In a recent press release titled “SEBI Cautions Investors”, SEBI has observed that electronic/ digital platforms accessible through the internet are facilitating fund raising in the form of private placement. SEBI has cautioned investors that all dealings on such unauthorized electronic platforms would be in contravention of the securities laws. The following is a description of the structure of one such platform and an analysis of its legal tenability.

The proposed platform required both investors and companies to register online. Post registration, investment dockets of member companies would be shared with member investors. Member investors may decide to post buy quotes for particular member company’s securities subsequent to which the company creates a subscription offer. Post allotment, the platform would permit / facilitate transfers of securities allotted amongst member investors.

Restrictions on public offer: The circulation of the investment docket is in the nature of a pre-invitation to an offer. Under the Companies Act, in the case of a private company any such invitation to the public is prohibited, whereas for an unlisted public company, offer to more than 200 persons is not permissible. Hence, the model will be in contravention of the Companies Act unless the member company is a public unlisted company and the investment docket is shared with no more than 200 persons in a year.

Restrictions on trading: As per the SCRA, a stock exchange is a body corporate incorporated for the purpose of assisting, regulating or controlling the business of buying or dealing in securities, registered with SEBI. These digital platforms propose to facilitate trading of securities amongst members and thereby fall within the definition of a stock exchange. They must mandatorily obtain registration with SEBI.

In light of the above, it is clear that the existing legal framework in India probably does not permit such platforms to function without significant alterations to the services provided. However, it also cannot be denied that the use of such innovative platforms serves a purpose which the existing large exchanges do not perform. Worldwide alternate exchanges are recognized and a clear regulatory framework is provided. SEBI should also enable a regulatory framework with certain relaxations like that of net worth of Rs. 100 crore (Rs. 1 billion) which acts as a natural entry barrier for such technology platforms.