC shall be informed by the market participant through any suitable mode of communication by June 1, 2024.
• Directions were also issued to the stock exchanges to:
  • Bring the provisions of the Circular to the notice of stockbrokers, and disseminate the same on their websites
  • Make amendments to the relevant bye-laws, rules and regulations for the implementation of the provisions related to MITC
  • Publish the implementation standards on the websites of the stock exchange
  • Communicate to SEBI, the status of the implementation of the provisions of the Circular in the monthly development report
• This Circular exemplifies SEBI's commitment to enhance investor convenience by reducing the voluminous documentation process as the voluminous nature of the documentation involved in the process of opening a trading account might overwhelm investors and divert their attention from crucial aspects of the broker-client relationship. Further, involvement of the BISF in framing and deciding upon key elements such as formulating the document, setting detailed standards, and determining the nature of communication and documentation ensures a coordinated industry effort between SEBI and BISF.
• As we navigate toward the implementation dates, questions such as what will constitute the Most Important Terms and Conditions and how the adopted standards will unfold, remain in the minds of stakeholders. This step by SEBI is a significant milestone in shaping a more transparent, accountable, and investor-friendly regulatory environment.

SEBI | Crackdown on finfluencers

There have been several instances of late of finfluencers (a term used to describe financial influencers who are individuals having a large follower base on social media and regularly share advice/information on topics relating to finance) misusing their position of influence. As an instance, Securities Exchange Board of India (SEBI) recently barred Mohammad Nasiruddin Ansari, a popular social media influencer from the securities market and ordered him to refund around INR 17.20 crore collected from his followers after it was found that he gave stock recommendations in the garb of providing educational training. Similarly, SEBI also cracked down on Sadhna Broadcast Limited and Sharpline Broadcast Limited wherein the promoters of these companies had colluded with finfluencers to disseminate misleading content and created an artificial exponential growth in share prices of these companies.

Currently, there is no specific legal framework to address the misinformation that may be shared by a finfluencer. In the present scenario, finfluencers can only be held liable for any malpractice/manipulation under the existing legal provisions such as Section 12A of the SEBI Act, 1992 which deals with prohibition of manipulative and deceptive devices, insider trading and substantial acquisition of securities or control and Regulation 4 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 which deals with Prohibition of manipulative, fraudulent and unfair trade practices. While SEBI does have specific guidelines and regulations for investment advisers and research analysts, the lack of any such specific regulations for finfluencers helps them to keep functioning in the grey area.

However, SEBI is trying to change this and had partnered with Advertising Standards Council of India (ASCI) to come up with Guidelines for Influencer Advertising in Digital Media

Key aspects:

• In the area of BFSI related to stock or investments, finfluencers should be registered with SEBI and their SEBI registration number should be stated with their name &
• For other financial advice, the influencer must have suitable qualifications such as an IRDAI insurance license, CA, CS
• In addition, they must abide by all disclosure requirements as mandated by financial sector regulators from time to
• The guidelines further mention that the influencer must disclose such qualifications and registration details prominently and also mention the ways to do it.
• Additionally, SEBI also released a consultation paper earlier this year which included following proposals:
  • No SEBI registered intermediaries/regulated entities or their agents/representatives shall directly or indirectly, have any association/relationship in any form whether monetary or non-monetary, for any promotion or advertisement of their services/products, with any unregistered entities (including finfluencers)
  • Entities registered/regulated by SEBI or stock exchanges or AMFI shall not share any confidential information of their clients with any unregistered entities
  • Finfluencers registered with SEBI or stock exchanges or AMFI in any capacity shall display their appropriate registration number, contact details, investor grievance redressal helpline, and make appropriate disclosure and disclaimer on any They shall also fully adhere to the code of conduct under the terms of their relevant registration
  • Such entities shall comply with the advertisement guidelines issued by SEBI, stock exchanges and SEBI recognized supervisory body from time to time.
  • SEBI registered intermediaries/regulated entities shall not pay any trailing commission based on the number of referrals as referral fee
  • SEBI registered intermediaries shall take active measures to dissociate themselves from any unregistered entity using their name, product or service. They shall take necessary action to bring it to the notice of enforcement agency concerned to take appropriate action, including filing case under Section 420 of the Indian Penal Code, 1860 for impersonation and fraud, etc. as may be applicable.Entities registered/regulated by SEBI or stock exchanges or AMFI shall not share any confidentialinformation of their clients with any unregistered entities

This crackdown on finfluencers by market regulators is not exclusive to India as market regulators across the globe are doing some blue skies thinking on ways to keep in check the activities of finfluencers that disrupt financial markets and especially target first-time investors.

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