Blockchain and Smart Contracts: Transforming Compliance in Mergers under Indian Securities Regulation
Introduction
The technological advancements have enabled the segment of M&A to go through a lot of transformations, offering efficiency, transparency and compliance to securities law. The blockchain and smart contracts can be a revolutionising stride when it comes to facilitate such transactions. As they offer seamless regulatory and compliance process, it would not be difficult to imagine a world where every transaction is instantly verifiable, secure and free from risk. This article is intended to provide readers a new insight regarding advantages of these technologies with future prospects and their integration with Securities law of India.
Blockchain and Smart Contracts
Blockchain is a decentralised technology that collects and records the data without central authority. It’s an open and distributed ledger equipped with cryptographic hashing that enables it to record each transaction in a block linked to the previous one, forming a resumed chain. It offers a safe, secured, and transparent deal for transactions that requires strict compliance, and in transactions with regards to M&A, it has the potential to restrict fraud and enhance data integrity, where the extraction of accurate and reliable data is of utmost value.
Smart Contract is being designed to regulate on its own with the terms and conditions of the agreement written into the code. They have been strategically designed to execute the contracts whenever such predefined conditions are met. Resultingly, it minimises the human interventions and mistakes that can happen. Being an automated designed technology, it ensures that all contractual obligations are met in real time, which adds a compelling reason to adopt such technologies that offers assurance in complex transactions.
Intervention of Blockchain, Smart Contract and Mergers
The M&A activity involves a lot of challenges and complexities and in such scenario blockchain and smart contracts can offer efficient solutions to several compliance challenges. By storing records in a secure manner that cannot be tampered with, blockchain will enable smoothen the process by eliminating hurdles and then overlooking phase of due diligence which requires very rigorous verification for financial record checks and legal status. It automates the process and provides compliance to regulations as mandated by Securities Exchange Board of India. The entire process of verification can be executed using the smart contract as it automates the process while ensuring compliance with the regulations enforced by Securities and Exchange Board of India.
The long and crucial process of M&As often questions the transparency, resulting in conflicts and rigorous watch from antitrust authorities. Blockchain addresses this by providing all of the participants with access to identical information; which significantly decreases risks associated with conflicts and frauds, improving levels of trust within stakeholders. These compliance related tasks run on the platform can be scheduled to comply with stipulations laid out by SEBI eradicating any non-compliance errors during execution.
Traditional M&A process incorporates many manual interventions and checks. Blockchain and Smart Contract can address this by bringing down the cost and manual interventions by substituting them with an automated process and eliminating manual checks at each and every interval by creating a single channel for all transactions related documents while ensuring compliance simultaneously.
Detailed Benefits
The adoption of Blockchain and Smart Contract can serve the purpose in an efficient manner, particularly for M&A transactions. The complex nature of these transactions makes it challenging to manually monitor every detail. To balance it, the enhanced security and records of documents by the blockchain can prevent tampering and ensure data integrity, as it is imperative to maintain accurate and reliable records necessary for regulatory compliance and due diligence.
Smart Contracts are automated to execute contractual obligations when specific conditions are met. It can be adopted so as to ensure timely transactions and minimise error as it increases the speed of transactions. This will help the M&A transactions to be done seamlessly without any interventions or non-compliance and avoid exceeding the timelines and conditions.
Furthermore, the adoption of such technologies will maintain accountability and transparency. As, the blockchain is equipped with mechanism that can record the transactions permanently allowing to have check on all the activities. This becomes crucial when it comes to adherence to regulatory compliance. It will allow the concerned authorities to have check on all the activities and most importantly, if the undertaken activities comply with the applicable laws and regulations or not.
The SEBI’s Substantial Acquisition of Shares and Takeovers Regulations 2011, that are concerned with the acquisitions of shares, voting rights, and control in listed companies. Smart Contracts can ensure to comply with the requirements by offering automated disclosure, timely and accurate filings. Using blockchain technology, smart contracts can automatically send notifications and file reports when certain levels of share acquisitions are reached. This helps reduce the risk of missing important disclosures and ensures transparency. By automating these processes, smart contracts make it easier to comply with regulations, improve accuracy, and increase efficiency.
Moreover, as per the SEBI’s Listing Obligations and Disclosure Requirements) Regulations, 2015, a listed company is required to ensure continuous disclosure and blockchain can provide automated seamless disclosures without failing, while smart contract can ensure that such disclosures are being made in compliance with the LODR regulations. Hence, can provide a reliable and efficient solution for meeting regulatory obligations.
Challenges and Considerations
The legal status of both the technologies are still evolving and there are no such frameworks presently to adopt these at present. Adoption of such frameworks can ease up the M&A activities taking place inside the boundary. The adoption process can be done by updating the current legislations and creating new guidelines to address such issues in relation to digital records and automated compliance mechanisms. The M&A process in India are currently governed by the Companies Act 2013, SEBI rules along with other compliance requirements. In present scenario, the integration of both the technologies can be challenging since the current laws may not fully account for these technologies.
Blockchain’s transparency can pose privacy constraints, especially when handling sensitive data. Resultingly, it can attract liability under the Information Technology Act 2000 and the upcoming Personal Data Protection Bill, 2023. Maintaining equilibrium with the blockchain’s openness can be challenging.
Challenges like a lack of skilled professionals and integrating the technology with existing systems. As the Indian market varies majorly in technical expertise, in such a scenario it would be challenging to scale blockchain network and the high cost of using smart contract. The usage of blockchain and smart contracts depends majorly on how does a company operates. Indian businesses involved in traditional industries may face challenges with regard to adoption of these technologies as the respective sector is still going through digital transformation.
Also, the decentralised nature of blockchain can exaggerate the jurisdictional matters, especially in cross-border M&A transactions. In such a scenario, it will become crucial to determine the applicable laws and jurisdiction for disputes arising from transactions done through blockchain. Moreover, in cross-border M&A it can attract international cooperation and harmonisation of laws.
Conclusion
The transformative nature of technologies can make complex transactions simple and effective for M&A activities. Hence, it can revolutionise corporate transactions. The distributed ledger used in blockchain is immutable and transparent so that all transactions are recorded and can be verified for fraud fighting while adhering to regulations. Smart Contracts makes the process smoother and automated by ensuring compliance with self-executing protocols, decreasing intermediaries, administrative expenses, and time required for a transaction.
The mechanisms of both the technologies are in compliance with the Securities and Exchange Board of India’s mandate for transparency and investor protection, bolstering market confidence, lending growth, and stability of Indian financial markets; their offerings can signal a bright future for M&A under Indian Securities law.
Sources:
https://www.mckinsey.com/featured-insights/mckinsey-explainers/what-is-blockchain
https://ksandk.com/corporate/smart-contracts-in-india-an-overview/#legal-status-of-smart-contracts-in-india
Understanding Blockchains Laws: Navigating the Evolving Regulatory Landscape
Author Bio
