Shruti RajanPartner
Khyati GoelSenior Associate
Rebecca CardosoAssociate
Key Developments
-
Amendments proposed to Rule 8 of the Securities Contracts (Regulation) Rules, 1957 to relax the prohibition on stockbrokers from carrying out non-securities business
The central government has issued a consultation paper proposing amendments to Rules 8(1)(f) and 8(3)(f) of the Securities Contracts (Regulation) Rules, 1957, which govern the qualifications for membership on a stock exchange, i.e., for becoming stockbrokers. Currently, stockbrokers cannot engage in any non-securities business as a principal or employee. They can only do so as an agent or broker but without incurring any personal financial liability. The intent of this rule is to ring fence client funds and safeguard the integrity of the securities trading ecosystem.
The consultation paper proposes to amend Rule 8 to exclude investments made by brokers from being considered as part of their business activities. This exemption will not apply if such investments involve client funds or securities, or if they create any financial liability for the stockbroker. The consultation paper also seeks feedback on specific proposals, such as whether an indicative list of activities amounting to ‘any business other than securities’ should be included in Rule 8 itself, what amounts to being engaged as a principal in a business, etc.
While the consultation paper seeks to provide clarity on the scope of Rule 8 to facilitate investment and business activities, the effectiveness of the proposals will largely depend on feedback from stakeholders. The proposed amendments will also have to be reconciled with the clarificatory circulars on Rule 8 issued by stock exchanges from time to time.
-
Framework for foreign venture capital investors revamped to streamline registration process, eligibility criteria and registration renewal
The Securities and Exchange Board of India (SEBI) amended the SEBI (Foreign Venture Capital Investors) Regulations, 2000 on 5 September 2024 to streamline and simplify the regulatory framework. The amended regulations will take effect from 1 January 2025.
A key change introduced by the amendments is that the process of granting registration to foreign venture capital investors (FVCI) has now been delegated to designated depository participants (DDP), similar to the registration process prescribed for foreign portfolio investors (FPI). Additionally, the eligibility criteria have been revised to provide that the applicantc must be:
- an entity incorporated or established outside India or in the International Financial Services Centre (IFSC),
- a resident of a country whose securities market regulator is a signatory to the International Organisation of Securities Commission’s Multilateral Memorandum of Understanding, and
- a fit and proper person based on the criteria specified in Schedule II of the SEBI (Intermediaries) Regulations, 2008, amongst other conditions.
SEBI also issued operational guidelines on 26 September 2024 to facilitate a smooth transition to the amended FVCI framework. The guidelines include additional details on the registration and post-registration process, Know Your Client (KYC) norms to be followed, and reporting of Type I or Type II material changes, similar to the compliances tasked upon FPIs and DDPs under the FPI framework.
Revamping the framework and simplifying the registration process is likely to boost foreign investment into India, encouraging a broader range of global investors to consider opportunities within the country.
-
Asset management companies mandated to establish institutional mechanism for fraud prevention
Following the mandate for stockbrokers to implement fraud prevention mechanism, SEBI has issued similar requirements for Asset Management Companies (AMC). (To read our previous update on the mandate for stockbrokers, click here.)
This mechanism must include processes aimed at identifying, monitoring and addressing specific types of misconduct, including front-running, insider trading, fraudulent transactions in securities, and the misuse of sensitive information. The key aspects of the mechanism are:
- Accountability: The Chief Executive Officer, Managing Director, or equivalent officer and Chief Compliance Officer of the AMC are responsible for implementing the institutional mechanism to deter potential market abuse.
- Alert systems: AMCs must develop and implement systems and procedures to generate timely alerts for any potential misconduct or market abuse.
- Policies and procedures: AMCs must formulate written policies and procedures for conducting examination and taking action in case of potential market abuse by employees and connected entities. A documented whistle-blower policy is also required.
- Reporting: Alerts, along with proof of action taken, must be reported to SEBI in the Compliance Test Report and Half-yearly Trustee Report.
The implementation of this mechanism is aimed at creating a more transparent and ethical trading environment. As AMCs adapt to these heightened compliance standards, they will need to invest in advanced surveillance systems and robust internal control procedures to effectively monitor trading activities and maintain oversight on their employees.
-
Master directions on fraud risk management issued for banks and non-banking financial companies
On 15 July 2024, the Reserve Bank of India (RBI) issued three master directions on fraud risk management applicable to banks, non-banking financial companies (including housing finance companies) and co-operative banks. The goal of these master directions is to enhance the framework for preventing, detecting, and reporting fraud in the financial systems.
The key highlights of the master directions are as under.
- The focus is on establishing a framework for detecting fraud through early warning signals and red flagging of accounts, along with a board-approved policy on fraud risk management.
- The master directions provide revised categories for reporting fraud, including misappropriation of funds and criminal breach of trust, fraudulent encashment through forged instruments, wilful falsification, etc.
- A ‘Special Committee’ is required to be constituted for monitoring and following-up on fraud causes.
- Detailed instructions are provided for reporting fraud to the RBI and other legal enforcement authorities.
- The time period from issuance of show cause notice to passing of an order by the competent authority is prescribed keeping in mind the principles of natural justice recommended by the Supreme Court in State Bank of India and Ors. v Rajesh Agarwal and Ors. on 27 March 2023.
The focus on early detection, rigorous reporting, and strong governance structures to prevent fraud underpins RBI’s commitment to strengthen the integrity of financial systems. Additionally, stipulating procedures to deal with loan account fraud reflects RBI’s intent of upholding principles of natural justice and reducing the scope of arbitrary action.
-
Reserve Bank of India introduces scheme for trading and settlement of sovereign green bonds in International Financial Services Centre
On 29 August 2024, the RBI introduced a scheme to facilitate the trading and settlement of Sovereign Green Bonds (SGB) in IFSC. This scheme allows certain type of foreign investors to participate in primary auctions conducted by the RBI and secondary market transactions for SGBs in IFSC. To ensure transparency, KYC and anti-money laundering practices, along with comprehensive data management and reporting protocols, have also been prescribed. The International Financial Services Centre Authority issued a circular on 24 September 2024 to further support the scheme.
This scheme, implemented with immediate effect, is intended to encourage foreign participation in SGBs, a relatively new type of security which reflects India’s growing focus on sustainable finance. The scheme is also expected to attract a diverse set of investors to the IFSC.
The next quarter is likely to see the notification of many developments, given the host of proposals approved by SEBI in its recent board meeting. These include modification of definitions in the insider trading regulations, amendments to the regulatory frameworks for investment advisers and research analysts, introduction of a framework for a new investment product or asset class under the mutual funds framework, developments with respect to offshore derivative instruments and segregated portfolios of FPIs, to name a few. Alongside these welcome changes, SEBI’s focus on other topics like retail investor participation in the futures and options segment is also highly anticipated.
