Financial Regulatory Regime

The previous quarter witnessed a key amendment to the Prohibition of Fraudulent and Unfair Trade Practices Regulations, 2003, which may now allow SEBI to successfully bring charges for circulation of careless or reckless messages such as stock tips on social media platforms. Further, in line with the broader digital India initiative, the last quarter saw an important development from RBI, pertaining to geo-tagging of payment system touchpoints, to identify the regional penetration of digital payments and monitor infrastructure density across different locations.

Shruti RajanPartner

Prashant PrakharSenior Associate

Vidhi ShahAssociate

The first quarter of 2022 saw several interesting developments on the financial regulatory front. In January, SEBI widened the language of the Prohibition of Fraudulent and Unfair Trade Practices Regulations, 2003 (FUTP Regulations), potentially with the objective of encompassing ‘reckless or careless dissemination of information’ as a fraudulent practice, whether on social media platforms or otherwise. Chiming in the global ESG drive, SEBI also issued a consultation paper on the regulation of ESG Rating Providers.

Further, in pursuance of its objective to protect shareholder interest, SEBI has directed stock exchanges to use its arbitration mechanism to address disputes between listed entities/RTAs (i.e., registrar and transfer agents) and their shareholders. Separately, with the invasion of technology in every sphere, the RBI issued a framework for geo-tagging of payment system touchpoints to target areas with deficient payment system infrastructure for focused policy action.

Key Developments

  • Amendment to the Prohibition of Fraudulent and Unfair Trade Practices Regulations, 2003

    SEBI amended the FUTP Regulations, particularly, Regulation 4(2)(k), which now reads as follows:

    Dealing in securities shall be deemed to be a manipulative, fraudulent or an unfair trade practice if it involves disseminating information or advice through any media, whether physical or digital, which the disseminator knows to be false or misleading in a reckless or careless manner and which is designed or likely to influence the decision of investors dealing in securities.

    While the amendment in the language is minimal, the broad language introduced is likely to have a significant impact on the information regarding securities (such as stock tips and analysis) circulated on social media platforms such as WhatsApp, Telegram or otherwise.

    SEBI had earlier sought to levy insider trading charges against identified individuals in certain cases for circulating material, non-public information regarding listed entities on WhatsApp groups, which in turn were broadcasted further. However, SEBI failed to establish its charge under the insider trading regulations at the appellate level.

    Pursuant to this amendment and in a fresh and revised approach, SEBI may now aim to bring charges for such irresponsible sharing of information on social media platforms as ‘reckless or careless’ dissemination of information under the FUTP Regulations instead of levying charges under the insider trading regulations. This is because, under the FUTP Regulations, the regulator will have the responsibility to meet a less onerous standard of proof as opposed to the higher standard of preponderance of probabilities under the insider trading norms in India.

    The success of such charges under the revised FUTP Regulations will be assessed when challenged before the appropriate forums.

  • Consultation paper on ESG rating providers

    In the past few years, regulatory authorities in India have imported requirements for certain listed companies to submit business responsibility and sustainability reports, which include an emphasis on ESG specific reporting, and have set out stewardship obligations of institutional investors, including assessment on the basis of the ESG criteria.

    While responsibilities have been cast upon listed companies and investors, there has been an evident regulatory gap in relation to ESG Rating Providers (ERPs), whose ratings the ESG landscape depends upon. To bridge this gap, SEBI recently introduced a consultation paper which proposes a regulatory framework for ERPs in India.

    The highlights of the paper are:

    • It proposes a framework for the accreditation of ERPs to ensure that market players are referring to genuine data from reliable market intermediaries.
    • Certain eligibility criteria for ERPs have been prescribed as follows:
      • ERPs must be registered research analysts or credit rating agencies with SEBI;
      • ERPs must have a minimum net worth of INR 10 crores;
      • ERPs must possess adequate infrastructural facilities such as database collection and management systems to provide ESG ratings; and
      • ERPs must have human resources with adequate qualifications/specialisations to provide such ratings.
    • The paper highlights the distinction between ESG Risk Ratings and ESG Impact Ratings and stresses the need to classify distinct products appropriately, as well as disclose the process of ESG ratings.
    • The paper suggests a range of different measures such as the requirement for ERPs to formulate a detailed conflict of interest policy and segregate personnel who work in the ESG Ratings department from any other activity undertaken by the ERPs, including ESG advisory and consultation services.
    • The paper also considers whether ESG ratings should be provided on a sector-specific basis and leaves it open for ERPs to provide it on a sector-agnostic basis.
    • In terms of remuneration for ERPs, the paper adopts a ‘subscriber pay’ model, versus an ‘issuer pay’ model to minimise conflict of interest.

    In an evolving regime such as ESG, the idea of light-touch and principle-based regulation would encourage more competition, innovation and efficiency, as opposed to formal requirements for registration and accreditation, setting the broader framework within which ERPs operate, and acting as a check on the activities of ERPs, which will in turn set the roadmap for corporate governance for the coming decades.

    To read our detailed update on this, please click here.

  • Standard Operating Procedure for dispute resolution between listed company and its shareholders

    To boost the existing framework for shareholder protection in India and in addition to the SCORES platform, which SEBI directly offers to investors in the securities market, SEBI recently directed stock exchanges to put in place a standard operating procedure to extend the facility of stock exchange arbitration mechanism to disputes arising between a listed company and its shareholders/investors.

    Such disputes may pertain to or emanate from regular investor services such as transfer/transmission of shares, dematerialisation or rematerialisation of shares, issuance of duplicate shares, transposition of holders, etc. and investor entitlements like corporate benefits, dividend, bonus shares, rights entitlements, credit of securities in public issue, interest/coupon payments on securities, etc.

    In relation to disputes in matters where RTAs offer services to shareholders on behalf of listed companies, RTAs must also be subject to the stock exchange arbitration mechanism.

  • Geo-Tagging of Payment System Touchpoints

    With a view to providing a robust payment acceptance infrastructure with multiple types of touchpoints across the country and to ensure that such touchpoints are accessible and available at all times, RBI introduced a circular setting out the Framework for Geo-Tagging of Payment System Touchpoints.

    Geo-tagging refers to the capturing of geographical coordinates (latitude and longitude) of payment touchpoints deployed by merchants to receive payments from their customers. It helps provide insights on regional penetration of digital payments, monitor infrastructure density across different locations, identify the scope for deploying additional payment touchpoints, and facilitate focused digital literacy programs, etc. For instance, if the Quick Response (QR) code is scanned at a restaurant to pay the restaurant bill, the latitude and longitude of the restaurant where the payment was made will be collected by the bank/non-bank payment system operator and passed on to the RBI.

    RBI’s framework sets out the foundation for geo-tagging of existing payment system touchpoints/acceptance infrastructure. Payment acceptance infrastructure includes point of sale terminals, QR codes deployed by banks/non-bank payment system operators, etc. Through geo-tagging, RBI aims to provide location information on an ongoing basis which can be useful in targeting areas with deficient infrastructure for focused policy action.

In the coming quarter, directions from the RBI on digital lending are awaited, especially given the increasing number of NBFCs in the fintech and digital lending arena. Updates in the cryptocurrency space are also expected, particularly if there are any changes to the taxation of cryptocurrencies or progress regarding the pending bill in Parliament.

Separately, it appears that a number of market players, including associations of brokers registered with SEBI, have made representations to stock exchanges in relation to its circulars on Rule 8 of the Securities Contract Regulation Rules, 1957, which identify and enlist activities that brokers must not engage in. In response to the concerns that have been flagged to the exchanges, clarifications from bourses are awaited.

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