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What are the legal risks associated with trading in securities in India?

Failed trades – trades in securities that are not settled on the contracted settlement date – are a global phenomenon. They arise when a seller or a purchaser of a security does not deliver the security or funds, as promised. Portfolio investors have become increasingly sensitive to the risks of a failed trade following a spate of high-profile failures to settle trades on the sidelines of the financial crisis.

While India was not the epicentre of the financial turmoil, the global nature of portfolio flows demands that the Indian payment and settlement system be evaluated in order to mitigate any risk associated with failed trades.

In the process of settling a trade, both the title to the securities and the consideration are exchanged. In India, as in many other common law jurisdictions, legal title to securities and any corresponding consideration is transferred only on settlement and no right, title or interest is transferred prior to settlement. A purchaser of securities does not obtain any beneficial right over the security purchased, even if the trade is matched.

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Mathew Chacko is a legal manager at Tan Peng Chin LLC in Singapore. He is licensed to practice Indian law and worked at one of India’s largest firms before joining Tan Peng Chin LLC. He advises clients on investments into India and has represented corporate clients, investment and commercial banks and private equity funds on a variety of transactional and related corporate matters. He can be contacted at mathew.chacko@gmail.com.

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