Settlement of Charges Between Indian Brokerages and the US SEC

Earlier this week, four Indian brokerage houses entered into
settlements with the US Securities and Exchange Commission (SEC) for charges of
carrying on brokerages services to institutional investors in the United States
(US) without registration under the US Securities Exchange Act of 1934 (the
Exchange Act). The SEC’s press release and the orders pertaining to the four
brokerages are available here.
SEC’s charge arose on the ground that the brokerages were
carrying out activities in the US that required registration under the Exchange
Act, unless they were able to avail of exemptions. However, none of this was
obtained by the brokerages. As the SEC notes, “Section 15(a) of the Exchange
Act generally prohibits a broker or dealer from making use of the mails or any
instrumentality of interstate commerce to effect any transaction in, or to
induce or attempt to induce the purchase or sale of any security without being
registered with the [SEC] as a broker-dealer”. SEC charged the brokerages for
violation of this provision and the relevant rules.
It is important to consider the type of activities that were
carried out by the brokerages, which were said to contravene US securities
laws. These include:
Travel to the US to meet with US investors;
Contact with US investors through email and
telephone calls;
Transmission of research reports on Indian
companies to US investors;
Purchase and sale of shares on Indian stock
exchanges on behalf of US investors;
Entering into commission sharing agreements with
US registered broker-dealers, and soliciting and providing brokerage services
through them;
Organizing and sponsoring investor conferences
in the US;
Participation as a broker in offerings of Indian
companies, including initial public offerings, follow-on public offerings and qualified
institutional placements (QIPs), which were carried predominantly in India but
with some shares being marketed and sold to US investors.
Although the charges were settled by the brokerages without
accepting or denying the findings of the SEC, the above discussion provides
some guidance as to the type of activities by Indian brokerages that could be
called into question by US securities laws.
Of course, the most viable option from a regulatory
standpoint would be for brokerages carrying out such activities to register
themselves with the SEC. This is particularly relevant given the effects of
globalization and the cross-border nature of the securities markets. Several
domestic Indian offerings of securities are extensively marketed to overseas
investors. Hence, compliance with securities laws in those jurisdictions
becomes important from a regulatory perspective. Given that both the
substantive laws and enforcement in the US are quite strong, we find instances
such as the present charges/settlements, but the same would apply in other
leading capital market jurisdictions as well.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.


  • Apart from registration, Rule 15a-6 also provides for a chaperoning agreement with a U.S. registered broker-dealer and a consequent exemption from registration. This may be particularly useful if the broker is likely to have infrequent activity in the US, not justifying the cost and hassles of a full- fledged registration. This is what Edelweiss seems to have (now) done.

    -Mangesh Patwardhan

  • Some of the charges in the press release of SEC states:

    (a) Sponsored conferences in the U.S.
    (b) Participated in securities offerings from India-based issuers to U.S. investors.

    These appear to be in relation to an IPO by an India company.

    Wondering whether there were no proper legal advisors for these IPOs or is it that, they just ignored it.

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