Improvements in technology have affected many financial services, and private placements are no exception.
Fintech and blockchain technology seem to be taking over the landscape of private placements, making the process more efficient, more transparent, and easier. As an amalgamation of the terms "financial technology," the term fintech represents a very broad array of technologies aimed at enhancing and automatizing the use of financial services. Blockchain, for example, is a part of fintech that helps strong, decentralized, ledger technology be more transparent. Together, the innovations redefine how private placements will be done in most cases offering substantive benefits and alleviating some of the long-standing challenges.
Private Placement under Companies Act
Compared to public offerings, the firms Act governs private issuances by firms more laxly. Public offerings are subject to stricter disclosure standards, compliance requirements, and rules set forth by the Securities and Exchange Board of India to safeguard the interests of subscribers. The company's board of directors has the exclusive authority to determine who is eligible for a private placement, and no more than 200 people may be invited or offered a private placement in a single fiscal year. When a private placement is being made, no business may use the media, marketing, distribution methods, or agents to educate the public about this kind of issue, nor may they release any public advertisements. A company's promoters and directors may be held accountable for a penalty up to the amount raised through the private placement or INR 2,00,00,000, whichever is lower, if the company makes an offer or accepts funds in violation of section 42 of the Companies Act. Additionally, the company may be required to return all funds to subscribers, plus interest, within 30 days of the order imposing the penalty.
Role of FinTech and Blockchain in Private Placement
Blockchain and fintech are automating investor matching, enhancing due diligence, organizing paperwork, guaranteeing compliance, and reducing expenses- all of which are revolutionizing private placements.1 FinTech's advanced algorithms and data analytics improve issuers' and investors' accessibility, efficiency, and transparency. Blockchain technology, on the other hand, lowers the risk of fraud by streamlining smart contract compliance and enhancing security through immutable transaction records. Blockchain simplifies the issuing and trading procedures in private placements and fosters confidence among stakeholders by decentralizing and encrypting data, signalling a dramatic shift in the financial environment.2 These features enable issuers and investors in complying with applicable legislation and helps regulators accomplish their supervision responsibilities.
Legal Compliances and Regulatory Landscape
India's FinTech and blockchain private placement regulatory environment is changing quickly, driven by a number of important factors:
Data Privacy and Security: Adherence to the Digital Personal Data Protection Act, 2023 is essential for managing personal data in private placements, in order to secure investor information, measures must be in line with the concepts of data reduction, purpose limitation, and guaranteeing data security.
Smart Contracts and Legal Enforceability: The Indian Contract Act, 1872 regulates smart contract enforceability, which necessitates compliance with conventional contract law standards. Which helps in determining the enforceability and legality of automated contract conditions in the absence of physical signatures is one of the legal issues.
Compliance with Securities Laws: The Securities and Exchange Board of India (SEBI) controls securities offerings and private placements. The SEBI's guidelines for private placements, which cover disclosures, investor protections, and listing requirements, must be followed by issuers.
Digital Payments and Technology Adoption: To ensure adherence to the Payment and Settlement Systems Act of 2007, the Reserve Bank of India (RBI) supervises digital payments and financial technology advancements. In addition to this, following RBI standards is necessary when using blockchain for financial transactions in order to guard against abuse and maintain stability in the financial system.
Implications on legal professionals
Technology and Automation: Technology and automation are profoundly transforming the legal profession, replacing traditional methods with advanced tools like artificial intelligence, machine learning, and legal tech solutions. Previously, legal work involved extensive manual research, document drafting, and repetitive tasks that were time-consuming and resource-intensive.
Globalization and International Law: Globalization has significantly impacted the practice of law, necessitating that legal professionals engage with a complex web of international laws, treaties, and regulations. As businesses and individuals increasingly operate across borders, legal issues have become more interconnected and multifaceted. Cross-border transactions and international trade require lawyers to be well-versed in international commercial law, including contract law, trade regulations, and dispute resolution mechanisms such as arbitration and mediation. Understanding these frameworks is essential for advising clients on cross-border deals and resolving disputes that arise in an international context.
Ethical and regulatory challenges: Ethical and regulatory challenges are increasingly prevalent in the legal profession, driven by technological advancements, globalization, and evolving societal norms. Legal professionals must navigate complex ethical dilemmas, such as balancing client confidentiality with data privacy laws in an era of digital communication. The use of artificial intelligence in decision-making processes raises concerns about transparency, bias, and accountability, requiring lawyers to ensure ethical standards are upheld.
Conclusion
Fintech and blockchain technology are propelling technological breakthroughs in private placements that are revolutionizing the capital markets. Fintech platforms greatly reduce time and costs while increasing accessibility by automating investor matching, streamlining due diligence, and enhancing documentation management. Simultaneously, blockchain technology builds confidence among stakeholders and assures compliance with strict regulatory frameworks like SEBI standards in India by providing transparency and security through immutable transaction records and smart contracts. The potential for fintech and blockchain to revolutionize private placements is enormous. Collaboration between legal professionals and technologists will be essential to realizing the full potential of fintech and blockchain to promote efficiency, transparency, and growth in private placements worldwide as regulatory landscapes change and technology advances. Less plainly put, FinTech and blockchain are complex and multi-dimensional with respect to their contribution toward the evolution of private placements. It is these technologies that shall overcome many conventional limitations of private placements with respect to efficiency, transparency, confidentiality, and accessibility.
Authored by:
Rajiv Sharma, Partner and Seerat Khera, Associate at Singhania & Co.
